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
1.Insurance contracts are complex legal
documents.
1.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