Chapter 6: Regulation

Why Regulate Businesses? zMarket failure zPublic choice zCapture theory

Why Regulate Insurance? zDestructive competition zPublic interest (information asymmetries)

Insurance regulation - goals zFair prices and fair contracts zSolvency zMake insurance available / affordable

Availability and affordability zInsurance capacity zCycles in profitability and surplus zEconomic feasibility zWhat is “affordable?”

History of insurance regulation zPaul vs Virginia (1869) zMcCarran Ferguson Act yLimited exemption from Sherman Act yState regulation

Some features of insurance regulation zState regulation yLegislative yJudicial yExecutive (Insurance Commissioners) zNAIC

Proposition 103 zRate roll back zNeed for a fair rate of return zCan territory determine rates?

Areas regulated zFormation and Licensing zAnnual and quarterly reports zInsolvency funds and early detection z Rate regulation z Financial regulation (Investments, Reserves) z Policy forms z Sales practices

Life Insurance Rate Regulation zRate regulation is indirect zLaws may specify mortality tables and interest rate assumptions for reserving zDisclosure requirement regarding standardized cost indexes and dividends

Property-Liability Rate Regulation zPrior approval zFile and use zUse and file zFlex rating (price range established) zOpen competition

Sales Practices Regulation zLicensing of agents zRebating zTwisting