Porter.4-Roles-State

Reading: Insurance Regulation, Insurance Institute of America, 2008. - Chapter 4 - Roles of State Regulators & the NAIC in Insurance Regulation

Author: Porter, K.

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BA Quick-Summary: Porter 4 (State Regulation) Chapter 4 discusses the roles of state regulators and the National Association of Insurance Commissioners (NAIC) in insurance regulation. State regulators set laws and guidelines that govern the insurance industry and includes: legislatures, courts, regulatory agencies The NAIC supports these efforts by developing model laws and regulations, coordinating interstate regulatory activities, and providing research and resources to ensure consistency and compliance across states.

Study Tips

This is another chapter where there are many items that could be asked on the exam, but historically it has not had a heavy focus. I added a few BattleCards that were not old exam questions but looked like potential questions. Spend about 60 minutes here.

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• basic facts about NAIC model law
• NAIC accreditation program
• miscellaneous facts about the NAIC and regulation in general

reference	part (a)	part (b)	part (c)	part (d)	part (e)
E (2015.Fall #6)	goals: - of insurance regulation	NAIC.Solvency: - state regulation improvements 1	07/08 financial crisis: - federal ins. regulation?
E (2015.Spring #5)	causes of insolvency - relate to example	NAIC.IRIS - relevant IRIS ratios	non-domiciliary state - investigation options	NAIC accreditation mission & function	NAIC accreditation - relate to part (c)
E (2014.Spring #2)	NAIC model law: - define	NAIC model law: - state benefits	NAIC model law: - insurer benefit	NAIC model law: - reason for modification	NAIC model law: - reason for not adopting
E (2012.Fall #2)	NAIC: - functions	NAIC model law: - reason for adopting	NAIC model law: - reason for not adopting

¹ The answer in the examiners' report is partially outdated because RBC has now does take into account operational risk, catastrophe risk and interest rate risk.

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In Plain English!

Alice the Actuary is training Ian the Intern. Ian is a total noob and asked Alice the following question: (Alice is very patient with noobs.)

Question: what is the NAIC (National Association of Insurance Commissioners)

• The NAIC is the U.S. standard-setting and regulatory support organization...

   - created & governed by the chief insurance regulators

   - from the 50 states, the District of Columbia and five U.S. territories.

Then Ian had a follow-up question:

Question: what the heck does the NAIC do

• That question came up on part (a) of an exam problem:

E (2012.Fall #2)

• The question asked for 4 NAIC functions and the examiner's report listed 37 answers (if I counted correctly, which I probably didn't because it doesn't really matter - the NAIC does a ton of different things!) But here's the answer I put into the BattleCards:

fundamental goals:

   - promote public interest (including fair & equitable treatment of consumers)

   - promote insurer solvency

   - promote state insurance regulation

types of regulatory assistance provided by the NAIC:

   - Develop uniform financial reporting standards

   - Assist states with pricing/coverage

   - Maintain databases to track solvency

• You should maybe skim the other answers in the examiner's report just to get a sense for all the different things the NAIC does.

Do you remember the references to something called NAIC Accreditation from prior syllabus readings. It was noted that that NAIC-Accreditation is voluntary but all states have gone through the accreditation process anyway. Let's help Ian the Intern understand this a little better.

Question: identify the mission of the NAIC Accreditation program (Note: this is different from the mission/function of the NAIC itself)

• maintain standards for solvency regulation

Ok, that's pretty easy, even for an intern! Now, one of the big advantages to being accredited, both to regulators and insurers, is that regulations are more likely to be uniform across states. Remember that the McCarran-Ferguson Act of 1945 essentially preserved state regulation, with certain exceptions, but without NAIC oversight states could have wildly different regulatory systems. Note that NAIC oversight is different from federal regulation. Recall that the NAIC is a support organization consisting of state regulators (and D.C. and U.S. territories) whereas federal regulation would involve the passage of laws by Congress.

Question: describe the NAIC Accreditation program for states

Interview:

   - personnel from state insurance department

Review:

   - state laws

   - prior examination reports

   - files on selected state insurers

   - operations of state insurance department

Understand:

   - communications within state insurance department

Discuss:

   - findings

Report:

   - findings

While Ian was on his coffee break, he found a very interesting article postulating that the NAIC accreditation program is unconstitutional. Wow. Daniel Schwarcz, professor of law at the University of Minnesota, argued essentially that the NAIC acts as a government entity by "strongly encouraging" (coercing) states to adopt NAIC model laws. The problem is that the NAIC has none of the accountability of a government entity. (Obviously this is not on the official syllabus, but it was too juicy a piece of gossip for Alice to leave out of this discussion.)

It's almost quittin' time so Alice allows Ian 1 more question before they both head home:

Question: what are some typical features of a state insurance regulatory system

• A state system typically has requirements for insurers regarding:

   - licensing

   - reporting & filing

• A state system typically has authority to:

   - conduct periodic exams

   - impose sanctions

The first part of Ian's homework is to review the above items then do quiz 1. Ian will need help so do you mind going over the quiz with him? :-)

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The second part of his homework is to study the answers to quiz 2 which are the rest of the old exam problems. Ian wants to slay the beast!

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