Porter Chapter 2.db

Front 1

List 10 key dates in the development of insurance regulation

Back 1

1752: First insurer chartered (PA)
1869: Paul v. Virginia
1871: National Insurance Convention
1890: Sherman Antitrust Act
1914: Clayton Antitrust Act
1936: Robinson-Patman Act
1944: South-Eastern Underwriters Association decision
1945: McCarran-Ferguson Act
1972: NAIC: Unfair Claims Settlement Practices Act and Unfair Trade Practices Act
1999: Gramm-Leach-Bliley Act

Front 2

List the 3 general periods in the development of insurance regulation

Back 2

1. Pre-1944: Pre-South-Eastern Underwriters Association (SEUA) decision
2. 1944-1947: SEUA decision and the McCarran-Ferguson Act
3. Post-1947: Post-McCarran-Ferguson Act

Front 3

What was the sentiment in the early 1800s and what did NY do in response?

Back 3

Early 1800s: states felt pressure to protect domestic insurers, as British insurers were charging lower rates, so some states prohibited foreign (country) insurers from writing

New York:
1. Established a process for managing insurer liquidation
2. Imposed 10% retaliatory premium taxes (levied on insurers licensed but not domiciled in NY)
3. Required insurers to file annual statements with the state comptroller to help ensure solvency
4. Implemented UEPR law (maintain reserves large enough to cover unearned premiums)
5. 1859: created first DOI (previously, state legislatures and state government officers oversaw insurance regulation)

Front 4

Describe Paul vs. Virginia

Back 4

1. Samuel Paul applied to become a licensed agent in Virginia to represent NY insurers
2. VA denied application because insurers hadn’t deposited the bond it required of insurers incorporated in another state)
3. Paul sold policies for NY insurers anyway
4. VA arrested and convicted Paul; VA Court of Appeals upheld decision
5. US Supreme Court affirmed rulings holding that, because insurance is a contract delivered locally, insurance transaction wasn’t interstate commerce-->states could continue to regulation their own insurance market without violating the Constitution

Front 5

List 4 actions of the newly-formed National Insurance Convention (NIC)

Back 5

1. Developed a constitution setting forth the regulators’ goals
2. Designed a uniform accounting statement
3. Adopted guidelines for insurer taxation
4. Adopted the first model law, which covered an insurance commissioner’s duties and the regulation of fire, life, and marine insurers

Front 6

List 4 proclamations/findings of the NIC in the early 1900s

Back 6

1. UW profits = EP – incurred losses and UW expenses
2. EP = portion of WP that corresponds to coverage that has already been provided
3. Investment income isn’t part of UW profit
4. Reasonable UW profit = 5% of premium + 3% of premium for conflagrations (large-loss fires)

Front 7

List 1 advantage and 1 disadvantage to the formation of compacts in the early to mid 1800s

Back 7

-Disadvantage: deterred open competition
-Advantage: determent was in the public’s best interests if it prevented insurer insolvency

Front 8

What was the effect on the insurance industry of the passing of the Sherman Antitrust Act?

Back 8

Act didn’t apply directly to insurers (insurance still not considered interstate commerce) but gave states impetus to pass own antitrust legislation against insurer compacts

Front 9

What happened in the late 1800s/early 1900s after passage of the Sherman Antitrust Act?

Back 9

1. Regulators started to become against the anticompact laws because they believed one of the causes of the competition-insolvency cycle was that insurers weren’t classifying insureds into adequately homogeneous groups
2. 1923: NCIC passed resolution to repeal state anticompact laws, and states therefore reinstated rate bureaus and compacts (concluding that for insurers to develop and maintain adequate rates and to avoid unfair discrimination, rate bureaus and insurer compacts or associations were necessary)

Front 10

What was the SEUA?

Back 10

SEUA was a compact comprising of nearly 200 private stock insurers that controlled 90% of the fire and allied lines insurance market (including coverage for marine and extended perils) in 6 southeastern states

Front 11

What was the SEUA decision?

Back 11

Missouri attorney general filed a complaint with the US DOJ Antitrust Division, which resulted in criminal indictments due to the following activities:
1. Continuing agreement and concerted action to control 90% of the fire and allied lines insurance market
2. Fixing premium rates and agents’ commissions
3. Using boycott and other forms of coercion and intimidation to force non-SEUA members to comply with SEUA rules
4. Withdrawing agents’ rights to represent SEUA members if the agents also represented non-SEUA companies
5. Threatening insurance consumers with boycott and loss of patronage if they didn’t purchase their insurance from SEUA members

Front 12

List the 2 questions the Supreme Court had to consider when ruling on SEUA

Back 12

1. Did Congress intend the Sherman Act to prohibit fire insurers’ conduct restraining or monopolizing the interstate fire insurance trade? (Yes)
2. If so, do fire insurance transactions that stretch across state lines constitute “commerce among the several states” so as to subject them to Congressional regulation under the Commerce Clause? (Yes)

Front 13

List 5 arguments in favor of Congress’ regulation of insurance

Back 13

1. Insurance isn’t a business that is distinct in each of the states (interrelated and interdependent across the states). Individuals in several different states can obtain insurance from the same insurer. Insurers’ decisions consider not only the environment of the state of domicile but also of the other states in which insurers sell their products
2. Of the 200 members of SEUA, only 18 were domiciled in one of the 6 SEUA states
3. Both before and after Paul v. Virginia, intangible products (e.g., electrical impulses of telegraph transmissions) were subject to Congressional regulation
4. Other businesses make sales contracts in states where they do not have headquarters, and these businesses are subject to Congressional regulation
5. No business that is transacted over state lines, including insurance, should be exempt from federal regulation

Front 14

What was the immediate effect of the Supreme Court's ruling on SEUA?

Back 14

Immediate effect: federal legislation applied to insurance:
1. Sherman Antitrust Act (1890) which prohibits collusion in attempts to gain monopoly power
2. Clayton Antitrust Act (1914) which identified and made illegal activities that lessened competition or created monopoly power such as price discrimination, tying (requiring purchase of one product with the purchase of another product), and exclusive dealing, and mergers between competitors
3. Robinson-Patman Act (1936) (amendment to Clayton Antitrust Act) which prohibited price discrimination with the exception of price differentials that could be shown to result from differences in operating costs of competing “in good faith”; meant insurers could reduce premiums to drive out competition only if they could prove that the reduction resulted from increased efficiencies in operations

Front 15

After the SEUA decision what did the NAIC recommend?

Back 15

1. Congress must be pressured to enact legislation under the Commerce Clause of the Constitution that would allow states to continue to regulate insurance
2. Congress must amend the Sherman and Clayton Acts to allow cooperating arrangements that are necessary and incidental to establishing adequate rates, coverages, and related concerns
3. Congress must amend the Federal Trade Commission (FTC) Act and the Robinson-Patman Act to exclude insurance from their provisions

Front 16

Describe the McCarran-Ferguson Act

Back 16

1. McCarran-Ferguson returned regulation of the “business of insurance” to the states because it was “in the public interest” to have states continue to regulate the business of insurance
2. If certain condition isn’t met, Congress can take over the regulation of the “business of insurance”

Front 17

How do the Sherman, Clayton, FTC, and Robinson-Patman Acts apply to the "business of insurance?"

Back 17

They apply to the “business of insurance” only if the states aren’t regulating the activities described in these acts, with 2 exceptions:
1. Sherman Act applies to insurers’ antitrust activities (federal government has regulatory power over insurers’ use of boycott, coercion, or intimidation); state legislation won’t supersede federal antitrust authority over insurers
2. A federal law that applies exclusively to the insurance industry supersedes any state regulation in the areas addressed by the federal legislation

Front 18

After passage of McCarran Ferguson what was the NAIC's 2 main concerns and what did it do in response?

Back 18

NAIC’s principal concerns:
1. Promoting equitable ratemaking
2. Preventing unfair trade practices

1946: NAIC approved 2 model rate regulation bills (one for commercial insurers and one for fire, marine, and inland marine insurers)

Front 19

List 2 purposes of the NAIC model rate regulation bills and 4 ways the bills achieved these purposes

Back 19

Purposes of bills:
1. To ensure that rates were adequate, not excessive, and not unfairly discriminatory
2. To allow cooperation in setting rates, as long as it didn’t hinder competition

To achieve purposes, bills:
1. Required prior approval of rates
2. Explained how to file rates
3. Described role of rating organizations
4. Recommended anti-rebating laws in states that didn’t already have them to promote fairness (prohibits insurers from returning portions of premiums and producers from returning portions of commissions to persons who purchase insurance because it can subvert uniform, approved rates and contracts and create favoritism among rebate recipients)

Front 20

List 7 activities that were prohibited under the 1947 Act Relating to Unfair Methods of Competition and Unfair Deceptive Acts and Practices in the Business of Insurance

Back 20

1. Misrepresentation and false advertising of insurance policies
2. False information and false advertising in general
3. Defamation
4. Boycott, coercion, and intimidation
5. False financial statements
6. Unfair discrimination
7. Rebating

Front 21

In the post-1947 era what 3 areas of insurance regulation did regulators focus most on?

Back 21

1. Insurer insolvencies
2. Unavailable and unaffordable insurance coverages
3. Inequitable treatment of insurance consumers

Front 22

In the post-1947 era how did the NAIC implement further regulation to mitigate insurer insolvencies?

Back 22

1969: NAIC adopted Post-Assessment Property and Business Insurance Guaranty Association Model Act (today all states have guaranty funds)

1971: NAIC implemented Early Warning Tests (renamed Insurance Regulatory Information system—IRIS—in 1977)

Front 23

What is the purpose and goal of the IRIS ratios?

Back 23

Purpose: Detect companies in financial trouble early enough that insurance regulators could minimize the guaranty assessments needed in the wake of insurer insolvencies
Goal: Prevent the need for guaranty fund assessments by taking over the insurers and returning them to active operation or merging them with other going concerns

Front 24

List 3 ways in which states address availability issues

Back 24

1. Fair Access to Insurance Requirements (FAIR) plan
2. Laws governing captive insurance organizations
3. Publication of auto insurance buyers’ guides explaining standard policies and options that can help consumers find available and affordable choices

Front 25

Describe FAIR plans

Back 25

1. Def: insurance pool through which private insurers collectively address an unmet need for property insurance on urban properties, especially those susceptible to loss by riot or civil commotion
2. Urban Property Protection and Reinsurance Act of 1968 established FAIR plans
3. If insurers don’t participate, they can’t seek funds from the federal reinsurance pool

Front 26

List and describe the 3 forms of captives

Back 26

1. Captive insurance organization: insurer that insureds own and control
2. Single-parent captive: captive insurer with one parent
3. Group captive: captive insurer owned by a group of companies, usually operating similar businesses, rather than a single parent; it uses an insurer to act for them or operates under the federal Risk Retention Act

Front 27

List 3 ways in which states address affordability issues

Back 27

1. National Flood Insurance Act (1968)
2. Terrorism Risk Insurance Act (TRIA, 2002)
3. Risk Retention Act of 1981 (Congress)

Front 28

Describe TRIA

Back 28

1. Established a temporary federal Terrorism Insurance Program, providing for a transparent system of shared public and private compensation for insured losses resulting from terrorist acts
2. Addressed market disruptionsensured availability and affordability
3. Allows for a transitional period following market disruption for the private markets to:
a. Stabilize
b. Resume pricing of insurance
c. Build capacity to absorb future losses

Front 29

Describe the Risk Retention Act of 1981

Back 29

1. Unexpected business lossesunaffordable premiums
2. Provisions:
a. Risk retention groups are primarily subject to the regulations of the state in which they are domiciled
b. The act pertains specifically to the area of insurance and overrides any state regulation that addresses the operation of risk retention pools as stated in McCarran-Ferguson
3. Amended in 1986 to include additional types of insurance and allow risk purchasing groups the same advantages as risk retention groups
4. 1983: NAIC adopted its own version, the Model Risk Retention Act (and amended in 1986)

Front 30

What is the defining characteristic of the surplus lines market and list 3 characteristics of risks that require surplus lines coverage

Back 30

Defining characteristic: nature of the risk itself

Coverage for risks that:
1. Are unique
2. Require high limits
3. Have difficult underwriting characteristics

Front 31

List 2 formal things that determine whether a specific risk falls within the surplus lines market

Back 31

1. Legal status of insurer
2. Licensing status of producer

Front 32

List 4 common characteristics of surplus lines laws

Back 32

1. Permit only specially licensed producers to place surplus lines business
2. Licensee must make the placement with unauthorized/nonadmitted insurers that meet specified financial and managerial requirements
3. Before a placement can occur, coverages must be declined by the admitted/licensed market through a “diligent search” of the state’s admitted/licensed insurance market
4. Insurers must meet certain standards like minimum capital and surplus amounts

Front 33

What is the key characteristic of the surplus lines market

Back 33

Freedom from state-imposed rate and form requirements enjoyed by the nonadmitted insurers participating in the market

Front 34

List 7 purposes of surplus lines laws

Back 34

1. Hold surplus lines broker accountable for placing business with eligible nonadmitted/unauthorized companies and set procedures for doing so
2. Set forth the financial and other eligibility requirements for nonadmitted/unauthorized companies
3. Review and regulate nonadmitted/unauthorized insurers for solvency
4. Review and list alien insurers centrally to facilitate state access to this information
5. Licensing is usually only available to producers who already have P&C licenses
6. Licensee must place business with insurer with adequate capital and surplus and often require the insurer to be licensed in at least one state
7. Licensee must conduct a “diligent search” of the licensed market and then files an affidavit with the state DOI affirming the search and that coverage was unavailable

Front 35

List 1 major disadvantage of surplus lines

Back 35

lack of guaranty fund protection

Front 36

Describe how the Gramm-Leach-Bliley Act arose and list its 4 provisions

Back 36

Arose out of affiliations in the 1990s between banks and insurers (questions arose about who would regulate); traditionally the federal government has regulated banking and the states have regulated insurance

Provisions:
1. Each segment of the financial services business is regulated separately
2. States continue to have primary regulatory authority for all insurance activities but prohibits state actions that would prevent bank-related firms from selling insurance on the same basis as insurance producers
3. Prohibits national banks from forming subsidiaries to underwrite insurance but banks can arrange for financial holding companies to create insurance affiliates, which makes it more difficult for a failing bank to use insurer assets to meet operational needs
4. Compels states to facilitate insurance producers’ ability to operate in more than one state

Front 37

List 3 concerns about the Gramm-Leach-Bliley Act

Back 37

1. Privacy of personal financial information
2. Ability of state regulation to serve an integrated and global financial services market adequately
3. Consumers’ desire or need for integrated financial services

Front 38

In the mid-1800s, more insurers were operating in several states and had problems with what (2)?

Back 38

1. Dissatisfaction with the Paul v. Virginia decision
2. Problems meeting various state demands

Front 39

After passage of the McCarran-Ferguson Act, why did the NAIC and state legislatures begin developing and implementing various insurance laws?

Back 39

1. To allow cooperation in setting rates
2. To keep Congress from interfering

Front 40

After passage of the McCarran-Ferguson Act, why and how did many states not closely follow the NAIC models?

Back 40

1. Many states didn’t want prior approval laws
2. Some states allowed rebating

Front 41

What is a common misconception of the surplus lines market?

Back 41

That it is unregulated; in fact, although regulation doesn’t follow the same pattern as the traditional licensed market, substantial regulation does apply

Front 42

List 2 major advantages of the key characteristic of the surplus lines market

Back 42

1. Rates and forms not regulated
2. Flexibility to adjust and quickly meet insured’s needs

Front 43

What concern does information-sharing among banks and insurance affiliates raise?

Back 43

Privacy concerns:
1. Requires banks to disclose information-sharing policies and practices
2. Because state laws can have more restrictive laws, may lead to inconsistency in practice in complying with state and federal laws