Unit 2: Insurance Regulation

Office & Records

Producer must have and maintain in the state issuing the license a place of business accessible to the public. License must be displayed in an area open to the public. Must keep records locally.

Appointment

to appoint a producer as its agent, the appointing insurer needs to file a notice of appointment within 15 days from the date the agency contract is executed or the first insurance application is submitted. Losing an appointment does not mean a loss of license but simply a loss of representation for that Insurer.

False Financial Statements

violation of unfair marketing practices to deliberately make a false financial statement regarding the solvency of an insurer with the intent to deceive others.

The Three Channels of Regulation

1. Federal Regulation, 2. State Regulation, 3. Self-regulation

Statutes

the body of law developed by the legislative branch of government. Outline the duties of the Commissioner and the activities of the Department of Insurance.

Exemptions from Examination

A person who is insured in one state and moves to another has 90 days after establishing legal residence to become a resident licensee.

Consumer Rights

Consumers can dispute information in their files that they feel is inaccurate, reporting agencies may then be required to re-investigate and correct or delete information.

Unfair Trade Practices Act

Divided into two parts: Unfair marketing practices & unfair claims practices which are governed by state dictated statutes.

McCarran-Ferguson Act

Established in 1945 that the federal government had the right to regulate the business of insurance only to the extent that the business is not regulated by the State law. Main intent of the law was to exempt the insurance industry from most federal anti-trust laws.

Investigative Consumer Reports

Includes interviews with associates, friends, neighbors, and consumers. Consumer must be notified.

Application for Exam

Producers must pass an exam to obtain a license

Insurance Code

The body of laws governing the insurance industry at the State level.

Commissioner/Superintendent/Director of Insurance

This person has broad powers to supervise and regulate the insurance affairs within the state. Does not make laws, instead, oversees insurance operations within the state as compliant with the laws made by the state legislature.

Twisting

Twisting occurs when a producer convinces a policyowner to lapse or surrender a present policy in order to sell him another one, usually from a different company. Any attempt by the producer to misrepresent another insurer by falsely making statements about financial condition of the company or by giving an incomplete comparison of policies is an unfair trade practice.

Buyer's Guide

a document providing basic info about insurance policies

Rules & regulations

developed by the Department of Insurance to expand upon statutory requirements and legislative intent.

Paul v. Virginia

established that the transaction of insurance across state lines was not interstate commerce and therefore should be regulated by local law. Decision held for 75 years.

Financial Services Modernization (Gramm-Leach-Bliley Act GLBA)

passed in 1999 to remove Depression-era barriers between commercial banking, investment banking, and insurance. Allows financial holding companies to engage in any activities that are financial in nature. Stipulated that holding companies would be regulated according to each type of business according to the respective laws for that line: e.g. a bank selling insurance is still regulated by state insurance laws. Outlined laws for putting measures to protect personal information: physical, electronic, etc. A Consumer is anyone about whom a company collects information. A Customer is a consumer who has an ongoing relationship with the financial institution. Consumers can opt out of allowing a company to share info. Health info has a stricter opt-in standard whereby sharing some health info requires permission.

Licensing Regulation

specific to each state

Fraud & False Statements

-any false report that willfully and materially overvalues land, property, or security in connection with financial reports/documents presented to an insurance agency or regulatory official or an agent or examiner acting for an insurance official for the purpose of influencing the actions of such individual. -false entries in any book, report, or statement that deceives any person, officer, employee or agent engaged in the business of insurance regarding the financial condition or solvency of such business -embezzling, abstracting, stealing or misappropriating any of the monies, funds, premiums, credits or other property of any person engaged in the business of insurance -corruptly influencing, obstructing, or impeding the due and proper administration of the law under which any proceeding is pending before any insurance regulatory official or agency or any producer or examiner appointed by such official or agency to examine the affairs of a person engaged int he business of insurance.

Misrepresentations

A lie which can include: -misrepresenting the benefits, advantages or terms of a policy -misrepresenting policy dividends by implying or stating that they are guaranteed -misrepresenting the financial condition of an insurer by means of an inaccurate or incomplete financial comparison and -misrepresenting an insurance policy by using a name or title that is untrue or misleading or by indicating that n insurance policy represents shares of stock.

License Denial, Nonrenewal, or Revocation

-providing incorrect, misleading, incomplete, or untrue info on license app -violating insurance laws, regulations, subpoena or orders of the Commissioner -obtaining or attempting to obtain a license through misrepresentation or fraud -improperly withholding, misappropriating, or converting money or property received in the course of doing insurance business -intentionally misrepresenting the terms of an actual or proposed insurance contract or application for insurance -felony conviction -unfair trade practices or fraud -using fraudulent, coercive, or dishonest practices or demonstrating incompetence, untrustworthiness, or financial irresponsibility in the conduct of business in the state or elsewhere -having an insurance producer license or its equivalent denied, suspended, or revoked in any other state, province, district or territory -forging another's name to an application for insurance or to any document related to an insurance transaction -improperly using notes or any other reference material to complete an exam for an insurance license -knowingly accepting insurance business from an individual who is not licensed -failing to comply with an admin or court order imposing child support obligations -failing to pay state income tax or comply with an admin or court ordered directing payment of state income tax Nonrenews or denies must be notified and advised in writing, in addition to or instead of license denial a fine can be imposed.

Issuance of License

Licenses contain the licensee's name, address, personal id #, date of issuance, lines of authority, and expiration date.

Disclosure Authorization

Producers must disclose the methods that will be used to collect personal information related to insurance transactions. Disclosure must be signed by the applicant and upon signature a window of time is allowed for the process of collecting info, once the window is closed, another authorization form must be signed.

Annual Statement

Required financial condition report by each insurance company

Self-Regulation

Several inter-company organizations and industry associations impose codes of ethical behavior on their members, including national, state, and local agent associations and associations made up of insurance companies.

Investments

State regulations that ensure that insurers invest only in high-quality assets to prevent insolvencies. Life insurance companies may invest in stable value funds such as: municipal bonds, corporate bonds, real estate mortgages, and even policy loans.

Rehabilitation and Liquidation

the Department of Insurance has the authority to assume control over company funds and management in the event of financial difficulty. Will attempt to make insolvent insurers solvent, liquidation only occurs if the firm cannot be made solvent.

South-Eastern Underwriters Decision

the South-Eastern Underwriters Association Supreme Court decision overturned Paul v. Virginia and stated that insurance transacted across state lines was in fact interstate commerce.

Boycott, Coercion, and Intimidation

violation of the act for a person or organization to commit or be involved in act of boycott, coercion, or intimidation that is intended to create a monopoly or restrict fair trade in the transaction of insurance.

Illegal Premiums and Charges

It is unlawful for a person or insurer to collect premiums or make charges that are not specified in the insurance contract

Continuation/Expiration/Renewal of License

License remains in effect unless revoked or suspended as long as fees are paid and the continuing education requirements are met by the due date.

Change of Address

30 days to give the head of the Department of Insurance written notice of any change of business address.

Penalties

A fine of $10,000 or up to one year in prison is the penalty for a person who obtains info about a client w/o having a legitimate reason.

Fair Credit Reporting Act

All insurers/producers must comply with this law regarding obtaining information from a third party concerning the applicant. Violators of the act may receive a $5,000 fine, one year in person, or both and may be liable for any damage to the applicant.

Discrimination

It is illegal to permit discrimination between individuals of the same class or insurance risk in terms of rates, premiums, fees, and policy benefits because of their place of residence, race, creed, or national origin.

False or Deceptive Advertising

It is unfair trade practice for any person to formulate or use an ad or make a statement that is untrue, deceptive, or misleading regarding any insurer or person associated with an insurer.

Termination of Appointment

Insurer can terminate agents at any time. If due termination was due to illegal activity, insurer must notify commissioner within 30 days.

Temporary Agent Licenses

Issued for 180 days to: -the surviving spouse or court-appointed personal rep of a licensed producer who passes away or becomes disabled in order to maintain the producer's business. -a member of a business entity licensed as an insurance producer, upon the death or disability of an individual designated in the business entity application or the license or -the designee of a licensed insurance producer entering active service in the armed forces of the US.

Nonresident Producer Licensing

Most states allow for transfer of licensing from state to state. Producers have 30 days from the time of transfer to provide proof of address change.

Assumed Names

Must notify the DoI if using name other than legal name

NAIC

National Association of Insurance Commissioners: imposes a strong influence in the area of the industry's self-regulation. Laws passed by the NAIC include: the Individual Accident and Sickness Policy Provisions Law, Standard Nonforfeiture and Valuation Laws, Fair Trade Practices Act, Unauthorized Insurers Service of Process Act, Insurance Holding Company System Regulatory Act, Variable Contract Law, Group Life Definition and Standard Provisions Bill, and Credit Life and Credit Health Insurance Regulation Bill.

Company Financial Ratings

Several orgs rate the financial strength of insurance carriers by analyzing their claims experience, investment performance, management, and other factors. Examples of orgs include: AM Best, Inc., S&P, Moody's, Duff &I Helps, and Weiss Ratings. Each firm uses a different rating scale/system and are the standard for financial health ratings in the industry.

Rebating

Splitting a commission with a prospect is prohibited in almost ever state. Rebating is any inducement in the sale of insurance that is not specified in the insurance contract. An offer to share commissions with the insurance applicant is an inducement in the sale of insurance that is not part of the insurance policy and thus constitutes rebating. Rebates include not only cash but also personal services and items of value.

Pretext Interviews

an interview whereby a person i an attempt to obtain info about another person, pretends to be someone else, misrepresents the true purpose of the interview, or refuses to properly identify himself when there is evidence of criminal activity, fraud, or mis-representation.

Consumer Reporting Agencies

collect info on individuals, prepare reports, and make reports available to persons or orgs with legitimate reason. Can be for-profit (Experian or Equifax) or non-profit (the Medical Information Bureau or a credit union). Consumers have the right to opt-out of reports generated by anyone other than the consumer by contacting the credit agencies. Opt-outs stand for 2 years.

Proper market conduct

conducting insurance business fairly and responsibly. In a market conduct examination, state Department of Insurance investigators examine the business practices and operations of an insurer and its agents to determine their authority to conduct insurance business in the state.

License for Controlled Business Prohibited

coverage written on a producer's own life or health and on the lives of health of such persons as the producer's relatives or business associates is called controlled business. Such activities are supposed to be limited

Unfair Claims Practices

designed to protect insureds and claimants from any claims settlement practices that are unfair, deceptive, or misleading such as: -Misrepresenting pertinent facts or insurance policy provisions relating to coverage at issue -failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies -failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies -refusing to pay claims without conducting a reasonable investigation based on all available information -failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed -Not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear. -Compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by such insureds -Attempting to settle a claim for less than the amount to which a reasonable person would have believed he was entitled by reference to written or principal advertising material accompanying or made part of an application -attempting to settle claims on the basis of an application that was altered without notice, knowledge, or consent of the insured -making claims payments to insureds or beneficiaries not accompanied by statements setting forth the coverage under which the payments are being made -Making known to insureds or claimants a policy of appealing arbitration awards in favor of insureds or claimants for the purpose of compelling them to accept settlements or compromises less than the amount awarded in arbitration -Delaying the investigation of payment of a claim by requiring an insured, claimant, or the physician of either to submit a preliminary claim report and then requiring the subsequent submission of formal proof of loss forms, both of which submissions contain substantially the same information. -Failing to promptly settle claims where liability has become reasonably clear under one portion of the insurance policy coverage to influence settlement under other portions of the insurance policy coverage -Failing to promptly provide a reasonable explanation of the basis relied on in the insurance policy in relation to the facts or applicable law for denial of a claim or for the offer of a compromise settlement. Penalties Cease and desist order may be ordered by Commissioner upon discovering unfair trade or unfair claims practice in addition, loss of license or fines may also be imposed.

Insurance insolvency regulations

govern such areas as the organization and ownership of anew company, capital and surplus requirements, reserves, accounting, investments, annual statements, and the rehabilitation and liquidation of impaired insurers Dept of Insurance has the right to compute the reserve liabilities of a company, to value its assets, and to approve or disapprove its investments, dividends, and expenses. Also can require a company to deposit securities to cover its liabilities in the state. Some states require annual financial statements and periodic audits of insurers by the Department of Insurance

Consumer reports

include written, oral, and other forms of communication that a consumer reporting agency has regarding a consumer's credit, character, reputation, or habits and are used or collected to determine eligibility for credit, insurance, employment or other purposes.

Policy Summary/outline of coverage

is a written statement describing the elements of the policy being sold.

Defamation

it is unfair trade practice for any person or company to make oral or written statements or to circulate literature that is false, maliciously critical, or derogatory to the financial condition of any insurer or that is calculated to injure anyone engaged in the insurance business.

License Required

must have the appropriate producer license for the class of insurance being sold, solicited, or negotiated. General exceptions exist for people who are not paid commissions for selling insurance.

Notice to Applicant

notice must be issued to all applicants for life or health insurance coverage. notice informs applicants that a past credit report will be ordered. agent must leave the notice and precept with the applicant

state Insurance Code

prescribes the procedures that must be followed for an insurance company to be formed: specifies the manner in which the company must be organized, requirements for incorporation, and the amounts of minimum capital and surplus.

State Guaranty Associations

protect claimants, policy-holders, annuitants, and creditors of financially impaired or insolvent insurers by providing funds for the payment of claims and other related policy benefits. Members include other insurance companies. If insolvency occurs, each member insurer will be assessed additional feeds to cover the insolvency.

GLBA Disclosure requirements

requires that a company make two primary disclosures to customers: one at the time of establishment of the customer relationship and the second before the company discloses protected information. opt-out is included in the second disclosure.

Churning

similar to twisting, the practice of using misrepresentation to induce replacement of a policy issued by the insurer the producer is representing, rather than the policy of a competitor. The impetus behind churning is to allow the producer to collect a large first-year commission on a new policy.