Today s lecture 26 insurance regulation
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Today’s Lecture - #26 Insurance Regulation. Introduction to Insurance Regulation Rationale History What Regulation Involves State vs. Federal Regulation Insurance Insolvency Current Problems with Insurance Regulation.

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Today s lecture 26 insurance regulation l.jpg
Today’s Lecture - #26Insurance Regulation

Introduction to Insurance Regulation

Rationale

History

What Regulation Involves

State vs. Federal Regulation

Insurance Insolvency

Current Problems with Insurance Regulation


Slide2 l.jpg
Insurance companies are one of the most heavily regulated industries. What is the most important reason to regulate insurers?

A) To prevent deceptive sales practices

B) To make sure they stay solvent

C) To make sure they don’t set rates too high

D) To make sure they don’t discriminate unfairly

E) Some other reason


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Why Regulate Insurance? industries. What is the most important reason to regulate insurers?

Market Power

Imperfect Information

Public Policy

Advance Nature of Contract

Insurer gets your money before fulfilling the contract


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Brief History of Insurance Regulation industries. What is the most important reason to regulate insurers?

Paul v Virginia - 1869

US v Southeast Underwriters Association (SEUA) - 1944

McCarran Ferguson Act - 1946


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You be the Supreme Court Judge industries. What is the most important reason to regulate insurers?

How would you rule in the SEUA case?

A) Uphold Paul v. Virginia:

Insurance is not commerce

B) Overrule Paul v. Virginia:

Insurance is commerce and subject to Federal laws

C) Compromise:

Insurance is commerce but should not be subject to Federal laws


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What is Regulated industries. What is the most important reason to regulate insurers?

Licensing Requirements

Solvency

Investments

Reserves

Guaranty Funds

Policy Forms

Rates

Trade Practices


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Rate Regulation industries. What is the most important reason to regulate insurers?

General Requirements

Rates must be adequate, not excessive and not unfairly discriminatory

Methods

Prior approval

File and use

Open competition

Classification issues


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What type of rating law applies in Illinois for automobile insurance?

A ) Prior approval

B) File and use

C) Open competition

D) No rating law applies

E) None of the above


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Regulation of Trade Practices insurance?

Agents must be licensed

Prohibited activities for agents

Twisting

Rebating

Allowed in Florida and California

Effect of agents’ interests

Claim practices

Underwriting practices


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General Advice insurance?

If you are having a problem with an insurance company (billing, claims, unjustified cancellation, unfair treatment), contact the insurance department in the state where you live.

In Illinois, contact:

Illinois Division of Insurance

320 West Washington Street

Springfield, IL 62767

217-782-4515

1-866-445-5364 (toll free)

or online at:

http://www.idfpr.com/DOI/Complaints/Complaints.asp


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State vs. Federal Regulation insurance?

States Currently Regulate Insurance

Only Major Industry Regulated at State Level

Why?

Tradition

Paul v. Virginia

US v. SEUA - during W.W.II

Led to McCarran-Ferguson Act


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Recent Proposals insurance?

Repeal of McCarran-Ferguson Act

Would lead to

Federal regulation instead of state

or Dual regulation

State regulation of small insurers

Federal regulation of major insurers


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Claimed Advantages of State Regulation insurance?

Have Current Knowledge

Recognizes Local Conditions

Encourages Experimentation

Effects of Mistakes are Localized


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Claimed Advantages of Federal Regulation insurance?

Uniformity

Could get the best regulators

Would be able to deal with large, multinational insurers


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Federal Government in Action on Insurance Related Issues insurance?

Social Security

Bankrupt by 2040 or earlier

Political environment prevents informed

discussions and solutions

Federal Savings and Loans Insurance Corporation (FSLIC) 1934-1989

Inadequate regulation

Political pressure to keep insolvent S&Ls open

Taxpayer cost of about $200 billion


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Federal Government in Action on Insurance Related Issues - Cont.

Pension Benefit Guaranty Corporation (PBGC)

12/31/04 financial position: negative $23.5 billion

United Airlines termination in May, 2005: $9 billion

Covered defined benefit pension plans

Underfunded by $600 billion (termination basis)

National Flood Insurance Program

Expected cost from Katrina and Rita $22 billion

Need to borrow from Federal government

Cannot repay these loans from future premium income


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What Happens When Your Insurer Goes Insolvent Cont.

State guaranty funds apply

Limits on coverage

Deductible on premium refunds

Delays in payment


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Types of Guaranty Funds Cont.

New York

Pre-assessment fund

1982 Legislature “appropriated” $87 million

Recently found illegal and forced to return funds

All Other States

Post-assessment basis

Longer delays

Limits on assessments


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Lessons from Executive Life and Mutual Benefit Cont.

Executive Life

Taken over by California regulators in April, 1991

Company was sold

Policyholders received 70-80% of their benefits


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Mutual Benefit Cont.

Taken over by New Jersey regulators in July, 1991

Withdrawals restricted until 1999

Significant penalties applied to withdrawals

Credited interest rates lowered below contract level


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Basic Lessons Cont.

If a company is too big, then regulators will intervene and re-write the contracts rather than declare insolvency.


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Current Problem Areas in Insurance Cont.

Complex product

Insolvencies

Rising costs of liability insurance

Lack of availability of property coverage in coastal areas

Irresponsible regulation

California - Proposition 103

New Jersey - Residual Auto Market ($3 billion in debt)


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Current Problem Areas in Insurance Cont.

Crooked regulators – Louisiana

Sherman Bernard - Commissioner 1972-1988 Convicted of taking payoffs – sentenced to 41 months in prison

Douglas Green - Commissioner 1988-91

Convicted of fraud, money laundering and bribery - served 12 years in federal prison

Jim Brown – Commissioner 1991-2002

Convicted of lying to the FBI – sentenced to 6 months in prison


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Conclusions Cont.

Insurance does need to be regulated

Current regulation is excessive and misdirected

Focus of regulation should be on solvency

Challenges presented by new financial instruments

Understanding derivatives

Dealing with international transactions

Hedging interest rate and similar risks

Expanding use of modeling

Need for competent, ethical regulators