CPCU 520 Assignment 2: Insurance Regulation

What does solvency regulations protect?

It protects insureds against the risk that insurers will be unable to meet their financial obligations

5 major types of state rating laws:

1. Prior approval laws 2. File and use laws 3. Use and submit laws 4. No filing laws 5. Flex rating laws

Regulators have traditionally monitored 3 key areas of market conduct:

1. Producer practices 2. Underwriting practices 3. Claims practices

What are the 3 separate and equal branches of government?

The legislative branch, the judicial branch (court system), and the executive branch.

4 types of "Unofficial Regulators" that affect insurers activities

1. AM Best Company 2. Duff & Phelps 3. Moody's 4. Standard & Poors 5. Weiss Ratings Inc.

To protect consumers, insurance regulators take action for unfair writing practices by:

1. Constrain insurers ability to accept, modify, or decline applications for insurance. 2. Establish allowable classifications. Regulators limit the ways in which insurers can divide consumers into rating classifications. 3. Restrict the timing of cancellations and renewals.

Insurance advisory organizations can provide these valuable services to participants in the insurance market and insurance regulators:

1. Develop rating systems 2. Collect and tabulate statistics 3. Research important insurance topics 4. Provide a forum for discussing important issues 5. Educate members, the industry, insurance regulators, and the public about relevant issues 6. Monitor regulatory issues of concern to members.

If an insurer is in violation of unfair practices, the insurer is subject to one or both of 2 penalties:

1. Fine per violation 2. Suspension or revocation of license

Well known insurance advisory organizations includes:

1. Insurance Services Office (ISO) 2. American Association of Insurance Services (AAIS) 3. National Council on Compensation (NCCI)

Insurance regulators try to main a sound financial condition of private insurers for several reasons:

1. Insurance provides future protection 2. Regulation is needed to protect the public interest 3. Insurers have a responsibility to insureds 4. Insurers have become insolvent despite regulatory reviews

Legislative policy regulation affects these 5 areas:

1. Mandatory provision 2. Prohibited provisions 3. Forms approval 4. Standard forms 5. Readability standards

Reasons for insolvency:

1. Rapid premium growth 2. Inadequate insurance rates 3. Inadequate reserves 4. Excessive expenses 5. Lax controls over managing general agents 6. Uncollectible reinsurance 7. Fraud *Poor management is the root of most of these factors.

Monitoring solvency protects insureds & the public by accomplishing 2 broad goals:

1. Reducing insolvency risk 2. Protecting the public against loss when insurers fail.

Administrative rules, regulations, and guidelines can be stated in:

1. Regulations communications by the state insurance department to insurers 2. Informal circulars or bulletins from the same source 3. Precedents set during the approval process.

Alien insurers must satisfy these requirements to get a license in a state:

1. Satisfy the requirements imposed on domestic insurers by the state they want to be licensed 2. Establish a branch office in any state and have funds on deposit in the US equal to the minimum capital and surplus required.

The 3 criteria that state insurance departments must meet to be accredited:

1. State insurance laws and regulations must meet basic standards of the NAIC models 2. The state's regulator methods must be acceptable to the NAIC 3. The state insurance department practices must be adequate as defined by the NAIC

The insurance industry is regulated for 3 reasons

1. To protect consumers 2. To maintain insurer solvency 3. To prevent destructive competition

3 major goals of regulation are to ensure that rates are:

1. adequate 2. not excessive 3. Not unfairly discriminatory

Capital Stock

A balance sheet value that represents the amount of funds that a corporations stockholders have contributed through the purchase of stock.

Bad Faith

A breach of duty of good faith and fair dealing.

The NIPR Gateway

A communication networks that links state insurance regulators with the entities they regulate to facilitate the electronic exchange of producer information.

Model Law

A document drafted by the NAIC in a style similar to a state statute that reflects the NAIC's proposed solution to a given problem or issue and provides a common basis to the states for drafting laws that affects the insurance industry.

Model Regulation

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

Twisting

A producer might induce an insured to replace one policy with another to the insureds detriment.

Insolvency

A situation in which an entity's current liabilities (as opposed to it's total liabilities) exceed it's current assets.

Guaranty Funds

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 assessments collected from all insurers licensed in that state.

Non-Admitted insurers are typically:

A surplus lines insurer

Consumer Federation of America (CFA)

Advocacy organization that provides information to consumers about auto insurance and works to improve the safety of household products.

Use and Submit Laws

Allows insurers to use the new rates and later submit filing info that is subject to regulatory review

File and Use Laws

Allows the insurer to use the new rates immediately after filing with the state insurance department

What is the National Association of Insurance Commissioners (NAIC)?

An association of insurance commissioners from the 50 US states, the District of Columbia, and the 5 US territories, and possessions, whose purpose is to coordinate insurance regulation activities among the various state departments.

Producer Database (PDB)

An electronic database consisting of information relating to insurance producers that links participating state regulatory licensing systems into one common repository of producer information

Licensing for claims adjusters includes:

An exam, background check, and ethics requirements.

Insurance Advisory Organizations

An independent organization that works with and on behalf of insurers that purchase or subscribe to it's services. They work with and on behalf of insurers.

Acceptable Non-Admitted Insurer requirements

File a financial statement that the insurance commissioner finds satisfactory, supply documentation of transactions to state regulators, obtain a certificate of compliance from its home state or country, and if an alien insurer, maintain a trust fund in the US

Uniform Certificate of Authority Application (UCAA)

Created in response to complaints about how long it took regulators to license a new insurer. It allows insurers to file copies of the same application for admission in numerous states.

System for Electronic Rate and Form Filings (SERFF)

Designed to enable insurers to send and states to receive, comment on, and approve or reject rate and form filings- has dramatically improved the timelines of product filings.

Courts influences insurers by:

Determining whether insurance laws are constitutional and whether administrative rulings and regulations are consistent with state law.

No Filing Laws

Do not require insurers to file rates with the state insurance department

Uniform Insurers Liquidation Act

Drafted by the NAIC- This model act promotes uniformity in liquidating assets and paying claims of a failed insurer.

Market analysis allows regulators to:

Identify general market disruptions, promote uniform analysis by applying consistent measurements between insurers, and facilitates communication and collaboration among regulators from different states.

What does the executive branch do?

Implements the laws

Market Conduct Annual Statement (MCAS)

In 2009, 29 states participated in the MCAS project and began to assemble baseline statistics that are used to benchmark insurer performance.

The primary goal of rate regulation:

Insurer financial stability which results in consumer protection.

What does the judicial branch do?

Interprets the laws

Prospective Loss Cost

Loss date that are modified by loss development, trending, and credibility processes, but without considerations for profits and expenses.

What does the legislative branch do?

Makes the laws

Public Citizen

Monitors the insurance industry and has contributed to substantive reforms in auto safety and seatbelt laws.

Trade associations operate at the:

National, state, and local levels.

The Insurance Fraud Protection Act

Part of a federal anti-crime bill titled, "Violent Crime Control and Law Enforcement Act of 1994" This broad legislation protects consumers and insurers against insolvencies resulting from insurance fraud.

NAIC Model Unfair Trade Practices Act

Prohibits insurers from any activity that would restrain trade or competition in the business of insurance. It also prohibits an insurer from misrepresenting it's own or another insurers financial status.

The purpose of regulating claims practices:

Regulatory claims control on claims practice is intended to protect insureds and maintain public confidence in the promise of insurance to pay valid claims promptly and fairly.

Flex Rating Laws

Require prior approval only if the new rates exceed a certain percentage above the rates filed previously.

Prior Approval Laws

Require rates and supporting rules to be approved by the state insurance department before they can be used

The McCarran Act

Reserves the usual state federal allocation of regulatory powers only for the business of insurance- This does not include everything insurers do such as federal employment laws.

What does the NAIC's Financial Analysis Working Group do?

Serves as both a coordinator and a fail safe mechanism for state insurance regulators as they oversee nationally significant insurers.

What happens when insurance rates are inadequate?

Some insurers can become insolvent and others might withdraw from the market or stop writing new business.

Who performs the day to day regulations for the insurance business?

State insurance departments which fall in the executive branch of each state department.

Paid-in-Surplus

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

Good Faith Claims Handling

The manner of handling claims that requires an insurer to give consideration to the insureds interest that is least equal to the consideration it gives to it's own interests.

Motgagor

The person or organization that borrows money from a mortgagee to finance the purchase of real property.

Rebating

The practice of giving a portion of the producers commission or some other financial advantage to an individual as an inducement to purchase a policy. Illegal in almost all states.

Main purpose of insurance industry professional and trade associations:

To advance the success of members and uphold ethical standards.