RMIN SG exam 2 CHAPTER 8 Reasons for Insurance Regulation o Maintain Insurer Solvency ability to continue operations pay claims financial strength Premiums paid in advance if becomes insolvent future claims are worthless Exposure to financial insecurity if person loses house in fire and claims cannot be paid they may be financially ruined Social economic costs Loss of jobs by insurance company if they are insolvent Loss to the state on taxes paid on premiums etc o Compensate for inadequate consumer knowledge Insurance contracts are complicated legal documents Consumers are unable to compare different contracts Insurance agents could be unethical o Ensure reasonable rates Not so high that they are charging excessive prices Not so low that their solvency is threatened o Make Insurance Available Available to all who need it Insurers can be unwilling to write for all applicants Govt can step in when private sector is unwilling to provide insurance History of Insurance Regulation o Early efforts State insurance commissions separate agency dealing with and supervising insurance 1851 New Hampshire Under direct legislation and supervision of the states Required only that companies issue periodic reports and provide public with information on their financial condition o Paul v Virginia Paul was a Virginia agent representing NY people Court said he can t sell NY insurance in VA operate across state lines SC said states should regulate insurance Fed shouldn t interfere Said insurance was NOT interstate commerce o South Eastern Underwriters Association case SEUA was a rating bureau that was found guilty of price fixing and other violations of the Sherman Antitrust Act Underwriting for multiple insurers causing them all to be the same price They decided to overturn Paul v Virginia and say that Fed should regulate insurance because it is interstate commerce o McCarran Ferguson Act public law 15 states have first priority to regulate insurance but Fed can intervene Continued regulation and taxation of the insurance industry by the states is in the public interest As long as state regulation is in effect federal antitrust laws will not apply to insurance Are parts of antitrust law that insurance companies are always subject to o Financial Modernization Act banks insurance companies and investment firms can combine merge They were historically regulated separately so questions over who regulates what Has answered a lot of regulatory questions for these financial service firms A lot of overlapping of regulations Fed controls banks states control insurance SEC controls securities so controlling all in one entity can be confusing Methods for Regulating Insurance o Legislation all states have laws regulating insurance Also subject to some federal laws o Courts state and federal courts hand down decisions concerning the constitutionality of state insurance laws the interpretation of policy clause and provisions and the legality of administrative actions by insurance departments o State Insurance Departments All states DC and US territories have their own insurance dept or bureau Insurance commissioner elected by governor National association of insurance commissioners NAIC Highest ranking insurance officials from each of the 50 states No legal authority to force states to do anything but provides recommendations and discusses issues What areas are regulated o Formation and licensing of insurers After formation insurers must have license to do business Must meet certain capital and surplus requirements Domestic foreign and alien insurers Each state has different licensing requirements so must meet requirements and get license for each state you are doing business If from GA but get license in FL then you are a foreign insurer in FL If have no license in AL then you are an alien insurer in AL and cannot legally insure there o Solvency Regulation Admitted assets more liquid investments premiums due BEFORE 90 days more conservative measure of assets than non admitted assets Reserves putting away enough money to pay off liabilities Surplus higher surplus more solvent Risk based Capital RBC insurers must have a certain amount of capital depending on the riskiness of their investments and insurance operations Monitored by regulators based on how much capital they have relative to their risk based capital requirements EX insurers that invest in junk bonds must set aside more capital than insurers than invest in treasury bonds o 4 types of risk o Asset Risk insurance risk interest rate risk business risk Investments insurance company investments are regulated with respect to types of investments quality and of total assets or surplus that can be invested in different investments Prevents insurers from making unsound investments that could threaten solvency Dividend Policy annual gains for insurers can either be added to their surplus or distributed to policyholders by dividends Dividend policies limit the amount of surplus an insurer can accumulate because this is usually at the expense of dividends to policyholders Reports Examinations used to maintain insurer solvency must file annual report with the state insurance department s where it does business also periodically examined by states Liquidation of Insurers if an insurer is financially impaired the state insurance department assumes control of the company and tries to rehabilitate if unable then it is liquidated according to code Guaranty Funds provide for the payment of unpaid claims of insolvent property casualty insurers o For life insurance all states have guaranty laws to pay claims of insolvent life insurers o Limit the amount that policyholders can collect if insurer goes broke Assessment Method major method used to raise the necessary funds to pay unpaid claims o Rate Regulation Prior approval Laws rates must be filed and approved by the state insurance department before they can be used Modified Prior approval law rate change is based solely on loss experience the insurer must file the rates with the state insurance department and the rates may be used immediately File and use Law insurers are required only to file the rates with the state insurance departments and the rates can be used immediately Use and file Law insurers can put into effect immediately any rate changes but the rates must be filed with the regulatory authorities within a certain period after first being used ex 15 60 days Flex rating Law prior approval of rates is required