LEGAL & COMPLIANCE OPERATIONS

Organization of Legal & Compliance Operations

In some companies, members of the legal department are also responsible for regulatory compliance matters. Other insurers have a separate unit that is devoted solely to compliance. In still other companies, individuals in various departments throughout the company perform compliance activities.

The person in charge of an insurance company’s legal function is known as the general counsel or chief counsel. In some companies the general counsel is also the company’s chief compliance officer.

Responsibilities of the Legal Department

Incorporations and Changes in Corporate Structure

Attorneys typically perform many of the tasks necessary for incorporation. Attorneys also apply for the license that the insurer must obtain from SID of each state in which it plans to conduct business. 

The legal department is heavily involved when an insurance company changes its corporate form, such as through a demutualization or a conversion from a mutual company to a mutual holding company. The legal dept. advises the board of directors on [1] the differences in the regulation of stock companies, mutual companies, and mutual holding companies, [2] the legal issues involved in the change in corporate form [3] the structure that would be most beneficial to the insurer, and [4] the best way to accomplish a change in corporate form.

Company attorneys also play an important role when an insurer is involved in a merger or strategic alliance with, or an acquisition of, another company. Attorneys help negotiate the terms of the agreement; and they draft and review the contracts and other legal documents associated with mergers, acquisitions and strategic alliances.

Product Development

An insurer’s legal department advises the product development team on relevant laws and usually reviews policy form drafts to ensure that new products comply with the laws of each jurisdiction in which the company will sell the products.

Contracts

A body of law, known as contract law, governs the requirements the parties to a contract must meet to form an agreement that is legally binding on the parties and that specifies the rights and duties of the parties.

Because many insurance companies invest in real estate, an insurer’s legal department often includes attorneys who are skilled in real property law, which is a branch of law that deals with the ownership and transfer of rights in real estate.

Product Distribution

The body of law that has been developed to regulate the relationship between the principal and their agents is known as agency law. The legal dept. is responsible for overseeing the legal aspects of the agency relationship, including writing the agency contracts and advising the insurer whenever legal questions arise about an agency contract.

Claim Administration

When a claim analyst [1] believes there is cause to deny a claim, [2] has a question about the insurer’s liability for a claim or the appropriate recipient of a policy benefit’s payment, or [3] suspects fraud, the claim analyst typically consults the legal department. The insurer’s attorney assists the claim analyst in interpreting the language of the life insurance policy and analyzing the facts of the situation to determine the insurer’s liability.

Employee Relations

This body of law is known as employment law. Employment laws [1] protect employees against unfair discrimination in the workplace,[2] guarantee employees certain minimum workplace standards and [3] ensure that certain minimum requirements are included in employee benefit plans.

Nondiscrimination in the Workplace

Such laws may prohibit discrimination in any or all of the following employment process:

• Recruitment
• Pre-employment testing
• Hiring, promotions, or transfer
• Training
• Firing, layoff, or recall
• Compensation, including pay and benefits

Employment Standards Legislation

The U.S. federal Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, record keeping, and child labor standards that affect workers of federal, state, and local governments and employees of companies that meet an annual dollar-volume-of-business test.

Standards for Employee Benefits

ERISA is designed to ensure that certain minimum plan requirements are contained in employee welfare benefit plans.

Litigation

Is the process or act of resolving a dispute by means of a lawsuit. The legal department represents the company or arranges for legal representation whenever the company is involved in a lawsuit. Attorneys handling litigation for an insurance company are responsible for

• Instituting or responding to the lawsuit.
• Researching the facts of the case.
• Taking statements from the involved parties.
• Consulting with company employees who are called upon to provide depositions.
• Researching relevant court cases.
• Representing the company in all trial court proceedings.
• Filing for or defending an appeal of the original trial decision.

Arbitration is a method of resolving a conflict in which an impartial third party, known as the arbitrator, evaluates the facts in dispute and renders a decision that is binding on the parties involved.

Mediation is a method of conflict resolution in which an impartial third party, known as a mediator, facilitates negotiations between the parties in an effort to create a mutually agreeable resolution to the dispute.

Regulatory Compliance

Insurance companies are generally subject to two types of regulatory requirements: [1] laws enacted by national, state, or provincial legislatures, and [2] rules and regulations adopted by administrative agencies, such as national, state or provincial insurance departments.

To effectively meet their regulatory obligations, insurers typically establish compliance management programs. Such a program enables an insurer to know which laws affect its business and to ensure that the company complies with these laws.

Prevention

Internal control consists of the steps a company takes to encourage adherence to the company’s management policies, promote operational efficiency, and safeguard the organization’s assets. Internal control extends beyond the compliance area and includes accounting controls, management efficiency controls, and other types of controls. Examples include Prenumbering (prenumbering checks and purchase orders), Soliciting third-party information (periodically sending to producers statements requesting notification of errors in payment).

Solvency Compliance and Market Conduct Compliance

Insurance laws can be generally divided into market conduct laws and solvency laws. In US, all publicly traded companies – including – stock insurers are subject to the federal Sarbanes-Oxley Act which calls for significant changes to corporate governance and financial reporting activities. One important requirement of the Act is mandatory certification of the accuracy of a company’s financial statements by the company’s CEO and CFO.

Market Conduct Compliance in the US

Much of an insurer’s market conduct is governed by provisions of unfair trade practices laws that have been enacted in almost all states. These laws define certain business practices as unfair and prohibit those practices in the business of insurance if they [1] are committed flagrantly in conscious disregard of the law or [2] occur so frequently as to indicate a general business practice.

Insurance Marketplace Standards Association (IMSA) is an association of insurers that implements a voluntary market conduct compliance program for the life insurance industry. To qualify for IMSA certification, an insurer must have in place policies and procedures that ensure compliance with IMSA’s Six Principles of Ethical Market Conduct.

• Conduct business according to high standards of honesty and fairness and to render service to its customers which, in the same circumstances, it would apply to or demand for itself.
• Provide competent and customer-focused sales and service.
• Engage in active and fair competition.
• Provide advertising and sales materials that are clear as to purpose and are honest and fair as to content.
• Provide for fair and expeditious handling of customer complaints and disputes.
• Maintain a system of supervision and review that is reasonably designed to achieve compliance with these principles.

Policy Form Filing and Approval

In the US, a life insurer generally may not begin to sell an insurance product in a state until the product’s policy form has been filed with and approved by the SID. Such filing and approval requirements enable state insurance regulators to ensure that policies comply with all applicable regulatory requirements. The compliance area is responsible for filing policy forms with state insurance regulators and, if necessary, working with members of the product development team to revise policy forms so that they meet regulatory requirements. Once an insurer obtains approval of a policy form, the company – typically the compliance area – develops issue instructions for business units that are affected by the new product.

Life insurance companies that issue variable life insurance and annuity products must comply with federal securities laws that govern the purchase and sale of all types of securities.

Producer Licensing

Insurance producers must obtain a license to sell insurance from the SID of each state in which they conduct business. Each insurance company develops policies and procedures to ensure that its producers have been properly appointed by the company to sell insurance on its behalf and are appropriately licensed to do so. The insurer must also develop procedures for terminating a producer’s appointment.

A producer selling variable life insurance/ variable life annuity must be a registered representative with NASD and must be associated with a broker/dealer firm that has registered with the SEC and is a member of the NASD.

Marketing and Sales

Attorneys & compliance specialists usually play a role in ensuring that the company and its producers comply with all applicable state and federal regulatory requirements for the marketing and sale of insurance products. Examples are described below:

Producer Activities

An insurance company typically develops a producer compliance program that [1] explains the company’s expectations of its producers regarding market conduct compliance,[2] explains the applicable market conduct laws and regulations, [3] trains producers in proper market conduct practices, and [4] audits the activities of the producers.

Producers violating market conduct laws is subject to fines by SID and in extreme cases the insurance company could lose its license.

Advertising & Sales Materials

Must comply with reqts. Designed to ensure that consumers receive accurate information about the insurance products they are considering buying. An insurer is ultimately responsible under the law for all its written advertising and sales materials.

Disclosure

Insurers and producers are required to disclose specific types of information to applicants for and owners of certain products.

Underwriting

Insurance companies establish underwriting guidelines that direct their own risk-assessment decisions. They are also required to apply premium rates to their underwriting decisions in a consistent manner.

Claim Administration

Most states have enacted laws based on the NAIC model Unfair Claims Settlement Practices Act that require insurance companies to investigate and pay claims promptly and fairly.

Complaint Handling

According to the NAIC model Unfair Trade Practices Act, an insurer must maintain complaint records for at least the current year and the two preceding years. The complaint record must contain

• The total number of complaints.
• The line of insurance that is subject of each complaint.
• The nature of each complaint.
• The disposition of each complaint.
• The length of time to process each complaint.

Each SID maintains an office for receiving and acting on consumer complaints. When a compliant is filed with the state rather than with the insurer, a complaint examiner records the complaint and sends a written request to the insurer named in the complaint to respond in writing to the allegations in the complaint.

The compliance staff develops and supervises the company’s complaint handling procedures to ensure that complaints are dealt with promptly and fairly. The compliance area also makes sure that the insurer’s records reflect all complaints [1] received directly from consumers and [2] submitted to the SID and then referred to the insurer.

Consumer Privacy

Certain life insurance company operations – particularly underwriting, customer service, and claim administration – may require the use of sensitive information about consumers, such as their financial and health information. Insurers must comply with the following laws regarding the use, disclosure, and protection on financial institutions:

Gramm-Leach-Biley (GLB) Act, which requires financial institutions to develop privacy and security procedures for the handling of individual’s nonpublic personal information and imposes notice and disclosure requirements on financial institutions.

The Federal Fair Credit Reporting Act, which regulates the reporting and use of consumer credit information and seeks to ensure that consumer credit reports contain only accurate, relevant, and current information.

State insurance laws that set standards for the collection, use, and disclosure of information gathered in connected with insurance transactions.

Market Conduct Examinations         

The purpose is to determine whether an insurer’s market conduct i.e. non financial operations are in compliance with applicable laws and regulations.

During market conduct examinations, a team of examiners from the SID visits the insurer’s home office or regional office. The examiners inspect samples of the insurer’s business records, such as producer licensing records, underwriting records, and records of customer complaints. Examiners evaluate whether [1] the insurer has established standards to ensure that the activity is carried out effectively, [2] the insurer’s standards comply with applicable regulatory requirements, and [3] the activity is being carried out according to the established standards. The scope of the examination could be comprehensive (full-scale) or target (limited scope for one or more specific areas).

The team upon completion of examination prepares a written report of its findings. As necessary, the SID conducts a follow-up examination to determine whether the insurer has complied with the specified actions in the examination report. The SID may sanction (a line or in severe case suspension) an insurer that is found to have violated state insurance laws or regulatory requirements.