JURISPRUDENCIA NACIONAL DEL DELITO DE FEMINICIDIO Recurso de Nulidad
XIV. CONCLUSIONES Y RECOMENDACIONES
Insurers are subject to numerous laws and regulations. The principal areas regulated include the following:
■ Formation and licensing of insurers
■ Solvency regulation ■ Rate regulation ■ Policy forms
■ Sales practices and consumer protection
■ Taxation of insurers
Formation and Licensing of Insurers
All states have requirements for the formation and licensing of insurers. A new insurer is typically formed by incorporation. The insurer receives a charter or certificate of incorporation from the state, which authorizes its formation and legal existence.
After being formed, insurers must be licensed to do business. The licensing requirements for insurers are more stringent than those imposed on other new firms. If the insurer is a capital stock insurer, it must meet cer- tain minimum capital and surplus requirements, which vary by state and by line of insurance. A new mutual insurer must meet a minimum surplus requirement (rather than capital and surplus, as there are no stock- holders) and must meet other requirements as well.
A license can be issued to a domestic, foreign, or alien insurer. A domestic insurer is an insurer domi- ciled in the state; it must be licensed in the state as well as in other states where it does business. A foreign
insurer is an out-of-state insurer that is chartered by
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future claim levels (risk of fluctuations in mortal- ity experience).
■ Interest rate risk. Interest rate risk reflects
possible losses due to changing interest rates. The impact of interest rate changes is greatest on those products where the contractual guarantees favor the policyholders and where policyholders are likely to respond to changes in interest rates by withdrawing funds from the insurer. Examples include a decline in the market value of assets supporting contractual obligations because of a rise in interest rates, and liquidity problems caused by policyholders withdrawing funds because of changing interest rates.
■ Business risk. Business risk represents the wide
range of general business risks that life insur- ers face, such as guaranty fund assessments and insolvency because of bad management.
The NAIC requires a comparison of a company’s total adjusted capital with the amount of required risk-based capital. Total adjusted capital is essentially the company’s net worth (assets minus liabilities) with certain adjustments.
Certain regulatory and company actions must be taken if an insurer’s total adjusted capital falls below its required RBC levels. The corrective action levels for life insurers are summarized as follows:
amount of new business an insurer can write is limited by the amount of policyholders’ surplus. One conservative rule is that a property insurer can safely write $1 of new net premiums for each $1 of policyholders’ surplus. Second, policyholders’ surplus is necessary to offset any substantial underwriting or investment losses. Finally, policyholders’ surplus is required to offset any deficiency in loss reserves that may occur over time.
In life insurance, policyholders’ surplus is less important because of the substantial safety margins in the calculation of premiums and dividends, con- servative interest assumptions used in calculating legal reserves, conservative valuation of investments, greater stability in operations over time, and less like- lihood of a catastrophic loss.
Risk-Based Capital To reduce the risk of insol-
vency, life and health insurers must meet certain risk-based capital standards based on a model law developed by the NAIC. The NAIC has drafted a similar model law for property and casualty insur- ers. Only the standards for life insurers are dis- cussed here.
Risk-based capital (RBC) means that insurers
must have a certain amount of capital, depending on the riskiness of their investments and insurance operations. Insurers are monitored by regulators based on how much capital they have relative to their risk-based capital requirements. For example,
insurers that invest in less-than-investment-grade corporate bonds (“junk bonds”) must set aside more capital than if Treasury bonds were purchased.
The risk-based capital requirements in life insur- ance are based on a formula that considers four types of risk:
■ Asset risk. Asset risk is the risk of default of
assets for affiliated investments; the parent com- pany must hold an equivalent amount of risk- based capital that provides protection against the financial downturn of affiliates. The asset risk also represents the risk of default for bonds and other debt assets and a loss in market value for equity (common stock) assets.
■ Insurance risk. Insurance risk is the equivalent
of underwriting risk and reflects the amount of surplus needed to pay excess claims because of random fluctuations and inaccurate pricing for
RBC Ratio (%) Zone Action
125% and above
Adequate None
100% to 124% Red flag Insurer must conduct trend test
75% to 99% Company
action
Insurer must file plan with regulator outlining corrective steps
50% to 74% Regulatory
action
Regulator must examine insurer and order corrective steps
35% to 49% Authorized
control
Regulator may seize insurer if necessary
Below 35% Mandatory
control
Regulator must seize
insurer
Source: “Insurance Companies’ Risk-Based Capital Ratios,” The Insurance
Insurance companies are also periodically exam- ined by the states. Depending on the state, domestic insurers generally are examined one or more times every three to five years by the state insurance depart- ment. However, state regulations have the authority to conduct an examination at any time when consid- ered necessary. Licensed out-of-state insurers are also periodically examined.
Liquidation of Insurers If an insurer is financially
impaired, the state insurance department assumes control of the company. With proper management, the insurer may be successfully rehabilitated. If the insurer cannot be rehabilitated, it is liquidated according to the state’s insurance code.
Most states have adopted the Insurers Supervision, Rehabilitation, and Liquidation Model Act drafted by the NAIC in 1977 or similar types of legislation. The act is designed to achieve uniform- ity among the states in the liquidation of assets and payment of claims of a defunct insurer and provides for a comprehensive system for rehabilitation and liquidation.
If an insurer becomes insolvent, some claims may still be unpaid. All states have guaranty funds that provide for the payment of unpaid claims of insol- vent property and casualty insurers. In life insurance, all states have enacted guaranty laws and guaranty associations to pay the claims of policyholders of insolvent life and health insurers.
The assessment method is the major method used to raise the necessary funds to pay unpaid claims. Insurers are generally assessed after an insol- vency occurs. New York is an exception because it maintains a permanent preassessment solvency fund, which assesses property and casualty insurers prior to any insolvency. A few states have preassessment funds for workers compensation. Insurers can recoup part or all of the assessments paid by special state premium tax credits, refunds from the state guaranty funds, and higher insurance premiums. The result is that taxpayers and the general public indirectly pay the claims of insolvent insurers.
The guaranty funds limit the amount that policyholders can collect if an insurer goes broke. For example, in life insurance, a typical state guaranty fund has a $100,000 limit on cash values, a $100,000 limit on an annuity contract, and a $300,000 limit on the combined benefits from all policies. Some state The effect of the RBC requirements is to raise the
minimum amount of capital for many insurers and decrease the chance that a failing insurer will exhaust its capital before it can be seized by regulators. Thus, the overall result is to limit an insurer’s financial risk and reduce the cost of insolvency. As a practical matter, the vast majority of insurers have total adjusted capital that exceeds their risk-based capital requirements.
Investments Insurance company investments are
regulated with respect to types of investments, qual- ity, and percentage of total assets or surplus that can be invested in different investments. The basic pur- pose of these regulations is to prevent insurers from making unsound investments that could threaten the company’s solvency and harm the policyholders.
Life insurers typically invest in common and preferred stocks, bonds, mortgages, real estate, and policy loans. The laws generally place maximum limits on each type of investment based on a percentage of assets or surplus.
Property and casualty insurers typically invest in common and preferred stock, tax-free municipal and special revenue bonds, government and corporate bonds, cash, and other short-term investments. The percentage of assets invested in real estate is relatively small (less than 1 percent in 2010). Most assets are invested in highly liquid securities—for example, high-quality stocks and bonds rather than real estate—that can be sold quickly to pay claims if a catastrophe loss occurs.
Dividend Policy In life insurance, the annual gain
from operations can be distributed in the form of divi- dends to policyholders, or it can be added to the insur- er’s surplus for present and future needs. Many states limit the amount of surplus a participating life insurer can accumulate. The purpose of this limitation is to prevent life insurers from accumulating a substantial surplus at the expense of dividends to policyholders.
Reports and Examinations Annual reports and
examinations are used to maintain insurer solvency. Each insurer must file an annual report with the state insurance department in states where it does business. The report provides detailed financial information to regulatory officials with respect to assets, liabilities, reserves, investments, claim payments, risk-based capital, and other information.
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immediately. Regulatory authorities have the author- ity to disapprove the rate filing if it violates state law. This type of law overcomes the problem of delay that exists under a prior-approval law.
Use-and-File Law A variation of file-and-use is a
use-and-file law . Under this law, insurers can put into effect immediately any rate changes, but the rates must be filed with the regulatory authorities within a certain period after first being used, such as 15 to 60 days.
Flex-Rating Law Under a flex-rating law , prior
approval of rates is required only if the rate increase or decrease exceeds a specified range. Rate changes of 5 to 10 percent are typically permitted without prior approval. The purpose of a flex-rating law is to allow insurers to make rate changes more rapidly in response to changing market conditions.
State-Made Rates A small number of states earlier
prescribed state-made rates that applied to specific lines of insurance.
Massachusetts earlier prescribed state-made rates for private passenger automobile insurance. However, in 2008, the Massachusetts law was changed to “managed competition.” Insurers are free to determine their own rates. The rates, however, can be disapproved if they are viewed as excessive. An independent actuarial firm reviews the rates filed by insurers to determine if the rates are in compliance with the law.
In addition, a few states, including Florida and Texas, specify the rates that title insurers in the state can charge for title insurance.
No Filing Required Under the no filing required
system, insurers are not required to file their rates with the state insurance department. However, insur- ers may be required to furnish rate schedules and supporting data to state officials. A fundamental assumption is that market forces will determine the price and availability of insurance rather than the discretionary acts of regulatory officials.
Commercial Lines Deregulation Many states have
passed legislation that exempts insurers from filing rates and policy forms for large commercial accounts with the state insurance department for approval. funds also do not protect out-of-state residents when
an insurer domiciled in the state goes broke.
Rate Regulation
Rate regulation is an important regulatory area. As noted in Chapter 7 , p roperty and casualty insur- ance rates must be adequate, not excessive, and not unfairly discriminatory. Rate regulation, however, is far from uniform. Some states have more than one rating law, depending on the type of insurance. The principal types of rating laws are the following: 3
■ Prior-approval laws
■ Modified prior-approval law
■ File-and-use law ■ Use-and-file law ■ Flex-rating law ■ State-made rates ■ No filing required
Prior-Approval Law Under a prior-approval law ,
rates must be filed and approved by the state insurance department before they can be used. In most states, if the rates are not disapproved within a certain period, such as 30 or 60 days, they are deemed to be approved.4
Insurers have criticized prior-approval laws on several grounds. There is often considerable delay in obtaining a needed rate increase, because state insur- ance departments are often understaffed. The rate increase granted may be inadequate, and rate increases may be denied for political reasons. In addition, the sta- tistical data required by the state insurance department to support a rate increase may not be readily available.
Modified Prior-Approval Law Under a modified prior-approval law , if the rate change is based solely
on loss experience, the insurer must file the rates with the state insurance department, and the rates may be used immediately (i.e., file-and-use). However, if the rate change is based on a change in rate classifica- tions or expense relationships, then prior approval of the rates may be necessary (i.e., prior-approval). The insurance department can disapprove the rate filing at anytime if the filing does not comply with the law.
File-and-Use Law Under a file-and-use law , insur-
ers are required only to file the rates with the state insurance department, and the rates can be used
Unfair Trade Practices Insurance laws prohibit a
wide variety of unfair trade practices , including mis- representation, twisting, rebating, deceptive or false advertising, inequitable claim settlement, and unfair discrimination. The state insurance commissioner has the legal authority to stop insurers from engaging in unfair trade practices and deceptive advertising. Insurers can be fined, an injunction can be obtained, or, in serious cases, the insurer’s license can be sus- pended or revoked.
Twisting All states forbid twisting. Twisting is the
inducement of a policyholder to drop an existing policy and replace it with a new one that provides little or no economic benefit to the client . Twisting
laws apply largely to life insurance policies; the objective here is to prevent policyholders from being financially harmed by replacing one life insurance policy with another.
All states have replacement regulations so that policyholders can make an informed decision con- cerning the replacement of an existing life insurance policy. These laws are based on the premise that replacement of an existing life insurance policy gen- erally is not in the policyholder’s best interest. For example, acquisition expenses for the new policy must be paid; a new incontestable clause and suicide clause must be satisfied; and higher premiums based on the policyholder’s higher attained age may have to be paid. In some cases, however, switching policies
can be financially justified. However, deceptive sales
practices by some agents of certain insurers have resulted in the replacement of life insurance policies that were financially harmful to the policyholders.
Rebating The vast majority of states forbid rebating.
Rebating is giving an individual a premium reduction
or some other financial advantage not stated in the policy as an inducement to purchase the policy . One
obvious example is a partial refund of the agent’s commission to the policyholder. The basic purpose of anti-rebate laws is to ensure fair and equitable treatment of all policyholders by preventing one insured from obtaining an unfair price advantage over another.
Consumer groups, however, believe that anti- rebating laws are harmful to consumers. Critics argue that (1) rebating will increase price competition and lower insurance rates; (2) present anti-rebating laws In most states, the legislation applies to comme rcial
auto, general liability, and commercial property lines. Proponents of deregulation of commercial lines believe that insurers can design new products more quickly to meet the specific insurance needs of cor- porations; insurers can save money because rates and policy forms do not have to be filed for a commercial account with offices in several states; and risk man- agers can get specific coverages more quickly.
Life Insurance Rate Regulation Life insurance rates
are not directly regulated by the states. Rate ade- quacy in life insurance is indirectly achieved by laws that require legal reserves to be at least a minimum amount. Minimum legal reserve requirements indi- rectly affect the rates that must be charged to pay death claims and expenses.
Policy Forms
The regulation of policy forms is another impor- tant area of insurance regulation. Because insur- ance contracts are technical and complex, the state insurance commissioner has the authority to approve or disapprove new policy forms before the contracts are sold to the public. The purpose is to protect the public from misleading, deceptive, and unfair provisions.
Sales Practices and Consumer Protection
The sales practices of insurers are regulated by laws concerning the licensing of agents and brokers, and by laws prohibiting twisting, rebating, and unfair trade practices.
Licensing of Agents and Brokers All states require
agents and brokers to be licensed. Depending on the type of insurance sold, applicants must pass one or more written examinations. The purpose is to ensure that agents have knowledge of the state insurance laws and the contracts they intend to sell. If the agent is incompetent or dishonest, the state insurance com- missioner has the authority to suspend or revoke the agent’s license.
All states have legislation requiring the continu- ing education of agents. The continuing education requirements are designed to upgrade an agent’s knowledge and skills and keep the agent up to date.
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