INSURANCE REGULATION

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COURSE TOPICS
🞆 The history of insurance
🞆 Importance of the insurance industry to the economy
(with specific focus on the US economy)
🞆 Understand why insurance needs to be regulated
🞆 History of insurance regulation in the US
🞆 Regulatory framework in the US
🞆 The future of insurance regulation

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INSURANCE
MARINE
FIRE
MOTOR
LIABILITY
HOME

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LET’S BEGIN WITH BRIEF HISTORY OF
INSURANCE
🞆 Records are available in the Manusmriti, Yagnavalkya’s
Dharmashastra and Kautilya’s Arthashastra
🞆 Chinese traders have been using risk reduction mechanisms
over 7,000 years ago
🞆 Code of Hammurabi dated about 2,250 BC shows evidence
of some form of insurance (especially in the form of burial
societies)
🞆 Insurance in London around the great fire of London was to
have an insurance company plate on the house to help the fire
brigade identify which house to protect
🞆 The great fire of New York and the birth of insurance in the
US 4
🞆 The development of the Lloyds of London
WHAT IS THE IMPORTANCE OF THE
INSURANCE INDUSTRY
🞆 Creates 2.3 million direct jobs
🞆 Financial assets worth $6.7 trillion
🞆 Contribution to US GDP $404 billion (2.8%)
🞆 Premium tax of $16.4 billion (USD 53 for every citizen)
🞆 6,296 insurance companies
🞆 Annual payroll $196 billion
🞆 The insurance industry has historically grown faster than
the American economy. The ratio of insurance income to
GDP rose from 7% in 1960 to 12% in 2000

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WHY SHOULD INSURANCE BE
REGULATED
🞆 The sub-prime crisis in 2008 and its lessons.
🞆 The documentary “INSIDE JOB”
🞆 Began with policy holder protection and focus on
solvency to pay claims

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METAMORPHOSIS OF THE INSURANCE
INDUSTRY OVER 200 YEARS
🞆 Started with small, local carriers who were regulated at
the state level
🞆 Increase in number and variety of insurance products
🞆 Companies have grown and are selling across state
borders
🞆 International companies have set up shop
🞆 Economic opportunities and competitive pressure
forcing companies to take on higher financial risk
🞆 The evolution of regulatory institutions has been both
compelled by as well as facilitated the development of
the insurance industry. 7
METAMORPHOSIS OF THE INSURANCE
INDUSTRY OVER 200 YEARS (P & C)
🞆 The property and casualty industry’s profile has changed
from short-tail to long-tail exposures
🞆 Increase in number of retention groups and captives.
Surplus lines providers increase
🞆 Weather patterns, earthquakes and extensive building in
high-exposure areas have also increased catastrophe
hazards in property lines
🞆 Unnatural perils such as terrorism and financial
misfeasance have increased
🞆 Consolidation and decrease in number of players
🞆 Higher percentage of business from cross-boundary 8
transactions (inter-state)
LETS TALK ABOUT BRIEF HISTORY OF
REGULATION
🞆 Traditionally, insurers bound to local community
🞆 Insurers became notorious for high expenses, shaky
finances and abusive sales practices. That was the focus
of initial regulation.
🞆 As the no of insurers increased, govt control became
ineffective. Hence the need to establish separate
commissioner’s office
🞆 Initial work was to license companies and agents,
regulate policy forms, set reserve requirements, police
insurers’ investments, and administer financial reporting.
🞆 Price regulation was essentially confined to limited
9
oversight of property-casualty industry rate cartels
BRIEF HISTORY OF REGULATION
🞆 NAIC was established in 1871 to coordinate regulatory
activities
🞆 Its initial activities primarily focused on the development
of common financial reporting requirements for insurers.
🞆 Used to discuss common problems and developing
model laws and regulations which each state could
modify and adopt according to its preferences.

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BRIEF HISTORY OF REGULATION
🞆 Responsibilities of the regulator increased manifold for
the following reasons:
⚫ Increasing diversity of insurance products and the types of
risks that insurers have assumed.
⚫ Geographic extension of insurance markets with a number of
carriers operating on a national and international basis.
⚫ Significant consolidation within the life, health and property-
casualty sectors as insurers have merged to achieve greater
economies of scale and increase their financial capacity.

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THE EVOLUTION OF STATE INSURANCE
REGULATION
🞆 Insurance regulation has been greatly affected by and
compelled to evolve in response to changes in the
industry and its economic and financial environment.
🞆 A large spike in insurer insolvencies in the mid-1980s
led to an intensive Congressional investigation and a
number of state regulatory initiatives. These included:
⚫ Strengthening of insurer financial standards
⚫ Risk-based capital requirements
⚫ Improved financial monitoring systems
⚫ A program for certifying the adequacy of each state’s
solvency regulation
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THE EVOLUTION OF STATE INSURANCE
REGULATION
🞆 However, growing industry complaints about the
inefficiency and high cost of outmoded state regulatory
policies warranted attention.
🞆 The objective of these initiatives were:
⚫ Streamline and harmonize state regulatory policies and practices
⚫ Reduce costs of regulation on insurers
⚫ Ease pressure for federal regulation
🞆 Areas of focus included:
⚫ company admission/licensing
⚫ special deposit requirements
⚫ countersignature requirements
⚫ deregulation of commercial lines 13
⚫ rate and form review
THE EVOLUTION OF STATE INSURANCE
REGULATION
🞆 Other major initiatives during the early years of this century included:
⚫ Enhanced consumer protection, encompassing the Consumer Information
Source (CIS) Web site.
⚫ More efficient market regulation, encompassing the Market Analysis
Handbook.
⚫ “Speed to Market for Insurance Products,” encompassing the Interstate
Insurance Product Regulation Commission (IIPRC) and the System for
Electronic Rate and Form Filing (SERFF).
⚫ Uniform forms and processes for producer licensing, encompassing the
National Insurance Producer Registry (NIPR).
⚫ Standardized insurance company licensing, encompassing the Uniform
Certificate of Authority Application (UCAA).
⚫ Improved solvency regulation, encompassing the Financial Data Repository
(FDR).
⚫ Streamlined changes of insurance company’s control, encompassing the
Form A Database. 14
 LETS TALK ABOUT STRUCTURE OF THE
STATE REGULATION

Insurance Commissioner

Financial Regulation Market Regulation Other Functions

Financial
Prices Producer Regulation
Requirements

Reporting &
Products Residual Markets
Monitoring

Intervention
Practices Information
Guarantees
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WHAT DOES FINANCIAL REGULATION
MEAN
🞆 Protecting policyholders and society in general against
excessive insurer insolvency risk is the primary goal of
insurance regulation.
🞆 Regulators protect policyholders’ interests by requiring
insurers to meet certain financial standards and to act
prudently in managing their affairs.
🞆 To accomplish this task, insurance regulators are given
authority over insurers’ ability to incorporate and/or
conduct business in the various states.
🞆 These statutes require insurers to meet certain minimum
capital standards and financial reporting requirements and
authorize regulators to examine insurers and take other 16
actions to protect policyholders’ interests.
FINANCIAL REGULATION
🞆 Financial regulation provides crucial safeguards for America’s insurance
consumers.
🞆 The states maintain at the NAIC the world’s largest insurance financial database,
which provides a 15- year history of annual and quarterly filings on 5,200
insurance companies.
🞆 Periodic financial examinations occur on a scheduled basis. State financial
examiners investigate a company’s accounting methods, procedures and financial
statement presentation.
🞆 These exams verify and validate what is presented in the company’s annual
statement to ascertain whether the company is in good financial standing.
🞆 When an examination of financial records shows the company to be financially
impaired, the state insurance department takes control of the company.
🞆 Aggressively working with financially troubled companies is a critical part of the
regulator’s role.
🞆 In the event the company must be liquidated or becomes insolvent, the states
maintain a system of financial guaranty funds that cover consumers’ personal 17
losses.
WHAT ARE FINANCIAL REQUIREMENTS
🞆 Solvency regulation policies impact a number of aspects of
insurers’ operations, including
Capitalization Reserves
Pricing and products Investments
Reinsurance Management
Asset-liability matching Transaction with affiliates
🞆 It also encompasses regulatory intervention with insurers in
financial distress, the management of insurer receiverships
(bankruptcies), and insolvency guaranty mechanisms that
cover a portion of the claims of insolvent insurers.
🞆 The primary responsibility for the financial regulation of an
insurance company is delegated to the state in which it is
domiciled 18
LET’S DISCUSS REPORTING AND
MONITORING
🞆 Insurers that fail to comply with regulatory financial
standards and/or are deemed to be in hazardous financial
condition are subject to regulatory intervention that can be
formal or informal.
🞆 Formal interventions typically involve regulators seizing
control of a company and can constitute conservation,
rehabilitation and liquidation depending on the condition
of the insurer and its prospects.
🞆 It is not uncommon for an insurer’s financial statement to
be revised when regulators step in and, hence, regulatory
measures can progress rapidly from simply controlling an
insurer’s transactions to its liquidation if restructuring or 19
rehabilitation is infeasible.
HOW DO WE DO MARKET REGULATION
🞆 The regulation of an insurer’s market practices is principally
delegated to each state in which it operates
🞆 The scope of market regulation is broad (potentially
encompassing all aspects of an insurer’s interactions with
consumers) and the states’ policies can vary significantly.
🞆 State regulation of insurers’ prices or rates is a particularly
visible and controversial topic.
🞆 Insurers’ policy forms and products also tend to be closely
regulated with the exception of products purchased by large
firms.
🞆 Other aspects of insurers’ market activities, e.g., marketing,
underwriting, and claims adjustment, generally fall within the 20
area of “market conduct” regulation
MARKET REGULATION
🞆 A state may impose some specific rules regarding certain
practices, such as constraining an insurer’s use of certain factors
in underwriting or mandating that they offer coverage to all
applicants.
🞆 Beyond this, regulation tends to be aimed at enforcing “fair
practices” based on regulators’ interpretation of what this means.
🞆 Monitoring and enforcement activities are typically
implemented through investigating consumer complaints and
market conduct examinations.
🞆 Producers or insurance agents are also regulated by the states
🞆 They must also comply with continuing education requirements
and are subject to regulatory sanctions if they violate regulations
governing their conduct. 21
MARKET REGULATION
🞆 Market regulation attempts to ensure fair and reasonable insurance
prices, products and trade practices in order to protect consumers.
🞆 With improved cooperation among states and uniform market conduct
examinations, regulators hope to ensure continued consumer
protections at the state level.
🞆 Market conduct examinations occur on a routine basis, but also can be
triggered by complaints against an insurer. These exams review agent-
licensing issues, complaints, types of products sold by the company
and agents, agent sales practices, proper rating, claims handling and
other market-related aspects of an insurer’s operation.
🞆 When violations are found, the insurance department makes
recommendations to improve the company’s operations and to bring
the company into compliance with state law.
🞆 In addition, a company may be subject to civil penalties or license 22
suspension or revocation.
WHAT IS COMPANY LICENSING
🞆 State laws require insurers and insurance-related businesses to be licensed
before selling their products or services.
🞆 Currently, there are approximately 7,000 insurers in the United States. All
U.S. insurers are subject to regulation in their state of domicile and in the
other states where they are licensed to sell insurance.
🞆 Insurers who fail to comply with regulatory requirements are subject to
license suspension or revocation, and states may exact fines for regulatory
violations.
🞆 In 2000, nearly 300 companies had their licenses suspended or revoked.
🞆 The NAIC’s Uniform Certificate of Authority Application (UCAA)a
company licensing system helps states expedite the review process of a new
company license.
🞆 In addition, an NAIC database has been developed to facilitate information
sharing on acquisition and merger filings. These databases assist insurance
regulators by creating a streamlined and more cost-efficient regulatory 23
process.
LET’S NOW TALK ABOUT PRODUCER
LICENSING
🞆 Insurance agents and brokers, also known as producers, must be licensed to sell
insurance and must comply with various state laws and regulations governing
their activities.
🞆 More than 3.2 million individuals are licensed to provide insurance services
🞆 State insurance departments oversee producer activities in order to protect
insurance consumer interests in insurance transactions.
🞆 The states administer continuing education programs to ensure that agents meet
high professional standards. Producers who fail to comply with regulatory
requirements are subject to fines and license suspension or revocation.
🞆 In 2000, nearly 16,000 insurance producers had their licenses suspended or
revoked.
🞆 When producers operate in multiple jurisdictions, states must coordinate their
efforts to track producers and prevent violations. Special databases are
maintained by the NAIC to assist the states in this effort. The National Insurance
Producer Registry (NIPR)—a non-profit affiliate of the NAIC—was established
to develop and operate a national repository for producer licensing information. 24
OUR FINAL TOPIC - CONSUMER
SERVICES
🞆 The states’ single most significant challenge is to be vigilant in the
protection of consumers, especially in light of the changes taking place
in the financial services marketplace.
🞆 States have established toll- free hotlines, Internet Web sites and
special consumer services units to receive and handle complaints
against insurers and agents.
🞆 The states also have launched an interactive tool to allow consumers to
research company complaint and financial data using the NAIC Web
site.
🞆 During 2000, state insurance departments handled 4.5 million
consumer inquiries and complaints.
🞆 In addition, many states sponsor educational seminars and provide
consumer brochures on a variety of insurance topics.
🞆 Some states publish rate comparison guides to help consumers get the 25
best value when they purchase insurance.
WHAT IS PRODUCT REGULATION
🞆 State regulators protect consumers by ensuring that insurance policy provisions
comply with state law, are reasonable and fair, and do not contain major gaps in
coverage that might be misunderstood by consumers and leave them unprotected.
🞆 The nature of the rate review, rating rules and forms varies somewhat among the
states depending on their laws and regulations.
🞆 For personal property-casualty lines, about half of the states require insurers to
file rates and to receive prior approval before they go into effect.
🞆 With the exception of workers’ compensation and medical malpractice,
commercial property-casualty lines in many states are subject to a competitive
rating approach.
🞆 Under such a system, regulators typically retain authority to disapprove rates if
they find that competition is not working.
🞆 Premiums for life insurance and annuity products generally are not subject to
regulatory approval, although regulators may seek to ensure that policy benefits
are commensurate with the premiums charged.
🞆 Many states subject health insurance rates to prior approval 26