HW_4

FIN 3610 General Insurance

Chapter 6 – Insurance Company Operations

Chapter 8 – Government Regulation of Insurance

Lecture Overview – Comments from Dr. Zietz

 

Insurance Company Operations and Government Regulation of Insurance Insurance Company Operations 

        The information contained in this next lesson, which comes from Chapters 6 and 8, may be more fascinating to some of you if you already have a specific interest in a particular field of insurance. For example if you're in actuarial science major, you will like the right making section. Many students found they want to go into underwriting and there's a good portion of the chapter on the underwriting steps and different types of consideration to beginning the underwriting process. Some students know right away that they're interested in sales while others know for certain that is not their strong interest. The production side of insurance covers again some of the marketing topics that we had earlier, but it will also tell you how professional organizations, such as the CPCU Chartered Property and Casualty Underwriter and the CLU Chartered Life Underwriter, are among others that encourage professionals within the industry to continuously improve their skills and knowledge by completing professional designations. Another area within the insurance industry that is fascinating and offers a great insight into many facets of the insurance process is claims settlement. There are various types of adjusters that are discussed in this chapter and the steps to the adjusting process is fairly structured. Entering the insurance industry through a claims position will provide insight into how the insurance industry can operate successfully. Reinsurance is kind of a term that many young professionals are not fully able to grasp but it is a very key tool used to sustain the insurance industry. Reinsurance, as noted on slide 15, is an arrangement by which the primary insurer that initially writes the coverage transfers to another insurer part of those potential losses. The primary insurer is called the seating company, and the company that accepts that seeded risk is the reinsure. This process allows companies to increase their underwriting capacity and reduce their reserves which may be more optimally invested elsewhere.

Insurance Regulation

Chapter 8 brings up several very interesting topics concerning the purpose of regulating the insurance industry and how the regulation may be efficiently accomplished. I typically ask the classroom students “what is the main reason for insurance regulation?” Most of them, being new in their study of insurance, say it is to keep the prices down. Then I respond by asking: do you think we need regulation to ensure the price of groceries is kept at a certain level? Do you think the price of a car should be regulated by the federal government? So what makes insurance different that results in needing regulation that other industries do not need?

If you bought an insurance policy on your house, what is your number one fear? If your house has a loss, the insurance policy will pay you for that loss through that sharing process we discussed. What would really keep you awake at night, especially if you bought the coverage at a very cheap premium, much cheaper than the other competitors? You probably should be concerned that the price may not be enough to sustain that group of insureds like we discussed in Chapter 1. So one of the key reasons for the insurance regulation is to make sure the insurance company is solvent. Should they write the coverage too cheaply, perhaps there will be no funds available when that person has the loss in the group.            Take some time and look up the development of insurance regulation overtime. You need to go back and read about Paul versus Virginia in 1868. The question has arisen for many years even prior to that that insurance is or is not interstate commerce. If insurance is deemed interstate commerce, then a different set of regulations would apply. The real question was, and still is, should states have the prerogative of regulating insurers domiciled in their territory or should the federal government have the right to regulate all insurers. As with other types of laws, there has always been a propensity to leave regulatory authority at the level of the consumer involved. Specifically, state regulation has been going on for many years.

Then, read about the US versus Southeast Underwriters Association case in 1944. This ruling overturned the palm the Virginia case from decades earlier and helped decide that insurance was in fact interstate commerce and should be regulated by the federal government.            This interesting story continues because that ruling, US versus Southeast Underwriters Association, only lasted for one year when the McCarran Ferguson act 1945 gave the states the authority to regulate insurance companies domiciled in their states, but reserved the right for federal antitrust laws to kick in if the states are unable to regulate activity.            Fast forward several decades to 1999, with the financial modernization act. This changed the earlier law that had prevented banks, insurance companies, and investment firms from competing across state lines. A summary of this important act is found on slide 6. Take some time to read about the modernization act as it really changed the way a lot of financial transactions are made today.            Continue reading through this chapter about the areas that are regulated, the reasons for that regulation, and how you would address the issue of insurance regulation if you were helping draft a bill in the legislature. Be sure to read the advantages and disadvantages of state versus federal regulation, and how the ultimate goal of regulation, which is to ensure solvency, is achieved. This is a very interesting chapter!