Cpcu 520 Ch. 02

Front 1

National Association of Insurance Commissioners

Back 1

An association consisting of the insurance commissioners of each U.S. state, the District of Columbia, and the U.S. territories and possessions that coordinates regulatory activities among the various insurance depts

Front 2

Model law

Back 2

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

Front 3

Model regulation

Back 3

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

Front 4

Domestic insurer

Back 4

An insurer doing business in its home state

Front 5

Foreign insurer

Back 5

A U.S. insurer doing business in a state that is not its home state

Front 6

Alien insurer

Back 6

In insurer domiciled outside the U.S.

Front 7

Surplus lines laws

Back 7

State laws that permit producers with a surplus lines license to write business for an "acceptable" nonadmitted insurer when protection from admitted insurers is not available

Front 8

Guaranty funds

Back 8

State-established funds that provide for the payment of unpaid claims of insolvent insurers licensed in that state. Although guaranty funds do not prevent insurer insolvency, they mitigate its effects

Front 9

Underwriting cycle

Back 9

A cyclical pattern of insurance pricing in which a soft market (low rates, relaxed underwriting, and underwriting losses) is eventually followed by a hard market (high rates, restrictive underwriting, and underwriting gains) before the pattern again repeats itself.

Front 10

Mandatory rate law

Back 10

State law under which insurance rates are set by a state agency or rating bureau and all licensed insurers are required to use those rates

Front 11

Prior approval law

Back 11

State law under which insurance rates must be approved by the state insurance dept before they can be used

Front 12

File-and-use law

Back 12

State law under which insurance rates must be filed with the state insurance dept but can then be used immediately

Front 13

Use-and-file law

Back 13

State law under which insurance rates can be put into effect with filing information subsequently submitted and subject to regulatory review

Front 14

Flex rating law

Back 14

State law under which prior approval is required only if the new rates exceed a cerain percentage above (and sometimes below) the rates previously filed

Front 15

Open competition system

Back 15

A system under which rates do not have to be filed with the state insurance dept

Front 16

Unfair trade practices acts

Back 16

State laws that prohibit an insurer from using unfair methods of competition and engaging in unfair acts or practices as defined in the acts

Front 17

Rebating

Back 17

The practice of giving a portion of the producer's commission or some other financial advantage to an individual as an inducement to purchase a policy

Front 18

Advisory organizations

Back 18

Independent corporations that work with and on behalf of insurers that purchase or subscribe to their services. Services include prospective loss costs and standard contract forms

Front 19

Identify three recurring issues in insurance regulation

Back 19

1. whether insurance should be regulated by state or federal gvmts

2. the extent to which insurance should be regulated

3. whether to require, encourage, or prohibit collaboration among insurers

Front 20

What role did each of the following play in establishing which level of govmt should regulate insurance?
-- Paul v. Virginia
-- Sherman Antitrust Act
-- South-Eastern Underwriters Association Decision
-- McCarran-Ferguson Act

Back 20

1. Paul v. Virginia: Affirmed state regulation of insurance, denied federal authority to regulate. "Insurance is not interstate commerce"

2. Antitrust act: prohibited collusion to gain a monopoly, prevented insurers from banding together to control insurance rates and coverage

3. SE UWs: overruled Paul v. Virginia - fed govmt had authority to regulate ins. Did not put a structure in place though for govmt to regulate from

4. McCarran-Ferguson: Regulation back to the states, federal anti-trust laws do not apply to states but do apply to boycotts, coercion, intimidation

Front 21

What changes occurred at Insurance Services Office (ISO) that resulted from the settlement of the attorneys general lawsuit?

Back 21

The ISO was reorganized as a result of this settlement. ISO's board was changed to include three insurance company executives, seven noninsurers, and ISO's president as chairperson. Insurer committees have been dissolved and repalced with insurer advisory panels, whose members make recommendations in their areas of expertise

Front 22

How does the Gramm-Leach-Bliley Act address each of the following issues?

-Authority for regulating insurance, banking, and securities functions

- Banks' authority to underwrite insurance

- Privacy

Back 22

- Authority for these functions is now determined by function. Insurance is regulated by existing state insurance depts, banking by the banking regulators, and securities by securities regulators.

- National banks are prohibited from underwriting insurance through an operating subsidiary but can arrange for a financial holding company to create an insurance affiliate.

- Banks are required to disclose their information-sharing policies and practices with customers

Front 23

Explain why each of the following is an important goal of insurance regulation

- Protect consumers
- Maintain insurer solvency
- Avoid destructive competition

Back 23

- Protect consumers - is important because majority of consumers are not equipped to analyze and understand complicated insurance policies. Ins. regulators are able to review insurance policy forms to ensure that they benefit the consumer. Regulators also protect policyholders by setting coverage standards, specifying policy language for certain coverages, and rejecting contracts that do not meet their approval.

- Maintaining insurer solvency is critical in protecting policyholders against the risk that insurers will not be able to meet their financial obligations. Insurance consumers, even large commercial customers, may find it difficult to evaluate the financial strength and viability of private insurers.

- Underpricing of insurance products to increase market share can lead to destructive competition by depressing price levels in the market as a whole. I prices fall too low, some insurers may become insolvent and some insurers may leave the market, leading to an insurance shortage. regulators are responsible for determining that premium levels are high enough to avoid such destructive competition.

Front 24

Identify the type of regulatory activities typically undertaken by state insurance departments

Back 24

- Approving policy forms
- Holding rate hearings and reviewing rate filings
- Licensing new insurers
- Licensing producers
- Investigating policyholder complaints
- Rehabilitating or liquidating insolvent insurers
- Issuing cease-and-desist orders
- Conducting periodic audits of insurers
- Evaluating solvency information
- Performing market conduct examinations
- Fining insurers for violations of state laws
- Publishing shoppers' guides and other consumer information

Front 25

In most states, the insurance commissioner is an appointed position; however, many states, now have elected commissioners

- What argument do proponents of an elective system cite to support their position?

- What is the argument in favor of appointing insurance commissioners?

Back 25

Pros for elective system cite:
- an appointed commissioner is subject to dismissal, while an elected commissioner is in office for an elected term
- An elected commissioner would likely change the insurance dept's stance if a different approach is required
Elected officials are keenly aware of issues that are important to the public
- An appointed commissioner might feel inclined to address the interests of those responsible for the appointment, while an elected commissioner is not obligated to special interests

Pros for appointment system cite:

- An appointed commissioner has no need to campaign and is not unduly influenced by political contributors
- An appointed commissioner is less likely to be swayed by ill-informed public opinion than an elected one
- An appointed commissioner is more likely to be perceived as interested in regulation rather than in political advancement

Front 26

Describe the ways in which the NAIC affects the regulation of insurance

Back 26

The NAIC assists state insurance depts by developing model laws and regulations for enactment by state legislators, by sharing financial information about insurers, and by developing uniform financial statement forms required by all states.

Front 27

Insurance regulation occurs primarily at the state level, but the issue of federal regulation is often raised

- What arguments have been advanced in favor of federal regulation?

- What arguments have been raised in favor of continued regulation by the states?

Back 27

Pro federal regulation:
- can provide regulatory uniformity across all states
- would be more efficient
- could attract higher-quality personnel

Pro state regulation:
- is more responsive to local needs
- The NAIC can facility uniformity of state laws
- allows for greater opportunities for innovation
- is a known entity, and its strengths and weaknesses have already been identified
- results in a desirable decentralization of political power

Front 28

What requirements must be met to form each of the following?

- Domestic stock insurance company

- Domestic mutual insurance company

Back 28

- State laws require that domestic stock insurers satisfy certain minimum capital and surplus requirements before a license is granted. Domestic insurers are licensed in the state in which they are incorporated

- Because a mutual insurer has no capital derived from the sale of stock, the minimum requirement applies only to surplus. Most states require mutuals to have an initial surplus equal to the minimum capital and surplus requirements for stock insurers writing the same types of business. Some states also require mutuals to have applications and deposit premiums from a stated minimum number of persons on more than a stated number of separate exposures with aggregate premiums in excess of a stated amount

Front 29

How do the licensing requirements for brokers differ from those for agents?

Back 29

Both agents and brokers must pass an examination to be licensed in each state where they do business. In those states that issue a separate broker's license, a different set of examinations may be used for brokers than for agents. Higher standards may also be imposed for a broker's license than for an agent's license.

Front 30

What requirements must a person who wans to do business as an insurance consultant typically meet?

Back 30

Those wanting to do business as an insurance consultant may require state licensing in some jurisdictions. Licensing requirements vary by state.

Front 31

What methods do state regulators use to monitor and regulate insurer solvency?

Back 31

1. establishment of financial requirements
2. review of financial annual statements
3. the Insurance Regulatory Information System (IRIS)
4. Onsite field examinations

Front 32

What factors historically have contributed to insurer insolvencies?

Back 32

- Rapid premium growth
- inadequate insurance rates and reserves
- excessive expenses
- lax control over managing general agents
- uncollectible reinsurance
- fraud

Front 33

What are the goals of insurance rate regulation?

Back 33

Ensure that rates are:
- adequate
- not excessive
- not unfairly discriminatory

Front 34

What are the advantages and disadvantages of prior approval insurance rating laws?

Back 34

Pro: rates must be approved before they can be used.

Con: may cause a delay in obtaining rate increases

Front 35

What are the advantages and disadvantages of file-and-use insurance rating laws?

Back 35

Pro: rate can be used immediately

Con: Filing is still required, and the state insurance dept may subsequently disapprove rates that violate state laws

Front 36

What are the advantages and disadvantages of use-and-file insurance rating laws?

Back 36

Pro: rate can be used immediately

Con: Rates are submitted to regulators for review

Front 37

What are the advantages and disadvantages of flex rating laws?

Back 37

Insurers may make changes in rates within an established range without prior approval. This allows insurers to make rate adjustments quickly in response to changing market conditions.

Front 38

What are the advantages and disadvantages of open competition rating laws?

Back 38

Market forces determine rates. Rates must still meet the standards of being adequate, non-excessive, and non-discriminatory

Front 39

What types of sales practices would cause a producer to be in violation of a state's unfair trade practices act?

Back 39

Producers who engage in:
- dishonesty
- fraud
- misrepresentation
- twisting
- unfair discrimination
- rebating

Front 40

What steps have insurance regulators taken in an effort to prevent solvency problems arising from improper underwriting practices?

Back 40

- constrained insurers' ability to accept, modify or decline applications for insurance coverage
- have limited the way in which insurers can divide consumers into rating classifications
- placing restrictions on the timing and reasons for cancellation and nonrenewals

Front 41

What types of claim activities are generally prohibited under state unfair claim practices laws?

Back 41

- misrepresentation of important facts or policy provisions relating to the coverage at issue
- failure to attempt to pay claims in good faith where liability is reasonably clear
- the attempt to settle a claim for less than the amount that a reasonable person believes he or she is entitled to receive based on advertising material
- the failure to approve or deny coverage of a claim within a reasonable period after a proof-of-loss statement has been completed

Front 42

What are some of the services that insurance advisory organizations provide to the insurance industry and its regulators?

Back 42

- developing rating systems
- collecting and tabulating statistics
- researching topics important to the industry
- providing a forum for discussion of relevant issues
- educate insurers, regulators, and the public about issues
- monitor regulatory issues of concern to their members