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Garlic: Purpose and Benefit

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Donnaleen Kama August 10th 2015

Reaction paper on Government Regulation of Insurance

The insurance industry is regulated for several reasons: To maintain insurer solvency to compensate for inadequate consumer knowledge. To ensure reasonable rates; to make insurance available * The insurance industry is regulated primarily by the states. The McCarran-Ferguson Act states that continued regulation and taxation of the insurance industry by the states are in the public interest. * Three principal methods are used to regulate the insurance industry: Legislation Courts State insurance departments * The principal areas that are regulated include the following: Formation and licensing of insurers Solvency regulation Rate regulation Policy forms Sales practices and consumer protection Taxation of insurers * Property and casualty insurance rates must be adequate, reasonable (not excessive), and not unfairly discriminatory. The principal types of rating laws are as follows: Prior-approval law Modified prior-approval law File-and-use law Use-and-file law Flex-rating law State-made rates No filing required * Insurers must pay a state premium tax on gross premiums. The primary purpose is to raise revenues for the state, not to provide funds for insurance regulation. * State versus federal regulation is an issue that has evoked considerable debate. The alleged advantages of federal regulation include the following: Uniform state laws and regulations. More effective negotiation of international insurance agreements. More effective treatment of systemic risk Greater efficiency of insurers
The advantages of state regulation include the following: Quicker response to local insurance problems Increased costs from dual regulation Poor quality of federal regulation Promotion of uniform laws by the NAIC Greater opportunity for innovation Unknown consequences of federal regulation * Critics argue that state regulation of insurance has serious shortcomings, including the following: Inadequate protection of consumers Improvements needed in handling complaints Inadequate market conduct examinations Insurance availability studies conducted only in a minority of states Regulators overly responsive to the insurance industry * Arguments for repeal of the McCarran-Ferguson Act include the following: The insurance industry no longer needs broad antitrust exemption. Federal regulation is needed because of the defects in state regulation. * Arguments in support of the McCarran-Ferguson Act include the following: The insurance industry is already competitive. Small insurers may be harmed. Insurers may be prevented from developing common coverage forms * Several current issues in insurance regulation include the following: Modernizing insurance regulation Insolvency of insurers Credit-based insurance scores

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