Question

In: Operations Management

A common goal of insurance regulators is to ensure availability of property insurance to homeowners residing...

A common goal of insurance regulators is to ensure availability of property insurance to homeowners residing in urban areas. Concerned that insurers will offer property business only in upscale neighborhoods or urban areas, regulators in State A adopted a regulation requiring insurers to maintain a business presence throughout urban areas. State B adopted a regulation with the same goal as State A; however, State B’s regulation does not exempt any companies and includes a requirement that an executive from each company annually file a certification with the state. The certification must indicate how the company is complying with the regulation and provide evidence that the company is actively soliciting policies throughout the urban areas, with sales initiatives proportionate to population.

  1. Some of the ways in which insurers in State A responded to the regulation included recruitment of additional agents, targeted advertising and community sponsorship initiatives. Name the type of regulation that best describes the approach taken by state A and explain why the actions taken by insurers in State A are consistent with that regulatory approach.
  1. Suppose State A proposes and adopts a change to the regulation to exempt smaller companies and niche writers from compliance with the regulation. Name the type of regulation that best describe State A’s approach following this change and explain why this change would not necessarily undermine the goal of State A’s regulation.
  1. Name the type of regulation that best describes the approach taken by State B and explain how it differs from the approach taken by State A.

Solutions

Expert Solution

a. The form of legislation that better defines the strategy adopted by State A is Product regulation and Market conduct rules. The approach taken by state A is consistent because State A regulated the product to be distributed throughout the state. Also, State A mentioned that the product has to be present in sparsely populated areas as well as not so developed areas. It guarantees that the measures are taken by state A insurer is in line with the regulatory approach.

b. Financial Reporting and capital requirements are the frameworks that will be followed by the state in case the State decides to exempt smaller companies from compliance with the regulation. Any business is supposed to earn money. So, it might not be possible for smaller players to be present all across geography. Thus ensuring fair competition and stopping the monopoly from bigger players.

c. Financial reporting by insurers, Financial examination, and Market conduct rules is the approach taken by State B. It differs from state A by the less strictness of doing business. While the business might show some false initiatives and those paper-based initiatives might not turn into actual results as compared to the stringent compliance norms of state A.


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