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43 Cards in this Set

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Consumer protection (reasons for insurance regulation)

The primary reason for insurance regulation is consumer protection(protecting the public). Regulators help to protect consumers by reviewing insurance policy forms, determine if the forms comply with state consumer protection laws. State legislatures can set coverage standards and specify policy language for certain insurance coverages. Insurance regulators also provide information about insurance matters so that consumers can make more informed decisions. Regulators can even make sure if certain coverage is available, many states make sure that certain coverages like auto, are available to everyone. Regulators may restrict an insurers rights to cancel a policy.

Maintain insurer solvency (reasons for insurance regulation)

Solvency represents an insurer's ability to meet its current and future financial obligations relating to losses. For example when losses come due insurance comp will be able to pay losses.




Insurance is also regulated to help maintain insurer solvency. Protects insureds (public) against risk insurer will be unable to meet their financial obligations. Consumers may find it difficult to evaluate an insurer's financial ability to pay claims, therefore regulators will do things to make sure insurers are staying solvnet however there is no guarentee and some insurers may become insolvent, the point of regulation is to minimize it.

Maintain insurer solvency (reasons for insurance regulation) pt.2

The goal of regulation is not to eliminate all insolvencies but rather to minimize the number of insolvencies.




Reasons regulators try to maintain sound financial condition of private insurers: if insurers become insolvent, future claims may not be paid. Regulation needed to protect the public and insurers hold substantial funds for the ultimate benefit of insureds.

Prevent destructive competitions (reasons for insurance regulation)

Regulators seek to prevent destructive (not all) competition within the industry. Regulators are responsible for determining whether rates are high enough to prevent destructive competition. For example maybe there's a large insurance comp with larger reserves that wants to sell all the insurance in the state so they cut their premiums in half which ends up putting all the other insurers out of business. Once they others are out of business the insurer jacks up the premium prices b/c there's no competition. Competition is needed to keep prices reasonable.




Insurance regulation does not guarantee that premiums for all types of insurance will be affordable for all consumers. Just need to make sure prices are too high or too low.

Prevent destructive competitions (reasons for insurance regulation) pt.2

Regulators try to avoid destructive competition b/c if insurance rate levels are inadequate, some insurers might stop writing new business. Price-cutting can lead to inadequate rates which can cause some insurers to become insolvent and others might withdraw from the market.




Some insurers choose to deliberately underprice their products in an attempt to increase their market share.




An insurance shortage can then develop, and individuals and firms might be unable to obtain the coverage they need. Certain types of insurance can become unavailable at any price.

State insurance depts.

State insurance depts fall within the executive branch of each state govt. Enforce laws enacted by the legislature. Acts under direction of state insurance commissioner. Primarily funded through state premium taxes, audit fees, filing fees and licensing fees.




State insurance dept activities: licensing insurers, producers, claim reps and other personnel. Approving policy forms. Evaluating solvency info. Hold rate hearings and reviewing rate filings. Performing market conduct examinations. Investigating policyholder complaints. Rehabilitate or liquidation insolvent insurers. Issuing cease-and-desist orders. Fining insurers that violate state law. Preventing fraud.

Insurance commissioner


State insurance commissioners are either appointed by the governor or elected. Elected can be better since they are elected for a full term whereas if they're appointed, they can be removes. Also, if they're elected chances are they were out speaking with people and now know what the important issues are in the public's eyes. Appointed on the other hand they're not sueded by public opinion and they don't have to campaign.




Duties of state insurance commissioner (typically delegated to their staff): overseeing state insurance depts. Putting into effect rules and regulations needed to administer insurance laws. Determining whether to issue licenses. Reviewing insurance pricing and coverage. Conducting financial/market examinations. Holding hearing on insurance issues. Taking action when laws are violated. Issuing an annual report on the status of the insurance market and insurance dept. Maintaining records of insurance dept activities.




Many of these duties are delegated

NAIC

The NAIC is an association of insurance commissioners from all states. Nonprofit corporation. Not regulated by the federal govt. 3 times a year all the insurance commissioners in the country get together to discuss important issues.




The NAIC has a big role in regulation even though they don't directly enact regulations. The NAIC provides a forum to develop uniform policy when appropriate. NAIC does not enact state laws (no direct regulatory authority). Developed uniform financial statement forms required for insurers to file. NAIC does create model laws and regulations which they submit to the states, at which point the states decide whether or not they will implement those laws and regulations. Alot of state do implement these laws and regs.

Federal regulation

The McCarran Act gives states authority to regulate business of insurance.




However the following federal regulation applies: Insurers are subject to federal employment laws like any other business. Stock insurers are subject to regulations relating to the sale of stock (SEC). Insurance Fraud Protection Act protects consumers and insurers against insolvencies resulting from insurance fraud.

Licensing insurers

By issuing a license a state can indicates an insurer meets minimum standards of financial strength, competence and integrity. Once licensed, the insurer is subject to all applicable state laws, rules and regulations. Insurance commissioner issues licenses. The Uniform Certificate Authority Application allows insurer to file copies of the same application for admission in numerous states. An applicant for an insurer's license must apply for a charter.




Some states permit insurance commissioner to deny a license to a worthy applicant if commissioner believes no additional insurers are needed. So insurer may not be given license even if they meet minimum standard depending on the commissioners decision.

Licensing insurers pt.2

A domestic insurer is an insurer licensed in its home state. License generally has no expiration date. Stock insurers must satisfy certain minimum capital and surplus requirements. Mutual insurers must generally have a minimum number of applications for a minimum of separate loss exposures b/c mutual insurers are cooperative they are owned by the insureds and therefore need a minimum number of policy applicants to get license.




Licenses of foreign insurers and alien insurers generally must be renewed annually.

Licensing insurers pt.3

A foreign insurer is licensed to do business in a state, but is incorporated in a different state. Must show it has met the requirements imposed by its home state. Must generally meet minimum capital and surplus requirements imposed on domestic insurers within the state other than the home state.

Licensing insurers pt.4

Alien insurers are domiciled outside the U.S. Must satisfy the requirements imposed on domestic insurers. Must usually establish a branch office in any state and have funds on deposit in the U.S. equal to the minimum capital and surplus required.

Licensing insurers pt.5

A nonadmitted insurer is not licensed in the insured's home state and therefore typically cannot sell insurance in that state. Typically a surplus lines insurer can sell insurance in certain states even though they aren't licensed in that state. Consumers can buy insurance from nonadmitted insurer, like surplus lines broker, if insurance is not available from admitted insurers. Includes unique and high capacity risks (product liab insurance).




A nonadmitted insurer writing business in the surplus lines market does not face regulatory constraints on insurance rates and forms. While nonadmitted insurer aren't void of regulation they just face less regulation than admitted insurers.

Licensing insurance personnel

Many states require personnel to be licensed, typically people who sell insurance to represent insurer.




Producers - produces must be licensed in each state where they do business. Must pass a written examination. Agents and brokers.




Claim rep - some states requires them to be licensed. Public adjusters, who represent insureds, are generally required to be licensed.

Licensing insurance personnel pt.2

Insurance consultants give advice, counsel or opinions about insurance policies. Some states require insurance consultants to be licensed and requirements for consultant;s license vary by state.

Monitoring solvency

Goals of monitoring solvency: Reducing insolvency risk and protecting the public against losses when insurers fail.




A balance exists between these goals and reducing the cost of risk for society. Insureds directly or indirectly pay costs of regulation including regulator's salaries. Insurers pay for losses of insolvent insurer and pass these costs on to insureds.

Methods to maintain solvency

Regulatory resposibilitiy for insurer solvency monitoring rests with the state insurance regulator. The mission of U.S. insurance regulation is to protect the interests of the insured. The regulatory framework relies on an extensive system of peer review.




Uniformity of approach to regulation has been facilitated by the NAIC accreditation program which determines if the state itself, not the insurer, has meet minimum standards of solvency regulation. All 50 states are currently accredited.

Methods to maintain solvency pt.2

NAIC accreditation review looks at these factors: Adequacy of state's solvency laws, Ability of the regulator to meet standards, Ability and willingness of the state regulator to cooperate and share pertinent information, Ability of the state to take action when an insurer is financially troubled or potentially troubled, Quality of the state regulator's organizational and personnel practices, Effectiveness of state's licensing processes, State's regulations must be in compliance with federal insurance regulation.

Solvency requirements for insurers

Common, but not required in all states, solvency requirements for insurers: Submit periodic financial statements to regulator and possibly a CPA to be audited, Have reserves evaluated by an actuary to attest to the validity and adequacy of reserves, Insurers perform risk-based capital calculation (series of ratios to indicate how solvent the insurer is) the results are reported to regulators, Adhere to minimum capital requirements of the state, Investments are conservative as they are monitored.

State guaranty funds

State guaranty funds are funds that provide some payment for unpaid claims of licensed insolvent insurers. Unpaid claims are paid by assessments collected from other insurers licensed in the state. All states have property-casualty insurance guaranty funds. Insurers can recoup all or part of the assessments by rate increases, premium tax credits and refunds from the guaranty fund. Auto insurance assessments are usually limited to insurer writing only auto insurance.

State guaranty funds pt.2

Common characteristics of state guaranty funds (actual characteristics differ from state to state): Assessments of solvent insurers is made only when insolvent insurer fails, any policies outstanding from insolvent insurer usually terminate within 30 days after the insurer fails, No state guaranty fund covers reinsurance or surplus lines, Claims are subject to maximum limits typically lesser of $300,000 or policy limit, Most states refund unearned premiums (premiums that are paid but that insurer hasn't provided insurance for yet), Most states apply a $100 deductible to claims.




Self-insured and surplus lines are generally not protected by guaranty funds.

Reasons for insolvency

Factors that contribute to insolvency: Primary factro is rapid premium growth for the wrong reasons precedes most major insolvencies (underwriting may be accepting too many risks), Inadequate insurance rates (rates may be too low to gain competitive edge), Inadequate reserves (maybe loss that wasn't adequately accounted for), Excessive expenses, Lax controls over managing general agents, Uncollectable reinsurance and Fraud.




If insurer is insolvent the insurance commissioner places the insurer in receivership. Under the Uniform Insurers Liquidation Act, creditors in every state are treated equally.

Insurance rate regulation golas

Rate regulation aims to protect consumers by ensuring financial stability of the insurer.




Goals of rate regulation are to ensure rates are: Adequate, Not excessive and Not unfairly discriminatory.

Adequate rates

Rate should be high enough to pay all claims and espenses for that type of insurance.




Factors that complicate rate adequacy: Main factor is that the insurer does not know what its actual expenses will be when a policy is sold (rates are an estimate), Insurer might charge inadequate rates due to price competition, State may not approve insurers rate request, Events could lead to higher actual losses (catastrophe), Actuaries may disagree about assumptions (can't decide what an adequate rate would be).

Not excessive

Rate should be adequate but not excessive.




Factors considered by regulators: Number of insurers selling a specific coverage in the rating territory, Relative market share of competing insurers, Loss experience for given type of insurance, Possibility of catastrophic losses, Margin for underwriting profit and contingencies, Marketing expenses and Special judgement factors. The degree of rate variation among competing insurers is a factor regulators consider when determining if rates are excessive.

Not unfairly discriminatory

Rate must not be unfairly discriminatory. Discrimination in the neutral sense is essential to insurance rating. Discrimination must be fair and consistent. Insureds with loss exposures that are roughly similar should be charged similar rates. For example 65 yr olds will be charged more for life insurance than 25 yr olds b/c the probability of a 65 yr old dying is higher than a 25 yr old.




Use of computer simulation modeling for catastrophes has complicated regulatory evaluation of whether rates are unfairly discriminatory.

Rating laws

State rating laws influence the amount insurers can charge, apply not only to rates for a new type of insurance but also to rate changes. State rating laws determine if insurer needs approval to raise their rates in that state.




Types of state rating laws: Prior-approval laws (require rates to be approved by the state insurance dept before they can be used, if the state doesn't respond within 30-90 days, depending on the state, the rates are deemed to be approved by the state), File-and-use laws (allows insurer to use the new rates immediately after filing with the state insurance dept), Use-and-file laws (allows insurer to use the new rates and later submit filing information that is subject to regulatory review), Flex rating laws (require prior approval only if the new rates exceed a certain percentage above or below previous rates), and No filing laws (does not require insurer to file rates with the state insurance dept, supply and demand determine rates)

Rating laws pt.2

Arguments for prior-approval system: Require insurer to justify requests for rate increases with supporting actuarial data (data supports rate increase, it's not just supply and demand). Help maintain insurer solvency.




Arguments for competitive-rating system: Less expensive to administer b/c no filing requirements it's just free market. Prior-approval systems may cause rates to be inadequate because of the time required for the regulatory review and approval process.

Policy regulation

Regulation of insurance policies helps protect consumers because policies are often complex. Insurance policies are drafted by insurers. Regulation does not require insurance policies to be "simple."




Contract language is regulated by legislation and insurance depts' regulations. Regulation may require certain forms and provisions.

Legislation

Policy regulation begins with state legislature passing law controlling structure and content. Mandatory and prohibited provisions e.g. life insurance there is a reinstatement provision. Legislation might mandate that policies be filed and/or approves by the state. If specified period elapses and the policy had not been disapproved, the policy is considered approved.




State legislature might require insurer to use a standaed polciy to insure property or liability loss exposures.




State insurance depts can create administrative rules, regulations and guidelines. Rules, regulations and guidelines can be stated in 1) state insurance dept regulations, 2) informal circulars or bulletins from state insurance dept and 3) precedents established during the approval process.

Courts

Courts do not directly regulate insurers and they do not directly create laws.




However, courts influence insurer by: Determining if laws are constitutional, Determining if rulings are consistent with law, Interpreting ambiguous policy provisions either in favor of the insured or the insurer, Determining if certain losses are covered, and Resolving other disputes over provisions.




Courts decisions often lead insurer to redraft their policy language and modify provisions.

Monitoring market conduct

Market conduct involves actions of certain insurance personnel such as producers, underwriters and claim reps, even monitors the market conduct of insurer itself. Laws regarding unfair trade practices prohibit abusive practices by the insurer and representatives of the insurer. If an insurer is in violation of the unfair trade practice act, fines and/or license suspension or revocation can occur. To protect consumers insurance regulators take actions such as constraining insurers' ability to accept, modify or decline insurance applications and establish allowable classifications. States require insurers to provide insureds with adequate advance notice of policy cancellation so insureds can obtain replacement coverage.




NAIC Model Unfair Trade Practices Act prohibits insurers from restraining trade or competition.

Producer practices

Producers (agents) practices that violate unfair trade practices act: Dishonesty or fraud (embezzle premiums), Misrepresentation (claiming losses are covered when they are not actually covered), Twisting (inducing insured to replace one policy with another, to insured's detriment, possibly to collect a commission), Unfair discrimination (favoring one insured over another based on random characteristics) and Rebating (giving a portion of the producer's commission to insured as an inducement to purchase)

Underwriting practices

Underwriting practices that violate unfair trade practices act: Unfair discrimination in selecting exposures, Misclassifying loss exposures, Cancelling policies contrary to rules, Failing to apply new rating factors to renewals, Failing to use correct policy forms, and Failing to use state-specific rules.

Claim practices

Claim settlement practices that violate unfair trade practices act: Misrepresenting important facts, Improperly investigating claims, Failing to make a good-faith effort to settle claims when liability is clear, Attempting to settle a claim for unreasonably low amount, and Failing to approve/deny claim within a reasonable time after proof-of-loss.




An insurer that violates good faith claim handling standards can be required to honor the terms of the policy and pay extracontractual damages. Legal remedies for bad faith actions can lead to both first (insured) and third party (claimant) actions.

Ensuring consumer protection

All insurance regulatory activities protect insurance consumers. State insurance depts often assist with complaints about rates or policy cancellations. Some states publish shoppers guides and other forms of consumer information to help the public.




State insurance depts typically do not have authority to order insurers to pay claims when facts are disputed, sometimes they may need to go to court.

Financial rating organizations (unofficial regulator)

Several financial rating agencies provide insurer financial ratings, including these: A.M. Best company, Duff and Phelps, Moody's, Standard & Poor's and Weiss ratings, inc.




Provide information about insurer financial strength in the form of a letter grade.

Financial rating organizations (unofficial regulator) pt.2

Financial rating information is used by: Corporate risk managers, Independent insurance producers (some agents work for themselves and represent several insurance companies so they will be interested in financial rating of insurers they work with), Consumers, Banks (typically require mortgagors to provide evidence of insurance from an insurer with specified financial rating)




The value of financial ratings is limited because they are based on past performance (just because they've done well in the past doesn't mean they will do well in the future).




An insurer whose financial rating is in decline can implement remedial measures including: Merge with a more financially secure insurer, Limit new business, Sell a portion of its book of business and Sell stock to raise additional capital (buying stock back would cause an outflow of capital.)

Insurance advisory organizations (unofficial regulator)

Advisory organizations are companies that work with, and on behalf of, insurers. Develop standard insurance policy forms and provide data regarding rates or loss costs. May also file loss costs and policy forms with the state on behalf of their member and subscribing insurers. Provide a forum for discussing important issues. Provide services to member insurers and insurers that purchase or subscribe to their services.

Insurance advisory organizations pt.2

Well-known insurance advisory organizations: Insurance services office, American association of insurance services, and National council on compensation insurance (NCCI)




Advisory organizations provide a degree of uniformity that can benefit consumers, regulators and insurers.

Professional and trade associations

Insurance associations provide services to their members for free. Professional (members are individuals sharing a common profession, e.g. CPCU association), Trade (members are companies that share a common industry, offers timely access to legislative developments on the national level.)




Provide educational, leadership and ethical development for individual members and their employers.

Consumer groups

Consumer groups have had a major influence on state insurance depts, the NAIC and legislators. Consumer groups often influence insurance commissioners to hold hearings on issues. Can lead insurers to take corrective action or lead regulators to develop legislative proposals. Strength in numbers