Chapter 5: Regulation and Evaluation of Insurers

Question 1

Sources of insurance regulation:
Self Regulation
Government Regulation

Answer 1

Self = insurers & associations

Government = State & Federal

Question 2

(NCOIL)

Answer 2

National Conference of Insurance Legislators
The purpose of the National Conference of Insurance Legislators (NCOIL) is to help legislators make informed decisions on insurance issues that affect their constituents and to declare opposition to federal encroachment of state authority to oversee the business of insurance, as authorized under the McCarran-Ferguson Act of 1945.

Question 3

Insurance Commissioner Duties

Answer 3

The commissioner’s authority extends to

1) licensing insurers and agents
2) requiring annual reports from the insurers
3) approving forms and rates in some, but not all, lines of insurance
4) investigating complaints of many kinds

Question 4

NAIC

Answer 4

National Association of Insurance Commissioners
(NAIC)
is a voluntary nonprofit association of state insurance administrators. The NAIC itself has no regulatory authority. It is important, however, not only for the zone examination procedures but also for its influence through the commissioners on uniformity of insurance
laws in the various states. The NAIC assists state insurance departments by developing model laws and regulations.

Question 5

Model Laws

Answer 5

A model law is a draft bill—the suggested wording of a new law—for consideration by state legislators. Any state may choose to adopt the model bill or adopt it with modifications.

Question 6

Model Regulation

Answer 6

A model regulation is a draft regulation that may be implemented
by a state insurance department if the model law is passed.

Question 7

Judicial Action

Answer 7

Action by the courts to determine whether a decision by the commissioner was in compliance with the states statutes

Question 8

What is regulated by the states

Answer 8

1) Formation and licensing of the insurers
2) Insurer operations
- forms and contracts
- rates
3) Rehabilitation and liquidation of insurers

Question 9

Prior approval law

Answer 9

A prior approval law requires that the proposed rates be filed with the insurance commissioner.
The rates may not be used by the insurer unless and until the commissioner approves them.

Question 10

File-and-use law

Answer 10

permits the immediate use of filed rates without the insurance commissioner’s affirmative approval. The commissioner, however, may disapprove the rates within a certain time period, such as 30 or 60 days.

Question 11

Use-and-file law

Answer 11

Numerous states have a use-and-file law. Rates must be filed with the insurance commissioner within a specified time after they are first used. The rates may be disapproved if not in compliance with the law.

Question 12

Flex-rating law

Answer 12

Under these laws, no regulatory approval is needed if a proposed new rate represents a change of less than 5 or 10 percent or some other stated percentage of the existing rate. Other rate changes require prior approval.

Question 13

open competition

Answer 13

From time to time for some lines, some states have also adopted open competition, which was pioneered in California. Open competition, which relies on competition to set rates, actually represents the absence of government regulation.

Question 14

Types of State Laws Affecting Insurance Rates

Answer 14

• Prior approval laws
• File-and-use laws
• Use-and-file laws
• Flex-rating laws
• Open competition
• Expense limitation laws

Question 15

legal Reserves

Answer 15

In life insurance, the legal reserve is an amount that, augmented by premium payments under outstanding contracts and interest earnings, is sufficient to enable
the life insurer to meet its expected policy obligations.

Question 16

Unearned premium reserve

Answer 16

In property and liability insurance, the unearned premium reserve must always be adequate to pay a return premium to all policyowners if their policies are canceled prior to expiration.

Question 17

Loss Reserve

Answer 17

A second type of reserve required of property and liability insurers is the loss reserve. The loss reserve reflects the insurer’s liability for losses that have already occurred but have not yet been paid or otherwise settled.

Question 18

Nonadmitted assets

Answer 18

Nonadmitted assets are thought to be of marginal quality or of little liquidity for policyowners if their
insurers should get into financial difficulty. Examples of nonadmitted assets are most office furniture and supplies, as well as premiums that are 90 days or more past due.

Question 19

Unfair Trade Practices Act

Answer 19

The NAIC developed the model Unfair Trade Practices Act, and almost all U.S. jurisdictions have adopted unfair trade practices acts. The acts prohibit unfair trade practices in insurance, including the following:

1) rebating
2) twisting
3) misappropriation
4) commingling of funds

Question 20

Rebating

Answer 20

Rebating is the return of any part of the premium, except in the form of dividends, to the policyowner by the insurer or agent as a price-cutting sales inducement.

Question 21

Twisting

Answer 21

Twisting is a special form of misrepresentation in which an agent may induce the policyowner to cancel the contract of another insurer in order to take
out a new contract based on an unfair or incomplete comparison of the contracts.

Question 22

Misappropriation

Answer 22

Misappropriation is an agent’s unlawful keeping of funds belonging to others.

Question 23

Commingling

Answer 23

commingling of funds occurs when an agent mixes the insured’s or the insurer’s funds with the agent’s personal funds; commingling of funds is prevented in some states by requiring a separate bank account for the agent’s premium funds held in trust for the insurer.

Question 24

unauthorized entity

Answer 24

Any agent who sells coverage from an unauthorized entity faces the risk of regulatory penalties, liability for
unpaid claims, and imprisonment on a felony charge. An unauthorized entity is an insurance company (or other organization either real or fictitious) that has not gained approval to place insurance business from a department of insurance in the jurisdiction where it or a
producer wants to sell insurance.

Question 25

At the state level insurance is regulated by?

Answer 25

legislative, administrative, and court action

Question 26

What is the general purpose of insurance regulation?

Answer 26

The general purpose of insurance regulation is to protect the public against insolvency and unfair treatment by insurers.

Question 27

Power of the insurance commissioner

Answer 27

The insurance commissioner has the power to, among other things, enforce the laws passed by the legislature and interpreted by the courts, license insurers and agents, and investigate to determine whether insurers and agents are meeting the requirements of the statutes.

Question 28

Discrimination vs unfair discrimination

Answer 28

Insurance regulations prohibit unfair discrimination. Many insurance rates are based on fair discrimination. Life insurance rates, for example, vary by age and reflect different mortality rates for people of different ages.

Question 29

hat are the majority of premium taxes used for?

Answer 29

Most premium taxes paid by insurers to the states are used for revenue purposes.

Question 30

Financial strength of an insurance company is based upon?

Answer 30

Financial strength is determined by the insurer’s ability to pay claims.

FYI:
In addition to financial strength, other important criteria for selecting an insurer are its willingness to pay claims, the service it provides, and the cost of its products.

Question 31

Criteria for evaluating an agent?

Answer 31

knowledge and ability 
willingness 
integrity 
character
representation.