1. Insurance Regulation in the United States Presentation to The International Judicial Academy Lawrence H. Mirel, Esq. Wiley Rein LLP May 25, 2009 Washington, DC

2. Contact Lawrence H. Mirel Wiley Rein, LLP 1776 K Street, NW Washington, DC 20006 (202)719-7449 Lmirel@wileyrein.com

3. Insurance is regulated by the states 1869: Paul v. Virginia. U.S. Supreme Court held that insurance was not interstate commerce, and therefore Federal Government has no jurisdiction. 1944: U.S. v. South-Eastern Underwriters Association. U.S. Supreme Court reversed Paul and held that insurance is interstate commerce and therefore subject to Federal Regulation. 1945: McCarran-Ferguson Act (Federal statute): Overturned South-Eastern. Prohibits Federal Government from regulating insurance to the extent that it is regulated by the states.

4. State regulation of insurance (continued) 1871: NAIC chartered. Oldest association of state officials in the U.S. 56 Members, all U.S. states plus DC. PR, VI, Guam, Amer. Samoa, and Northern Marianas. One jurisdiction one vote. Elected vs. appointed commissioners. There is some Federal Government involvement in insurance: flood, crop, nuclear facilities, backstop for terrorism risk.

5. Why insurance is regulated Purchasers of property/casualty insurance pay up front to protect against a loss that may or may not occur in the future. Purchasers of life insurance pay up front to protect against an event that may happen sooner than anticipated. The primary purpose of regulation is to ensure that when a claim is made, the company that took your premiums can pay that claim.

6. Subjects of insurance regulation Solvency. Regulators must ensure that the insurer has sufficient funds to meet future obligations. This means it must have sufficient capital and surplus to cover all likely future claims, plus a reasonable amount for unlikely but still possible claims. Forms. Regulators must review contract forms used by insurers to make sure they are clear, conform to all legal obligations, and are fair to consumers. Courts construe insurance contracts against the companies that made them, because they are contracts of adhesion.

7. Regulatory subjects (continued) Rates. General rule is: Rates must not be inadequate, excessive or unfairly discriminatory. 1.“excessive” if they charge too much 2.“inadequate” if they charge too little 3.“unfairly discriminatory” if they charge different rates for same class of risk

8. Other areas of regulatory authority Consumer complaints. In U.S., insurance departments are expected to hear and resolve consumer complaints against insurers. Public education. What is insurance, how much should you have, how can you compare products, etc.

9. Regulating reinsurance; U.S. and Non-U.S. reinsurers Reinsurance is insurance for insurers Reinsurance in the US is regulated indirectly, through credit for reinsurance given to ceding companies Non-admitted (non-US) reinsurers are currently required to post 100% collateral in a U.S. bank “Port of entry” resolution adopted by NAIC last December

10. Cutting edge issues Should states continue to regulate insurance? Optional federal charter proposal Separate systems for Life and P/C Single state regulator (EU Passport) “Speed to market” and interstate compact Regulation by litigation; class action lawsuits, regulatory preemption (Wyeth v. Levine).

11. Insuring against catastrophes Is there enough private money to cover exposure or is government help needed? 1.Terrorism Risk Insurance Act 2.Proposal for Natural Catastrophe Fund 3.The lessons of Katrina and the Florida problem Securitization of risk

12. Conclusions Current system is cumbersome, expensive, redundant and hard to justify. But it works. Consumers are protected. Companies rarely become insolvent and consumers are protected (usually) when they do through “guaranty funds.” Would a federal system work better?

13. Contact Lawrence H. Mirel Wiley Rein LLP 1776 K Street, N.W. Washington, DC 20006 (202) 719-7449 Lmirel@wileyrein.com