Insurance Regulation Questions

What are the three primary forms of an insurer's licensing status in any given state?

- Domestic Insurer -Foreign Insurer -Alien Insurer

List the four methods regulators use to verify insurer's solvency.

- Establish financial requirement by which to measure solvency. -Conduct on-site field examinations to ensure regulatory compliance. - review annual financial statements. - Administer the insurance regulatory information system (IRIS).

Explain why Important insurance regulators try to maintain and enhance the financial condition of private insurers.

- Premiums are paid in advance, and the period of protection extends into the future. If an insurer becomes insolvent, future claims might not be paid even though the premiums has been paid. Consumers may find it difficult to evaluate insurers financial ability to keep their promises. - Regulation is needed to protect the public interest. Large numbers of individuality are adversely affected when insurers become insolvent. For Example, an unusually large catastrophe that affects a large area can make an insurers financial ability to pay claims uncertain, such as when Hurricane Andrew struck Florida in 1992 and caused seven insurer insolvencies.

Compare a foreign insurer to an alien insurer.

A Foreign insurer is a US insurer that is licensed to do business in a state but is incorporated in a different state. An alien insurer is a non-US insurer that is licensed to do business in the US states where it wishes to operate.

Describe a nonadmitted insurer, and explain how nonadmitted insurers can transact business in a state.

A nonadmitted insurer, often referred to as a surplus lines insurer, is not authorized by the state insurance department to do business within that state. Under surplus lines law, a nonadmitted insurer may be permitted to transact business only through a specially licensed surplus lines producer.

Describe a reciprocal insurance exchange

A reciprocal insurance exchange consists of a series of private contracts in which subscribers, or members of the group, agree to insure each other.

Describe the three major criteria that a state insurance commissioner would consider when deciding to approve or disapprove an insurers request for a rate.

A state insurance commissioner would consider whether the rate is adequate; it should be sufficient to pay all claims and the expenses related to those claims, helping to maintain insurer solvency. The commissioner would also determine whether the rate is excessive and would disapprove an excessive rate; insurers are entitled to a fair return, but not to excessive or unreasonable profit. A state insurance commissioner would also consider whether the rate is unfairly discriminatory; insurers are permitted to adjust premium rates based on the risk profile of different groups o insureds, but these rates must be fair and consistent.

Explain what penalties can be imposed under most state unfair trade practices laws in each of these circumstances: A) An insurance agent engages in unfair trade practices. B)An insurer is guilty of unfair underwriting practices.

A) State Regulators can suspend or revoke the licenses of sales agents or brokers who engage in unfair trade practices B) An insurer that is guilty of unfair underwriting practices could be fined, or its operating license could be suspended or revoked.

A state insurance department has received several complaints alleging that Insurance Company is slow to resolve claims and then denies them without explanation. A) Explain how the department of insurance is likely to follow up on these complains. B)Identify the type of regulatory oversight under which insurance company operations fall.

A) The insurance department may investigate the complaints and may hold formal hearings as part of the investigation process. if the investigation indicates that the allegations are true, the claims representative or insurer may face a reprimand, fine, license suspension, substantial legal judgement, or another legal penalty. B) Insurance company operations fall under market conduct regulation.

ABC Company is an insurer incorporated and licensed in one state. ABC would like to expand into a neighboring state. What requirements will ABC need to meet in order to be licensed in the neighboring state?

ABC will first need to show the regulator in the neighboring state that it has satisfied the requirements in its home state. ABC will also need to satisfy the minimum capital, surplus, and other requirements imposed on domestic insurers within the neighboring state.

Describe how different states meet the three major criteria for insurance rates.

Different states meet these criteria by different types of rating laws that vary in the type and extent of control the states assert over insurers rates.

Describe open-competition rating laws.

In open-competition rating, market prices driven by the economic laws of supply and demand, rather than regulatory decisions, determine insurance rates. However, state departments typically have the authority to monitor competition and disapprove rates if deemed necessary. The major criteria that rates must be adequate, not excessive, and not unfairly discriminatory continue to apply.

Identify the focus of market conduct regulation.

Market conduct regulation focuses on how insurers treat applicants for insurance, insureds, and others who present claims for coverage.

A new insurer in a state that has an open-competition rating law is charging rates for auto insurance policies that are much lower than those of all of the other auto insurers in the state. Many of the other insurers express concern to he insurance commissioner that these rates are too low. Discuss whether the insurance commissioner can take action on the complaint in an open-competition rating system.

One of the three major criteria that states consider in evaluating insurance rates is whether they are adequate. Under open-competition rating laws, the insurance commissioner has the responsibility to be sure that rates are adequate, not excessive, and not unfairly discriminatory. therefore, the insurance commissioner can investigate the rates charged by the new insurer and take action if deemed necessary.

Insurance policy language is usually regulated for what purpose?

Regulators review insurance language to protect consumers. Many insurance policies are complex legal documents that may be difficult for some consumers to analyze and understand. Regulators can set coverage standards, specify policy language for certain insurance coverages, and disapprove unacceptable policies.

What are the three most common forms of insurer ownership?

Stock Insurance Companies Mutual Insurance Companies Reciprocal Insurance Exchanges

Compare the organization of a stock insurer and a mutual insurer.

Stockholders supply the capital needed to form a stock insurer or to expand it's operations. Stockholders expect to receive a return on their investment in the form of stock dividends, increased stock value or both. A mutual insurer is owned by it's policyholders. Because a traditional mutual insurer issues no common stock, it has no stockholders. Stockholders and policy holders have similar voting rights and elect the insurer's board of directors.

Explain why surplus lines insurers are generally exempt from insurance regulations pertaining to policy forms and rates.

Surplus lines insurers are willing to provide coverage for risks that admitted insurers are unable or unwilling to offer. Because these insurers increase the availability of insurance, they have the freedom to use policy provisions and rate that are appropriate for a particular risk.

What is the purpose of licensing individual insurance professional such as producers and claims representatives?

The examinations required for licensing, along with continuing education requirements, attempt to ensure that insurance professionals have a minimum level of insurance knowledge and meet ethical standards.

Identify the two major objectives of regulations regarding insurance policy forms.

The first objective is that insurance policies be clear and readable to insurance consumers. The second major objective is to detect and address any policy provisions that are unfair or unreasonable.

Compare file-and-use rating laws with use-and-file laws.

Under File-and-use laws, insurers must file rates with the state insurance department prior to their use, but the rates can be used immediately without specific approval. Use-an-file laws are variation of the file-and-use law in which insurers file rates within a specified period of time after rates are put into use.

What happens when insurance rates become inadequate due to destructive competition?

When insurance rate levels become inadequate, some insurers may not collect enough money to pay all of their insureds claims and may become insolvent. Other insurers might lose so much profit the they withdraw from the market or stop writing new business. An insurance shortage can then develop, and individuals and organizations might be unable to obtain the coverage they need.