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FIN 3440 (15)
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Lecture 3

Lecture 3 Law And Regulation

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Department
Finance
Course
FIN 3440
Professor
All Professors
Semester
Fall

Description
Insurance RegulationInsurance in the United States has been regulated at the state level for a long time and in modern times it has been heavily regulatedWe stated last class that contracts including insurance contracts are a method to transfer riskBut you might wonder why the insurance industry based upon a contract between the insurer and the insured is so heavily regulatedThe three principal reasons are to control or influence insurance industry solvency pricing and contract terms because for the most part insurance involves dealings between an insurance company and the relatively unsophisticated publicIndustry abuses and problems over the years have led to increasing regulation of the insurance industry as a matter of public policyLandmark legal actions which laid the foundation for todays insurance regulatory structure throughout the United States are as followsPaul vs Virginia 1869held that insurance fire insurance here is not commerce therefore it is not subject to federal regulation as interstate commercethe antitrust provisions of this Sherman Antitrust Act 1890Act could not be applied to the insurance industry because of the Paul case above Armstrong Investigation 1905spectacular publicity surrounding abuses and misconduct of the life insurance industry in New York in 1905 led to numerous regulatory reforms across the USUS vs Southeastern Underwriters 1944indictment of insurance companies for pricefixing and boycotting in violation of the Sherman Antitrust Act and overruled the Paul vs Virginia case exposing the insurance industry to federal regulationMcCarranFerguson Act 1945extreme concern of federal intervention due to the Southeastern case led the National Association of Insurance Commissioners NAIC to urge Congressional passage of a law Public Law 15 which reaffirmed the right of the federal government to regulate insurance but which agreed that the federal government would not exercise that right as long as the industry was adequately regulated by the states ie if states do a good job of selfregulationIn effect states were given the power to regulate insurance in their respective jurisdictions and following the passage of the law many states acted quickly to improve their regulatory systems to be in compliance with the spirit of the federal law rating laws unfair trade practices solvency standards and licensing requirementsDoddFrank Wall Street Reform and Consumer Protection Act 2010Created the Federal Insurance Office FIO to monitor the insurance industry while maintaining state regulation of insurance it remains to be seen what impact this new legislation will have on the insurance industryElements of Insurance Regulation at the State Level in Louisiana and similar in other statesSolvency RegulationLicensing authority allows the commissioner of insurance appointed by the governor in most states elected in Louisiana to decide which companies are allowed to do business within the stateLicensing attests the financial stability of the applicant company such as the capital and surplus requirements outlined in the insurance code of the state varies from state to stateIn the 1990s the NAIC developed riskbased capital standards for life property and liability and health insurersIn addition to capital and surplus requirements the commissioner typically reviews information about the management of new company applicants to assess their competence and experienceInsurers must comply with significant regulatory reporting requirementsThe insurance code requires every licensed insurer to submit annual and quarterly reports to the commissioner of
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