Ch 2 Flashcards
What effect did Paul v. Virginia have on insurance regulation?
1869/Virginia/Samuel B. Paul: US Supreme Court upheld state regulation of insurance.
What effect did the South-Eastern Underwriters Association’s decision have on insurance regulation?
SEUA: compact between about 200 insurers that controlled 90% of SE market. 1944/US Supreme Court: the following acts now apply to insurance:
1) Sherman Act/1890 - prohibit collusion to gain monopoly - can no longer band together to control rates and coverages.
2) Clayton Act/1914: in conjunction with Robinson-Patman Act (1936) prohibit activities that lessen competition or create monopoly power (price discrimination, tying (must buy one product when purchasing another. Robinson-Patman Act limited price discrimination to differentials attributed to difference in operating coss resulting from competing in good faith.
3) FTC Act of 1914: prohibit unfair methods of competition and unfair or deceptive trade practices. Promotes competition.
What effect did the Sherman Antitrust Act have on insurance regulation?
1890/Congress/Prohibits contracts, combinations, and conspiracies in restraint of trade and other attempts to monopolize the market.(can still exchange cost and pricing information in a competitive environment per 1925 noninsurance clause. rating bureaus started becoming popular)
What effect did the McCarran-Ferguson Act have on insurance regulation?
Returned insurance regulation to the states.
What effect did the ISO and AG lawsuit have on insurance regulation?
Eliminated perception that ISO provided a vehicle for insurer collusion.
Lawsuit by 7 states AGs: alleged conspiracy for global boycott of certain types of CGL coverages, particularly environmental damages from pollution. ISO drafted language.
Result: ISO reorganized. Rate and form decisions are made by ISO staff.
How does insurance regulation protect consumers?
Reviewing policy forms to determine whether you benefit consumers and comply with state consumer protection laws.
Protect against fraud and unethical behavior.
Ensure that insurance is readily available. (Cancellation restrictions)
How does insurance regulation maintain insurer solvency?
Solvency regulation protects Insureds agains the risk the insurers will be unable to meet their financial obligations.
How does insurance regulation assist in preventing destructive competition?
protects against insurers lowering price to increase market share. This drives down price levels in entire market and could lead to inadequate rates, which could lead to insolvency. Some carriers might stop writing or leave the market, producing an insurance shortage.
What are the regulatory activities of State Insurance departments?
Executive branch. Enforce insurance laws enacted by the legislature.
What duties are performed by state insurance departments?
licensing insurers
- licensing producers
- approving policy forms
- holding rate hearings and reviewing rate filings
- evaluating solvency info
- market conduct examinations
- rehabbing/liquidating insolvent insurers.
- investigate policyholder complaints
- prevent fraud
Arguments for federal regulation?
- uniformity
- more efficient
- attract more experienced personnel
- less expensive / less duplication (each state)
What are the licensing requirements for insurers and insurance personnel?
- Financial Strength
- Integrity
- Competence
Why do insurers become insolvent?
Poor management is too reason. Rapid premium growth Inadequate rates Inadequate reserves Excessive expenses Lax controls over managing general agents Uncollectible reinsurance. Fraud
What is the goal of rate regulation?
Insurer financial stability and, as a result, consumer protection. Three major goals are to ensure that rates are:
1) adequate
2) not excessive
3) not unfairly discriminatory.
What are the major types of state rating laws?
Prior approval File and use Use and file No laws Flex rating laws
Reasons supporting rate regulation.
- rate increases have to be justified
- help maintain solvency by ensuring adequate rates
- keep rates reasonable and fair
- without regulation insurers would raise rates to unfairly earn expressive profits.
Reasons opposing rate regulation.
- rates could be inadequate by the time they are approved. Could lead to less new business written and insurance availability problems.
- less expensive
- more flexible. Rates can be adjusted in response to changing economic and market conditions.
- free market forces lead to reasonable and fair rates.
How is policy wording regulated?
Through legislation an insurance departments’ rules, regulations, and guidelines.
How is market conduct regulated?
Monitoring market conduct of the following for unfair trade practices:
producer practices; fraud/dishonesty, misrep, twisting (induce insd to replace one policy with another), unfair discrimination, rebating.
Underwriting practices
Claims practices
How do regulatory activities protect consumers?
State insurance departments respond to consumer complaints (rates/policy cancellations/difficulty finding insurance), and they provide information and education to consumers. They also publish complaint ratios for consumers’ use, shoppers guides.
Term: Robinson/Patman Act
imited price discrimination to differentials attributed to difference in operating coss resulting from competing in good faith.
What is the condition of the McCarran Ferguson Act that is important because if it is not met, regulation returns to Congress?
States must have their own antitrust legislation and their own unfair trade practices legislation. Federal government still had control over boycott, coercion, intimidation, labor relations.
What was the NAIC’s Act Relating to Unfair Methods of Competition and Unfair Deceptive Acts
A model act to help states develop own laws to prevent federal government from controlling the insurance business as prescribed the the McCarran Act.
What did the Gramm-Leach-Bliley Act achieve?
States continue to have primary regulatory authority over insurance activities. Bank related firms can now sell insurance as producers an banking activities is overseen separately.
Compels stated to facilitate producers ability to operate in more than one state. Allowed states 3 years to develop reciprocal licensing agreements. O
Also treats underwriting differently from sales/marketing. National banks can’t underwrite through a subsidiary but can arrange for a holding company to create an insurance affiliate. Makes it difficult for a failing bank to use insurer assets.