Porter.2-Devlpt

Chapter 2 of Porter discusses the development of insurance regulation through various key events and seminal legal cases.

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Study Tips

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.)

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...
• 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 (1980) and U.S. v SEUA (1944) on state v federal insurance regulation

reference	part (a)	part (b)	part (c)	part (d)
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: out - fed role in insurance	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: out - describe	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 & surplus lines out (f) Dodd-Frank cedant benefits out
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
• 1944: U.S. v SEUA (South-East Underwriters Association)
• 1945: McCarran-Ferguson 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)

1868: 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?

Rullings:

• 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

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')

1914: The Clayton Antitrust Act prohibits activities that encourage monopoly power specifically: [Hint: PEM-1]

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

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

• price discrimination - must be based on reduced on operating costs of corporation
• tying is prohibited - requiring purchase of 1 product to purchase another (can't require purchase of auto insurance to buy homeowners insurance)

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)

This 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 already covers monoppolization

   - 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 illegal. In response, the NAIC proposed laws to return authority to states and that would permit cooperative rate-setting as was done in the compacts.

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

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.

The exam problem from 2018.Spring covers everything you need to know. The answers are given in the next quiz.

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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