Regulation Modernization | IIITHE TOPICAPRIL 2. Insurance is regulated by the individual states. The move to modernize insurance regulation is being driven in part by the globalization of insurance services. Some large U. S. companies that operate in other countries support the concept of a federal system that provides one- stop regulatory approval while others believe the merits of a state system outweigh the virtues of a single national regulator. As a result of discussions about the merits of each system, states are making it easier for insurers to respond quickly to market forces. States monitor insurance company solvency. One important function related to this is overseeing rate changes. Rate making is the process of calculating a price to cover the future cost of insurance claims and expenses, including a margin for profit. To establish rates, insurers look at past trends and changes in the current environment that may affect potential losses in the future. Rates are not the same as premiums. Investors are buying more government bonds right now than at any time in the last year. Should you join them? Last modified: September 14th, 2017. Getting started. Cloudflare's API exposes the entire Cloudflare infrastructure via a standardized programmatic interface. A rate is the price of a given unit of insurance—$2. The premium represents the total cost of many units. If the price to rebuild a house is $1. Rates vary according to the likelihood and potential size of loss. Using the example of earthquake insurance, rates would be higher near a fault line and for a brick house, which is more susceptible to damage, than a frame one. While the regulatory processes in each state vary, three principles guide every state’s rate regulation system: that rates be adequate (to maintain insurance company solvency), but not excessive (not so high as to lead to exorbitant profits), nor unfairly discriminatory (price differences must reflect expected claim and expense differences). ![]()
Recently, in auto and home insurance, the twin issues of availability and affordability, which are not explicitly included in the guiding principles, have been assuming greater importance in regulatory decisions. In line with these principles, states have adopted various methods of regulating insurance rates, which fall roughly into two categories: "prior approval" and "competitive." This does not mean there is no competition in states using a prior approval system. Most approved rates in prior approval states are the rates used, but in some cases, particularly in commercial coverages, companies compete at rates below these approved ceilings. Increasingly, even in the most regulated states, officials are relying on competition among insurance companies to keep rates down and are modernizing and streamlining the rate setting process. RECENT DEVELOPMENTSCongress and Federal Matters. The Federal Insurance Office (FIO), an entity within the U. S. Department of the Treasury that was created as a result of the 2. Dodd- Frank financial services reform law to report to Congress and the President on the insurance industry, is expected to release a report on how to improve and modernize insurance regulation in the United States. The report was mandated by the Dodd- Frank legislation. In developing the report, the FIO sought public comments from a wide variety of sources, including policyholders, academic experts, consumer groups, state insurance regulators, insurance industry representatives and other interested parties. The request asked for comments in 1. The report, due at the beginning of 2. Speaking at an industry forum in January 2. Michael Mc. Graith, the first director of the FIO and a former Illinois insurance regulator, said the first report would set out how the FIO intended to monitor access to affordable insurance for underserved communities, a key responsibility. He also said that one immediate priority for the FIO was to ensure regulatory systems in other countries, such as Solvency ll , see Issues Update report, and proposals for new international accounting systems, do not put U. S. insurers at a disadvantage. Insurance will continue to be regulated by the states, but the act includes a narrow preemption of state insurance laws in areas where the FIO determines that the state law is inconsistent with a negotiated international agreement and treats a non- U. S. insurer less favorably than a U. S. insurer. The FIO has the authority to monitor the insurance industry, identify regulatory gaps or systemic risk, deal with international insurance matters and monitor the extent to which underserved communities have access to affordable insurance products. The FIO covers insurers, including reinsurers, but not health insurance. Recently, the FIO has been trying to resolve differences between European and U. S. regulatory schemes, particularly with regard to rules for reinsurers wishing to enter the U. S. market. In testimony before a subcommittee of the House Financial Services Committee in October 2. Mc. Graith said his goal was to work with state regulators to ”establish customs and practices that best serve the United States, our economy, the insurance industry and consumers.” The FIO is responsible for setting up the Federal Advisory Committee on Insurance, authorized by the Treasury to provide guidance on matters related to the office, he said. The committee will have 1. The 2. 01. 0 reform bill addressed a number of concerns about insurance: lack of an entity at the federal level that could represent insurance interests, particularly in the discussion of international issues and the need to streamline the regulation of reinsurers and surplus lines insurers. Among other things, the FIO must submit an annual report to Congress on the insurance industry. In gathering information, the FIO may require insurers, with the exception of small insurers, which are exempt, to submit data. The FIO is empowered to issue subpoenas but it must obtain data from state and federal regulatory agencies, where possible, before requiring insurers to submit them. The FIO oversees the federal terrorism insurance program. Responding to the events that helped precipitate the financial crisis, the legislation also calls for systemic risk regulation. Under the bill, the federal government has authority to seize and dismantle large financial firms whose insolvency could destabilize the financial system. The bill creates a liquidation fund for this purpose to which large insurers might be required to contribute, even though insurance companies do not usually pose a systemic risk and the industry already has a funding system (state guaranty funds) to pay for the unwinding of failed companies. When assessing insurers for the cost of liquidations, contributions to these guaranty funds must be taken into account. In addition, the reform package creates a separate Consumer Financial Protection Agency to address some of the practices that are believed to have contributed to the crisis. Property/casualty insurance is excluded from the agency’s jurisdiction. Individual states oversee market conduct as well as solvency. In addition, the Dodd- Frank bill allows surplus lines (nonadmitted) insurance and reinsurance companies to be regulated by a single state and establishes national standards for how states regulate reinsurance and the surplus lines market, among other things. Nonadmitted insurers are companies that sell insurance to riskier entities whose business traditional insurance companies are unwilling to accept. From the beginning of discussions, the property/casualty insurance industry has been concerned that bank- centric regulatory provisions would be imposed on the industry. Insurers have pointed out that property/casualty insurance companies are unlikely to pose a systemic risk to the financial system. They are generally low- leveraged businesses with more conservative investment portfolios than other financial services segments and have more predictable cash outflows tied to insurance claims rather than on- demand access to assets. In addition, as mentioned above, the insurance industry already has a mechanism to deal with failing companies and to protect policyholders in the event of an insolvency. Insurers are monitoring the rule- making aspect of the legislation. State Regulation Reform. North Carolina: Two legislative committees have been working on modernizing the state’s auto and property insurance regulatory systems to improve availability and affordability but both suggested that specific legislative proposals be put off until the 2.
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