Life and Health Marketing (LOMA) - Chapter 3 - REGULATION OF LIFE AND HEALTH INSURANCE MARKETING

Overview

special position of public trust - financial well-being & business conduct of insurers is of such importance to so many people
PO can lose $ if insurers don't adhere to standards
policies are complex documetns not easily understoon
PO wants to be treated fairly and ethiclly w/ accurate info

US State Regulation

Background
- McCarran-Ferguson Act (1945) - state regulates insurance
- insurance dept - admin agency w/in each state
- insurance commissioner - head of ins dept
- NAIC - Promostes coinsistency w/in each state's ins dept
- insurance laws in two basic categories
  - solvency laws - esnure insurers financially able to meet obligations
  - Mkt Conduct Laws - ensure insurers and distributors operate fairly adn ethically
Regulation of Products
- protect customers by requiring certain provisions or not allowing certain provisions
- require simplified language
Regulation of pricing
- reasonbale rate - cover's insurers expenses & provides a fair profit
- competition usually keeps rates reasonable
- loss ratios - total claims incurred / total prems rec'd
- adequate rate - high enough to provide insurer w/ enough $ to pay operating expenses and benefits when they come due
  - life ins rate adequacy indirecly regulated via min reserve reqs
- equitable rate - prem rate that varies from policy to policy based only on factors affecting the product's costs - not allowed to vary based on race or religion etc
Regulation of Distribution
- Licensig of Ins Producters - to get license, must prove: are of good character/meet residency req/pass an exam
  - license for each state/line they sell
  - reciprocity - two states agree that if ok in one state, ok in the other
- Prohibited Sales Practices
  - Misrepresentation - false or misleading statements
  - Replacement - replacing one contract with another. In itself, not illegal
    - Twisting - misrepresent features of a product to induce replacement
    - Churning - replacing one policy after another to earn series of 1st year commissions
  - Rebating - offer inducement to purchase (not banned in all states)
  - Missappropriation - illegal use of PO funds
  - Commingling of Funds - combining monies belonging to PO(s) w/ producer's own funds
- Suitability requirement - need reasonable grounds for recommending a specific product as suitable for customer's needs
Regulation of Promotion
- Advertising and sales Promotion Materials
  - Advertisement - any material designed to create public interest in life ins/annuities, insurer, producer OR induce public to purchase, increase, modify, restate, borrow on , surrender, replace, retain a policy
  - Insurer ultimately responsible, even if producer creates ad
- Disclosure
  - NAIC Disclosure Model Reg
    - aid customers in puchasing suitable & reasonably priced ins
    - provide accurate adn reliaebl info to ensure competitive mkt
    - discourage undesirable mkt behavior
  - must give prospect a Buyer's Guide and Policy Summary
  - Buyer's Guide
    - describes various types of ins and points out +/- of each type
    - explains cost comparison indexes
  - Policy Summary
    - disclosure info on specific policy being considered by prospect
Market Conduct Examinations
- peridodic exams of insurance co to ensure they comply w/ state laws
- areas of focus in mkt conduct exam
  - cert of authority adn licensing of agents/brokers nonf options on life ins pols
  - policy form/endorsment approvals sales/advertising materials
  - u/w and rating of policies apps rejected/declined
  - pols cancelled/not renewed replacements
  - claims practices customer complaints

US Federal Regulation

Antitrust Regulation
- state antitrust regs, but subject to certain provisions of Fed antitrust laws
- Boycott - competing cos agree to refrain from doing business w/ another co
- Coersion and Intimidation - methods of force used by a business to make another business act or refrain from acting in a certain manner
- Price fixing - competing businesses act together to affect the price of a product
Consumer Protection Regulation - affect mktg of life and health ins
- FTC Act - regulates unfair competition, deceptive business practices adn prohibits false or deceptive advertising that crosses state lines
- Fair Credit Reporting Act (FCRA) - must comply when insurer obtains credit reports for u/w or claims investigation
- GLB Act Privacy Provision - protect non-public personal info from indescriminate dessemination.
  - disclosure of practices @ beg of relationship and annually thereafter
  - allow opt-out of sharing
  - maintain policies to protect security and confidentiality of non-public info
  - refrain from sharing acct #s w/ non-afiiliated 3rd parties for mktg purposes
- HIPAA 1996 - privacy protections for group adn health mkt
- Regulation of Variable Ins Products
  - subject to regulation by SEC
  - 4 fed Laws affect mktg of variable products
    - Securities Act of 1933
    - Securities Exchange Act of 1934
    - Investment Co Act of 1940
    - Investment Advisors Act of 1940
  - Securities Act of 1933 - Truth in Securities Act
    - general fraud provision - prohibits misrep
    - registration provision - must provide essential info
    - prospectus - most of the info in the registration statement
      - any communication (written or oral) that offers security for sale
  - Securities Exchange Act of 1934 - gave SEC broad authority to regulate securities
    - primary focus - registration of brokers and dealers who sell securities
    - securities broker - indiv, corp or other legal entity engaged in business of buying/selling securities for the account of others
    - securities dealer - engaged in business of buying/selling securities for own account
    - firms that sell must a) register as B-D w/ SEC and b) become member of NASD
    - NASD - non-profit self regulating org responsible for making sure everyone follows rules
    - SEC registration of B-D - most often an insurer will create and register a subsidiary ot be a registered B-D
    - NASD Registration of Respresntatives and Principals
      - Registered Rep
        
        business assoc of NASD member
        engages in securities business on behalf of member
        passed a specified NASD exam
      - Principal
        
        officer/manager or an NASD member
        involved in day-to-day operations of securities business
        qualified as a registered rep
        passed additional exams
    - NASD regulatory Oversight Activities
      - B-D must supervise reg reps & principals to ensure compliance
      - reg reps and principals must serve customers properly and deal fairly w/ public
      - reg reps mush have reasonable grounds for believing recommendation is suitable
      - NASD approval of ads and sales lit
        
        Name of B-D
        no promises of results exaggerations or opinions w/ no reasonable basis
        don't imply state or fed endorsement/approval of product
        no rediction/project o finvestmetn results
    - SEC "Good" Internal Controls
      - strong/capable compliance/legal staff
      - create regular exceptino reports and review
      - regular communication w/ customer - disclose fees/risks
      - periodic reviews of customer holding by branch office
      - written procedures fro branch audits w/ written reports as results
      - clear compliance guidance to producers
      - regular provider trainig - compliance/security laws/self reg rules
      - immediate discipline
      - review producers to ensure continued licensing/education req
      - optical scanning instead of manual paper-based processing
      - written procedure to minimize error/delays
      - quality control unit to monitor trx processing
      - procedures to separate adn secure incoming premium payments
  - Investment Company Act of 1940 - regulates conduct of investment cos
    - Sep Acct considered an investment company by act
  - Investment Advisors Act of 1940 - conduct of investment advisors
    - investment advisors - compensated for providing advince to investors about value of securities or advisability of buying/selling securities
    - if producer sells VA/VUL and only gets commissions, not req'd to register as investment advisor, jsut reg rep or principal
- Federal Regulation of Bank Insurance
  - Licensing and Locatoin
    - agency/B-D must be clearly identified adn separate from teller area
    - employee must be properly licensed/registered
    - must fully and accurately disclose identity of business providing the service
  - Prohibited Sales Practices
    - Tying Arrangement - conditions the sale of one item on the sale of another
  - Advertising adn Dsiclosure Requirements
    - Fed Banking laws require additional disclosures
      - product is insurance/annuity and not bank-guar product
      - amounts payable are premiums and not deposits
      - product is not insured by FDIC or other gov't agency or bank

Canadian Legal Environment

Background
- Dual regulation - both federal and provincial govt regulate
- Federal - OSFI
Provincial Regulation of Market Conduct
- Insurance Act of each procince regulates conduct and creates Office of Superintendent of Ins
- Canadian Council of Ins Regulators (CCIR) - similar to NAIC
  - because of CCIR - fairly uniform regs across provinces
- CLHIA (Canadian Life and Health Ins Association)
  - voluntary associate that promotes self-regulation to avoid over-regulation
  - CLHIA guidelines
- Products
  - CCIR Uniform Life Ins Act & Uniform Acc and Sickness Ins Act - adopted by all provinces by Quebec
  - CLHIA Indiv Var ins Contracts (IVIC) Guidelines
    - Compliance Report - questions exploring compliance
    - Information Folder - collection of 21 items to prove financial soundess of a product
  - Policy Form filing required if
    - condition to obtaining license to conduct business w/in province
    - before mktg an individual variable life contract
    - no new filings for trad products after licensed
- Pricing
  - indirectly since ins must charge adequate rates to fund sufficient assets
  - prohibit unfair discrimination (race/sex/religion/etc)
  - can't discriminate between two people who present same risk
- Distribution
  - Producer Licensing - no special license to sell variable products but must be accredited by provincial securities commission
  - Prohibited Sales Practices - similar to US
    - in addition, license revoked if
      - violates ins act and/or related regs
      - material misrep on license app
      - guilty of fraudulent practice
      - demonstrates incompetence or untrustworthiness in trx of life ins
- Promotion - prohibits specified ad/sales promotion practices adn mandates cost/benefit disclosures
  - Advertising and Sales Promotion - prohibits
    - false/misleading ads or statement re: policy features
    - conduct that results in unreasonable delay/resistance to fair settlement of claims
  - Add'l guidance by CLHIA prohibits
    - false/misleading statement/presentations/testimonials
    - disparaging statements about other insurers or their products
    - statements w/ tech/industry language beyond general public understanding
    - guarantees unless conditions/limitations fully explained
    - Coupon Advertisements
      - must be truthful and not misleading
      - must define terms & disclose exceptions/exclusions/limitations
- Cost adn Benfit Disclosure
  - CLHIA-developed buyer's guide
  - policy summary
  - if guarnateed values of reatures mentions, must be display inillustrations
  - if non-guar elements displayed, illustration must have at least two summaries
  - variable products - must give copy of Info folder onfile w/ office of super
    - describes guar/non-guar benefits
      - method of determing benefits
      - surr/loan/nonf provisions
      - charges imposed if surrendered
Federal Regulation to Maintain Competition
- Ins Co Act - Admin by OSFI - regulates
  - fed incorp ins cos
  - insurers incorp outside of Canada but do business in Canada
  - provincially incorp insurers that choose to register w/ fed gov't
  - regulates incorporation, corp governance, solvency
- Competition Act (1986)
  - Prohibits
    - mergers/monopolies that may operate to detriment of public interest
    - price fixing agreements that unduly lessen competition
    - other anti-competitive or deceptive mktg or unfair trade practices
Feds - Privacy
Provinces - Customer Protection

Copyright © 2004 Steve Welander.
Permission is granted to copy, distribute and/or modify this document under the terms of the GNU Free Documentation License, Version 1.2 or any later version published by the Free Software Foundation; with no Invariant Sections, no Front-Cover Texts, and no Back-Cover Texts. A copy of the license is included in the section entitled 'GNU Free Documentation License'.