Porter.5-Opns-State

Porter Chapter 5, State Department of Insurance Operations, covers the various functions of the state DOI. The most important subtopic concerns types of filing laws (prior approval, file & use, use & file, no-file.)

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Study Tips

Porter Chapter 5, State Department of Insurance Operations, explicitly states that the educational objectives are:

• functions of state DOIs
• roles of insurance commissioners (overlaps with functions of state DOIs)
• DOI administrative activities: communication, funding, operations, budgeting, hiring staff

The chapter introduction goes on to say that the main topics covered are:

• Is the commissioner elected or appointed?
• To whom might an appointed insurance commissioner be responsible? Why?

These are not necessarily the items that are covered on the exam. The entire Porter text accounts for under 10% of the exam and your studying should be based primarily on the types of questions asked on past exams.

Estimated study time: 1 hour (not including subsequent review time)

BattleTable

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

• types of rate filings
• functions of the state DOI (Department of Insurance)

reference	part (a)	part (b)	part (c)	part (d)
E (2019.Spring #2)	disapproved filing: - reasons	prior approval: - for auto liability	no-file: - for data breach liability	Porter.8-Rates
E (2018.Fall #2)	financial exams: - purpose	impact on capital reqs: - LOB, ownership structure	Porter.12-Insolvency
E (2015.Fall #2)	disapproved filing: - reasons	no-file laws: - argue FOR	SCENARIO: - types of rate filings

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In Plain English!

Basic Information

The main question from this chapter is this:

Question: what does the state DOI do (DOI = Department of Insurance)

• Well, it turns out they do a lot of things the public doesn't normally think about. The text lists 9 functions and I've put them into 3 groups because that makes them easier for me to remember:

Group 1: licensing & regulation

   - licensing of insurers (for insurers doing business in their state)

   - licensing of producers (sellers may have to pass exams, pay licensing fees, perform continuing education)

   - regulation of rates & coverages (see below for 4 types of rate filings)

   - regulation of claims adjusters (market conduct exams may include claims adjusting & settlement practices)

Group 2: insurer solvency

   - financial exams (includes financial statements, IRIS,...)

   - monitor sale of insurance securities (stocks, bonds, real estate, loans)

   - determine need for receivership (either rehabilitation or liquidation of an impaired insurer)

Group 3: other services

   - fraud prevention (NAIC has an online fraud reporting system)

   - consumer services (education, complaint resolution)

Let's go into a little more detail on the Group 1 item of rate regulation:

Question: briefly describe the 4 types of rate regulation

• These are listed from strongest regulation → weakest regulation:

prior approval: rates must be approved before use (use varies by line of business)

file & use: rates must be filed before use

use & file: rates may be used immediately but must be filed within a specified time frame (like 30 days)

no-file: rates may be used without filing (sometimes called open competition)

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Insurance Commissioners

Note: This section on "Insurance Commissioners" in the source text is not on the syllabus (pages 5.12 - 5.22 are excluded.) It's included below as background information because commissioners and the state DOI are referenced in other parts of the syllabus. You don't have to memorize these facts, but it doesn't hurt to read them over, especially the duties of the commissioner and administrative activities of the DOI.

Whether an insurance commissioner is elected or appointed depends on the state and there is no consensus on which procedure better serves the public interest.

Question: identify advantages for electing a state insurance commissioner

• an elected commissioner

  - will serve a full term (an appointed commissioner is subject to dismissal by whoever appointed them)

  - will be more responsive to the electorate

Question: identify advantages for appointing a state insurance commissioner

• an appointed commissioner

  - doesn't need to campaign (or spend time raising campaign funds)

  - is likely to be more knowledgeable about insurance (versus someone who is good populist campaigning)

In general, the roles and/or duties of an insurance commissioner relate to enforcing the insurance laws of the state, but there are several specific roles that generally fall under the authority of the commissioner.

Question: briefly describe the duties of a state insurance commissioner

• duties of the commissioner obviously overlap with functions of the state DOI, but a few additional items listed in Porter include:

  - managing activities of the DOI

  - initiating action when insurance law violations occur

  - issuing annual reports

  - maintaining records of DOI activities

Every regulatory organization involves certain administrative activities and insurance regulation is not different.

Question: identify and briefly describe administrative activities of a state DOI

communications:

  - written materials

  - surveys of insurers

  - advisory groups

  - press conferences

funding:

  - premium taxes

  - fees & assessments

  - appropriations from state treasuries

  - fines & penalties

budgeting:

  - varies greatly by size of state

hiring:

  - contract hiring (technical expertise)

  - appointment hiring (senior staff)

  - career hiring (civil service)

I'm sure it's enough just to memorize communication-funding-budgeting-hiring. Most of the bullet points within those categories are things you could come up with on the spot if you had to.

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Types of Insurance Companies

This is something you should have in your general knowledge because it could affect regulatory treatment. For example, an alien insurer may have higher capital requirements because state regulators may have less access to this insurer's operations.

Question: what are some of the different ownership structures of insurance companies

stock company:

• owned by stockholders, goal is to make a profit for stockholders (policyholders do not share in profits)
• this is the most common ownership structure in the U.S.

subsidiary:

• more than 50% of stock owned by a parent company or holding company
• parent is not necessarily another insurer (could be a bank)

mutual company:

• owned by policyholders, dividends are paid to policyholders at the discretion of management/BoD
• often fill an unmet need, can be small & local or large & international
• this is the most common ownership structure globally

reciprocal company:

• owned by policyholders, managed by attorney-in-fact, each member covers the risk of other members
• similar to mutual companies except:

   - reciprocals transfer risk to other subscribers

   - mutuals transfer risk to the organization

risk-retention group, captive:

• see: What is a risk retention group?

foreign insurer:

• an insurer domiciled in another state (not another country)

alien insurer:

• an insurer domiciled in another country

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