1. GOVERNMENT REGULATION OF INSURANCE

2. Reasons for Insurance Regulation

3. 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.

4. 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

5. Ensure Reasonable Rates Make Insurance Available

6. Historical Development of Insurance Regulation

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

8. 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.

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

10. 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.

11. 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.

12. 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.

13. Methods for Regulating Insurers

14. 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

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

16. State Insurance Departments

17. Areas That Are Regulated

18. Formation and Licensing of Insurers

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

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

21. Policy Forms

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

23. State versus Federal Regulation

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

25. 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

26. 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

27. Repeal of the McCarran-Ferguson Act

28. 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.

29. 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.

30. 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