Bảo hiểm - Chapter 8: Government regulation of insurance

Chapter 8Government Regulation of InsuranceAgendaReasons for Insurance RegulationHistorical Development of Insurance RegulationMethods for Regulating InsurersWhat Areas are Regulated?State versus Federal RegulationCurrent Problems and Issues in Insurance RegulationReasons for Insurance RegulationMaintain insurer solvencyCompensate for inadequate consumer knowledgeEnsure reasonable ratesMake insurance availableHistorical Development of Insurance RegulationInsurers were initially subject to few regulatory controlsPaul v. Virginia (1868) affirmed the right of the states to regulate insuranceThe court ruled that insurance was not interstate commerceIn U.S. v. South-Eastern Underwriters Association (1944) the court ruled that insurance was interstate commerce when conducted across state lines and was subject to federal regulationThe legality of rating bureaus was questionedHistorical Development of Insurance RegulationThe McCarran-Ferguson Act (1945) states that continued regulation and taxation of the insurance industry by the states are in the public interest Federal antitrust laws apply to insurance only to the extent that the insurance industry is not regulated by state lawe.g., insurers are not exempt from the Sherman Act provisionsThe Financial Modernization Act (1999) changed federal law that earlier prevented banks, insurers, and investment firms from competing outside their core areaMethods of Regulating InsurersThe three principal methods of regulating insurers are:Legislation, through both state and federal lawsCourt decisions, e.g., interpreting policy provisionsState insurance departmentsEvery state has an insurance commissioner, who administers state insurance lawsThe National Association of Insurance Commissioners meets periodically to discuss industry problems and draft model laws What Areas Are Regulated?All states have requirements for the formation and licensing of insurersLicensing includes minimum capital and surplus requirementsA domestic insurer is domiciled in the stateA foreign insurer is an out-of-state insurer that is chartered by another state, but licensed to operate in the stateAn alien insurer is an insurer that is chartered by a foreign country, but is licensed to operate in the stateWhat Areas Are Regulated?Insurers are subject to financial regulations designed to maintain solvencyAssets must be sufficient to offset liabilitiesAdmitted assets are assets that an insurer can show on its statutory balance sheet in determining its financial conditionStates have regulations that address the calculation of reservesAn insurer’s surplus position is carefully monitored by state regulators What Areas Are Regulated?Life and health insurers must meet certain risk-based capital standardsA risk-based capital (RBC) standard means that insurers must have a certain amount of capital, depending on the riskiness of their investments and insurance operationsAn insurer’s RBC depends on:Asset riskUnderwriting riskInterest rate riskBusiness riskA comparison of the company’s total adjusted capital to the amount of required risk-based capital determines whether company or regulatory action is required What Areas Are Regulated?The purpose of investment regulations is to prevent insurers from making unsound investments that could threaten the company’s solvency and harm the policyownersLaws generally place a limit on the proportion of assets in a specific asset category, such as real estateMany states limit the amount of surplus a participating life insurer can accumulate, rather than pay as dividendsWhat Areas Are Regulated?Each insurer must file an annual report with the state insurance department in the states where it does businessThe state insurance department assumes control of insurance companies that they determine to be financially impairedAll states have guaranty funds that provide for the payment of unpaid claims of insolvent property and casualty insurersStates have guaranty laws and guaranty associations that pay the claims of policyowners of insolvent life and health insurersThe assessment method is the major method used to raise the necessary funds to pay unpaid claims What Areas Are Regulated?Rate regulation takes a variety of forms across statesForms of rate regulation for property and casualty insurance include:Prior approval lawModified prior approval lawFile-and-use lawUse-and-file lawFlex-rating lawState-made ratesNo filing requiredMany states exempt insurers from filing rates for large commercial accountsLife insurance rates are not directly regulated by the statesWhat Areas Are Regulated?State insurance commissioners have the authority to approve or disapprove new policy forms before the contracts are sold to the publicSales practices are regulated by the laws concerning the licensing of agents and brokersAll states require agents and brokers to be licensedInsurance laws prohibit a variety of unfair trade practices, such as misrepresentation, twisting, and rebatingTwisting is the inducement of a policyowner to drop an existing policy and replace it with a new one that provides little or no economic benefit to the clientRebating is the practice of giving an individual a premium reduction or some other financial advantage not stated in the policy as an inducement to purchase the policyWhat Areas Are Regulated?State insurance departments typically have a complaint division for handling consumer complaintsMost complaints involve claimsInformation is provided to consumers on insurance department websites and in brochuresInsurers pay numerous local, state, and federal taxesInsight 8.2 2008 Annual Ranking of Automobile Insurance Complaints in New York State (based on 2007 data) (cont.)Insight 8.2 2008 Annual Ranking of Automobile Insurance Complaints in New York State (based on 2007 data)State versus Federal RegulationShould the McCarran-Ferguson Act be repealed?Arguments for federal regulation include:Uniformity of laws and standardsGreater efficiencyMore competent regulatorsState versus Federal RegulationAdvantages of state regulation include:Greater responsiveness to local needsPromotion of uniform laws by the NAICGreater opportunity for innovationUnknown consequences of federal regulationDecentralization of political powerState versus Federal RegulationShortcomings of state regulation include:Inadequate protection against insolvencyInadequate protection of consumersInadequate market conduct examinationsInsurance availabilityRegulators may be overly responsive to the insurance industryCurrent Problems and Issues in Insurance RegulationCrisis in Insurance RegulationCritics believe that lax regulatory oversight at both the state and federal levels contributed to the current financial meltdownThe federal government bailout of AIG limited the worldwide repercussions of the crisis Modernizing Insurance RegulationCritics believe the current regulatory system is brokenProposals for reform are moving in two directions:A dual system of regulation that would allow insurers to choose either a state or federal systemAn optional federal charter proposal would allow life insurers to choose a federal or state charterModernization of regulation at the state levelCurrent Problems and Issues in Insurance RegulationInsolvency of insurers continues to be an important regulatory concernReasons for insolvencies include:Inadequate ratesInadequate reserves for claimsRapid growth and inadequate surplusProblems with affiliatesOverstatement of assetsAlleged fraudFailure of reinsurers to pay claimsMismanagementCatastrophic lossesCurrent Problems and Issues in Insurance RegulationThe principal methods of ensuring insolvency are:Minimum capital and surplus requirementsRisk-based capital standards Review of annual financial statementsField examinationsEarly warning system (IRIS ratios)FAST system analysisCurrent Problems and Issues in Insurance RegulationAn increasing number of insurers are using a credit-based insurance score for underwritingProponents argue:There is a high correlation between an applicant’s credit record and future claims experienceInsurance scores benefit consumersUnderwriting and rating can be more objective and consistentMost consumers have good credit scores Critics argue:The use of credit data in underwriting or rating discriminates against minorities and other groupsCredit reports often contain errors that can harm insurance applicantsCredit-based insurance scores may penalize consumers unfairly during business recessions