Porter.3-Roles-Fed

Porter Chapter 3, Federal and Other Influences on Insurance Regulation, covers several historical court decisions and Acts of Congress that have influenced the federal role.

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Study Tips

Porter Chapter 3 is an example of syllabus material where your best bet is to take a leap of faith and recognize the following:

• historically this chapter has appeared on 1 exam out of 5 (frequency = 20%)
• historically this chapter has accounted for roughly 1 point when it appears on an exam (severity = 1.0 / 70.0 pts = 1.4%)

That means if you skipped this chapter entirely, the overall impact on you score would be roughly 20% x 1.4% = 0.3%. This equates to about 0.25 pts on the exam. Now, one-quarter of a point could mean the difference between passing and failing, but the real issue is the opportunity cost. If you spend more time here, you have to spend less time elsewhere. Is there an opportunity to spend that time in a more valuable way studying or reviewing something else? That's a matter of judgment.

Alice's advice is that instead of studying the whole of chapter 3 in Porter, just memorize these 2 things:

• characteristics of the 'business of insurance'
• exceptions to the McCarran-Ferguson Act

This will take you 10 minutes and is a good use of your time because if a question on this chapter shows up on the exam, it will almost certainly be one of those two.

Alice's Fun Fact: This study tip is almost as long as the actual content of this wiki article. :-)

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• characteristics of the business of insurance
• exceptions to the McCarran-Ferguson Act

reference	part (a)	part (b)	part (c)	part (d)	parts (e) & (f)
E (2019.Spring #5)	Porter.2-Devlpt	McCarran-Ferguson Act: - business of insurance	Porter.2-Devlpt
E (2017.Fall #4)	business of insurance: - characteristics	SEUA decision: 1 - rationale for decision	McCarran-Ferguson Act: - exceptions	rate regulation: - regulator difficulties 2	Baribeau.Regs
E (2016.Spring #6)	McCarran-Ferguson Act: - exceptions	business of insurance: - characteristics	FIO: - Act that created it 1	Baribeau.Regs

¹ These questions really belong in Porter.2-Devlpt but Alice couldn't be bothered moving them. (Blame Alice!)

² This is general knowledge that you would already have from Exam 5 on ratemaking & reserving.

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In Plain English!

When we talk about whether insurance should be regulated at the federal or state level, we assume we know the meaning of the term insurance. Common forms of insurance are auto policies and product warranties, but what makes these particular things "insurance" but certain other things "not insurance".

Question: identify characteristics of the business of insurance

• SPECIFIC to insurance industry
• SPREADS risk (or transfers risk)
• CONTRACT between insurer & insured

These characteristics arose from the legal case Group Life & Health Co v Royal Drug (1979), and that link takes you to a surprisingly easy to understand summary of the case. Basically the original court ruling said that state rather than federal regulation applied because the case involved the business of insurance. The case was then decided on the basis of state regulation, noting that the federal Sherman Antitrust Act wouldn't apply. The Court of Appeals overturned the ruling on the basis that the case did not involve the business of insurance and that the Sherman Act did apply. There is also a forum thread with a further explanation.

This dovetails nicely into the other important topic from this chapter:

Question: identify exceptions to the McCarran-Ferguson Act

• FEDERAL govt may regulate insurance if

   - states are NOT regulating insurance

   - Sherman Act applies (boycott, intimidation by insurer)

   - if Congress passes an applicable law (supersedes state law)

To finish this chapter, here are a few other examples of federal regulation:

1933: Securities Act (disclosure & reporting requirements for publicly traded companies, see also the wikipedia article Securities Act of 1933)

1968: National Flood Insurance Act (discussed further in the wiki article Horn.Flood in the subsection Intro to NFIP)

1981: Risk Retention Act (discussed further in the wiki article GAO.Report in the subsection Intro to Risk Retention Groups)

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