(LESSONS FROM THE ECONOMIC CRISIS FOR) INSURANCE REGULATION

Question 1

SECT A: (LESSONS FROM THE ECONOMIC CRISIS FOR) INSURANCE REGULATION

ARGUMENTS FOR A SINGLE FEDERAL REGULATORY SYSTEM (3)

Answer 1

1. NATIONAL UNIFORMITY
   2, AVOID COSTS OF DUPLICATION
2. TRADITIONAL SYSTEM IS INEFFICIENT; SINGLE VOICE FOR US INS REGULATION

Question 2

SECT A: (LESSONS FROM THE ECONOMIC CRISIS FOR) INSURANCE REGULATION

WHY REGULATION FAILS

Answer 2

1. Regulatory fallibility – humans make mistakes
2. Regulatory forbearance – failure to take prompt & stringent action
   i. Believe that insurer can pull through without intervention
   ii. Shutting down company not a pleasant experience
   iii. Failed insurer can damage regulator’s reputation
    Failure to act may increase size of deficit
    Insurer may “bet the farm” (increase risk taking), with upside benefitting owners/shareholders and downside to the detriment of policyholders & guaranty funds
3. Regulatory capture – tendency for regulators to advance special interests of the industry it regulates from

Question 3

SECT A: (LESSONS FROM THE ECONOMIC CRISIS FOR) INSURANCE REGULATION

REASONS FOR REGULATORY FORBEARANCE (3)

Answer 3

1. BELIEF THAT INSURER CAN PULL THROUGH W/O INTERVENTION
2. LIQUIDATING COMPANY IS UNPLEASANT
3. FAILED INSURER CAN DAMAGE REGULATOR’S REPUTATION

Question 4

SECT A: (LESSONS FROM THE ECONOMIC CRISIS FOR) INSURANCE REGULATION

REPURCUSSIONS OF REGULATORY FORBEARANCE

Answer 4

INCREASE THE SIZE OF DEFICIT; INSURER MAY “BET THE FARM”, INCREASING RISK TAKINGTO THE BENEFIT OF STAKEHOLDERAND TO THE DETRIMENT OF THE POLICYHOLDERS & GUARANTY FUNDS

Question 5

SECT A: (LESSONS FROM THE ECONOMIC CRISIS FOR) INSURANCE REGULATION

STRUCTURE OF US INSURANCE REGULATION

Answer 5

1. State-based system with checks & balances that limit regulatory failures
2. Duplication from inertia of state laws that developed independently
3. Compromise among diverse perspectives => centrist solutions
4. Peer review & peer pressure counteract regulatory fallibility, regulatory forbearance & regulatory capture
5. Market discipline vs moral hazard - bailouts create moral hazard (riskier actions)

MM CC Duppy’s PP State
1. Market discipline vs moral hazard
 Bailouts create moral hazard (riskier actions)
2. Compromise among diverse perspectives => centrist solutions
 Balance in regulation – over regulation costs vs costs of under regulation
3. Duplication
 Exists due to inertia of state laws that developed independently
 Cost of mistake > cost of duplicative regulation
4. Peer review & peer pressure
 Peer pressure counteracts with regulatory forbearance & regulatory capture
 Effective system of peer review requires
i. Free-flowing information
ii. Willingness to challenge & be challenged
iii. Ability for another state to act
5. State-based system with checks & balances that limit regulatory failures

Question 6

SECT A: (LESSONS FROM THE ECONOMIC CRISIS FOR) INSURANCE REGULATION

EFFECTIVE PEER REVIEW SYSTEM

Answer 6

1. Free-flowing information
2. Willingness to challenge & be challenged
3. Ability for another state to act

Question 7

SECT A: (LESSONS FROM THE ECONOMIC CRISIS FOR) INSURANCE REGULATION

TYPES OF PERIOD EXAMINATIONS BY STATE DOIS (2)

Answer 7

1. ON-SITE FINANCIAL EXAMINATION EVERY 5 YEARS
2. MARKET CONDUCT EXAMINATIONS

Question 8

SECT A: (LESSONS FROM THE ECONOMIC CRISIS FOR) INSURANCE REGULATION

NAIC PRINCIPLES FOR A NATIONAL STRUCTURE (4)

Answer 8

1. UNIFORM STANDARDS WHERE APPROPRIATE; LOCAL STANDARDS WHERE NECESSARY
2. STATE-LEVEL COOPERATION & COLLABORATION - WITH EFFECTIVE PEER REVIEW SYSTEM
3. INDUSTRY/DEPT COOPERATION & COLLABORATION - INS REGULATORS HAVE EQUAL REG AUTHORITY AS OTHER REGULATORS
4. EXTERNAL COOPERATION & COLLABORATION - MODES TO INTERACT WITH OTHER INDUSTRIES & COUNTRIES

Question 9

SECT A: (LESSONS FROM THE ECONOMIC CRISIS FOR) INSURANCE REGULATION

FUNCTIONS OF STATE INSURANCE REGULATORY SYSTEMS (5)

Answer 9

1. SET LICENSING REQUIREMENTS
2. SET REPORTING & FILING REQUIREMENTS
3. REGULATE COVERAGE & PRICING
4. CONDUCT PERIODIC EXAMINATIONS
5. POWER TO IMPOSE SANCTIONS

Question 10

SECT A: (LESSONS FROM THE ECONOMIC CRISIS FOR) INSURANCE REGULATION

NAIC PROCESS FOR GRANTING STATE DOI FINANCIAL ACCREDITATION (3)

Answer 10

UPON REQUEST BY STATE INS COMMISSIONER, NAIC REVIEWS STATE DOI
1. STATE LAWS & REGULATION
REVIEW LAWS & REGULATIONS
REVIEW PRIOR EXAMINATION REPORTS
2. REGULATORY METHODS - INSPECT REGULATORY FILES FOR SELECTED COMPANIES
3. DOI PRACTICES - INTERVIEW DEPT PERSONNEL
REVIEW ORGANIZATIONAL & PERSONNEL POLICIES
WALK THROUGH DEPT TO UNDERSTAND DOCUMENT & COMMUNICATION FLOWS

Question 11

SECT A: (LESSONS FROM THE ECONOMIC CRISIS FOR) INSURANCE REGULATION

TYPES OF INSURERS BASED ON PLACE OF DOMICILE, RELATIVE TO SUBJ STATE (3)

Answer 11

1. DOMESTIC - LICENSED IN SUBJ STATE, DOMICILED IN SUBJ STATE
2. FOREIGN - LICENSED IN SUBJ STATE, DOMICILED IN DIFFT STATE
3. ALIEN - LICENSED IN SUBJ STATE, DOMICILED IN DIFFT COUNTRY