Lesson 5 Part 2 - Lesson 5(2 Insurance Regulation Insurance...

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Lesson 5 (2): Insurance Regulation
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Insurance Regulation The rules of the marketplace, established by law, administered by public officials, and interpreted by the courts Purpose is to promote and protect the public’s welfare because of the special qualities of the insurance marketplace McCarran Act (Public Law 15) - Federal law that gives the power to the states to regulate insurance
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Reasons for Insurance Regulation Insurer solvency issues Unequal knowledge and bargaining power Problem of pricing Promotion of social goals
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Insurer Solvency Insurance is a promise to be delivered in the future – consumers find it difficult to evaluate and monitor insurer solvency to protect oneself Insolvent insurers: Cause serious problems for insureds due to the scope and number of people involved - severity potentially enormous Companies are in a quasi-fiduciary position Life insurance companies invest a substantial amount of savings Accounting (statutory accounting) and investments highly regulated
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Unequal Knowledge and Bargaining Power Imbalance in competition of marketplace Complexity of contracts; difficult to understand Insurance is an intangible good Difficult for consumer to evaluate so a public regulator is needed To provide “standardized” approved contracts To equalize consumer’s bargaining power
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Problem of Pricing Open competition pricing said not to work because prices are set before costs are known - sometimes years Consumers cannot judge the adequacy of prices Solvency regulation substituted for unrestrained competition to generate sales of the most contracts at a below cost price.
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Types of Price Regulation Prior approval – the state has to agree to the rates after they are submitted and justified. Open competition – The insurer charges what they want and can change the prices at any time. The practical implications of this is that open competition does not really exist. If the regulators deem them to be inappropriate, the state can disallow the use of the rates. In the life insurance business there is no direct rate regulation. Rates, however, are indirectly regulated by reserve requirements . The states set minimum reserve requirements based on an interest rate, mortality tables, and methods of calculation. If the company chooses to charge less than required by reserve requirements, the company will show a loss.
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Promotion of Social Goals Promotes the sharing of losses for society
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This note was uploaded on 10/08/2011 for the course FINANCE FINANCE taught by Professor Don'tknow during the Spring '09 term at American Internation College.

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Lesson 5 Part 2 - Lesson 5(2 Insurance Regulation Insurance...

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