Insurance and the Government

1
Insurance and theGovernment

• RMI 3500
• Intro. To Risk Mang. Ins.
• Robert Klein

Revised 1/12/06
2
Topics

• Explain the government context for insurance.
• Regulatory principles realities.
• Describe regulatory framework.
• Explain regulatory functions.

• Discuss regulatory issues and trends.

3
Vested with the Public Interest

• Politicians have been interested in many
  aspects of insurance.
• Viewed as a government function in some
  countries.
• In U.S., abuses problems in early 1800s
  motivated government intervention.
• serious financial consequences for persons
• fiduciary relationships ? vulnerabilities
• externalities affect other private/public goals

4
Scope of Government Involvement
Federal Government
State Governments

• Insurance
• Markets
• insurers
• agents
• buyers

Trade Laws
Regulation
Taxes
Legal Framework
Anti- Trust
5
Theories of Regulation

• Public Interest Theory
• Regulation intended to correct market failures
  and benefit consumers/public.
• Economic Theory
• Politicians/regulators transfer wealth to
  maximize political support.
• Political Theory
• Regulation affected by economic interests,
  ideology, bureaucracy, political elites, nature
  of issues.

6
Market Failures

• Government intervention may be used to remedy
  market failures.
• Workable Competition requires
• lack of entry barriers and market power
• good information
• no significant externalities
• Market Failures
• violation of one or more of the above conditions

7
Insurance Market Failures?

• Information Problems
• Principal-Agent Conflicts
• Market Power?
• Unequal Bargaining Power
• Externalities

8
Kleins Regulatory Principles

• Regulation should correct market failures where
  it is necessary and feasible to do so.
• Regulation should not attempt to impose market
  outcomes different than those that would be
  produced by competitive market.

9
Regulatory Objectives

• Limit insurers financial risk.
• Promote market efficiency, i.e., competitive
  prices, products valued by consumers.
• Promote equity in pricing and access to
  insurance.
• Promote fair trade practices prevent abuses.

10
Regulatory Reality

• Vested with the Public Interest
• Regulation sometimes used to promote societal
  preferences.
• Conflicting notions of equity.

• Interest groups may influence regulation to favor
  them.
• Constraints on regulatory knowledge and power.

11
Regulatory Framework
Federal government has power to supersede state
regulation
Each state has commissioner with primary authority
Other Institutions
Legislatures
Courts
NAIC
International Authorities
12
Regulatory Functions
Insurance Commissioner
Market Regulation
Financial Regulation
Other Functions
Financial Requirements
Prices
Producer Regulation
Reporting Monitoring
Products
Residual Markets
Intervention Guarantees
Practices
Information
13
Financial Regulation

• Minimum capital requirements
• fixed
• risk-based capital

• Other financial requirements
• Financial reporting
• Financial monitoring
• Intervention and guaranty funds

14
Market Regulation

• Products, prices, underwriting, and other market
  practices.
• Prior approval vs. competitive systems
• Monitoring competition
• Market Conduct
• complaints
• exams
• sanctions

15
Effect of Rate Suppression

Supply
Rate suppression will distort market supply and
demand
pc
Demand
pr
Q
qc
qs
qd
16
Other Regulatory Functions

• Oversight of agents
• Consumer information/education
• Residual markets
• Anti-fraud
• Legislative advice

17
Regulatory Issues

• Tradeoff between financial risk and
  prices/benefits.

• States regulate national and global industry.
• Should government restrict terms of insurance
  transactions?
• Should certain types of insurance be mandatory?

18
Regulatory Issues (cont.)

• How should equity be defined implications for
  allocation of costs.
• Should risk classification criteria be
  restricted?
• Should government impose cross subsidies in
  insurance?
• Should certain benefits be mandated, e.g., Viagra
  for Bob Dole?

19
Terrorism Natural Disasters

• Should the government backstop terrorism
  insurance?
• How should the government respond to financial
  losses from natural disasters?
• Free disaster payments?
• Government insurance programs with or without
  subsidies?

20
Financial Services Modernization

• Recent federal legislation has reduced barriers
  to cross selling of products.
• Functional Regulation scheme contemplated.
• Can states adjust or will the federal government
  take over insurance regulation?