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The "Why of Government Regulation" |
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Efficient markets believe government should simply ensure competition can exist.
Non-efficient markets believe direct intervention (regulation is necessary to correct market failures) |
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Two Approaches to Government Control |
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Concentrates on maintaining competition. |
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Direct intervention in the decisions of firms will produce results as near as possible to those that would occur in a competitive market |
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Three Economic Theories of Regulation |
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Market Failure Theory Capture Theory Public Choice Theory |
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Regulators ensure that market failures don't occur at such a rate that it puts insurers out of business. (Too much/little service, at a price that is too high/low) |
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The regulators of the industry become more concerned about the success of the industry than about the consumers |
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Favoring certain segments in and out of the industry at the cost of others. |
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Rationale for Regulation of Insurance |
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Vested in the Public Interest Rationale
Destructive Competition Rationale |
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Vested in the Public Interest Rationale |
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Failures in this field can affec persons other than those directly involved in the transaction.
Fiduciary nature of insurance and extensive influence requires regulation |
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Destructive Competition Rationale |
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Competition, if left unregulated can become excessive |
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Two Goals of Insurance Regulation |
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Solvency and Equity
Emerging Goals of Availability and Affordability |
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Five Forms of Market Regulation |
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Unfair Practices (Rebating, Twisting) Policy Forms Competence of Agents Consumer Complaints and Assistance Privacy and the Gramm Leach Billey Act |
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Directly or indirectly giving or offering to give any portion of the premium or any other consideration to an insurance buyer as an inducement to purchase insurance |
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Inducing a policyholder to lapse or cancel a policy of one insurer to replace it with the policy of another insurer in a way that would prejudice the interest of the policyholder. |
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While complicated, are subject to regulatory standards and must be approved by the regulatory authorities to ensure that the insurance-buying public will not be mistreated. |
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All states require that those who sell insurance have a license |
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Consumer Complaints and Assistance |
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All state insurance departments offer assistance to consumers in resolving disputes |
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Privacy and the Gramm Leach Bliley Act |
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Insurers must notify consumers about their privacy policies and must give them the opportunity to prohibit the sharing of their protected financial information with nonaffiliated third parties |
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Three General Requirements for Regulation of Rates |
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Reasonable Adequate Not unfairly discriminatory
*Life insurance rates only regulated indirectly |
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the rates, with interest from investments, must be sufficient to pay all losses as they occur and all expenses connected with the production and servicing of the business |
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5 Approaches to Regulation of Property and Liability Rates |
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Prior Approval No filing (open competition) File-and-use Informational Filing Flex Rating |
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Insurance companies must obtain approval of its intended rates from the commissioner before they may be used. |
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Rates are not required to be filed with or approved by the state. However, the company must maintain records of experience and other information in developing the rates and make these available to the commissioner upon request. |
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Insurer must file proposed rate changes, but may use the new rates after a short waiting period. However, the rates may subsequently be disapproved by the commissioner |
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Almost the same as no filing, except for the fact that insurers *must* file for informational purposes |
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A range is established for insurance rates and insurers are permitted to change their rates within the established range. |
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4 Arguments by Those Favoring State Regulation |
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Definition
State authorities are more familiar with local problems. State authorities are more responsive to local needs. NAIC already provides uniformity to the extent desirable Federal system would be superimposed on state system |
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Most impressive argument favoring state regulation |
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Federal regulation would substitute uniformity for the existing diversity of state regulation. |
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3 causes of Availability Problems |
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Definition
Absolute supply of insurance is limited by regulatory standards the dictate relationship between insurer surplus and written premiums.
The price of insurance is less than the cost of production.
The cyclical nature of insurance creates periodic shortages |
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2 causes of Affordability Problems |
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Definition
The cost of the insurance
The income of the buyer |
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California Proposition 103 |
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Definition
Go from no file to prior approval system, but essentially mandated a reduction in insurance premiums. Law was challenged in California Supreme Court, decided the rollback was required unless insurer was able to prove that such rates would deprive it of a reasonable rate of return. |
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Application containing the insured's statements. Information from the Agent or Broker Information from External Agencies Physical Examinations or Inspections |
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Questionnaire filled out by the insured gives the insurer the information needed to decide whether to accept, reject or seek additional information |
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Information from the Agent/Broker |
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Underwriter can place weight on the recommendations of the agent/broker. In certain cases, the underwriter will agree to accept an exposure that does not meet underwriting requirements of the company. This is called accommodation risk |
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Information from External Agencies |
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Underwriters request reports from agencies that specialize in providing information about individuals or organizations. Credit bureaus, cooperative information bureaus within the insurance industry, DMV, etc. |
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Physical Examinations and Inspections |
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Requiring the applicant to undergo medical examination or have the asset inspected. |
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Expected Losses divided by Number of Exposure Units |
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Pure Premium / 1 - Expense Ratio |
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Four Types of Individual Rates |
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Judgement Rating Schedule Rating Experience Rating Retrospective Rating |
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Lacking credible statistics, usually ocean marine applications |
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Apply schedule of charges and credits to some base rate to determine the appropriate rate for a single exposure unit. |
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Take a base rating, then multiply it by a modification factor: (Actual Loss Ratio - Expected Loss Ratio) / Expected Loss Ratio * Credibility Factor |
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self-rated program under which the actual losses during the policy period determine the final premium for the coverage, subject to a maximum and minimum. |
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Insurance is a contract... |
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Definition
Of indemnity Personal Contract (Between a person and the insurer) Unilateral Contract (Only the insurer is legally bound to do anything) Conditional Contract Contract of Adhesion (take it or leave it) Aleatory Contract (Outcome is affected by chance and the number of dollars given up by contracting parties will be unequal) Utmost Good Faith (Insured must fully and fairly disclose all facts) |
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Doctrines related to Good Faith |
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Misrepresentation (grounds for recission if material fact - would not have agreed to the same terms had it been known)
Concealment (failure to disclose, must be intentional)
Warranties |
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The intentional relinquishment of a right |
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Prevents an individual from alleging or denying a previously admitted fact |
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When a contract is written it cannot be modified by oral evidence |
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