Principles of Risk Management and Insurance PDF
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George Rejda, Michael McNamara, William Rabel
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This textbook chapter details government regulation of insurance, explaining the reasons behind it, various methods, and the different areas of insurance that are regulated.
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Principles of Risk Management and Insurance Fourteenth Edition Chapter 8 Government Regulation of Insurance Copyright © 2020, 2017, 2014 Pearson Education...
Principles of Risk Management and Insurance Fourteenth Edition Chapter 8 Government Regulation of Insurance Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved Learning Objectives (1 of 2) 8.1 Explain the major reasons why insurers are regulated 8.2 Identify the major areas of insurance that are regulated 8.3 Identify the principal methods for regulating insurance companies Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved Learning Objectives (2 of 2) 8.5 Explain the objectives of rate regulation and the different types of rating laws 8.6 Identify the current issues in insurance regulation 8.8 Explain the purpose of market conduct regulation Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved Reasons for Insurance Regulation Maintain insurer solvency Compensate for inadequate consumer knowledge Ensure reasonable rates Make insurance available Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved Methods for Regulating Insurers The three principal methods used to regulate insurers are: – Legislation, through state laws – Court decisions, e.g., interpreting policy provisions – State insurance departments Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved What Areas Are Regulated? (1 of 10) All states have requirements for the formation and licensing of insurers – Licensing includes minimum capital and surplus requirements – A domestic insurer is domiciled in the state – A foreign insurer is an out-of-state insurer that is chartered by another state, but licensed to operate in the state – An alien insurer is an insurer that is chartered by a foreign country, but is licensed to operate in the state Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved What Areas Are Regulated? (2 of 10) Insurers are subject to financial regulations designed to maintain solvency – Assets must be sufficient to offset liabilities – Admitted assets are assets that an insurer can show on its statutory balance sheet in determining its financial condition – States have regulations that address the calculation of reserves – An insurer’s surplus position is carefully monitored by state regulators Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved What Areas Are Regulated? (3 of 10) Life and health insurers must meet certain risk-based capital (RB C) standards – Insurers must hold a certain amount of capital, depending on the riskiness of their investments and insurance operations – An insurer’s RB C depends on asset risk, underwriting risk, interest rate risk, and business risk – A comparison of the company’s total adjusted capital to the amount of required risk-based capital determines whether company or regulatory action is required Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved What Areas Are Regulated? (4 of 10) The purpose of investment regulations is to prevent insurers from making unsound investments that could threaten the company’s solvency and harm the policy owners – Laws generally place a limit on the proportion of assets in a specific asset category, such as real estate Many states limit the amount of surplus a participating life insurer can accumulate, rather than pay as dividends Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved What Areas Are Regulated? (5 of 10) Each insurer must file an annual report The state insurance department assumes control of insurance companies that they determine to be financially impaired – All states have guaranty funds, guaranty laws and guaranty associations that pay the claims of policyowners of insolvent insurers – The assessment method is the major method used to raise the necessary funds to pay unpaid claims Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved What Areas Are Regulated? (6 of 10) Rate regulation takes a variety of forms across states – Forms of rate regulation for property and casualty insurance include: Prior approval law Flex-rating law Modified prior approval law State-made rates File-and-use law No filing required Use-and-file law – Many states exempt insurers from filing rates for large commercial accounts – Life insurance rates are not directly regulated by the states Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved What Areas Are Regulated? (7 of 10) State insurance commissioners have the authority to approve or disapprove new policy forms before the contracts are sold to the public – Insurance contracts are technical and complex – Purpose is to protect the public from misleading, deceptive, and unfair provisions Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved What Areas Are Regulated? (8 of 10) Sales practices are regulated by the laws concerning the licensing of agents and brokers – All states require agents and brokers to be licensed – All states require agents to obtain continuing education to upgrade their knowledge and skills Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved What Areas Are Regulated? (9 of 10) Insurance laws prohibit a variety of unfair trade practices, such as misrepresentation, twisting, and rebating – Twisting is the inducement of a policy owner to drop an existing policy and replace it with a new one that provides little or no economic benefit to the client – Rebating is the practice of giving an individual a premium reduction or some other financial advantage not stated in the policy as an inducement to purchase the policy Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved What Areas Are Regulated? (10 of 10) State insurance departments typically have a complaint division for handling consumer complaints – Most complaints involve claims Information is provided to consumers on insurance department websites and in brochures Insurers pay numerous local, state, and federal taxes A retaliatory tax is a state tax on out-of-state insurers operating within the state’s jurisdiction – Most states have retaliatory tax laws that protect domestic insurers from excessive taxation by other states where they do business Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved Describe the Issues Related to Insolvency of Insurers (1 of 3) Insolvency of insurers continues to be an important regulatory concern Reasons for insolvencies include: – Inadequate rates – Inadequate reserves for claims – Rapid growth and inadequate surplus – Mismanagement and fraud – Bad investments – Problems with affiliates – Overstatement of assets – Catastrophe losses – Failure of reinsurers to pay claims Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved Describe the Issues Related to Insolvency of Insurers (2 of 3) Key parts of Ssolvency include: – Capital requirements – Risk management – Corporate governance – Group supervision – Reinsurance – Statutory accounting and financial reporting Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved Describe the Issues Related to Insolvency of Insurers (3 of 3) The principal methods of ensuring solvency are: – Minimum capital and surplus requirements – Risk-based capital standards – Reserve requirements – Restrictions on investements – Review of annual financial statements – Field examinations – Early warning system (I RI S ratios) – FAS T system analysis Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved Explain the Purpose of Market Conduct Regulation (1 of 3) Market conduct refers to the marketing practices of insurers and agents that involve interaction with insureds, claimants, or consumers. Practices include: – Sales of insurance policies – Advertising of insurance products – Underwriting and rating – Collection of premiums – Policy renewals, termination, and changes – Claims settlement Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved Explain the Purpose of Market Conduct Regulation (2 of 2) Regulators are concerned that certain industry practices may have an adverse effect on policyholders, beneficiaries, claimants and insurance consumers Concerns include: – Sale of unsuitable insurance products – Misrepresentation of coverage – Excessive sales pressure – Rates that are excessive or unfairly discriminatory – Denial of legitimate claims – Improper termination of policies Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved