Fundamentals of Insurance Planning Chapter 5
What are the three key categories of state regulation of insurance?
1) formation and licensing of insurers: specific standards of organization, often higher than those set for general business, ensure solvency, competence, integrity of insuring organization; step 1-incorporation- state recognizes formation of new entity, step2- licensing-check on insurer's financial condition to ensure sufficient initial capital. Objective of licensing is to provide preliminary method of lessening the chance of insurer's financial insolvency 2) supervision of insurance operations: contracts and forms, rates, reserves, asset and surplus values, investments, product licensing, unfair trade practices, unfair claims practices, and taxation 3) rehabilitation and liquidation: commissioner presides over the insurance company's liquidation- can be due to insolvency; can be voluntary effort to effect corporate reorganization or merger
8. What criteria can a financial planner use to help clients select insurers for their insurance programs?
1) insurers financial strength, 2) Willingness to pay claims, 3) service before and after claims, 4) Underwriting- conservative or liberal, 5) cost of products and lines of products offered
What criteria can a financial planner use to help clients choose reliable and competent agents or brokers for their insurance programs?
1) knowledge and ability 2) willingness to do business 3) integrity and character 4) representation
What are the three basic methods of government insurance regulation?
1) legislative action: foundation of insurance regulation, creates insurance laws, often combined into insurance code 2) administrative action: application and enforcement of insurance laws, responsibility of insurance commissioner 3) court action: detailed interpretation of troublesome parts of law
How do each of the following aspects of insurer operations tend to be regulated. Point out any differences between regulation of life insurers and property liability insurers. 1. contracts and forms 2. rates 3. reserves 4. assets and surplus values
1. contracts and forms: insurance policies are complex legal documents, not fully understood by consumers, could be used to mislead or unfairly treat policy owners. policy forms must be approved by, or at least filed with, commissioner. life and health contracts are not standard contracts, so similar forms or benefits are not required, transportation insurance field most non-uniform of insurance contracts
How do each of the following aspects of insurer operations tend to be regulated. Point out any differences between regulation of life insurers and property liability insurers. 1. contracts and forms 2. rates 3. reserves 4. assets and surplus values
2. rates: price of insurance contracts controlled to varying degree in different lines of insurance, some lines, such as aviation insurance, practically unregulated, life insurance, regulation involves maintaining minimum reserves, rather than setting rates, most other kinds of insurance are subject to some direct rate regulation. statutory standards outlined by insurance rating law, 1) rates should be reasonable and adequate for the class they apply to, 2) no rate to be unfairly discriminatory, 3) consider past and prospective loss experience and reasonable underwriting profit
How do each of the following aspects of insurer operations tend to be regulated. Point out any differences between regulation of life insurers and property liability insurers. 1. contracts and forms 2. rates 3. reserves 4. assets and surplus values
3) reserves- states require insurers to maintain minimum reserve considered adequate to meet policy obligations as policies mature; life insurance legal reserve is an amount that, augmented by premium payments under outstanding contracts, is sufficient to enable the life insurer to meet its assumed policy obligations, In P&L unearned premium reserve musta at all times be adequate to pay a return premium to policyowners who cancel before policy expiration; reserve to cover outstanding claimes
How do each of the following aspects of insurer operations tend to be regulated. Point out any differences between regulation of life insurers and property liability insurers. 1. contracts and forms 2. rates 3. reserves 4. assets and surplus values
4) assets and surplus values: value of assets report in the Annual Statements of insurers must be correct and conservative in order that liabilities, reserves, and residual surplus items have true meaning, securities held by insurers are valued according to practices adopted by NAIC, nonadmitted assets not included in annual statement
How do each of the following aspects of insurer operations tend to be regulated. Point out any differences between regulation of life insurers and property liability insurers. 5. investments 6. agent's licensing 7. trade practices h. claims practices
5. investments: laws governing types of securities that may be purchased for investment, strictest regulations apply to life insurers, subject to vigorous supervision of their investment portfolios, Bond and common stocks prime investments, P&L insurers supervised more leniently, safest type of investments for all assets held as reserves and other liabilities, remainder of assets may be invested in wider range of securitites
How do each of the following aspects of insurer operations tend to be regulated. Point out any differences between regulation of life insurers and property liability insurers. 5. investments 6. agent's licensing 7. trade practices h. claims practices
6. agent's licensing- legally required in all states to be licensed as broker or agent, insurance departments administer laws, objective to permit insurers to use only competent, trustworthy representatives, require continuing education
How do each of the following aspects of insurer operations tend to be regulated. Point out any differences between regulation of life insurers and property liability insurers. 5. investments 6. agent's licensing 7. trade practices h. claims practices
7. trade practices- illegal in all states under laws similar to FTC act, aim at retaining jursidiction for the states, prevent fraud and unethical acts of agents and brokers, provide fines, suspention or revocation of licenses, commissioner has broad powers to prevent unfair practices
How do each of the following aspects of insurer operations tend to be regulated. Point out any differences between regulation of life insurers and property liability insurers. 5. investments 6. agent's licensing 7. trade practices h. claims practices
8. claims practices- most states have laws patterened after NAIC's model acts, some practices considered unfair include: failing to investigate claims properly, failing to communicate or acknowledge communications from clients on timely basis, failing to provide reasonable explanation of claim denial, failing to maintain procedures for complaint handling about claims, misrepresenting pertinent policy provisions affecting claims, failing to try to settle claim once insurer's liability had been made clear, attempting to settle claim for less that reasonable person would expect
6. Maria Rodriguez, your client, is reluctant to buy whole life insurance, because she has heard some insurers becoming insolvent. She is concerned that her insurance company might not be able to perform its obligations by the time she dies and her heirs need the insurance proceeds. How does insurance regulation seek to protect insurance buyers like Maria when an insurance company becomes insolvent?
All 50 state have guaranty fund plans to partially protect consumers against insolvency of insurers, assess solvent insurers to pay unpaid claims of insolvent company and return unearned premiums to policyowners. Guaranty funds appear to protect consumer reasonably well. Improvments include: 1) giving guaranty funds immediate access to insolvent insurer's assets, 2) giving guaranty funds priority, 3) permitting a tax offset agains premium taxes paid by sovlent insurers
What are the arguments for and against regulation of insurance by the states?
For State: 1) local nature of insurance transactions, 2) reasonable success of state regulation for many years 3) value of regulation on state-by-state basis, gradual change and innovation 4) NAIC model legislation to achieve uniformity in legislation 1) federal regulation would be cumbersome, expensive, less effective, fragmented Against State: 1) incosistency across states, lack of uniformity 2) inadequate funding for insurance commission, 3) need for greater standardization, 4) desire for increased competition 2)
Your financial planning client asks why insurance seems to be so highly regulated. How would you explain the general purpose of insurance regulation to this client?
General purpose of insurance regulation is to protect public against insolvency or unfair treatment by insurers, state's view regulation as important source of revenue through premium tax, subject to considerable government regulation because it is generally classed as a business that "is affected with a public interest"
Insurers participate in many activities that are forms of self-regulation. What are the two ways that insurers engage in self-regulation?
Two examples of self-regulation include American Council of Life Insurers (ACLI); which promotes public relations and legislation, and The American College, strives to improve insurance education and set standards for professional courses and designations
legal reserve
amount that, augmented by premium payments under outstanding contracts and interest earnings, is sufficient to enable the life insurer to meet expected policy obligations
nonadmitted asset
assets of marginal quality or little liquidity for policyowners if their insurers should get into financial difficulty, ex. most office furniture and supplies, premiums 90- days or more past due
unfair trade practices
developed by NAIC, rebating, twisting, misappropriation, commingling of funds, enforced by commissioner
model law
draft bill, suggested wording of a new law, for consideration by state legislators, state may adopt, adopt with modifications or ignore model
model regulation
draft regulation that may be implemented by state insurance department if the model law is passed
unearned premium reserve
in property and liability insurance, must always be adequate to pay a return premium to all policyowners if their policies are canceled prior to expiration. reflects the proportion of written premium that the insurer has not earned by providing protection for the full policy period
unauthorized entity
insurance company that has not gained approval to do insurance business from the department of insurance in the jursidiction where it wants to produce or sell insurance; agents are responsible for determining carriers they sell for are approved by department of insurance in their state
National Conference of Insurance Legislators (NCOIL)
organization of legislators whose primary focus is insurance legislation and regulation; purpose is to help legislators make informed decisions on insurance issues that affect their constituents and to declare opposition to federal encroachment of state authority
premium tax
payment from insurers to the state based on a percentage of the gross premiums policyowners pay, resembles state tax on insurance, passed to consumers, primarily generate revenue for the state, small percentage used to operate the state insurance department
file and use law
permits the immediate use of filed rates without the insurance commissioner's approval, however, commissioner may disapprove rates within a certain time period
open competition
pioneered in CA, relies on competition to set rates, represents the absence of government regulation,
rehabilitation
process of restoring an insurer to financial stability through reorganization
use and file law
rates must be filed with insurance commissioner within a specified time after they are first ysed, rates may be disapproved if not in compliance with the law
loss reserve
reflects the insurer's liability for losses that have already occurred but have not yet been paid or otherwise settled
prior approval law
requires proposed rates be filed with the insurance commissioner, rates may not be used by insurer unless and until the commissioner approves them
rebating
return of any part of the premium, except in the form of dividends, to the policyowner by the insurer or agent as a price-cuttting sales inducement
twisting
special form of misrepresentation in which an agent may induce policyowner to cancel existing contract of another insurer to take out new contract based on unfair or incomplete comparison of the contracts
guaranty fund
state fund designed to partially protect consumers against insurer insolvency, assess sovlent insurers in order to pay an insolvent company's unpaid claims and to return unearned premiums to policyowners
misappropriations
unlawful keeping of funds belonging to others
flex-rating law
used for some lines of insurance, no regulatory approval needed if proposed new rate represents a change of less than 5-10% or other stated percentage of the existing rate; other changes require prior approval
National Association of Insurance Commissioners (NAIC)
voluntary nonprofit association of state insurance administrators, no regulatory authority, develops model laws and regulations
commingling of funds
when an agent mixes the insured's or insurer's funds with the agent's personal funds, some states require separate bank account for funds held in trust for insurer