# c. **Chartering and** Licensine of Comlanies<sup>**ant**</sup> **Ag.n**

A primary power of insurance departments<sup>is the chartering of insurance companies incorporated</sup> in their respective states as "domestic insurers."<sup>The code typically specifies the minimum capital and</sup> surplus needed by a stock company and the<sup>minimum surplus required of a mutual company. The most</sup> striuigent requirement, in New York State,<sup>calls for $1 million ir. capital stock and $2 million in surplus</sup> for a total of S3 million. Standards for forming<sup>a mutual company in New York are equally stringent</sup> and no new mutual insurers have been incorporated<sup>there for several decades. In other states, chartering</sup> standards are not as stiff; initial capital can be<sup>as low as $350,000 in some western states so that the</sup> number of new incorporations is considerably higher.<sup>The insurance codes often require that organizing</sup> directors and officers be of good character<sup>with proven business capabilities. The charter then issued</sup> often specifies which classes of insurance<sup>may be underwritten by the company, and which lines (such</sup> as health insurance or casualty insurance) may<sup>only be written through a subsidiary.</sup> In addition to chartering, insurance departments<sup>are charged with the licensing of insurers, both</sup> domestic and out-of-state companies, with<sup>renewals of such licenses subject to compliance with a wide</sup> range of state standards, including filing of annual<sup>financial statements, observance of investment laws,</sup> etc. Without such licenses, companies from other<sup>states (called foreign insurers) are not permitted to sell</sup> policies to state residents, except for mail-order insurance<sup>which many states now permit. In this way,</sup> each state is able to exercise a strong degree<sup>of control over the operations both of domestic companies</sup> and of out-of-state and alien companies admitted<sup>to do business in the state.</sup> A related control element arises from licensing<sup>of insurance agents and brokers, which is usually</sup> specified by insurance law. To obtain a license,<sup>the applicant must show that he has been certified by</sup> an insurance company as to his honesty and<sup>competence, and he must pass whatever tests of competency</sup> are required by the insurance commissioner.<sup>The license may be revoked or suspended if the agent</sup> willfully violates insurance regulations, or conducts<sup>fraudulent practices, or is proved incompetent.</sup> Licenses are usually perpetual, but sometimes<sup>renewal fees are required. Separate licensing is often</sup> required for sales of health insurance, a product<sup>line carried by many life insurance companies. If the</sup> agent wishes to sell variable annuities or variable<sup>life (investment products regulated by the Securities and</sup> Exchange Commission), he must also obtain<sup>a special federal license upon passing prescribed</sup> examinations. Some states also issue limited licenses<sup>which permit only the sale of credit life insurance.</sup>

## d. Approval of Contract Forms

A key element of consumer protection by state<sup>regulators is the control over authorized contract</sup> forms for policies sold to residents of the state.<sup>As new versions of life insurance and annuities are</sup> developed within companies, the policy provisions<sup>must receive the commissioner's approval before they</sup> can be offered to the public. Regulatory review<sup>is designed to exclude ambiguous language and to</sup> prevent unfair or deceptive practices, in the<sup>effort to protect policyholders and beneficiaries. The</sup> commissioner usually is empowered to disapprove<sup>policy forms that are contrary to any provision of state</sup> laws or regulations, or are deemed to be unfair,<sup>inequitable or misleading to the policyholder.</sup> Standard policy provisions required under the insurance<sup>laws of most states commonly deal with</sup> such matters as grace periods for premium payment;<sup>incontestability; nonforfeiture benefits and surrender</sup> values; policy loans after three years; and a variety<sup>of other legal rights. Where group life insurance is</sup> involved, state laws also require the policy<sup>to provide for conversion privileges on termination of</sup> employment or on termination of the master policy.

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