Deck 10: Insurance Regulation

Question 1

Which of the following is not an argument for federal regulation?

A) There will be substantial improvement in efficiency due to fewer jurisdictional requirements.
B) There will be less influence over federal regulators by insurance companies.
C) There will be more expertly trained personnel.
D) It will bring more tax money to the federal government.

Answer 1

D

Question 2

The right of the states to regulate insurance was first established by the:

A) SEUA decision
B) Paul v. Virginia decision
C) National Association of Insurance Commissioners Act
D) McCarran-Ferguson Act

Answer 2

B

Question 3

Which of the following best describes the two sources of insurance regulation?

A) State governments and the federal government
B) Insurance law and the administration of that law
C) Contracts and the court system
D) Administrative bodies and the court system

Answer 3

B

Question 4

The South-Eastern Underwriters Association Case:

A) preceded the Paul V. Virginia case
B) upheld the precedent set in Paul v. Virginia
C) reversed the Paul v. Virginia decision
D) none of the above

Question 5

Insurance regulations require legal reserves and surplus because:

A) assets have to equal liabilities plus owners' equity
B) reserves are long-term obligations and must be met with long-term assets
C) they provide a cushion against bad underwriting and investment results
D) insurers must pre-fund all agent's commissions and underwriting expenses

Question 6

Which of the following is not a stated purpose of regulation?

A) Promote competition among the largest insurers in the state
B) Maintain insurer solvency
C) Deal with unique pricing problems that do not allow for full and unrestrained competition
D) Promote social goals

Question 7

Which of the following is not directly a subject of state insurance regulation?

A) Financial solvency of insurance companies
B) Trade practices of insurance companies, such as agent compensation and product pricing
C) Marketing activities of insurance companies
D) The rates that insurers charge for insurance

Question 8

What was the major result of the Armstrong and Merrit Investigations?

A) Passage of the McCarran Act
B) Bankruptcy of the SEUA
C) The repeal of McCarran-Ferguson Act
D) A new insurance code for the state of New York

Question 9

Currently, the extent of the federal government's right to exercise regulatory authority over insurance companies is dictated by:

A) SEUA case
B) Paul v. Virginia decision
C) Robinson-Patman Act
D) McCarran-Ferguson Act

Question 10

Insurer reserve requirements exist to:

A) force the insurer to maintain a minimum amount of assets
B) allow the insurer to earn investment income
C) allow the insurer to charge higher premiums
D) set money aside for fixed asset acquisition

Question 11

Which of the following is the most important goal of insurance regulation?

A) Limiting the number of insurance companies in the state
B) Promoting the solvency of insurance companies
C) Mandating that all citizens purchase auto insurance and health insurance
D) Approving the contractual language of insurance policies sold in the state

Question 12

Which of the following is an example of an admitted asset?

A) Office furniture
B) Supplies
C) Equipment
D) Real estate holdings

Question 13

The regulator's objective with respect to insurance rates is to ensure that rates are:

A) understood by consumers and affordable for most consumers
B) equal for all applicants, adequate, and minimally discriminatory
C) fair, adequate and not unfairly discriminatory
D) fair, not excessive, and affordable

Question 14

Which one of the following is an argument for federal regulation of the insurance transaction?

A) If there were federal regulation, state regulation would still be required for intrastate transactions.
B) State regulation allows experimentation and isolation of bad laws.
C) Many states do not have enough trained people to regulate insurance efficiently.
D) All of the above

Question 15

Why is there unequal knowledge and bargaining power in the insurance transaction?

A) The complexity of the insurance contract and the intangible nature of the product
B) The insurance companies want to confuse consumers so it is difficult to make choices.
C) Consumers do not receive the policy until months after the contract goes into effect.
D) There is no competition in the industry, therefore the consumer is stuck with inferior products.

Question 16

The arguments for federal regulation of insurance all of the following except:

A) lack of uniformity of state regulation
B) state regulation costs more to administer
C) federal regulation would be less expensive
D) federal regulation would be more flexible

Question 17

Which of the following is not a reason for the comprehensive regulation of insurance?

A) Widespread abuse of consumer rights
B) Severe impact of insurer insolvency
C) Unequal knowledge and bargaining power of buyers and sellers
D) Unique pricing problems inherent in insurance

Question 18

Which of the following is an example of a nonadmitted asset?

A) Office furniture
B) Supplies
C) Equipment
D) All of the above

Question 19

Which of the following is a subject of state insurance regulation?

A) Equal employment practices of the insurer
B) Standards of financial solvency
C) Business acquisition practices
D) Insurance contract provisions

Question 20

Which one of the following is not a reason for the regulation of insurance?

A) To prevent insurer insolvencies
B) To promote social goals
C) The unequal knowledge and bargaining power of the parties to the contract
D) To stabilize the economy

Question 21

The main outcome of the Gramm-Leach-Bliley Act of 1999 is to allow:

A) banks, insurers and security dealers to openly compete with one another
B) banks, insurers and security dealers to form financial services holding companies
C) insurers to choose between state or federal regulation
D) banks to evade the provisions of the Glass-Steagall Act

Question 22

The McCarran-Ferguson Act recommended that:

A) states dismantle their regulatory systems
B) states submit to federal insurance regulation
C) state regulation be phased out over a ten-year period
D) none of the above

Question 23

The failure of three large life insurance companies resulted in the NAIC's development of which of the following for life insurers?

A) Interest maintenance reserves
B) Asset valuation reserves
C) Risk-based capital requirements
D) National guaranty funds

Question 24

Under regular audits and solvency testing an insurer is subject to:

A) no state guaranty fund participation
B) more restrictive rate regulation
C) the requirement to file an annual statement
D) FDIC participation and protection

Question 25

What is the purpose of the asset valuation reserve?

A) To absorb losses arising from sales of assets for less than their cost (capital losses)
B) To absorb losses arising from the insolvency of debtors (credit losses)
C) To absorb losses caused by changes (increases) in interest rates on government securities
D) To absorb losses caused by guaranty fund assessments made against insurer assets

Question 26

One result of the Gramm-Leach-Bliley act has been:

A) the separation of banks and insurance companies
B) greater consistency of agent licensing requirements across state lines
C) increased restrictions on where agents and insurers may operate
D) both A and C

Question 27

The Merritt Committee Investigation looked into solutions for dealing with:

A) unethical and undesirable behavior by insurance companies
B) effectiveness of state taxation as opposed to insurance regulation
C) states that do not have a state insurance commissioner system in place
D) insurers that violate risk-based capital requirements

Question 28

IBNR reserves are an estimate of:

A) losses that have been incurred but not reported to the insurer
B) losses that have been incurred and reported to the insurer, but not yet settled
C) unearned premiums the insurer owes policyholders
D) agent commissions owed

Question 29

An alien insurer is:

A) one that is home-officed outside the U.S.
B) one that has offices both in the U.S. and in other countries
C) one that is incorporated in another state
D) one that has not been in existence for at least three fiscal years

Question 30

NAIC stands for:

A) National Association of Investment Commissioners
B) National Affiliated Insurance Commissioners
C) National Association of Insurance Commissioners
D) none of the above

Question 31

What is the purpose of the interest maintenance reserve?

A) To absorb losses arising from sales of assets for less than their cost (capital losses)
B) To absorb losses arising from the insolvency of debtors (credit losses)
C) To absorb losses caused by changes (increases) in interest rates on government securities
D) To absorb losses caused by guaranty fund assessments made against insurer assets

Question 32

The NAIC requires life insurers to keep two different types of reserve accounts. These reserve accounts are designed to protect insureds from poor investment results the insurer may suffer. What are these two reserves called?

A) Mandatory securities valuation reserve and supplementary securities valuation reserve
B) Mandatory securities valuation reserve and asset valuation reserve
C) Mandatory securities valuation reserve and interest maintenance reserve
D) Interest maintenance reserve and asset valuation reserve

Question 33

A foreign insurer is:

A) one that is home-officed outside the U.S.
B) one that has offices both in the U.S. and in other countries
C) one that is incorporated in another state
D) one that has not been in existence for at least three fiscal years

Question 34

Different prices for identical goods is one sign of a market that has uninformed buyers.

Question 35

A domestic insurer is:

A) one that is home-officed outside the U.S.
B) one that has offices both in the U.S. and in other countries
C) one that is incorporated in another state
D) none of the above

Question 36

"Prior-approval" price regulation is known as "use-and-file" regulation.

Question 37

Under the provisions of the Gramm-Leach-Bliley Act, all of the following are true except:

A) state insurance commissioners oversee insurers operating in their state
B) within a financial services holding company, insurance records must be kept separate from other financial records
C) only licensed insurance agents can receive commissions for insurance sales
D) state insurance commissioners and the Federal Reserve jointly oversee the banking activities of insurer-owned banks

Question 38

In the Paul v. Virginia decision, the U.S. Supreme Court decided that Paul was legally an agent of the state of Virginia.

Question 39

The NAIC requires life insurers to have reserve accounts that protect insureds from the:

A) insurer's poor underwriting decisions
B) insurer's poor investment results
C) catastrophic hurricane years
D) effects of terrorism risk on the insurer's stability

Question 40

A life insurer's policy reserve equals the difference between the mathematical liability of a future death claim and the value of:

A) future premiums the insured will have to refund to its policyholders
B) future premiums the insured will pay the insurer
C) future investment earnings on premiums the insured will pay the insurer
D) all present death claims

Question 41

Risk-based capital requirements take into account differences in a particular insurers' underwriting and investment practices.

Question 42

A legal reserve is a cash asset account maintained by life insurers.

Question 43

Life insurance companies have a debtor/creditor relationship with their living insureds that is similar to a fiduciary relationship.

Question 44

Congress passed McCarran-Ferguson Act as a response to the SEUA decision.

Question 45

The Gramm-Leach-Bliley Act took effect on January 1, 1998.

Question 46

The best argument for continued state insurance regulation is that state regulation is cheaper and more efficient than federal regulation would be.

Question 47

Explain what a guarantee fund is. How are guarantee funds financed?

Question 48

The Southeastern Underwriters Association (SEUA) case reversed the Paul v. Virginia decision.

Question 49

An alien insurer is a non-U.S. insurer.

Question 50

What is the overall regulatory objective for a state's rate regulations?

Question 51

Risk-based capital requirements have been developed for both life and non-life insurers.

Question 52

Unrestrained price competition does not work in the insurance market because prices have to be determined long before final costs are known.

Question 53

The NAIC is a federal regulatory agency for administering federal insurance programs for armed service personnel.

Question 54

McCarran-Ferguson Act expressed the intent of the federal government to forever abandon to the states the right to regulate insurance.

Question 55

The Appleton Rule applies to all insurance companies doing business in Wisconsin.

Question 56

It is generally illegal for an insurance agent to share her commissions with an insured.

Question 57

A foreign insurer is a non-U.S. insurer.

Question 58

A loss reserve is more likely to be maintained in relatively large amounts by a property than a life insurance company.

Question 59

Property insurance companies have more freedom in their investment activities than do life insurance companies.

Question 60

What is the difference between prior approval and open rating laws?

Question 61

Explain briefly the purpose of the McCarran Act.

Question 62

Explain what a policy reserve is. How is a policy reserve calculated?