GOVERNMENT REGULATION OF INSURANCE

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GOVERNMENT REGULATION OF INSURANCE
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Reasons for Insurance Regulation
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Maintain Insurer Solvency 1. Premiums are paid
in advance but protection extends into the
future. 2. Policyowners are exposed to
financial insecurity if insurers become
insolvent and claims are unpaid.
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• Compensate for Inadequate Consumer Knowledge
• Insurance contracts are complex legal documents.
• It is difficult to compare and determine the
  monetary value of insurance contracts.
• 3. Protection is needed against unethical
  agents

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Ensure Reasonable Rates Make Insurance
Available
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Historical Development of Insurance Regulation
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Early Regulatory Efforts 1. State-chartered
companies 2. State insurance commissions
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Paul vs. Virginia 1. Ruled that insurance was
not interstate commerce 2. The states rather
than the federal government had the right to
regulate the insurance industry.
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This decision stood for about 75 years until the
Supreme Court reversed it in 1944.
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South-Eastern Underwriters Association Case 1.
Reversed the Paul v. Virginia decision-- court
ruled that insurance was interstate commerce
when conducted across state lines and was
subject to federal regulation. 2. The
decision cast doubt on the legality of private
rating bureaus and the power of the states to
regulate and tax the insurance industry.
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To resolve the confusion and doubt that existed
after the South-Eastern Underwriters decision,
Congress passed the McCarran-Ferguson Act (Public
Law 15) in 1945.
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McCarran-Ferguson Act (Public Law 15) The
McCarran-Ferguson Act states that continued
regulation and taxation of the insurance
industry by the states are in the public
interest. It also states that federal antitrust
laws apply to insurance only to the extent that
the Insurance industry is not regulated by state
law.
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Methods for Regulating Insurers
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Legislation 1. State laws-- formation of
insurance companies licensing of agents and
brokers financial regulation rates sales and
claims practices taxation rehabilitation or
liquidation of insurers protection of consumer
rights 2. Federal laws-- mail-order sales
advertising sale of variable annuities
private pension plans
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Courts 1. Constitutionality of state insurance
laws 2. Interpretation of policy clauses and
provisions 3. Legality of administrative
actions by state departments
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State Insurance Departments
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Areas That Are Regulated
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Formation and Licensing of Insurers
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Financial Regulation admitted
assets reserves policyowners
surplus risk-based capital investments dividend
policy reports and examinations liquidation of
insurers
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Rate Regulation prior-approval
laws file-and-use laws open-competition
laws flex-rating laws life insurance rates not
regulated
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Policy Forms
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Sales Practices and Consumer Protection
licensing of agents and brokers twisting reba
ting unfair trade practices complaint
division readable policies shoppers guides
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State versus Federal Regulation
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Advantages of Federal Regulation uniformity of
laws greater efficiency more competent
regulators
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Advantages of State Regulation greater
responsiveness to local needs promotion of
uniform laws by NAIC greater opportunity for
innovation unknown consequences of federal
regulation decentralization of political
power
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Shortcomings of State Regulation inadequate
protection against insolvency inadequate
protection of consumers improvements needed in
handling complaints inadequate market conduct
examinations insurance availability
studies regulators overly responsive to insurance
industry
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Repeal of the McCarran-Ferguson Act
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Arguments for repeal of the McCarran Act include
the following a. The insurance industry no
longer needs broad anti-trust exemption.
b. Federal legislation is needed because
of the defects in state legislation.
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Arguments against repeal of the McCarran Act
include the following a. The insurance
industry is already highly competitive. b.
Small insurers would be harmed. c. Insurers
may be prevented from developing common coverage
forms. d. Dual regulation may result from
repeal of the McCarran Act.
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Current Issues in Insurance Regulation
Increase in Mergers and Acquisitions Growth of
the Internet and E-Commerce Insolvency of
Insurers Quality of Insurance Regulation
Deregulation of Commercial Lines Credit
scoring
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