1. 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

2. Insurance companies are one of the most heavily regulated industries
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

3. Why Regulate Insurance?
Market Power
Imperfect Information
Public Policy
Advance Nature of Contract
Insurer gets your money before fulfilling the contract

4. Brief History of Insurance Regulation
Paul v Virginia
US v Southeast Underwriters Association (SEUA)
McCarran Ferguson Act

5. You be the Supreme Court Judge
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

6. What is Regulated Licensing Requirements Solvency Investments Reserves
Guaranty Funds
Policy Forms
Rates
Trade Practices

7. Rate Regulation General Requirements
Rates must be adequate, not excessive and not unfairly discriminatory
Methods
Prior approval
File and use
Open competition
Classification issues

8. 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

9. Regulation of Trade Practices
Agents must be licensed
Prohibited activities for agents
Twisting
Rebating
Allowed in Florida and California
Effect of agents’ interests
Claim practices
Underwriting practices

10. General Advice
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
(toll free)
or online at:

11. State vs. Federal Regulation
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

12. Recent Proposals 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

13. Claimed Advantages of State Regulation
Have Current Knowledge
Recognizes Local Conditions
Encourages Experimentation
Effects of Mistakes are Localized

14. Claimed Advantages of Federal Regulation
Uniformity
Could get the best regulators
Would be able to deal with large, multinational insurers

15. Federal Government in Action on Insurance Related Issues
Social Security
Bankrupt by 2040 or earlier
Political environment prevents informed
discussions and solutions
Federal Savings and Loans Insurance Corporation (FSLIC)
Inadequate regulation
Political pressure to keep insolvent S&Ls open
Taxpayer cost of about $200 billion

16. 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

17. What Happens When Your Insurer Goes Insolvent
State guaranty funds apply
Limits on coverage
Deductible on premium refunds
Delays in payment

18. Types of Guaranty Funds
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

19. Lessons from Executive Life and Mutual Benefit
Taken over by California regulators in April, 1991
Company was sold
Policyholders received 70-80% of their benefits

20. Mutual Benefit 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

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

22. Current Problem Areas in Insurance
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)

23. Current Problem Areas in Insurance
Crooked regulators – Louisiana
Sherman Bernard - Commissioner Convicted of taking payoffs – sentenced to 41 months in prison
Douglas Green - Commissioner
Convicted of fraud, money laundering and bribery - served 12 years in federal prison
Jim Brown – Commissioner
Convicted of lying to the FBI – sentenced to 6 months in prison

24. Conclusions 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