2010 Il Life & Health Insurance Exam Unit 2

Front 1

Regulation of the Insurance Business

Back 1

• Three major channels of regulation of the
insurance industry are:
– Federal regulation
– State regulation
– Self-regulation

Front 2

Federal Regulation

Back 2

Most insurance regulation takes place at state
level, but there are some important regulations
at the federal level

Front 3

Federal Regulation pt. 2

Back 3

• Federal jurisdiction applies to individuals or
companies whose activities affect interstate
commerce, which includes most insurance
activity, but only to the extent that such business
is not regulated by state law
– McCarran-Ferguson Act – main intent of act was to
exempt insurance industry from most of the
provisions of the federal antitrust laws

Front 4

Fair Credit Reporting Act

Back 4

• Sets up procedures for consumer reporting
agencies to follow in their dealings with
businesses to ensure that records are
confidential, accurate, relevant, and properly
used
• All insurers and their producers must comply
with this act regarding information obtained from
a third party concerning the applicant

Front 5

Fair Credit Reporting Act 2

Back 5

• Act states that
– When an applicant is denied coverage due to
information obtained from a third party source, the
applicant will be informed of the source
– Insurer must permit an applicant to refute any
adverse information
– If applicant feels information incorrect, the applicant
can send brief statement to reporting agency with
correct information

Front 6

Fair Credit Reporting Act pt. 3

Back 6

• Act states that (continued)
– A Notice to the Applicant must be issued to all
applicants that a report(s) will be ordered concerning
their past credit history and any other pertinent
information; agent must leave this notice with the
applicant along with the receipt
– Consumer reporting agencies include credit agencies,
Equifax, Medical Information Bureau, etc.

Front 7

Insurance Code

Back 7

• The body of laws of the state

Front 8

State Regulation

Back 8

• State regulation consists of:
– Statutes – body of law developed by legislative
branch of government
– Rules and regulations – developed by Department of
Insurance

Front 9

Head of the Insurance Department-
The Commissioner, Superintendent, or Director
of Insurance (titles differ by state)

Back 9

– Commissioner’s powers and duties include:
• Conduct investigations and examinations
• Make reasonable rules and regulations
• Hire appropriate people and delegate authority
accordingly
• Examine insurers, agents, and brokers
– Includes books and records
– Examination intervals and procedures vary by state
(Please see your State Law Supplement for details
specific to your state)

Front 10

Commissioner’s powers and duties include:
(continued)

Back 10

– Subpoena witnesses and administer oaths
– Issue orders and notices
– Issue insurance licenses and certificates of authority
– Impose penalties – including fines, suspensions, and
revocations
– Approve insurance policy forms sold within the state
– Approve rates and rate increases for regulated lines
of insurance

Front 11

Commissioner does not

Back 11

write laws, Legislature
writes laws
• Commissioner can have no financial interest
with any insurer

Front 12

State Insurance Code prescribes

Back 12

procedures
that must be followed for an insurance company
to be formed

Front 13

Certificate of authority

Back 13

– Authorized/admitted insurers are issued a certificate
of authority
• A legal certificate issued by state Department of
Insurance (DOI)
• Grants insurance company legal right to write
insurance contracts in that particular state

Front 14

Insurer solvency

Back 14

– Protection against insurer insolvency one of principal
concerns of insurance industry
– Insurance insolvency regulations govern pertinent
areas to try to prevent from occurring
– Many states have adopted regulations for the
establishment of guaranty associations
– There are various rating services/organizations
(companies that rate the financial strength of
insurance carriers) available to refer to regarding an
insurance company’s financial strength

Front 15

Financial requirements

Back 15

– To help in detection of financial problems, various
state statutes:
• Impose capital and surplus requirements
• Require preparation of annual financial statements
• Require periodic examinations (or whenever
deemed necessary)
– States have regulations to ensure that insurers invest
in only high-quality assets

Front 16

Guaranty associations

Back 16

Organized to help protect claimants, policyholders,
annuitants, and creditors in the event an insurer does
become insolvent
– Some common characteristics of guaranty
associations include:
• Composed of insurers authorized to transact
business within the state
– An insurer’s authorization to transact business in the
state is contingent upon membership in the association

Front 17

Guaranty associations pt. 2

Back 17

– They establish accounts to collect funds for the
administration and assessment of the association
– Supervised by Commissioner and board of directors
• whose duties are specified by law
– Member insurers are assessed on the percentage of
premiums each insurer has individually earned in the
state

Front 18

Definition of agent/producer

Back 18

– Anyone not a duly-licensed broker, who solicits
insurance or aids in placing risks, delivering policies
or collecting premiums on behalf of an insurance
company
• Agents represent their companies
• Brokers represent their clients

Front 19

Licensing Requirements

Back 19

– Be at least 18 years of age
– Not have committed any act that would be reason for
denial, suspension, or revocation of an insurance
license
– Where required, complete any applicable state
prelicensing requirements
– Where required, pay appropriate fees and
successfully pass applicable exam(s)

Front 20

Licensing Requirements pt. 2

Back 20

– Submit application and pay appropriate license fees
– Where required, obtain and maintain a bond
• Since producers’ duties involves handling of
monies/premiums, the bond protects applicants
and insureds in the event of wrongdoing on the
part of the producer
• Applicants who are acting solely for an insurance
company are typically exempt due to insurance
company accepting responsibility for their agents

Front 21

Types of Licenses

Back 21

• Resident producer (individual)
– Allows a resident individual—agent—to solicit and sell
insurance
• Nonresident producer (individual)
– Allows a nonresident individual to solicit and sell
insurance
• Must be in good standing in their residence state
• Must hold same kind of license(s) in their
residence state
• Residence and nonresidence states involved
typically reciprocal in regards to licensing
arrangements

Front 22

Types of Licenses pt. 2

Back 22

• Temporary
– Temporary licenses for nonproducers
• Typically allowed to provide service for insureds
during transition period
– Temporary licenses for insurance producer applicants
• Allows person to operate as agent while in the
process of getting fully licensed

Front 23

Types of Licenses pt. 3

Back 23

• Limited lines
– Allows person to transact certain lines of insurance
only—may not transact other lines of insurance
– Limited lines include the following classes of
insurance
• Baggage or limited health, accident, or trip
cancellation
• Industrial life insurance
• Industrial accident and health insurance

Front 24

Types of Licenses - Business and financial entities

Back 24

Business and financial entities
– Must also be properly licensed in order to sell
insurance in the state

• Business and financial entities (continued)
– Process includes
• Submitting appropriate paperwork and paying
required fees
• Having required persons properly licensed,
including a licensed producer responsible for the
entity’s compliance with state insurance laws,
rules, and regulations
• Types of businesses and financial entities include
– Corporations
– Partnerships
– Banks

Front 25

Exemptions for Licensing

Back 25

• In some states, certain persons are exempt from
licensing requirements
• This exemption generally applies to persons
who are not actively soliciting or selling
insurance or do not receive commission based
compensation

Front 26

Maintaining a License

Back 26

• Unless revoked or suspended, producers’
license remains in effect as long as
– Required renewal fee has been paid
– Continuing education (CE) requirements have been
met
• CE requirements and time periods vary by state –
Reminder: See your state law supplement
• For nonresident producers, meeting CE
requirements for resident state typically suffices
CE requirements for nonresident state
– When applicable, meeting bond requirements

Front 27

Maintaining a License pt. 2

Back 27

• Change of address
– Licensed producer must notify Commissioner of a
change in address within a designated time frame –
common time frame for many states is 30 days
• Assumed name
– An insurance producer doing business under any
other name than the producer’s legal name is
required to notify the Commissioner before using the
assumed name

Front 28

Commissions

Back 28

• An insurer or licensed producer must not pay (or
share) commissions to a person for selling or
negotiating insurance if that person is required
to be licensed but is not when conducting the
insurance business
• Other commission related points apply – see
your state law supplement

Front 29

Fiduciary Responsibilities

Back 29

• Due to responsibilities and duties of a producer,
they are held in a fiduciary capacity (hold a
position of financial trust and confidence)
• Proper handling of premium monies is subject to
state specific laws, rules, and regulations
• Any misappropriation of these funds is subject to
state specific penalties and fines
• Any commingling of funds is strictly prohibited

Front 30

Disclosure

Back 30

• All policies sold by an insurance producer must
identify the name of the producer,
representative, or firm

Front 31

Felony Convictions

Back 31

• Any insurance producer who is convicted of a
felony must report the conviction to the
Commissioner within the state specified time
period and submit any relevant documents at
the same time

Front 32

Acting Without a License

Back 32

• A person without an insurance producers license
may not solicit or sell insurance
• Violations are subject to state specific penalties
and fines

Front 33

Disciplinary Actions:
Penalties and Fines

Back 33

• Commissioner may place on probation,
suspend, revoke, or refuse/deny to issue or
renew a producer’s license or may levy a civil
penalty (fine) for many reasons, including:
– Providing incorrect, misleading, or materially untrue
information in the license application
– Violating insurance laws, regulations, subpoenas, or
orders

Front 34

Disciplinary Actions:
Penalties and Fines pt. 2

Back 34

• Reasons, including: (continued)
– Improperly withholding, misappropriating, or
converting money or property received in the course
of doing insurance business
– Having been convicted of a felony
– Using fraudulent, coercive, or dishonest practices
– Demonstrating incompetence, untrustworthiness, or
financial irresponsibility in the conduct of business

Front 35

Disciplinary Actions:
Penalties and Fines pt. 3

Back 35

Cease and desist order
– Can be issued by Commissioner in situations where
violations have occurred or it is felt a licensee’s
conduct presents an immediate danger to the public
– The order prohibits the individual or entity from
continuing that practice
– Failure to comply can result in substantial fines which
vary by state
– Prohibits the individual or entity from continuing that
practice/activity

Front 36

Disciplinary Actions:
Penalties and Fines pt. 4

Back 36

• See your state law supplement for additional
violations and more detailed information
regarding specific penalties and fines that
pertain to your state

Front 37

Regulated Practices-
Controlled business

Back 37

– Business written on a producer’s own person,
immediate family members, or such persons as the
producers relatives or business associates
– Typically permitted provided the amount of controlled
business does not exceed a state specific
percentage of the total premiums written by a
producer in any 12 month period

Front 38

Regulated Practices
• Unfair trade practices

Back 38

– Consist of unfair marketing practices and unfair claim
practices

Front 39

Regulated Practices
• Unfair marketing practices

Back 39

– Misrepresentation – a lie
• Leading someone to believe certain benefits,
conditions, or advantages exist in a policy when
they do not
• Results from the omission or incorrect statement of
a material fact
– False or deceptive advertising

Front 40

Unfair marketing practices (continued)
– Twisting...

Back 40

• Using misrepresentation to induce a person to
drop existing insurance coverage and purchase
new insurance with a new producer and company
when it is not in the best interests of that person

Front 41

Unfair marketing practices- Defamation

Back 41

• Making oral or written statements that are false,
malicious, or derogatory to the financial condition
of any insurer or that is calculated to injure anyone
engaged in the insurance business

Front 42

Unfair marketing practices - Churning

Back 42

• Inducing a person to replace an existing policy with
a new policy of the insurer the producer is
representing (rather than a competitors policy)
• Done for purposes of generating commissions for
the producer, not in the best interests of the client

Front 43

Unfair marketing practices - False financial statements

Back 43

Deliberately make a false financial statement
regarding the solvency of an insurer with the intent
to deceive others

Front 44

Unfair marketing practices - Rebating

Back 44

• Giving something of value to a prospective
insurance applicant to induce the purchase of a
policy
• Prohibited in almost all states

Front 45

Unfair marketing practices – Boycott, coercion, and intimidation

Back 45

• That results in, or tends to result in, an
unreasonable restraint of, or monopoly of,
insurance business

Front 46

Unfair marketing practices - Unfair discrimination

Back 46

• Illegal to permit discrimination between individuals
of 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

Front 47

• Unfair claim practices
– Include, but not limited to:

Back 47

• Misrepresenting to claimants material facts or
policy provisions
• Not attempting in good faith to bring about prompt,
fair, and equitable settlement when liability has
become reasonably clear
• Failing to settle claims promptly, where liability has
become reasonably clear, under one portion of the
insurance policy in order to influence settlements
under other portions of the insurance policy
coverage

Front 48

Regulated Practices - Include, but not limited to (continued)

Back 48

– Failing within a reasonable time to affirm or deny
coverage of a claim or to submit a reservation of
rights to a policyholder
– Attempting to enforce a full and final release of a
claim when only a partial payment has been made
– Refusing to pay a claim without conducting a
reasonable investigation with respect to the claim
– See your state law supplement for additional
unfair claim practices

Front 49

State Regulation

Back 49

• Reminder note: All the previous information
covers regulation that is common in many
states. Please make sure you review the state
law supplement for detailed information pertinent
to your specific state.