Lecture Notes -Insurance

Lecture Notes -Insurance - Regulation of Regulation of...

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Unformatted text preview: Regulation of Regulation of Insurance Questions of the Day Questions of the Day 1. 2. How do insurance companies work? How are insurance companies regulated? State Law ­ McMcCarran Ferguson Act Similarities to banking Differences from banking 3. Current Issues Some Terms and Concepts Some Terms and Concepts You Should Know Insurance Premium Risk Tort Liability Insurance Lines McCarran­Ferguson Act Life Property Casualty (inc. liability) NAIC Agent, Brokers and Producers Reserves Annuity Form Regulation Market Conduct Exam Surplus Lines What is Insurance? What is Insurance? Insurance is a product – and a contract Insurance is an agreement to pay… an uncertain amount at an uncertain time in the future relative to an uncertain event How is it “priced” – what is the “cost” Limits on coverage – not all fires, for example Historical information – actuarial assessment of risk Time value of money Tort Liability Tort Liability Tort = In general, a civil (not criminal) wrong, other than breach of contract, for which a court will provide a remedy in the form of a suit for damages. Torts include willful or negligent acts or omissions on the part of a defendant. Negligence = Failure to conduct oneself by the legal standard required of a reasonable person in protecting against foreseeably risky, harmful acts. Liability insurance is designed to cover an insured (defendant) for unintentional tort acts. Risk shifting and risk distribution Insurance as an “intermediary” between those who want to avoid “risk” (a financial liability) and those who are willing to assume risk for a price However, insurance companies are also like banks in that their balance sheet includes financial assets – making them a conduit between borrowers and lenders or between investors and companies seeking investors How do Insurance Companies How do Insurance Companies Work? Similarities to Banks Similarities to Banks Issued “charters” that authorize the activity Capital and Solvency Requirements Regulated for safety and soundness – manage insolvencies Activities prescribed by the State (lines of insurance like types of lending or deposits) Consumers are protected Industry protected by “guaranty funds” – thought different than deposit insurance Differences from Banks Differences from Banks State regulation only; not dual system Rate Setting: Because of complexity of “products” (insurance “lines”), the premiums paid are specifically regulated Greater emphasis on the “contract” of insurance – similar to deposit or loan contract, but everything in insurance ties back to the terms of the insurance – what risks are covered and what risks are excluded States have primary responsibility for insurance activities The issuing of a policy of insurance is NOT a transaction of commerce within the meaning of the Commerce Clause, even though the parties be domiciled in different States, but is a simple contract of indemnity against loss. Paul v. Virginia Paul v. Virginia U.S. Supreme Court 1868 State insurance license requirement does not conflict with the US Constitution provisions that "citizens of each State shall be entitled to all the privileges and immunities of citizens in the several States," nor with the Congressional power "to regulate commerce . . among the several States.“ Corporations are not citizens within the meaning of the first of these clauses. Special privileges enjoyed by citizens in their own States are not secured by it in other States. U.S. v. South­Eastern Underwriters U.S. v. South­Eastern Underwriters U.S. Supreme Court ­ 1944 Holding: A fire insurance company which conducts a substantial part of its business transactions across state lines is engaged in "commerce among the several States" and subject to regulation by Congress under the Commerce Clause. (reverses Paul) A conspiracy to fix and maintain arbitrary and noncompetitive premium rates on insurance, and a conspiracy to monopolize interstate insurance trade are violations of the Sherman Antitrust Act. Congress did not intend that the business of insurance should be exempt from the operation of the Sherman Act. (a) State regulation. The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business. (b) Federal regulation. No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, McCarran Ferguson Act McCarran Ferguson Act 15 USC 1012 (1945) Insurance Regulation Insurance Regulation Entry and Licensing Requirements Charters (Home State) Licenses (Interstate Expansion) Initial Capital and Continuing Capital Requirements Disclosure of Organizers and Principals – Background Acceptance of Regulator and Regulations Financial Reporting – Examinations Usually limited to authority in home state Similar “acceptance” of regulator, but may be less than above “Capital” may be Bond Designation of Agents for Service of Process Payment of fees or taxes sale to “non­admitted” insurance companies (availability/spreading risk) Surplus Lines Capital Capital, Reserves, Investments and Insolvency Insurance Regulation Insurance Regulation Reserves Capital Stock and Surplus built through accumulation of profits Regulation of dividends and distributions [United Health Care example] Maintained against actuarial and investment risks Loss Reserves and Unearned Premium Reserves Balance resource protection against excessive rates Varies by lines of Insurance – Life (long term), Casualty (liquidity) Risk­based assessments Use of Guaranty Funds or Associations Investment Regulation Insolvency Rate Making and Filings Rate Making and Filings (or “Form” Regulation) Approval of different products for sale to the public Different processes are used: Prior approval versus “file and use” – role of the AG or public advocate Risk Classifications – to protect against unreasonable discrimination (similar insured persons should pay similar rates) ­ [Beacon example and discussion] Rating “bureaus” – private entities that establish classifications and rates that insurance companies join “Adequate” (to protect the insurer), but not “Excessive” (to protect the insured) “Group” rates and “enrollment” – generally cheaper Insurance Regulation Insurance Regulation Insurance Contracts Insurance all about the contract (offer, acceptance, consideration/premium = binding contract) Regulators regulate the terms of contract to protect consumers (cancellation, premium forfeiture, disclosures, unfair denial of claims, etc) Multiple lines, commercial and personal, create difficult environment to regulate Uniform/Standardized Contracts. Primary effort to standardize in personal lines – life, personal property and casualty (home, auto and personal liability) Case Study Case Study Beacon Insurance Company Workers Compensation Lines of Insurance Unique Charter – following failure of system Dominance – build­up of capital and reserves Report that showed different insured companies were paying different rates – based on “consent to” rates “Market conduct” examination by regulator Class Exercise Class Exercise United Healthcare of New England Separate Health Care Insurance Commissioner (Chris Koller) created in 2005 – See HIC “charge” in Public Notice Holding Company law in Rhode Island http://www.rilin.state.ri.us/Statutes/TITLE27/27­35/IND Subsection 4(g) – what is the “standard” for approval? Summary Summary ...
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