IMch24 - CHAPTER 24 Government Regulation of Risk...

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CHAPTER 24 Government Regulation of Risk Management and Insurance WHY INSURANCE IS REGULATED Future Performance Complexity Unknown Future Costs Violations of Public Trust THE LEGAL BACKGROUND OF REGULATION THE McCARRAN-FERGUSON ACT FEDERAL VERSUS STATE REGULATION RESPONSIBILITIES OF THE STATE INSURANCE DEPARTMENT Licensing and Financial Solvency Minimum Capital Investments Liquidation Security Deposits Guaranty Funds Regulation of Rates and Expenses Property-Liability Rates Prior Approval versus Open Competition Laws State-Mandated Rates Life Insurance Rates Agents’ Activities Regulation of Contract Provisions MISCELLANEOUS INSURANCE LAWS Service-of-Process Statutes Retaliatory Laws Anticancellation Laws Reciprocal Laws Anticoercion Laws TORT REFORM TAXATION OF INSURANCE Future of Insurance Regulation KEY TERMS AND CONCEPTS Anticoercion statutes Deficit Reduction Act of 1984 (DEFRA) File and use Insolvency funds Misrepresentation Open competition laws Prior approval Rebating Reciprocal laws Retaliatory laws Risk-based capital Service-of-process statute South-Eastern Underwriters Association (SEUA) case Twisting Unauthorized insurers service-of- process acts ANSWERS TO QUESTIONS FOR REVIEW AND DISCUSSION 1
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1. Losses were substantial and so were assessments against insolvency funds during the time of their brief history (1969 to date). Losses occurred in all states. It would appear that even though the losses were small compared to the total premiums written by all insurers, the funds are needed and provide an orderly way to handle losses by spreading them out among participating insurers rather than having these losses fall on policyholders or taxpayers. 2. Under prior approval law, an insurer must obtain permission to use a rate before it is actually used, whereas under the open competition law, the insurer may file a rate and then proceed to use it immediately unless stopped by the insurance commissioner. Under some open competition laws, filing is not required. In theory, free market forces will operate to protect the consumer’s interest as well or better under open competition laws as under prior approval laws, but the point is as yet undecided. There has been no strong recent trend for more states to adopt open competition laws. A majority of states (about 30) still use the prior approval laws as the way to best protect the consumer’s interests. See text for arguments pro and con. 3. Three examples of competition in insurance are given in the text: price competition still exists, companies compete with better contracts or more flexible underwriting conditions, and finally, some companies give better service. For example, State Farm and Allstate advertise superior claims service facilities, providing an adjusting office in most cities of any substantial size any place in the United States. On the other hand, large multiple-line insurers advertise that they can take risks of larger size and offer a complete package in one company. Large workers’
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IMch24 - CHAPTER 24 Government Regulation of Risk...

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