who oversees the state regulation of state insurance?
the insurance commissioner or superintendent
How does an insurance commissioner get his job?
depends. They are often political appointees, but they are sometimes elected officials
what does N.A.I.C stand for?
National association of insurance commissioners
How many states participate in the NAIC?
all of them
what is the NAIC?
they make regulation uniform across states
What organization reduces redundancy in insurance regulation?
How does the NAIC reduce redundancy?
they reduce redundancy through solvency monitoring, licensing, audits, etc.
_______utilizes expensive personnel on a national level and spreads the charge basis?
Approximately how many key legal events gave rise to the legal landscape of the insurance world today?
What are the 6 key legal events that gave rise to the legal landscape of the insurance world today?
1.paul vs. Virginia(1869)
2. Sherman anti-trustact(1890)
3. southeastern underwriters association decision(1944)
4. McCaron -ferguson act(1945)
5.the ISO case(1971)
Paul vs Virginia(what happened?)
an insurance agent(paul) was violating Virginia laws by selling insurance for a new York company.
paul argued that va was incorrect as congress has a right to regulate interstate commerce
supreme court ruled that insurance is not interstate commerce
In paul vs. Virginia; what was paul's argument?
he argued that va was incorrect and that congress has a right to regulate interstate commerce
What was the ruling in Paul vs. Virginia?
The supreme court ruled that insurance is not interstate commerce.
Sherman Anti-trust act
an 1890 congressional act prohibiting collusion to gain monopoly
How does the Sherman anti-trust act apply to the insurance industry?
It prevents insurers from banding together to control rates and/or coverage.
Southeastern underwriters association decision(1944)(what happened?)
SEUA was sued by the justice department for violation of the Sherman anti-trust act.
the case found evidence of pricing collusion
the supreme court ruled against seua and gave control of the insurance industry to the fed
What does seua stand for?
southeastern underwriters association
what was the job of the seua before they were sued?
perform functions such as data collection, policy forms, actuarial support etc.
Who were the members of the seua?
The seua was comprised of 200+ stock insurers in the south
who was the seua sued by and why?
they were sued by the justice department for violation of the Sherman anti-trust act
How did the supreme court rule in the seua case?
they ruled against the seua
What policy changes occurred because of the southeastern underwriters association decision?
the supreme court gave control of the insurance industry to the fed.
what was the reasoning behind giving control of the insurance industry to the fed in the seua decision?
They deemed state regulation efforts inadequate
Congressional act restoring states' right to insurance regulation
After passage of the McCarron-ferguson act, can te feds regulate the insurance industry at all?
yes, the feds can regulate in cases in which states fail in their duty
Post McCarron-ferguson act, who is in charge of coordinating state regulation?
what happened in the ISO case?
in 1988, iso was sued by the attorney generals
7 states alleged anti trust for changes made to the cgl policies
it ended in an out of court settlement and iso agreed to serve only as a "statistical" agent for its members
In 1971, how was the ISO created?
It was created when six separate rating bureaus merged together
What does the ISO do?
produces standardized policy forms
What does ISO forecast?
True/false ISO does premium calculation for firms
IN the ISO case, what did 7 states allege?
they alleged that ISO was violating the Sherman anti trust laws for changes they made to their cgl policy forms
How was the ISO case resolved?
there was an out of court settlement(1994) and iso agreed to only serve as a "statistical" agent for its members.
what order did the six key legal events happen in?
1.paul v Virginia(1869)
2. Sherman anti-trust act(1890)
3. seua decision(1944)
4. McCarron ferguson act(1945)
6.gramm-leach Bliley act(1996)
Financial services modernization act
another name for the gramm-leach Bliley act
what is another name for te gramm leach Bliley act?
financial services modernization act
What is the gramm leach Bliley act
an act passed in 1996 that deregulated elements of the financial industry
allows financial companies to compete in banking, insurance and securities
Prior to GLB, what were companies not allowed to do?
Companies were not allowed to engage in business in more than one of the following industries:
What is an example of a post-glb merger?
What is a variable annuity?
annuities with investment in stock
What is variable life insurance?
Life insurance where mortality is partially financed by investment in stock.
What is an example of something good that came from glb?
What do cat bonds allow insurers to do?
issue debt to help finance catastrophic losses through the risk linked securitization of catastrophic risks
The buyer of a cat bond provides a large upfront investment in return for:
periodic interest pmts over the life of the bond
repayment o the principle at the end of the bonds term
(insurer has the right to reduce or eliminate investment if cat loss occurs)
Why would investors buy cat bonds?
high interest than is available from other bond issuers of a similar default risk
Investor can use cat bonds to diversify their investment portfolio because cats are not correlated with financial markets
(particularly helpful to non-stock insurers)
true/false cat bonds are ties to that of an insurers specific losses?
What are the cat bond triggers?
modeled loss(cat bond trigger)
exposure portfolio is modeled and results of a model must exceed a certain threshold
index(cat bond trigger)
when industry losses from peril exceeds a certain threshold
parametric(cat bond trigger)
Indexed to the actual cat disaster
(such as windspeed, hurricane category, amt of rain etc)
indemnity(cat bond trigger)
tied to that insurer's specific losses
What is the bad thing that came out of GLB
mortgaged backed securities
securitization of mortgages
the act of bundling mortgages as an investment and selling it as a security. the security is based on the risk they (mortgages)default
An insurer that is not incorporated in the united states
What are the four types of insurers that are incorporated in the US?
an insurer incorporated in the state I which it is selling coverage
an insurer incorporated outside the stae in which it is selling coveage
an insurer licensed to do business in a given state
not licensed to do business in a given state.
If an insurer is nonadmitted in a state can they still sell insurance there?
They can only sell excess and surplus
also the customer can only buy if they demonstrate that they cannot buy from a licensed insurer
What are the advantages of licensed insurers for policyholders?
they are protected by regulatory efforts because of:
access to guaranty funds
What are advantages of licensed insurers for insurers?
they have marketing priority for their products
What are the main reasons for insurance regulation?
especially for individuals and small businesses
Insurers are compelled to assure that insurance is available because of_________laws.
requirement by law
why insurance demand constant over time?
lenders-require to decrease default risk
standardization of accounting methods
statutory accounting principles
standard accounting principles
accounting method chosen by NAIC to measure insurer solvency
_______ provides the most "pessimistic" conditions for measuring insurer solvency.
sap(statutory accounting principles)
Do insurers go bankrupt?
no, they go insolvent.
Who declares an insurer insolvent?
an insurer is declared insolvent by the commissioner of the domiciled state.
What may happen prior to insolvency declaration?
the insurance commissioner may meet with executives, limit underwriting, and review claims
a fund that is set up by the commissioner for an insolvent insurer
What does a guaranty fund cover?
policyholders,claimants,and policyholders with pre-paid premium
Under a guaranty fund, are corporations covered?
no, only businesses and small businesses
what are the coverage limits of a guaranty fund?
large buyers of insurance and risk managers not eligible
only 300,000 per person or business covered
Who is covered under a guaranty fund?
policyholders with pre paid premium
How are guaranty funds financed?
the funds are available from reinsurance and investments to pay unpaid claims
surviving insurers in state assessed charge based on market share
regulation of policy forms, endorsements, and applications
Insurance is a contract of_______.
adhesion(this protects the consumer)
Ambiguity in a policy will usually be judged by the courts in favor of ____________?
the policy holder
t/f courts have defined insurer obligations
What are he two main goals of rate regulation?
affordability and adequacy
What happens if expected losses and claims are greater than prices permitted by regulators?
it could result in lack of availability of coverage
If there are few options for high risk people, what d state regulators do?
they set up state pools
regulated rates are_______
failure to provide insurance in a certain geographic region
types of rate regulation(5)
mandatory rate law
prior approval laws
file and use laws
what is an example of a state with mandatory rate laws?
north Carolina for its auto insurance
when a state or bureau sets a rate
mandatory rate law
issues with mandatory rate laws?
Rates may not b set at an appropriate amount, or insurers may decline to write policies.
prior approval laws
a type of rate regulation law where a rate (or rate increase) must be approved by the state before it can be used
What are problems with prior approval laws?
delays are an issue which may make the rate increase inadequate when finally approved
when claims inflation is high this can be a big problem
file and use laws
changes must be filed with the state, but then changes can be used immediately after filing
t/f file and use laws are more in line with a free market structure
what happens when a problem arises with file and use laws?
states reserve the right to revoke the rates
a rate regulation tool where insurers only need approval if the rate exceeds a certain percentage above or below previously filed rates.
______ restricts lowering or raising rates too much, but allows for quick reaction to changing market conditions in a short period of time
no restrictions on rate regulation
what type of rate regulation is common in commercial lines, but not used often in personal lines?
What way of rate regulation is essentially driven by supply and demand`
fees paid based on the volume and profitability of insurance placed by brokers/agents
_________ provides incentive for producers to underwrite and source risks more carefully
t/f contingent commissions crate a conflict of interest
in 2004, spritzer(ag of ny) filed a suit against a group of brokers and insurers
they alleged that contingent commissions give incentive for brokers to recommend more expensive coverage
the investigation turned up bid rigging evidence
Companies that were involved in the bid rigging scandal(that paid settlements) were
marsh,aon,willis,chubb,aig,liberty mutual and zurich
Who no longer participates in contingent commissions?
aon and marsh
a large, prominent financial conglomerate(headquartered in philly) with significant property-casualty operations(top 10) that failed due to a multitude of reasons including a controversial ceo named saul steinburg and an overly ambitious expansion strategy
Timeline of reliance's demise?
troubles became apparent in 1999
attempts at restructuring failed
it was placed in receivership in 2001
who was the ceo of reliance
what are the biggest measurement issues to property casualty insurers(2)
under pricing and under reserving
_____ and _______ proceed cautiously with lagging information
regulators ad rating agencies
t/f capital does not need to be assessed against risks a firm faces
t/f size and importance of insurer can make regulators and raters even more cautious
there is no ratio measure tat provides "real time" indication of under pricing, poor underwriting, and under reserving
performance measures lab behind these practices, especially for long tail lines
true/false regulators and raters are reluctant to use subjective indicators to issue warnings