CPCU 520 Chapter 2

arguments in favor of appointing a commissioner

-an appointed commissioner has no need to campaign or to be unduly influenced by political contributors, is less likely to be swayed by ill-informed public opinion than an elected one, and is more likely to be perceived as a career government employee interested in regulation than as a politician interested in political advancement

arguments that proponents of electing a commissioner have

-appointed commissioners are subject to dismissal while an elected commissioner is in office for a full term -an elected commissioner is more likely to change the insurance department's stance when needed -an elected commissioner is more aware of the public's concerns -an appointed commissioner feels obligated to yield to the interests of those responsible for the appointment

duties of a typical state insurance commissioner

oversee the state insurance department's operation, promulgating orders, rules, and regulation to administer insurance laws, determining whether to issue business licenses to new insurers, producers, and other insurance entities, reviewing insurance pricing and coverage, conducting financial and market examinations of insurers, holding hearings on insurance issues, taking action when insurance laws are violated issuing an annual report on the status of the state's insurance market and insurance department, and maintaining records of insurance department activities

potential consequences for producer unfair trade practices

producers are subject to fines, penalties, or license revocation if they engage in certain illegal and unethical activities

contrast fair discrimination and unfair discrimination as they apply to insurance rates

Fair discrimination means that an insurer should charge substantially similat rates for loss exposures that are roughly similar with respect to expected losses and expenses. If similar exposures were to be charged substantially different rates, that would constitute unfair discrimination.

compare the benefits of market analysis with traditional market conduct examinations

market analysis allows regulators to identify general market disruptions, promotes uniform analysis by applying consistent measurements between insurers, and facilitates communication and collaboration among regulatores from different states. Traditional market conduct examinations, on the other hand, focus on company-specific issues.

explain the purpose of financial rating orgs

financial rating orgs provide summary info about insurer financial strength in the form of a financial rating, typically a letter grade. Corp risk managers, independent insurance producers, and consumers consult these ratings when selecting an insurer.

the rehabilitation vs liquidation options for insolvent insurers

If an insurer falls into insolvencym the insurance commissioner places it into receivership. With proper management, rehabilitation might be possible, and thus the insurer could continue to operate. If the insurer can't be rehabilitated, it is liquidated according to the state's insurance code. Creditors are usually prioritized according to the NAIC's Uniform Insurers Liquidation Act and receive the failed insurer's assets.

why preventing destructive competition is an important goal of insurance regulation

if prices fall too low, some insurers may become insolvent and some may leave the market, leading to an insurance shortage

explain how financial ratings orgs act as unofficial regulators of insurers

insurers whose financial ratings decline can find it difficult to attract and retain customers. Many corporate and public entity risk managers, as well as contractors, are required to choose insurers with ratings above a certain grade level. Therefore, insurers strive to attain and maintain good financial ratings.

why maintaining insurer solvency is an important goal of insurance regulation

it is critical in protecting insureds against the risk that insurers will not be able to meet their financial obligations

how state insurance regulatory activities by each branch of government affect the wording of insurance policies

The nature and content of insurance coverage is controlled by laws that are created and passed by the state regulations. Such legislation may require standard forms or specific wording for policies.

the types of regulatory activities typically undertaken by state insurance departments

licensing insurers; licensing producers, claim reps, and other insurance personnel; approving policy forms; holding rate hearings and reviewing rate filings; evaluating solvency info; performing market conduct examinations; investigating policyholder complaints; rehabilitating or liquidating insolvent insurers; issuing cease-and-desist orders; finding insurers that violate state law; publishing shoppers' guides and other consumer info and preventing fraud

prospective loss costs

loss data that are modified by loss development, trending, and credibility processesx, but without considerations for profit and expenses

capital stock

a balance sheet value that represents the amount of funds that a corp's stockholders have contributed through the purchase of stock

bad-faith (outrage)

a breach of the duty of good faith and fair dealing

model law

a document drafted by the NAIC, in a style similar to a state statute, that reflect's the NAIC's proposed solution to a given problem or issue and provides a common basis to the states for drafting laws that affect the insurance industry. Any state can adopt the model bill or adopt it with modifications.

model regulation

a draft regulation that may be implemented by a state insurance department if the model law is passed

insolvency

a situation in which an entity's current liabilities exceed its current assets

guaranty fund

a state-established fund that provides a system for the payment of some of the unpaid claims of insolvent insurers licensed in that state, generally funded by asseessments collected from all insurers licensed in the state

contrast adequate rates and excessive rates as they apply to insurance rates

adequate rates generate premiums that provide for payment of all claims and expenses related to those premiums, and are vital in maintaining insurer solvency. Excessive rates allow for unreasonable profits at an unfair cost to consumers.

the difference between an admitted and nonadmitted insurer

an admitted insurer is licensed by a state insurance department to do business in the insured's home state. A nonadmitted insurer is not licensed in the insured's home state, although it may be an admitted insurer in other states.

advisory organization

an independent org that works with and on behalf of insurers that purchase or subscribe to its services

domestic insurer

an insurer doing business in the jurisdiction in which it is incorporated

alien insurer

an insurer domiciled in a country other than the United States

foreign insurer

an insurer licensed to operate in a state but incorporated in another state

reciprocal insurer

an insurer owned by its policyholders, formed as an unincorporated association for the purpose of providing insurance coverage to its members (called subscribers), and managed by an attorney-in-fact. Members agree to mutually insure each other, and they share profits and losses in the same proportion as the amount of insurance purchased from the exchange by that member.

National Association of Insurance Commissioners (NAIC)

association from the U.S. whose purpose is to coordinate insurance regulation activities among the various state insurance departments

the requirements that must be met to form a domestic mutual insurance company

because a mutual insurer has no capital derived from the sale of stock, the minimum requirements only apply to surplus. Most states require mutuals to have an initial surplus equal to the minimum capital and surplus requirements for stock insurers writing the same types of business. Some states also require applications and deposit premiums from a stated minimum number of persons on more than a stated number of separate exposures with aggregate premiums in excess of a stated amount.

explain how advisory orgs function as unofficial regulators or insurers

by developing rate info and standard insurance forms, advisory orgs provide uniformity, leading to consistent practices among insurers that benefit consumers and regulators, as well as the insurers themsevles.

the ways in which the NAIC affects the regulation of insurance

developing model laws and regulations for enactment by state legislators, by sharing financial information about insurers, and by developing uniform financial statement forms required by all states

compare how professional and trade associations act as unofficial regulators in the property-casulaty insurance industry

professional associations provide leadership and education for their members. They also contribute to establishing standards and practices for various groups of professionals employed throughout the industry. Trade associations are often involved in activities to influence the development of legislations and regulations that will affect either a segment of the insurance industry or the entire industry. These associations also inform their members of changes in laws and regulations.

compare the arguments for prior-approval systems versus competitive rating systems

proponents of prior-approval systems argue that these systems help maintain insurer solvency through regulatory review of data to analyze the adequacy of rates, help keep rates fair and reasonable, and prevent insurers from raising rates to earn excessive profits. Proponents of competitive rating systems argue that prior-approval systems may cause rates to be inadequate, that competitive rating systems are more flexible and less expensive to administer, and that free market forces lead to reasonable, fair rates.

the factors that contribute to insurer insolvencies

rapid premium growth, inadqeuate reserves, excessive expenses, lax controls over managing general agents, uncollectible reinsurance, and fraud. Poor management is at the root of most of these problems.

potential consequences for insurer unfair underwriting practicies

regulatory penalties may include a fine per violation and suspension or revocation of the insurer's license. Additionally, unfair underwriting practices can result in an insurer's insolvency.

potential consequences for insurer unfair claim practices

regulatory penalties may include fines and suspension or revocation of the insurer's license. In addition, legal actions can be filed in the courts by insureds and third-party claimants for the tort of bad faith.

duties of a typical state insurance commissioner

see page 2.15

the typical regulatory solvency requirements for insurers

see page 2.16

describe the activities of state insurance departments designed specifically to support consumers

state insurance departments often assist with complaints about rates or policy cancellations or with consumers' difficulty in finding insurance. To help make consumers more knowledgable about the cost of insurance, some state publish shoppers' guides and other forms of consumer information.

the requirements that must be met to form a domestic stock insurance company

state laws require that domestic stock insurers satisfy certain minimum capital and surplus requirements before a license is granted

paid-in surplus

the amount stockholders paid in excess of the par value of the stock

why protecting customers is an important goal of insurance regulation

the majority of consumers are not equipped to analyze and understand complicated insurance policies

good-faith claim handling

the manner of handling claims that requires an insurer to give consideration to the insured's interests that is at least equal to the consideration it gives its own interests

mortgagor

the person or org that borrows money from a mortgagee to finance the purchase of real property

the 3 criteria state insurance departments must meet to satisfy the NAIC's Financial Regulation Standards and to be accredited

the state's insurance laws and regulations must meet basic standards of NAIC models, the state's regulatory methods must be acceptable to the NAIC, and the state's insurance department practices must be adequate as defined by the NAIC

the purpose of state guaranty funds

they pay some of the unpaid claims of insolvent insurers licensed in the particular state. These funds mitigate the effects of insurer insolvencies.

why some states require claim reps to be licensed

to ensure technical competence and to potect consumers from unfair, unethical, and dishonest claim practices

the goals of insurance rate regulation

to ensure that rates are adequate, not excessive, and not unfairly discriminatory

the purpose of the System for Electronic Rate and Form Filings (SERFF)

to improve the efficiency of the rate and form filing and approval process and to reduce the time and cost involved in making regulatory filings