Porter.2-Devlpt

Reading: Insurance Regulation, Insurance Institute of America, 2008. - Chapter 2 - Development of Insurance Regulation (excluding 2.19 - 2.29)

Author: Porter, K.

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BA Quick-Summary: Porter 2 (Development of Insurance Regulation) Chapter 2 of Porter discusses the development of insurance regulation through key events and seminal legal cases: It highlights significant milestones which affirmed state authority over insurance regulation including: Paul v. Virginia (1869) Sherman Antitrust Act (1890) U.S. v SEUA (1944) McCarran-Ferguson Act (1945) The chapter also covers the Gramm-Leach-Bliley Act of 1999, which removed barriers between banking, securities, and insurance companies. Key themes include the evolution of state versus federal regulation and the impact of major legislative and judicial actions on the insurance industry.

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Multiple Choice (mini BattleQuiz 4) ← for general review of topic

Study Tips

Porter Chapter 2, Development of Insurance Regulation, explicitly states that the main topics covered are:

• How did insurance regulation develop before the SEUA case? (Southeast Underwriters Association)
• How did the SEUA case affect insurance regulation?

These are not necessarily the items that are covered on the exam. The entire Porter text accounts for under 10% of the exam, but chapter 2 is the most heavily tested chapter so this is where the bulk of your time on Porter should be spent. You basically just have to memorize this whole wiki article.

Based on the old exam questions below, it looks like there's a lot to learn but the questions are repetitive. Spend 10 minutes reading the wiki article, then do the quizzes. Remember that the quizzes cover the old exam problems but my answers are usually easier to understand than the examiner's report. (You'll get more value from the examiner's reports after you're familiar with the material.)

Estimated study time: 1 day (not including subsequent review time)

BattleTable

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

• McCarran-Ferguson Act of 1945 that affirms state authority in insurance regulation
• Sherman Antitrust Act of 1890 that prohibits anti-competitive contracts
• Gramm-Leach-Bliley Act of 1999 that removed barriers between banking, securities, and insurance companies
• surplus lines insurance for high-limit and/or unique risks
• Clayton Antitrust Act (1914) and the Robinson-Patman Amendment (1936) regarding anti-competitive practices
• legal cases Paul v Virginia (1869) and U.S. v SEUA (1944) on state v federal insurance regulation

Questions held out from Fall 2019 exam: #6. (Skip these now to have a fresh exam to practice on later. For links to these questions, see Exam Summaries.)

• Question highlighted in red are outdated.

reference	part (a)	part (b)	part (c)	part (d)
E (2019.Spring #4)	Paul v Virginia: - describe the case	SEUA decision: - Supreme Court ruling	after SEUA1 decision: - NAIC recommendations
E (2019.Spring #5)	Clayton Antitrust Act Robinson-Patman Act	Porter.3-Roles-Fed	NAIC model laws: - motivation
E (2018.Fall #3)	McCarran-Ferguson Act: - fed supersedes state	McCarran-Ferguson Act: - purpose of model bills	McCarty.Credit
E (2018.Spring #2)	surplus lines: - describe a transaction	surplus lines: - regulatory exemptions	surplus lines: - market regulation
E (2018.Spring #4)	Paul v Virginia: - describe the case	McCarran-Ferguson Act: - federal role	state insurance regulation - list 4 examples	federal involvement: - programs & roles
E (2018.Spring #5)	Gramm-Leach-Bliley Act: - banking & insurance	Gramm-Leach-Bliley Act: - privacy concerns	Gramm-Leach-Bliley Act: - NAIC response
E (2016.Fall #1)	Paul v Virginia: - describe the case	Sherman Antitrust Act: - federal/state impact	after SEUA1 decision: - NAIC model laws	Robinson-Patman Act: - individual price optimization
E (2015.Spring #3)	SEUA decision: - Supreme Court ruling	Gramm-Leach-Bliley Act: - fed role in insurance	Dodd-Frank: - see Baribeau.Regs	insurance regulation: - federal vs state
E (2014.Fall #1)	McCarran-Ferguson Act: - 2 consequences	McCarran-Ferguson Act: - unanswered questions	McCarran-Ferguson Act: - NAIC response	SCENARIO: - evaluate legality
E (2014.Fall #3)	Gramm-Leach-Bliley Act: - describe	Dodd-Frank: - see Baribeau.Regs	NAIC.Solvency	NAIC.Solvency
E (2014.Spring #4)	Sherman Antitrust Act: - prohibitions	Sherman Antitrust Act: - auto insurer cooperation	(c) Sherman Antitrust Act: (d) Paul v Virginia, U.S. v SEUA	(e) Dodd-Frank - see Baribeau.Regs (f) Dodd-Frank - see Baribeau.Regs
E (2013.Fall #4)	Clayton Antitrust Act: - impact on insurance	Clayton Antitrust Act: - interpret scenario	McCarran-Ferguson Act: - impact on regulation	McCarran-Ferguson Act: - interpret scenario
E (2012.Fall #5)	Clayton Antitrust Act: - describe	Robinson-Patman Act: - describe	Clayton & R-P: - NAIC responses
E (2012.Fall #6)	Sherman Antitrust Act: - describe (key features)	Sherman Antitrust Act: - application to insurance

¹ SEUA = South-East Underwriters Assoication

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In Plain English!

Intro

An important issue surrounding insurance is whether regulation should be state or federal. There were several seminal legal cases and/or events that addressed this issue over the past 150 years:

• 1869: Paul v Virginia
• 1890: Sherman Antitrust Act
  • 1914: Clayton Antitrust Act
  • 1936: Robinson-Patman amendment to Clayton Antitrust Act
• 1944: U.S. v SEUA (South-East Underwriters Association)
• 1945: McCarran-Ferguson Act
• 1999: Gramm-Leach-Bliley Act

The McCarran-Ferguson Act essentially gives states the authority to regulate insurers. Insurers are subject to federal anti-trust acts to the extent they aren't regulated by state law. But the federal government still retains the right to pass insurance laws that supersede state laws.

State regulation has proven effective at protecting consumers. Examples of issues that fall under insurance regulation are:

• financial regulation (capital requirements, investments,...)
• market conduct (sales, U/W, claims handling)
• licensing (both insurers & producers)

1869: Paul v Virginia

Wikipedia has an excellent article for Paul v Virginia.

Alice the Actuary has a nifty way of organizing information about legal cases. It's the FIR-method: Facts, Issues, Rulings. She can't wait to show you how it works! For Paul v Virginia:

Facts:

• Prior to 1869, insurance was regulated exclusively by states.
• Paul was not licensed by VA to sell insurance for companies domiciled in NY, but did so anyway.
• Paul was arrested and fined.

Issues:

• Did VA have the authority to prevent Paul from selling NY policies in VA?

Rulings:

• Supreme Court: Yes, states could regulate insurance without violating U.S. Constitution.
• Reason: Insurance is a contract delivered locally, not interstate commerce, so federal legislation doesn't apply.

1890: Sherman Antitrust Act (and others)

The Sherman Act was the original antitrust legislation from 1890, but it was too vague and big companies found ways to circumvent it and continue to engage in anti-competitive practices.

1890: The Sherman Antitrust Act prohibits anti-competitive contracts that encourage monopolies - restraint of trade/commerce

(applies only to interstate commerce ==> does not apply to insurance because of 'Paul v Virginia')

The Clayton Act (1914) and Robinson-Patman Act (1936) were updates that attempted to eliminate loopholes in the Sherman Act. The Clayton Act was more specific than the Sherman Act and prohibited activities such as those listed below. These acts apply to all business, although their applicability to insurance was not adjudicated until the SEUA case. (See further down.)

1914: The Clayton Antitrust Act prohibits activities that encourage monopoly power specifically: [Hint: PEM-1]  → read JJJJ's old west tale!

Price discrimination - pricing differences between similar risks

Exclusive dealings - sale of insurance conditional on buyer not doing other business with competitors

Mergers & acquisitions that lessen competition

1 person cannot be a director of 2 competing corporations

(tying is also prohibited - requiring purchase of 1 product to purchase another → can't require purchase of auto insurance to buy homeowners insurance)

(previously, this was incorrectly listed under the Robinson-Patman Act.)

(A better memory trick for this list is TEMPO. Click the link for an explanation!

1936: The Robinson-Patman Act was an amendment to the Clayton Antitrust Act:

• price discrimination - must be based on reduced operating costs of corporation

Some anti-competitive practices are tolerated in insurance. Examples are rate bureaus and insurer compacts. A rate bureau is a 3rd party that provides common information to multiple companies for the purposes of pricing. This is permitted to maintain adequate rates and avoid unfair discrimination. (An insurer compact is an association of insurers, also for the purpose of maintaining adequate rates.)

1944: U.S. v SEUA (South-East Underwriters Association)

The results of U.S. v SEUA prompted the passage of the McCarran-Ferguson Act which is discussed in the next section.

Facts: (U.S. v SEUA)

• In 1942 DOJ (Department of Justice) indicted SEUA on 2 violations of the Sherman Antitrust Act:

   - rate-fixing and subsequent boycotting of agencies who didn't go along with rate-fixing

   - monopolization of market

Issues:

• Does the federal government have the authority to preempt states and regulate the business of insurance?

Rulings:

• District Court: No, federal authority is not recognized. DOJ case is dismissed.
• Supreme Court: Yes, federal authority of insurance is recognized. District Court decision is reversed. (4-3 decision)

   - Sherman AntiTrust Act applies and already covers monopolization

   - insurance is interstate commerce (other intangible products like electricity transfer are subject to federal regulation of interstate commerce so insurance should be also)

   - only a small number of SEUA members were domiciled in 1 of the SEUA states (comprised 6 southern states)

Note that the decision in U.S. v SEUA gave regulatory authority of insurance to the federal government and made insurer compacts that engage in anti-competitive practices illegal. In response, the NAIC proposed laws NAIC pressured Congress to return authority to states (under Commerce Clause of Constitution) and that would permit cooperative rate-setting as was done in the compacts (amendments to Sherman Act, Clayton Act.) After McCarran-Ferguson (described below) the NAIC proposed 2 model bills to ensure rates were adequate, not excessive, and not unfairly discriminatory, and also to allow cooperative rate-setting provided it didn't hinder competition. The motivation of the NAIC model law can be described as identifying unfair trade practices and reducing federal intervention.

1945: McCarran-Ferguson Act

In 1945, Congress passed the McCarran-Ferguson Act in response to the Supreme Court ruling in the SEUA case. This Act:

• essentially preserves the authority of states to regulate insurance
• but federal laws applying exclusively to insurance supersede state laws
• exempts insurance from most federal regulation including antitrust regulation, (not exempt from Sherman Antitrust Act)
• but doesn't exempt boycott, coercion, intimidation regardless of state regulation

See also exceptions to McCarran-Ferguson in Porter.3-Roles-Fed.

1999: Gramm-Leach-Bliley Act

The Gramm-Leach-Bliley Act is a federal law that removed barriers between banking, securities, and insurance companies. Prior to GLB, any one institution was prohibited from acting as any combination of investment bank, commercial bank, and insurance company. (GLB repeals portions of the Glass-Steagall Act, enacted during the Great Depression of the 1930s in an effort to prevent future financial crises.)

GLB also requires financial institutions to explain how they share and protect their customers' private information. In particular, it requires disclosure of information-sharing practices between banks and insurer affiliates. This is important in modern times where personal information has great economic value to corporations.

Here's a short list of GLB provisions:

• REQUIRES disclosure of information-sharing practices between banks and insurer affiliates
• PROHIBITS formation of insurance-selling subsidiaries by national banks
• PROHIBITS paying claims with bank funds (if holding company holds bank & insurer)
• PROHIBITS preventing banks from selling insurance (states can't make laws to prevent banks from selling insurance)
• FACILITATES selling insurance in more than 1 state by a single producer

This last GLB provision prompted a response by the NAIC called the Producer Model Act. This Act helps states establish reciprocal licensing & uniform standards across states.

Surplus Lines

Surplus lines insurers (also called non-admitted insurers) will accept risks that are declined by admitted insurers. An admitted insurer is simply one that is licensed in the state and must abide by all state regulations. The reason a non-admitted insurer accepts risks that other insurers do not is that a non-admitted insurer doesn't have to abide by all state regulations. This gives them leeway in rates, coverage, and the matter of guaranty funds. This isn't to say that non-admitted insurers are unregulated, but the regulations are relaxed because they fill a need in the market, possibly very high limits or unique underwriting characteristics, or other risks that admitted insurers don't want to take on.

Here's some basic information about surplus lines. (Surplus lines is the same things as excess lines)

Question: briefly describe a typical surplus lines transaction

• a specially licensed surplus lines broker places insurance with an unauthorized/non-admitted insurer

Question: identify 2 types of regulatory exemptions for surplus lines and the benefits to policy holders

exemption ==> from filing rates

• benefit: insurer can always charge adequate premium

exemption ==> from guaranty funds

• benefit: costs of fund not passed on to policyholder

Question: describe ways that the surplus lines market is regulated

• product must be unavailable in traditional insurance market
• producers must be licensed to sell surplus lines insurance
• producers must place business with insurers that meet managerial & financial requirements

Quizzes

These are all old exam questions. I broke them into 3 sections.

mini BattleQuiz 1 questions from 2018.Spring and more recent.

mini BattleQuiz 2 questions from 2015-2016

mini BattleQuiz 3 older questions

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