Chapter 8: Government Regulation of Insurance

admitted assets

assets an insurer can show on its statutory balance sheet for purposes of determining its financial position

alien insurer

insurance company chartered by a foreign country and meeting certain licensing requirements

assessment method

the major method used to raise the necessary funds to pay unpaid claims

credit-based insurance score

derived from the applicant’s credit history and is combined with other underwriting factors

domestic insurer

insurance company domiciled and licensed in the state in which it does business

file-and-use law

law for regulating insurance rates under which companies are required only to file the rates with the state insurance department before putting them into effect

flex-rating law

type of rating law in which prior approval of the rates is required only if the rates exceed a certain percentage above and below the rates previously filed

Financial Modernization Act of 1999

changed federal law that earlier prevented banks, insurers, and investment firms from competing fully in other financial markets outside their core area

foreign insurer

insurance company chartered by one state but licensed to do business in another

guaranty funds

funds that provide for the payment of unpaid claims of insolvent property and casualty insurers

McCarran-Ferguson Act

federal law passed in 1945 stating that continued regulation of the insurance industry by the states is in the public interest and that federal antitrust laws apply to insurance only to the extent that the industry is not regulated by state law

modified prior-approval law

a state rating law where rate changes are based solely on loss experience; the rates must be filed with the state insurance department and can be used immediately; however, if the rate of change is based on a change in rate classification or expense relationship, prior approval of the rates is necessary

Paul v. Virginia

landmark legal decision of 1869 establishing the right of the states, and not the federal government, to regulate insurance; ruled that insurance was not interstate commerce

prior-approval law

law for regulating insurance rates under which the rates must be filed and approved by the state insurance department before they can be used

rebating

a practice – illegal in virtually all states – of giving a premium reduction or some other financial advantage to an individual as an inducement to purchase the policy

reserves

liability items on an insurer’s balance sheet and reflect obligations that must be met in the future

retaliatory tax laws

the state imposes the retaliatory tax in exactly the same way that out-of-state insurer’s home state imposes on domestic insurers operating within its borders

risk-based capital (RBC)

under NAIC standards, insurers are required to have a certain amount of capital that is based on the riskiness of their investments and operations

South-Eastern Underwriters Association (SEUA) case

legal landmark decision in 1944 overruling the Paul v. Virginia ruling and finding that insurance was interstate commerce when conducted across state lines and was subject to federal regulation

twisting

illegal practice of inducing a policyholder to drop an existing policy in one company and then replace it with a new policy in another company through misinterpretation or incomplete information

use-and-file law

a rating law that is a variation of a file-and-use law; insurers can put into effect immediately any rate changes, but the rates must be filed with regulatory authorities within a certain period after first being used