1. Topic 7. Insurance Markets and Regulation
BUS 200
Introduction to Risk Management and Insurance
Jin Park

2. Overview Insurance Markets Insurance Regulation Underwriting Cycle
Types of insurers
Insurance Regulation
Why Regulate?
Who Regulates?
What’s Regulated?
The Government as Insurer

3. Underwriting Cycles Combined Ratio Soft Market Hard Market
Insurance losses - low
Prices decrease and competitive
Hard Market
Insurance losses - above expectations
Reserves insufficient to cover losses
Prices increase

4. Types of Insurers By organizational form By licensing Stock Mutual
Reciprocal
Lloyd’s
By licensing
Domestic
Foreign
Alien
Admitted
Non-Admitted (or Excess and Surplus Lines)

5. Why Regulate? To maintain insurer solvency To protect policyholders
Unfair Practices and Deceptive Policies
To avoid destructive competition
To ensure appropriate and equitable rates
To make insurance available and affordable
To enforce insurance laws
To keep the public informed on insurance matters

6. Who Regulates? In 1869, Paul vs. Virginia
Insurance regulation by the state was constitutional.
In 1933, Glass-Steagall Act of 1933
Prohibits merge between banks and insurance companies.
In 1944, U.S. vs. SE Underwriters Association, et al.
The Supreme Court determined that federal antitrust laws applied to insurance.
In 1945, McCarran-Ferguson Act
Returned the regulation of the “business of insurance” to the states, subject to certain restrictions.
In 1999, Gramm-Leach-Bliley Act
Allowed M&A among banks and insurers
Reaffirmed that the states should regulate the business of insurance

7. What’s Regulated? Licensing Requirements Financial Requirements
Solvency regulations
Investment requirements – RBC, Investment in stocks
Guaranty Funds Associations
Policy and Rate Regulation
Control of Agents’ Activities
twisting, rebating, misappropriation of funds
Control of Claims Adjusting
Control of Underwriting Practices
No unfair discrimination
Privacy concerns – use of personal credit score

8. Government as Insurer Primary insurer or reinsurer Why?
To provide insurance needs not met by private insurers
To force people to buy insurance
To provide convenience
To gain efficiency

9. State Insuring Organizations
Unemployment compensation insurance
Guaranty funds
Workers’ compensation benefit funds

10. Federal Insuring Organizations
Social Security Administration
Federal Deposit Insurance Corporation
Federal Crop Insurance Corporation
Fair Access to Insurance Requirements (FAIR) plans
National Flood Insurance Program
Pension Benefit Guaranty Corporation
Overseas Private Investment Corporation