Insurance Regulation and Ethics
Regulatory Structure
Insurance is regulated primarily at the state level through insurance departments headed by a commissioner. Know the role of the NAIC (model laws and coordination, not direct regulation) and the McCarran-Ferguson Act (states regulate insurance; limited federal antitrust exemption).
Key Regulatory Areas
Understand licensing (agents, brokers, adjusters), rate regulation (rates must be adequate, not excessive, and not unfairly discriminatory), solvency regulation (reserves, risk-based capital, guaranty associations), and market conduct examinations. Know advertising rules, replacement regulations, and privacy requirements.
Producer Duties
Producers owe duties of fiduciary responsibility (handling premiums), disclosure, and fair dealing. Know the difference between an agent (represents the insurer) and a broker (represents the insured). Understand commingling (illegal mixing of premium funds) versus misappropriation (theft).
Ethics
Ethical conduct includes avoiding twisting (misrepresenting to induce replacement), churning (replacing policies to generate commissions), rebating (illegal sharing of commissions), and defamation of competitors. Know unfair trade practices and fraud reporting obligations.
Traps
Questions often confuse the NAIC's advisory role with actual regulatory authority, or treat federal law as the primary regulator of insurance. Another trap: rebating is illegal in most states even if the client requests it.
Rule of Thumb
State regulator = authority; NAIC = model guidance. Agent = insurer's representative; broker = client's representative.