GOVERNMENT REGULATION OF INSURANCE

Reasons for Insurance Regulation

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.

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

Ensure Reasonable Rates Make Insurance Available

Historical Development of Insurance Regulation

Early Regulatory Efforts 1. State-chartered companies 2. State insurance commissions

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.

This decision stood for about 75 years until the Supreme Court reversed it in 1944.

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.

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.

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.

Methods for Regulating Insurers

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

Courts 1. Constitutionality of state insurance laws 2. Interpretation of policy clauses and provisions 3. Legality of administrative actions by state departments

State Insurance Departments

Areas That Are Regulated

Formation and Licensing of Insurers

Financial Regulation admitted assets reserves policyowners’ surplus risk-based capital investments dividend policy reports and examinations liquidation of insurers

Rate Regulation prior-approval laws file-and-use laws open-competition laws flex-rating laws life insurance rates not regulated

Policy Forms

Sales Practices and Consumer Protection licensing of agents and brokers twisting rebating unfair trade practices complaint division readable policies shoppers’ guides

State versus Federal Regulation

Advantages of Federal Regulation uniformity of laws greater efficiency more competent regulators

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

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

Repeal of the McCarran-Ferguson Act

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.

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.

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