Ch. 8 Government Regulation of Insurers

What areas are regulated?

• formation & licensing of insurers

• solvency regulation

• rate regulation

• policy forms

• sales practices & consumer protection

• taxation of insurers

Formation & 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

• annual statement must be filed

• calculation of reserves

• premium to surplus ratio

• investment types and quality

• guaranty funds

Rate Regulation differs by

state

Prior-approval

rates myst 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 Rate Regulation 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

Policy Forms Purpose

to protect consumers from misleading, deceptive, or unfair provisions

Sales Practices & Consumer Protection

prohibit unfair trade practices

All states require

• licensing of brokers and agents

• continuing education for brokers and agent

Twisting

inducement of 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

McCarran-Ferguson Act (1945)

• established that insurance is regulated and taxed by the states because that is in the people’s best interest

• 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)

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

Financial Stability Oversight Council (FSOC)

• has the authority to treat systemic risk

• can classify non-bank financial companies as “systemically important financial institutions”

Argument for Federal Regulation

• decrease complain 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 is different

• federal regulation is historically inefficient

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

• the national Association of Insurance Commissioners 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

Market Conduct Practices

• sales of insurance policies

• advertising of insurance products

• underwriting and rating

• collection of premiums

• policy renewals, termination, and changes

• claims settlement

Market Conduct Examinations

state departments of insurance conduct market conduct examinations of insurers to protect consumers from:

• Sales of insurance policies

• Advertising of insurance products

• Excessive sales pressure

• Rates that are excessive or unfairly discriminatory

• Denial of legitimate claims

• Improper termination of policies