chapter 8 - government regulations of insurers

national association of insurance commissioners

The National Association of Insurance Commissioners (NAIC) provides expertise, data, and analysis for insurance commissioners to effectively regulate the industry and protect consumers.

Founded in 1871, the U.S. standard-setting organization is governed by the chief insurance regulators from the 50 states, the District of Columbia, and five U.S. territories to coordinate regulation of multi- state insurers.

government regulation of insurance

• state

• federal

important federal acts

1. McCarran-Ferguson Act (1945)

2. Financial Modernization Act (1999)

3. Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)

McCarran-Ferguson Act (1945)

• established that insurance should be regulated and taxed by the states

• federal antitrust laws do not apply to insurance (with some exceptions)

Financial Modernization Act of 1999 (Gramm-Leach-Bliley Act)

• Eliminated barriers between insurers and banks

• Insurers can have banking operations and banks can have insurance operations

• Led to several mergers & acquisitions (travelers & citigroup)

• Created some confusion as to who would regulate each division

• Frequently cited as a contributor to the financial crisis (2008)

Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)

• Established general federal oversight of the insurance industry

  • Established federal insurance office

• Created the financial stability oversight council (FSOC)

  • Has the authority to treat systemic risk (collapse of entire financial system due to the failure of a single entity or group of entities)

  • Can classify non-bank financial companies (which includes insurance companies) as “systemically important financial institutions” (SIFIs)

  • SIFIs receive tougher financial oversight and are regulated by the federal reserve

goals of insurance regulation

1. Maintain insurer solvency

2. Educate consumers

3. Ensure reasonable rates

4. Make insurance available

maintain insurance solvency

• Why do regulators care about the solvency of insurers?

  • Insurance contracts are worthless if the insurer goes bankrupt

  • Potential financial hardship for consumers

educate consumers

• Insurance policy is a complex legal document

• Difficult to compare insurance coverages and costs

• Insurance is a contract of adhesion

• Prevent unethical insurers or agents from taking advantage of consumers

ensure reasonable rates

• Ensure economically reasonable premium for needed coverages (health, fire, auto liability, et al)

• Prevent excessive/unsubstantiated rate increases

• Ensure premiums are sufficient to pay losses

make insurance available

• Insurers may not be willing to underwrite types of risks

• Fair access to insurance requirements (FAIR plans)

• Restrict the market exit of insurers

what areas are regulated?

1. Formation and licensing of insurers

2. Solvency regulation

3. Rate regulation

4. Policy forms

5. sales practices & consumer protection

6. taxation of insurers

formation and licensing of insurers

Minimum capital and surplus requirements

• Domestic insurer

  • Domiciled in the state

• Foreign insurer

  • Chartered (domiciled) in another state but licensed to operate in the state

• Alien insurer

  • Chartered in a foreign country but licensed to operate in the state

solvency regulation**

• Assets must be sufficient to offset Liabilities

• Calculation of reserves

• Premium to Surplus Ratio

• Investment types and quality

• Annual Statement must be filed

  • NAIC Model

• State Guaranty Funds

rate regulation

*Regulations differ by state

1. Prior approval

   1. Rates must be filed and approved by the state before being used

2. File-and-use

   1. Rates must be filed with the state but can be used immediate

3. Other methods (really no questions on it)

   1. Modified-prior-approval, use-and-file, flex-rating, state-made rates, and no filing required

policy forms

• Policy forms and endorsements must be filed with the state department of insurance

• Purpose is to protect consumers from misleading, deceptive, or unfair provisions

sales practices & consumer protection

• All states require:

  • Licensing of brokers and agents

  • Continuing education for brokers and agents

• Prohibit unfair trade practices

  • Twisting

    • Inducement of a policyholder to drop an existing policy and replace it with a new one that provides little or no economic benefit to the client

  • Rebating

    • Practice of giving an individual a premium reduction or some other financial advantage not stated in the policy as an inducement to purchase the policy

taxation of insurers

• Insurers pay a state tax on gross premiums received from policyholders

market conduct**

• Refers to the marketing practices of insurers and agents that involve interactions with insureds, claimants, or consumers

• Practices include:

  • Sales of insurance policies

  • Advertising of insurance products

  • Underwriting and rating

  • Collection of premiums

  • Policy renewals, termination, and changes

  • Claims settlement

market conduct examinations

• Think of people from Pennsylvania coming into QBE company in New York and she said she has to be on stand by constantly when they visit to answer any questions they may have

• state departments of insurance conduct market conduct examinations of insurers

• goal is tot protect consumers from:

  • sale of unsuitable insurance products

  • misrepresentation of coverage

  • excessive sales pressure

  • rates that are excessive or unfairly discriminatory

  • denial of legitimate claims

  • improper termination of policies

arguments for federal regulation

• Decrease compliance costs

• Increase competition

• Increase innovation

• More effective negotiations of international insurance agreements

• more effective treatment of systemic risk

argument for state regulation

• needs of each state are different

• federal regulation is historically inefficient

• transition to federal would be costly and require dual regulation for a short time

• the national association of insure commissioners (NAIC) already advocates for uniformity

• insurers can innovate by experimenting in different states

• unknown consequences of federal regulation