1. Chapter 8: Regulation

2. Why Regulate Businesses? zMarket failure zPublic choice zCapture theory

3. Why Regulate Insurance? zDestructive competition yRisk of underpricing yLax underwriting zPublic interest (information asymmetries) yFirms are not allowed to take “excessive” risks and go bankrupt yProduct, sales methods (Compare with securities industry/banking)

4. Insurance regulation - goals zFair prices and fair contracts zSolvency zMake insurance available at affordable prices

5. Some features of insurance regulation zState regulation yLegislative yJudicial yExecutive (Insurance Commissioners) zNAIC

6. Areas regulated zFormation and Licensing zAnnual and quarterly reports zInsolvency funds and early detection z Rate regulation z Financial regulation (Investments, Reserves) z Policy forms z Sales practices

7. Life Insurance Rate Regulation zRate regulation is indirect zLaws may specify mortality tables and interest rate assumptions for reserving zDisclosure requirement regarding standardized cost indexes and dividends

8. Property-Liability Rate Regulation zPrior approval zFile and use zUse and file zFlex rating (price range established) zOpen competition

9. Sales Practices Regulation zLicensing of agents zRebating zTwisting