RIMS Regulatory Framework & Compliance 2 — Questions and Answers
Question 1: Under the McCarran-Ferguson Act, which entity has primary regulatory authority over insurance companies in the United States?
- The Federal Insurance Office (FIO)
- Individual state governments (Correct answer)
- The Securities and Exchange Commission (SEC)
- The National Association of Insurance Commissioners (NAIC)
Correct answer: Individual state governments
The McCarran-Ferguson Act of 1945 explicitly grants individual states the primary authority to regulate the insurance industry.
Question 2: Which Dodd-Frank Act provision most directly affects large insurance holding companies by subjecting them to Federal Reserve oversight?
- Volcker Rule
- SIFI designation for systemically important financial institutions (Correct answer)
- Title VII derivatives regulation
- Consumer Financial Protection Bureau authority
Correct answer: SIFI designation for systemically important financial institutions
Dodd-Frank allows the Financial Stability Oversight Council (FSOC) to designate insurers as SIFIs, subjecting them to Federal Reserve supervision.
Question 3: A risk manager discovers their company's captive insurer is not licensed in the state where most claims originate. What is the PRIMARY compliance concern?
- Federal antitrust violations
- Unauthorized insurance transaction exposure under state law (Correct answer)
- ERISA preemption issues
- SEC registration requirements
Correct answer: Unauthorized insurance transaction exposure under state law
Conducting insurance transactions in a state without proper licensure constitutes unauthorized insurance and exposes the company to regulatory penalties.
Question 4: The NAIC's Insurance Regulatory Information System (IRIS) ratios are primarily used to:
- Set premium rates for commercial lines
- Identify insurers warranting regulatory attention based on financial condition (Correct answer)
- Establish minimum capital requirements for new entrants
- Determine policyholder dividend eligibility
Correct answer: Identify insurers warranting regulatory attention based on financial condition
IRIS ratios are financial solvency tools that help regulators identify insurers whose financial condition may require closer scrutiny.
Question 5: Which federal law most significantly impacts how risk managers handle employee benefit plan risks, preempting most state insurance laws for self-funded plans?
- HIPAA
- COBRA
- ERISA (Correct answer)
- ACA
Correct answer: ERISA
ERISA preempts state insurance laws for self-funded employee benefit plans, creating a federal regulatory framework that supersedes state requirements.
Question 6: Under Risk-Based Capital (RBC) requirements, what action is triggered when an insurer's RBC ratio falls below the 'Company Action Level'?
- Immediate state takeover of the insurer
- The insurer must submit a comprehensive financial plan to regulators (Correct answer)
- Mandatory reinsurance purchase
- Automatic policy cancellation for all policyholders
Correct answer: The insurer must submit a comprehensive financial plan to regulators
At the Company Action Level, the insurer must file a corrective action plan with the state insurance department outlining steps to restore capital adequacy.
Question 7: A company operating in multiple states must file its workers' compensation rates. Which regulatory filing approach requires prior approval before using new rates?
- File-and-use
- Use-and-file
- Prior approval (Correct answer)
- Flex rating
Correct answer: Prior approval
Under prior approval systems, insurers must receive explicit regulatory approval before implementing new rates, as opposed to file-and-use which allows immediate use after filing.
RIMS Regulatory Framework & Compliance 2
Under the McCarran-Ferguson Act, which entity has primary regulatory authority over insurance companies in the United States?