INSURANCE REGULATION

1
INSURANCE REGULATION

• Charles Bryan

2
GOVERNMENT REGULATION

• Insurance is a regulated industry
• Business consideration is that insurance operates
  in a regulated and a competitive industry
• Personal lines and workers compensation are more
  heavily regulated than the other lines
• Insurance is primarily regulated by the states
• In Ohio, the principal regulatory agency is the
  Ohio Department of Insurance
• Rates
• Forms (policies)
• Agent licensing
• Complaints
• Financial
• Premium tax

3
Reasons For Government Regulation

• Insurer Solvency
• Analysis and Evaluation of financial statements-
  yellow book
• Minimum capital required
• Risk based capital
• Compensation for inadequate consumer knowledge
• Buying guides
• Complaints
• Reasonable rates
• Not excessive
• Not inadequate
• Not unfairly discriminatory
• Class rating
• Credit rating
• Insurance availability

4
History of Insurance Regulation

• Creation of insurance commissions in 1850s
• New York a pioneer
• Paul vs. Virginia (1868) insurance is not
  interstate commerce and the states rather than
  the federal government should regulate insurance
• South Eastern Underwriters (1944) insurance is
  interstate commerce and is subject to regulation
  by the Federal government
• SEUA was a cooperative rating bureau that
  published rates that member companies used
• Insurance was subject to anti-trust laws and so
  rating bureaus were per se illegal
• McCarran Ferguson Act (1945) continued state
  regulation rather than federal regulation is in
  the public interest
• Abrogated SEUA case
• Financial Modernization Act (1999) different
  types of financial institutions can be combined
  under the same umbrella organization
• Insurers can buy banks, and a single holding
  company can offer insurance, banking and
  investment services
• Citibank
• USAA

5
Types of state regulation

• Legislation
• Regulatory rulings and procedures
• Regulatory hearings
• Court decisions
• National Association of Insurance Commissioners
• Voluntary organization
• Form of financial reporting
• Model laws
• Committees for regulatory networking

6
Areas of Regulation

• Formation and Licensing of Insurers
• First requirement is capital
• Second requirement is an acceptable management
  team and corporate structure
• Licensing is by line of business
• Solvency Regulation
• Separate financial statements using statutory
  accounting
• Statutory accounting is governed by the states
  rather than by FASB
• Concept of admitted assets
• Surplus difference between assets and
  liabilities
• Risk based capital
• Primary means for measuring required surplus
• Risk charge for each element of an insurers
  balance sheet
• Financial examiners

7
Areas of Regulation Contd

• Investments
• Limited types of investment vehicles in which
  insurers can invest and the asset can be admitted
  for solvency purposes
• Life insurers mostly real estate
• Property-casualty insurers mostly non-taxable
  bonds
• Liquidation
• Generally insolvent or nearly insolvent companies
• Preserve the assets so that policyholders and
  claimants can be paid
• Liquidator can be held personally liable

8
Areas of Regulation Contd

• Rate regulation
• Varies by line of business within state
• More regulation for personal auto, homeowners and
  workers compensation
• Prior approval
• Modified prior approval
• File and use
• Use and file
• Flex rating
• State made rates
• Open competition
• Agent licensing
• Agents must be licensed by the state and
  appointed by companies
• Examinations
• Complaints against agents
• Dividend Policy

9
Current Issues in State Regulation

• Bid rigging
• Through a broker, companies secretly agree on a
  price to be offered to the insured company
• Violations of federal and state regulations on
  anti trust market allocation issue
• Example Marsh contacted its companies to protect
  renewals and told competitive companies to offer
  a price higher than the current company was
  offering a renewal (B quotes)
• Questionable accounting practices
• Taking credit for reinsurance when no transfer of
  risk occurred
• AIG liabilities transferred to Gen Re in a bogus
  reinsurance transaction
• Then AIG purchased the liabilities back in a
  commutation
• CEO of AIG and CEO of General RE forced out
• Criminal indictments

10
Federal vs. State Regulation

• Advantages of state regulation
• Responsiveness to local needs
• Availability of NAIC for uniformity
• Opportunity for innovation
• Decentralization of political power
• Many companies would prefer federal regulation to
  state regulation
• No rate regulation
• Only solvency regulation
• Countrywide rather than state by state
• Easier to introduce product changes and rate
  changes
• Revised territory approaches based on density in
  the territory
• More expertise in the regulatory field
• Repeal of McCarran Ferguson
• Optional Federal charter
• Precedent in savings institutions
• Company would choose
• Other proposals