Insurance Regulation - Chapter 7

Government regulation

Government oversees practice of underwriting.

Notification Requirements

Guidelines relating to timing and contents of the notice of declination or termination. Requirements are different depending notice follows declination, cancellation or nonrenewal.

Enforcement of Unfair Trade Practice

If insurer commits this, commissioner of state where It happened holds a hearing to allow insurer to present proof of innocence. Before hearing, the commissioner will probably order a cease-and-desist order to ban insurer from continuing the activity. If insurer proves his innocence the order is removed.

Antifraud Plan

If states require one, Examiners determine whether there is a plan and if it complies with statutory requirements and if antifraud materials give enough detail for employees to perform their jobs correctly.

Typical violations include

1) Discriminating unfairly in risk selection to applicable laws 2) Misclassifying risks 3) Canceling or nonrenewing policies contrary to statutes regulations and policy requirements 4) Using underwriting rates/rules not approved by DOIs of states insurer is doing business 5)Not using underwriting guidelines for each program 6) Not applying implemented underwriting and rate factors to renewals 7) not using correct forms and rates 8) not using state specific rules

Examiners ensure

1) Each policy application has been completed and signed by the applicant 2) File contains info supporting underwriters decision regarding risk class and premium rating. 3)Insurer provided notice of an adverse underwriting decision to applicant in accordance with regulation. 4) Review of insurers declined applications to verify reasons for declination. Also verify info is not from less objective sources.

If DOI finds insurer is in violation of unfair trade practices - penalties occur

1) Fine per violation - higher fines happen with conscious activities with disregard to law 2)Suspension or revocation of license - DOI imposes penalty if insurer knew activity was an unfair trade practice. If insurer disagrees with commissioners findings he can file for judicial review within a period of time. If court agrees with commissioner, court's decision is final.

Beyond 60 day period Insurers can cancel for Property/casualty

1) Insured has not paid premium 2) fraud or material misrepresentation by or with the knowledge of insured when applying, continuing coverage or presenting a claim. 3)willful and reckless acts or omissions by name insured increasing insurer risk 4) risk has increased greatly 5) insured property violates safety standards 6) DOI determined continuing to insure risk would be against the law 7) real property covered by insurance subject to property taxes is 2 years delinquent at the time of cancel.

Large risks meet at least one criteria according to law

1) Insured has total property worth at least specified minimum 2)insured received engineering or inspection services meeting DOI standards 3) insured has total annual gross revenue of at least a specified minimum 4) insured has total property, general liability or multiperil insurance premium at least a specified minimum.

DOIs consider these factors whether to set up market exams

1) Market share - insurers with large market share affect more consumers and therefore a greater concern to DOIs 2)Complaints - DOIs may see possible problems by looking to see which insurers have more complaints compared with their market share. 3) Insurer changes - DOI's may select those insurers undergoing changes i.e. management change, change in premium volume 4) Regulatory changes - changes to state statutes or regulations may affect certain lines of insurance and DOI's focus on those insurers. 5) Insurer's history - passage of time from one exam to another (i.e. insurers prior willingness to fix an issue or other DOI's findings.

Market Conduct Exam steps

1) State insurance department schedules exam 2) State notifies insurer 3)Examiners work with Insurer's coordinator to prepare for exam 4)Examination is conducted 5) Examiners prepare preliminary report 6)Insurer examines report to review with state. Changes and comments are offered. 7)Hearing is held if insurer requests 8) Examination report is finalized and adopted by the state ins dept 9)State may order insurer to take actions to correct violations 10) sanctions are imposed on insurer and those who violated laws.

To accomplish discrimination goals regulation imposes

1) constraints on insurers ability to accept, modify or decline loss exposures. State insurance statutes require insurers to cover loss exposures they might not wish to cover (i.e. auto owner living in low-income neighborhood) 2) Requirements for policy wording - regulators specify wording of clauses in policies. Many states require DOIs approval of insurance policies before use. Protection to insurers offering coverage that is too risky and protects insureds from misleading policy wording. 3) Limits on allowable classifications - insurers are constraint to assigning loss exposures to classifications. (ie. unisex auto insurance or where insured uses his vehicle "territory". 4) Restrictions on timing and conditions of coverage4 cancellations and nonrenewals. All states must give ample notice of cancellation or nonrenewal. Insurers can only cancel or nonrenew for nonpayment of premium or material increase in loss exposure. This protects consumers against losing coverage without notice.

Examiners review complaints and make conclusions

1) do complaint records reflect all consumer complaints including DOI and are they complete 2) are there patters to complaints (i.e. products or specific areas). If examiners detect pattern they may have to locate source and broaden the exam 3) have complaints been handled with compliance and within response time.

Prohibited activities - life, accident, health, property casualty underwriting found in unfair trade practices laws

1) individuals of same class - equal life expectations 2) same class - similar health characteristics - accident/health insurance 3) based on property/casualty loss exposures on geographic location of risk - unless sound reason was made 4)residential or personal property contained based on age of residential property 5) sex, marital status, race, religion, national origin - Marital status can be considered for eligibility for dependents. 6) applicant or insureds physical or mental impairment. Does not apply to accident and health insurance sold by property/casualty. This provision does not change other provision of law with respect to termination, modification issuance or renewal 7) refusing to insure based on another insurer refusing to insure or cancel or renew existing policy. This does not prevent termination of excess policy due to failure of insured to maintain underlying coverage 8) failing to maintain books, records, documents so data is accessible by regulators during exams.

Using Federal sentencing guidelines as foundation regulatory compliance program must include

1) insurer should place compliance responsibility with high level executive 2) insurer must tailor standards to specific business and state activities that are accepted and not accepted. 3) insurer must communicate standards to employees clearly and regularly 4) insurer must put auditing and monitoring systems in place 5) insurer must discipline individuals who fail to comply.

Regulators monitor underwriting in order to

1) prevent insurer insolvency - insurer can analyze loss exposures to determine costs of any losses that might occur. Inappropriate underwriting can drain insurers surplus. 2) prevent unfair discrimination against insureds or applicants - Fair discrimination is necessary, but unfair discrimination is not permitted.

DOIs check filed forms to ensure they include provisions such as

1)Policy cancellations 2)loss reporting requirements 3)Claim settlement provisions 4)subrogation provisions 5)fraud and dishonesty definitions and penalties 6)dispute resolution procedures. Regulators may also apply state requirements regarding readability to forms.

Market Conduct Examiners look for

1)Unfair discriminatory underwriting processes 2) Improper cancellations and nonrenewals 3) failure to file rates or forms 4) Wrong filed rating plan application 5) Incorrect risk classes 6)Inaccurate risk classification application 7)Anticompetitive practices

Beyond 60 day period insurers can cancel for auto

1)insured has not paid premium 2) fraud or material misrepresentation by or with the knowledge of insured when applying, continuing coverage or presenting a claim 3) name insured license for auto or any driver in the house has been suspended or revoked 4) Name insured or anyone in house has been convicted or forfeited bail in relation to offense involving vehicle that could result in suspension of license 5) insured motor vehicle: is mechanically defective that endangers safety; is used for carrying persons for hire; used to transport flammables for illegal purposes; authorized as emergency vehicle; has been altered during policy period; insured relocated to state insurer not licensed; insured has not paid fees to acquire/maintain coverage; commissioner determined insuring risk would be against the law.

Comprehensive Examination

A market conduct examination of all insurer's market conduct operations.

Target examination

A market conduct examination of one or only a few facets of an insurer's market conduct operations.

Cost based pricing

Actuarial concept which is rating that identifies and controls every variable that has an effect in quantifying differences between otherwise identical risks.

Comprehensive examinations

DOI examiners conduct examinations at insurers offices (regional office where records are held). Examiners include DOI employees and/or independent examiners headed by examiner in charge. Insurer's office employee is examination coordinator who obtains and coordinates info.

Reexamination

DOIs conduct these some time after completing comprehensive or target examination. Purpose is to determine whether an insure has complied with recommendations from previous exam.

Cancel policies

Declination, termination and disclosure laws allow insurers to cancel policies for specified reasons varying by state. If policy has been effective less than certain period of time (usually 60 days)and is not a renewal, cancellation is legal.

Prohibited Terminations and declinations

Declination, termination and disclosure laws define reasons not allowed: 1) Race, religion, nationality, etc. (regarding auto, ratings can be based on age, sex and marital status) 2) occupation of applicant or insured for auto policies and others of the same household 3) previous declination or termination of applicant/name insured 4) use of residual market mechanisms by applicant/name insured 5) age or location of insured residence unless insurer uses the criterion to make acceptable business reasons (i.e. moral hazard too great) 6) age or location of insured auto unless insurer uses the criterion to make acceptable business reasons. (i.e. insurer not licensed In state)

Multistate cooperative examinations

Every state has authority to examine insurers conduct. States cooperate with each other in performing exams. Multistate exams are good for financial reviews. Insurer's financial condition can vary from state to state but insurers solvency requirements are similar between states. In contrast insurer's market conduct practices may not be the same in each area the insurer operates. (i.e. insurer may sell different products in different locations and practices vary from product to product.) Regulatory requirements vary from state more than do requirements concerning insurer solvency.

After the Market exam

Examiners document findings throughout process. Complete exception form each time there are problem findings. After exam examiners summarize in written report listing problems on exception forms and recommendations for problem solving. Examiners provide report to DOI and insurer. Insurer has opportunity to discuss with DOI and how to correct it. Insurer that objects to report can request formal hearing before hearing officer. Upon receipt, DOI adopts report and places it in file and most cases becomes public document. DOI provides copy to NAIC who loads in their info system for other states to view. DOI may issue an order to insurer on exam to provide date insurer must provide to DOI to provide evidence it has complied with order. If exam shows insurer violated any state law, DOI may sanction insurer. Generally, they are fines but Certificate of Authority may be revoked or suspended. State laws provide DOI with guidance on amount of fines for each violation. Many DOIs follow federal sentencing guidelines, statutes that mandate specific penalties for violations. Primary influence of guidelines is how much blame is to be placed on insurer. (i.e. insurers have good faith to prevent employees from engaging in illegal activities.

If state requires insurer to file underwriting guidelines

Examiners ensure filings were made.

Beyond 60 day period insurers can cancel for commercial auto policies

1) non-payment of premium 2) fraud or misrepresentation 3)material change in risk

Termination

An insurer's cancellation of a policy during the policy term or nonrenewal of coverage at the end of a policy term.

Internal Audit

Examiners want to ensure insurers internal and external audits are taking place. Effective compliance tool. They audit the internal plan, audit reports, how management uses info gathered from internal reports and procedure manuals. Has insurers incorporated changes?

Declination

Insurer's refusal to provide coverage to an applicant who has made a written request to insurer or its producer refusal to forward a written request to an insurer. Declination means 1) insurer providing coverage differs from the one the applicant made request for 2)policy terms differ from the terms the applicant requested in written application.

Enforcement

Insurer/producer can be sanctioned for violating the law with timing and content of notification for reasons of termination or declination. A DOI may require insurer to accept applicant, or reinstate/renew insureds policy at same rate and terms it offers similar risks. If DOI determines violation is business practice, insurer may cease and desist and/or fines/penalties including revoking their license.

Residual markets for auto and property influence underwriters

Insurers must accept risks at inadequate rates under residual market mechanisms affecting underwriting losses and resulting in standard insureds paying higher rates to subsidize residual market loss experience. Insureds pay more than the trust cost even though they are classified as high risk. Standard drivers subsidize costs of supplying protection to high risk drivers.

Denying applicants

Insurers must provide written detail to applicant or inform them it is available upon request. In some states producers request applicants who do not deal with insurers, insurers must provide written notice to producers who forward it to applicants. NAIC recommends 21 day turn-around for written requests but some states it is varied. When insurers terminate policies, they must deliver notice personally to insureds or mail them at last known address. Termination notices must also explain reasons and sent within a timeframe.

Declination, Termination and Disclosure Laws

Many states incorporate these provisions under their unfair trade practices laws. Before these laws, insurers could cancel, nonrenew and deny coverage for applicants with little explanation or notice. Consumers are entitled to know why insurers deny coverage or cancel/nonrenew. Sufficient notice is needed to find replacement coverage. Laws establish requirements for denying applicants including reasons for actions.

Complaint Handling

Market conduct exam includes review of complaint handling procedures. Many states have laws based on Model Unfair Trade Practices Act which insurers must maintain marketing and performance and complaint records.

Multistate cooperative examination

Market conduct examination performed on behalf of a number of states that have agreed on the standards against which to evaluate the insurer. Market Conduct Handbook guides to states that want to engage in multistate exams. Current system shows insurer subject to exams by DOI of every state insurer is licensed. Regulatory overlapping oversight is costly and time consuming for insurers. Industry orgs now have proposed ways to revise conduct exam system. (i.e. ACLI American Council of Life Insurers proposes system of zone exams, similar to finance condition zone exams that states now conduct. Streamlining is being used.

Unfair Trade Practices Act

McCarran Ferguson - states developed their own laws prohibiting unfair methods of competition or unfair trade practices. Failure of states to enact legislation could result in federal intervention. NAIC then developed Unfair Trade Practices Act which all states have adopted. Before McCarran Ferguson, Federal Trade Comission Act provided regulatory supervision over business trade practices.

Equity

Mean different things to different people. Insurers want actuarial equity - each insured pays for only the risk. Underwriters and Ratemakers achieve actuarial equity by assigning insureds to appropriate classifications. Rate regulation ensures fair regulation.

Form Regulation laws

Most states require DOI approval of policy forms before they are issued. Insurer must file forms with DOI with appropriate supporting information. States can have more than 1 of the form filing laws. Types of form filing and type of insurance coverage the form applies depends on state. Once period in which regulators need to respond is over without disapproval, the insurers can use the commercial forms.

Underwriting laws

Most states restrict underwriters ability to decline, cancel, renew. Most states regulate an underwriters activities under unfair trade practices laws (i.e. activities- unfair discrimination, collusive underwriting). Most states review forms.

NAIC and Unfair Trade practices

NAIC suggested defining unfair trade practice as specific activity described in unfair trade practices act that an insurer commits with frequency and is general practice. (i.e. 5 days notice of cancellation, definition does not state acts that happened 1 or 2 x because they were not business practices. To address issue NAIC recommended addition of 2nd definition as: insurers commission of an activity specified in an act in a flagrant manner with disregard for the law. Now if only done once knowing does an Unfair trade practice.

US Dept of Treasury Office of Foreign Assets Control

OFAC administers and enforces economic and trade sanctions against foreign countries, individuals based on US policy and security.

State Filing Laws

Prior approval, file and use, use and file, no file, open competition, state-mandated.

Underwriting

Process an insurer uses to select and classify loss exposures to provide insurance coverage. Proper underwriting is essential to insurer's solvency and to fair treatment of applicants and insureds

NAIC recommendation day's notice for cancellations

Property (Property Insurance Declination Termination and Disclosure Model Act - NAIC Model Laws Regulations and Guidelines - Conditions in Force 60 days - 14 days notice; in Force greater than 60 days - 30 days notice. Auto (NAIC Automobile Insurance Declination Termination and Disclosure Model Act - NAIC Model Laws Regulations and Guidelines - Conditions Cancel for nonpayment - 10 days notice; Cancel for other reason - 20 days notice.

Social equity

Regulators must balance insurer's desire for actuarial equity with the need for social equity - all consumers have access to insurance at affordable rates. To help achieve this legislators and public identified socially unacceptable rating variables in every state (i.e. race, religion, national origin) for pricing decisions. If loss experience differs based from those of unacceptable variables, insurers cannot reflect that experience in rating plans. In some jurisdictions law has eliminated gender as a rating factor even though there may be a difference with auto - both pay same rates. If underwriters favor females over males they can override risk selection.

USA Patriot Act

Significant underwriting law. US Government effort to cut off access of terrorists and drug trafficking. Restricts corporations and individuals in dealing with these people. Money laundering and financial services are a concern. Law prohibits firms (including insurance) from engaging in business with those on OFAC's Specifically Designated Nationals (SDN) list. Violators can face fines, prison and civil penalties.

Examination Scheduling

Some states DOI's examine each insurer periodically while others do when complaints come in or if there is concerns regarding an insurer's operations.

Deemer provision

State law stating that if DOI does not disapprove of an insurers filed forms within the time the deemer provision specifies, the forms are deemed approved and can be issued by the insurers filing the forms.

Some states exempt form filing requirement policies used to insure highly protected risks (HPRs) and special risks unique and difficult to insure.

States also exempt manuscript (individual) policies from fore filing requirements.

Limiting Auto coverage

States can limit insurers ability to nonrenew or decline coverage. Another approach - prohibit insurers from denying coverage, to provide at least 1 year before canceling and limiting reasons for non-renewal.

Solvency Regulation influences underwriting

Surplus requirements stipulate premium to surplus ratio that insurers cannot exceed and cannot write new business if exceeds. cannot exceed 3 to 1. (written premium for all time-money put aside for claims). Reinsurance can assist to bring the ratio up for surplus. If may not be available but regulators assist insurers and reinsurers reach a solution.

Advertising and sales

There are requirements for advertising and sales materials (i.e. mass media, sales illustrations).Exams compare compare these to policy forms that are advertised and apply with unfair trade practices act. Exams review studies on procedures for reviewing these materials. If insurer allows sales producers to develop, examiners look over procedures. Insurers communicate with producers through training materials, bulletins, newsletters and memos. Producers must have effective training. Examiners look at whether insurer has communicated changes in regulatory requirements promptly and accurately to producers.

Market Conduct Exam preparation

When exam is scheduled, DOI notifies insurer in writing for preparation. Can be a few weeks to 60 days. Letter contains: 1) description of scope of exam and time period it will review 2) date exam will begin and estimated completion time 3) estimated cost of exam and method for billing cost to insurer 4) materials insurer must provide i.e. guidelines, manuals, forms notices of approval, advertising materials and producers records. 5) requests for info the insurer is to compile 6) identify office space, supplies and equipment insurer will provide. If there is a valid reason for more preparation time, DOIs may postpone. If DOI has reason to believe policyowners may suffer harm, there may not have to be prior notice to insurer for examination to occur.

Compulsory auto insurance and financial responsibility laws

affect underwriters. Auto must be provided at specified risk limits that would not be accepted otherwise. This requirement affects the rate system and costs among all insureds.

Underwriting regulation

affects indirectly rates, claims and solvency regulation. Underwriters misclarify risks - rates will be wrong. Underwriters acceptance of fraudulent risks affects claims and inflates rates. Insurers insolvency can suffer from acceptance/misclassification of poor risks. Regulation of underwriting protects solvency, rates and claims.

Rate Regulations

affects underwriting directly. Costs of insurance coverage should be distributed properly and adequately using the classification system.

Unfair discrimination

application of methods of treatment to insureds that have basic characteristics (i.e. race, gender, religion, etc). Unfair discrimination can also occur when no statistical support exists for an underwriting decision.

Regulators and Insurers work together

disagreements may happen on rate levels for classifications. An underwriter may avoid insuring risks that fall within certain classes. Insurers my seek to insure risks that fall within an excessive classification. Both work together.

Scope of market conduct examinations

during exam, examiners evaluate insurers business to determine 1) has standards been established to ensure activity is carried out effectively? 2) do standards comply with regulatory requirements 3)is activity being carried out to meet standards?. Examiners need to see organization and structure to ensure regulatory compliance. They review (i.e. certificate of authority, audit plans, computer systems, antifraud plans, complaint handling, advertising and sales.

Certificate of Authority

examiners evaluate operations to ensure they conform to certificate of authority. (i.e. personal lines can only see personal lines business) Annual statements - premiums match statements.

States vary from NAIC recommendations

i.e. 15 days notice for: nonpayment of premiums, policy in effort 60 days or less and not a renewal, suspension of insured's driver's license during period, issuance of policy and misrepresentations. 60 days for all other reasons.

Filing forms submitted for DOI approval must be accompanied by or similar to

i.e. Property-casualty forms filing supplement - name, co identifier 3)type of liability coverage (claims or occurrence) 4)list of forms 5)I certify with name

Size or type of risk a form covers can determine the kind of form filing law

i.e. a rule might exempt policies used for large risks from its filing requirements.

Non-renewal notices (similar to termination notices)

insurers to mail to insureds at last known address or deliver to them in person with a written explanation. NAIC recommends insurers give 30 day notice but states often vary.

Computer systems

market conduct examiners evaluate insurers systems to ensure safeguards and controls are in place. Also evaluate disaster recovery records. If disaster happens, insurer must recover info and operate without interruption.

Reinsurers

may refuse if liability policies don't have specific pollution exclusions even though pollution may not be a problem. therefore insurers cannot write business because they do not have access to reinsurance. Availability to liability ins in jurisdiction decreases. To increase availability of general liability, regulator must approve revised liability policy with pollution exclusion.

Exam techniques

prior to exam, examiners will review items to familiarize with insurers operations (i.e. previous exams and their problem areas; Annual Statements for finances). When they arrive, they review business records, policies and procedures manual - does insurer maintain accurate records?. Because of volume, examiners use statistical sampling to review representation of records (i.e. auto claim payments - total set of records is evaluated with them best method to portion records for examination.

Unfair Trade practices in Underwriting

protect both the industry and the consumer, prohibit insurer from using unfair methods of competition and engaging in other unfair actions or practices.Acts give DOIs authority to decide if insurers activities result in unfair competition or qualify as unfair trade practices if activities are not specifically addressed in the acts.

NAIC Market Conduct Examiners Handbook

provides framework for performing market conduct examinations. Accesses compliance with NAIC model laws. Provides DOI with developing procedures based on applicable regulatory requirements. DOI's rely on these for consistency.

US Interstate Commerce Commission and PUC

specify requirements for autos and vehicles available for hire. Underwriters must comply with risks.

Desk examinations

target market conduct examination in which DOI examiners review some of an insurers business records in DOI offices. Exam is limited in scope. (i.e. handling complaints relating to those on desk examiners).

Federal Motor Carrier Act

vehicles must meet these requirements 1) provide blanket coverage for all owned and hired autos 2) meet requirement notices (i.e. rate and coverage changes and policyholder status and names insurers send out notices 3) provide required limits of liability based on vehicle covered 4)satisfy policy and endorsement wording requirements

An examiner

when a certain type of complaint occurs, examiner always refers to insurer's underlying guidelines. 1) Policy population by line of business 2) Underwriting criteria - examiner can compare results with other insurers in industry. 3)Application of Underwriting rules to the risks insured (ie premiums charged, new business, endorsement use and termination procedures) 4) Insurer's cancellation and nonrenewal practices (see if complying with statutes, regulations and its own underwriting guidelines.