Insurance Regulation and Compliance
Domain 4: Insurance Regulation and Compliance
This domain tests the state-based regulatory architecture, solvency monitoring, market conduct rules, and the compliance duties that sit on producers and insurers.
Architecture
- McCarran-Ferguson Act (1945). States regulate insurance; federal antitrust applies only to the extent states do not regulate.
- NAIC. Drafts model laws, rates, and guidelines and accredits state departments; it does not enforce.
- Licensing. Certificate of authority for insurers; producer license, appointment, continuing education, resident and nonresident authority.
- Solvency. Risk-based capital tiers: company action level below 200% RBC ratio, regulatory action below 150%, authorized control below 100%, mandatory control below 70%; reserves; state guaranty associations with coverage limits that vary by state.
- Market conduct. Unfair trade practices, misrepresentation, twisting, churning, rebating, replacement rules, advertising and illustration rules.
- Suitability and best interest. NAIC Suitability in Annuity Transactions Model Regulation #275, revised in 2020, imposes a best-interest standard on annuity recommendations.
- Privacy. GLBA safeguards, HIPAA, and state breach notification laws.
Worked example
Total adjusted capital is $72 million and company action level RBC is $40 million. RBC ratio = 72 / 40 = 180%. That is below 200% but above 150%, so the company must file a corrective action plan with the commissioner. At 140% it would trigger regulatory action; at 90%, authorized control; at 60%, mandatory control. The ratio compares capital with a risk-weighted requirement, not with total assets.
Traps
- Treating the NAIC as an enforcement agency.
- Applying federal securities law to fixed annuities, which are state-regulated insurance products.
- Ignoring replacement disclosure when a policy is replaced.
- Assuming guaranty association coverage is unlimited or automatically covers separate accounts.