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Finance 431 Insurance Regulation Lessons from Illinois

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Finance 431 Insurance Regulation Lessons from Illinois Overview Historical Development Insurance Regulation Industry Structure Antitrust Legislation Insurance ... – PowerPoint PPT presentation

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Title: Finance 431 Insurance Regulation Lessons from Illinois


1
Finance 431Insurance RegulationLessons from
Illinois
2
Overview
  • Historical Development
  • Insurance Regulation
  • Industry Structure
  • Antitrust Legislation
  • Insurance Regulation in Illinois
  • Analysis of the Illinois Auto Experience
  • Generalization to Other Lines
  • Recent Events

3
History of Insurance Regulation - 1
  • Objectives
  • Protection of the Public
  • Taxation
  • Regulation by Legislation
  • Charters
  • Financial disclosure requirements
  • Statutory Reporting Requirements
  • Massachusetts 1807
  • New York 1827
  • Taxation of Insurers
  • Massachusetts stamp tax 1785
  • New York premium tax 1824
  • Differential premium taxes 1827

4
Why Were States Regulating Insurance?
  • Commerce Clause of the U. S. Constitution
  • Congress shall have the power ... to regulate
    commerce ... among the several states
  • Limits power of states to regulate interstate
    business
  • Paul v. Virginia 1869
  • Insurance is not interstate commerce
  • Insurance contracts are not commerce
  • Policies do not take effect until delivered, so
    not interstate in nature
  • States could regulate (and tax) insurance

5
Early Structure of the Property Insurance Industry
  • Primarily Fire Insurance
  • Adverse Effects of Competition
  • Rating Associations
  • Local
  • National Board of Fire Underwriters 1866
  • Catastrophic Fires
  • New York City 1835
  • Chicago 1871
  • Boston 1872
  • San Francisco 1906
  • Insurance Bankruptcies

6
History of Insurance Regulation - 2
  • Response to Ruinous Competition
  • Merritt Committee 1910
  • National Convention of Insurance Commissioners
    1914
  • Rating Laws Allowed Joint Ratemaking

7
Federal Antitrust Legislation
  • Sherman Act 1890
  • Section 1 - restraint of trade, including joint
    pricing
  • Section 2 - monopoly
  • Clayton Act 1914
  • Strengthened Sherman Act with specific provisions
  • Banned price discrimination (with many
    exceptions)
  • Federal Trade Commission Act 1914
  • Robinson-Patman Act 1936
  • Amended Clayton Act
  • Strong restrictions on price discrimination
  • Required justification for any price
    differentials
  • Goal to protect small stores from lower prices of
    chain stores

8
Watershed in Insurance Regulation
  • Southeastern Underwriters Association Case 1944
  • Regional rating bureau with restrictions on rates
  • Legal actions began in 1922
  • Settlement provided payments to state officials
  • Result challenged by Missouri Attorney General,
    joined by U. S. Department of Justice
  • U. S. Supreme Court ruled insurance was commerce
  • McCarran-Ferguson Act 1945
  • States could continue to regulate insurance
  • Federal antitrust laws would be superceded by
    state regulation (except boycott, coercion and
    intimidation)
  • No federal law applies to insurance unless
    specifically stated in legislation

9
Insurance Rate RegulationPost-SEUA
  • All states adopted rate regulatory laws to
    supercede federal antitrust laws
  • State made rates
  • Mandatory bureau rates
  • Prior approval
  • File-and-use
  • Use-and-file
  • Open competition
  • Rates are not to be inadequate, excessive or
    unfairly discriminatory

10
Which law or court ruling currently prevents the
Federal antitrust laws from being applied to the
joint ratemaking activities of insurance
companies?
  • A) Paul v. Virginia
  • B) Southeastern Underwriters Association
  • C) Sherman Act
  • D) McCarran-Ferguson Act
  • E) None of the above

11
The Merritt Committee report recommended that
rating bureaus should be allowed, subject to
state regulation, to prevent excessive
competition. Which line of business did this
report consider?
  • A) Fire
  • B) Workers Compensation
  • C) Automobile
  • D) Commercial General Liability
  • E) None of the above

12
Illinois Rate Regulation
  • Adopted Prior Approval law 1947
  • Enacted Open Competition Law effective 1970
  • Open Competition Law expired in August 1971
  • Illinois has no rate regulatory law for most
    lines of business

13
Illinois Statistics
  • Population
  • 12,419,293 as of 4/1/2000
  • Fifth largest state
  • Size
  • 55,593 sq. mi. (25th largest)
  • Urban Population - 84.6
  • Per capita income 31,278 (8th)

14
How Is Illinois Faring without Auto Insurance
Rate Regulation?
  • Loss ratio - Less variable
  • Rate levels - Less variable
  • Number of insurers - Highest in nation
  • Premium levels - Lower than comparable areas
  • Uninsured drivers - Lower
  • Residual market size - Lower
  • Cost of regulation - Lower
  • Conclusion
  • No need to regulate auto insurance rates

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20
Insurance Industry Shift
  • Auto Insurance is the primary line of business
  • Not subject to same risk of catastrophe
  • Rating information needs reduced
  • More competitive environment
  • Fire risk controlled
  • Building codes
  • Advances in fire protection
  • New catastrophe risks
  • Hurricane
  • Earthquake
  • Flood
  • Terrorism

21
Generalization to Other Lines
  • Rate regulation is not needed for any line of
    business with competitive markets and minimal
    catastrophe risk
  • Regulation could be beneficial for particular
    lines that are not competitive
  • Title insurance
  • Regulation could be beneficial for coverages
    exposed to catastrophe risk to prevent
    insolvencies
  • Hurricanes
  • Earthquake
  • Flood
  • Terrorism

22
Recent Events - 1
  • Massachusetts Auto Insurance
  • State made rates 1976-2007
  • File and use for 2008
  • Reasons for change
  • New commissioner Nonnie Burnes
  • Restricted market for coverage
  • Few companies sell auto insurance
  • Major national insurers wont write in
    Massachusetts
  • Setting rates under prior system was a lengthy
    and expensive process

23
If you were the Massachusetts insurance
commissioner, how would you decide if the new
system is working?
  • A) The percent of policyholders insured through
    the assigned risk plan reduces.
  • B) Insurance rate levels decline
  • C) Loss ratios increase
  • D) More insurers enter the market in the state
  • E) All of the above

24
Recent Events - 2
  • Blueprint for a Modernized Financial Regulatory
    Structure
  • Released by Treasury Secretary Henry Paulson on
    March 31, 2008
  • Proposes Federal insurance regulation option
  • National Insurance Commissioner
  • If insurer opts for a federal charter, it would
    not be subject to state insurance regulation
    (some exceptions)

25
Based on what you know about insurance, the
public interest would be best served if what
level of government regulated the insurance
industry?
  • A) States
  • B) Federal
  • C) Both
  • D) Each insurer should pick whether it would be
    regulated by state or federal government
  • E) Insurance companies should not be regulated
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