Author: Nancy Germond
When we're starting our insurance career, we're regularly warned about “insurance regulation." What is industry regulation and how did insurance regulation come about? Let's review the history of insurance regulation and the main reasons for the regulation of the insurance industry.
Maintaining and Managing Competition
The U.S. business model thrives with competition. One of the main reasons for insurance regulation is to maintain competition. In the U.S., our nation wants to prevent monopolies – one entity – an insurer – covering more than its fair share of homeowners and businesses. How much competition is there and how badly could harm occur to your insured or your agency financially by poor insurer performance?
If insurers deliberately set rates to write a lot of new business, will they remain solvent to pay all the claims that may arise as a result of that new business? This is just one of the concerns of insurance regulatory bodies.
Regulation also protects the consumer from improper treatment. Certain regulations exist to prevent the insurer from being treated unfairly. These include bad faith claims-handling statutes and policy cancellation provisions in state law.
Main Reasons for Insurance Regulation
There are two main reasons for the regulation of the industry.
- We serve the public welfare to protect the public and its assets. Insurance is vital to the American economy.
- To avoid competition such as price-fixing or rate inadequacy that would be damaging to our industry, and ultimately to the public, which insurers serve.
Coverages evolve as society and consumer needs change. Premiums must be reasonable given predicted losses. Necessary coverages must be readily available. As society changes, insurance coverages emerge, such as coverage for social media liability and active assailant events.
As you continue in your career, you'll experience what we call “hard" insurance markets and “soft" insurance markets, which change coverage availability and pricing. For more on industry cycles, read the linked article. At this time, we're in a hard market, and for many newer producers, this will be a new challenge.
Who Regulates the Insurance Industry?
Since the founding of America's first insurance company in 1736, states regulated the insurance industry. After the Civil War, a case arose in 1869, Paul v. Virginia. An insurance agent violated Virginia law by selling insurance without a Virginia producer's license. After Paul was arrested, he sued the state, claiming insurance was interstate commerce, and lost. The U.S. Supreme Court ruled that insurance was not interstate commerce and that state regulation applied. That decision stood for the next 75 years.
In 1944, in United States v. South-Eastern Underwriters Association (SEUA), the U.S. Attorney General sued the SEUA, alleging it colluded to set property insurance rates.
The Supreme Court reversed its decision in Paul, ruling that since insurance is interstate commerce, it is subject to regulation by the federal government.
In response to the above, Congress began to debate bills that would rule on industry regulation. Interestingly for you history buffs, the insurance industry viewed the overturn of Paul “with considerable alarm," according to one insurance textbook, and introduced bills to preserve the ability to develop rates.
While early bills failed, the National Association of Insurance Commissioners successfully drafted a bill that did pass, Public Law 15 or the McCarran-Ferguson Act. However, the caveat in McCarran-Ferguson was this – as long as the states adequately regulated the insurance industry, the federal government would not act to regulate the industry.
This is the common law of the land today. However, the Sherman Act, the Clayton Act and the Federal Trade Commission Act allow Congress to regulate if the states fail to do so. This is why so many questions that arise as you navigate your state's rules can best be answered by your state Independent Agents & Brokers Association. State legislators enact laws that admitted carriers must adhere to.
Who Regulates Now?
The practice of spreading risk is an integral part of how businesses can function. Under McCarran-Ferguson, state legislators enact laws governing the conduct of insurers within its boundaries. Whether domestic, foreign, or alien carriers, the state regulates them. Let's define these types of carriers.
Domestic carrier – A carrier domiciled in that state.
Foreign carrier – A carrier based in another state, even if that carrier has a branch in that state.
Alien – A carrier domiciled in another country.
Admitted carrier – Also known as a “standard market" insurer, that company files with each state's insurance commissioner (or another title) and that commissioner approved them to do business. An admitted carrier's customers can access that state's guaranty fund should the carrier become insolvent.
Non-admitted carriers do not file their forms and rates with the states. There are two types, approved (the state says “you can operate here), and non-admitted, which the states have not approved.
State courts rule on insurance, and in the case of workers' compensation cases, administrative law judges in those states generally rule on whether an injury occurred in the scope and course of employment, and which benefits apply. Interestingly, each workers compensation policy refers to the state statutes that apply to any injury or illness arising in that state.
Occasionally insurance litigation lands in federal court due to issues of civil rights, jurisdiction, claims involved Native Americans, or other matters. For the most part, however, states adjudicate the majority of insurance proceedings.
Here is a not-inclusive list of actions states regulate.
- Licensing insurers
- Licensing brokers, agents and adjusters
- Examination of insurance carriers
- Carrier insolvency
- Rates
- Reserve
- Investments
- Forms
- Unfair trade practices
National Association of Insurance Commissioners (NAIC)
This advisory body assists most states' regulatory agencies develop forms, model laws and model financial regulations. The NAIC is an advisory body, not a regulatory body, so states can use their information or choose to develop their own. While laws are common across many states, each state is different. We cannot always answer a question in one state and assume it applies to another. This is why your state Big “I" is so invaluable to you, even if your agency has branches in more than one state.
This article is a brief overview of insurance regulations as they stand today in the United States. For more information, you can sign up for Understand the Insurance Industry: From Regulations to Operations, a three-hour training available on ABEN.
Last Updated: June 23, 2023
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