Question

In: Economics

Governments sometimes intervene in insurance markets. Explain in detail two reasons why they might intervene and...

Governments sometimes intervene in insurance markets. Explain in detail two reasons why they might intervene and outline the rationale and justification for doing so.

Solutions

Expert Solution

The states control insurance by controlling the firms that create the insurance plans and market it. States began to control insurance companies by granting charters that allowed them to establish and operate within the state, but few other criteria applied.

Insurance regulations often consists of state laws and other regulations related to insurance companies' solvency and markets. Solvency laws aim to ensure that insurers' solvency is preserved and that the consequences of an insolvency are remedied when it happens. Business regulations aim to ensure that policyholders are treated equally, to avoid discrimination and unethical claim practices, and to control advertisement and other promotions, underwriting, premium processing, rates paid and insurance plans. States also ban unethical or misleading practices in the sale of legislation, litigation resolution and other practices.

The state has an interest in ensuring insurer solvency, because if an insurer is insolvent and can not pay claims, individuals will face financial difficulties. The main methods for protecting consumers include ensuring that insurance agents and brokers do not misrepresent their products, that contracts are readily understandable to most consumers and that insurance policies have specific provisions; otherwise, it would be very difficult to compare different policies

Insurance firms that offer insurance within a state usually have to be approved by the state. When an insurance company receives a license, the state's insurance commissioner must decide whether the insurance company's owners are qualified and experienced, and whether the insurance company has the required capital sum to cover possible claims and retain solvency. The amount of capital the state needs the insurance company to have may vary depending on the state, the type of insurance the company offers, and whether it is structured as a partnership or joint venture.


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