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2.1 Financial background and literature review

2.1.1 Financial background

Unlike most products, the value of an insurance product can not be determined until
after claims are closed - when it is too late to decide whether a different insurer
or a different product might be a better choice. For example, if an insurer goes
bankrupt, the insured with unpaid claims will face a loss. The loss may even impact
the insured’s daily life if he or she does not have the financial capacity to pay the
claim(s). In addition, insurers usually draft the insurance contract and decide the
final premium. Insureds do not have much input about it. Such special aspects of
insurance products add much uncertainty to the consumers.

In order to protect consumers, U.S. government started implementing regulation
of insurance companies and agents in the States back to more than one hundred years
ago. In 1869, there was an important U.S. Supreme Court case “Paul v. Virginia”.
The Supreme Court decided that the regulation of insurance should be through states.
The use of bureau rates was encouraged, which led to rate-making in concert. As a
result, local and regional bureaus were formed after 1877.

However, Congress passed the Sherman Antitrust Act in 1890 to eliminate rating
bureaus. Similar Antitrust Acts were passed later on, such as Clayton Act, Federal
Trade Commission and Robinson-Patman Acts. Meanwhile, there were voices from
the opponents’ side. For example, between 1910 and 1922, National Association of



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