Chapter 8: Government Regulation of Insurers

Exam 3

What Areas are Regulated? 

• Formation and Licensing of Insurers  

• Solvency Regulation 

• Rate Regulation 

• Policy Forms 

• Sales Practices and Consumer Protection 

• Taxation of Insurers 

Formation and Licensing of Insurers 

• 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

• Guaranty Funds

Rate Regulation

• Differs by state.  

• Prior-approval: Rates must be filed and approved by the state before being used. 

• File-and-use: Rates must be filed with the state, but can be used immediately. 

• Other Methods: 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 and 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. 

Important Regulations

• McCarran-Ferguson Act (1945) 

• Financial Modernization Act (1999) 

• 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-Biley)

• Eliminated barriers between insurers and banks. 

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

• Led to several mergers and acquisitions (Travelers and 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. 

• 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. 

Arguments for Federal Regulation

• Decrease compliance costs.

• Increase competition. 

• Increase innovation.

• More effective negotiations of international insurance agreements. 

• More effective treatment of systemic risk.  

Arguments for State Regulation

• Needs of each state are different.

• Federal regulation in historically inefficient.  

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

• The National Association of Insurance Commissioners (NAIC) already advocates for uniformity.

• Insurers can innovate by experimenting in different states. 

• Unknown consequences of federal regulation.

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 and premiums 

  • Policy renewals, termination, and changes 

  • Claims settlement 

Market Conduct Examinations

• State departments of insurance conduct market conduct examinations of insurers. 

• Goal is to 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.