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Insurance Regulation Overview

Life is full of unexpected events. As insurance consumers, we count on many types of insurance to provide us with protection and peace of mind. Knowing that coverage is available when we need it most is helpful.

Whether you've contracted a serious illness, experienced damage to your home in a natural disaster, sustained damage in a car accident, or received a life insurance payout from a loved one, you benefit from insurance policies.

The insurance industry affects so many people. It also impacts the financial system as a whole. As such, the insurance sector is regulated on multiple levels. The regulatory framework involves state and federal laws. These laws regulate initiatives and the conduct of insurance businesses.

Read on for an overview of insurance regulation. Insurance regulation seeks to protect consumers. It also promotes fairness and the financial health of the insurance industry across jurisdictions.

Who Regulates Insurance Companies?

In the United States, individual states regulate insurance companies. Each state has its own set of statutes and rules. State regulation originates from the McCarran-Ferguson Act of 1945. The McCarran-Ferguson Act provides that federal law could supersede state insurance regulations. This principle applies unless federal law addresses the business of insurance.

McCarran-Ferguson Act

The McCarran-Ferguson Act exempts the business of insurance from federal law. This includes federal antitrust laws to a limited extent. The Act can exempt the insurance industry from federal antitrust laws. States are exempt from federal antitrust laws as long as the state has an antitrust statute.

The McCarran-Ferguson Act provides that supervisory authority for taxation and regulation of the insurance industry is in the public interest. It gives state law preeminence over federal law.

The McCarran-Ferguson Act remains in effect. There have been efforts to repeal or amend it. Often these attempts concern the health insurance industry. State insurance departments oversee insurer solvency and market conduct. These departments also rule on requests for rate increases for coverage.

State Insurance Regulation

In addition to federal insurance regulations, organizations like the National Association of Insurance Commissioners (NAIC) encourage state regulatory agencies to adopt more uniform rules and regulatory requirements.

Rate Setting

State insurance departments oversee the regulation of insurance companies and providers. One key area for state insurance regulation pertains to rate-setting. Rate-setting refers to how companies determine the insurance coverage they will provide.

The regulatory system requires rates in insurance contracts to meet the following requirements:

  • Adequate to pay for claims filed, avoid insolvency, and maintain financial stability
  • Adequate to maintain financial stability and remain solvent
  • Are non-excessive concerning the cost to consumers
  • Are non-discriminatory. State laws may prohibit unfair discrimination based on factors other than actuarial risk

Insurance Licensing

A state must license an insurance company before it can conduct business in that particular state. Insurance companies licensed and authorized by a state are said to be admitted in that state.

Capital Requirements

All insurance companies within a state are subject to solvency regulations. State regulations require insurance companies to meet specific capital and surplus requirements. These requirements vary by state.

Insurance Agent Regulations

Individual states regulate how providers sell insurance to consumers. For example, states dictate certain requirements for becoming an insurance agent. These requirements for agents in each state and the District of Columbia can include the following:

  • Fingerprinting
  • Background checks
  • Mandatory training courses
  • State licensing exams

States set marketing rules for insurance. They seek to avoid deceptive marketing practices to protect the average consumer. State regulation of risk management helps instill confidence in the insurance industry.

Federal Insurance Regulation

States are the primary regulators of the insurance industry. There are continued efforts to give the federal government a more significant role in regulating the insurance industry. The focus is on maintaining the financial solvency of the industry. Federal insurance regulations include the following:

  • Dodd-Frank Act: This law initiated many reforms after the 2008 financial crisis. It created the Federal Insurance Office. This Federal Insurance Office monitors the insurance industry. The Dodd-Frank Act also initiated corporate governance reform.
  • Affordable Care Act (ACA): The ACA instituted health insurance reforms. Other reforms prohibit insurance companies from denying coverage for pre-existing conditions. It also initiated minimum requirements for health care policies.
  • Health Insurance Portability and Accountability Act of 1996 (HIPAA): HIPAA advanced public health law to provide insurance coverage and increase patient safeguards. HIPAA also promoted efficiency in the insurance markets. Before HIPAA, people with chronic illnesses were afraid of losing coverage. The ACA's rules on pre-existing conditions replaced HIPAA's guidance. HIPAA's data privacy and security rules for patient health information remain intact.
  • National Flood Insurance Act: This makes flood insurance available through the federal government. A standard homeowner's policy does not cover floods. The National Flood Insurance Program (NFIP) is a federally-backed casualty insurance program. It's available to homeowners, renters, and businesses.
  • Gramm-Leach-Bliley Act: This allows affiliations among insurance companies, securities firms, and banking institutions. It reaffirms the McCarran-Ferguson Act making states the primary regulators of the insurance industry.

Federal law governs certain aspects of the insurance industry. States regulate most aspects of the insurance industry, such as reinsurance and consumer protection.

Insurance Fraud

Another area of insurance regulation is insurance fraud. Insurance fraud includes acts by individuals filing false or illegitimate claims. Insurance fraud also occurs when insurance companies or agents engage in misconduct. This misconduct includes selling unlicensed insurance products.

Some instances of insurance fraud are treated as criminal acts and may be prosecuted as such. If you believe an insurance company has committed fraud or other misconduct, file a complaint with your state's insurance commissioner.

Insurance Company Obligations

Insurance regulation also occurs through the application of other state laws. For example, insurance companies and policyholders must abide by state contract laws. Failing to honor the policy terms may constitute a breach of contract.

Insurance companies must also act in good faith when:

  • Investigating claims
  • Defending policyholders in lawsuits according to the insurance policy
  • Paying for legitimate insurance claims
  • Other responsibilities

Insurance companies acting in bad faith may face a breach of contract or a bad faith lawsuit.

Need Help With Your Insurance Rights?

Between state and federal law, insurance regulation is complicated and ever-expanding. It can take time to determine your rights under your insurance policy. It's difficult to understand the array of insurance rules and regulations. Their various exceptions can be even more challenging.

Whether you're an insurance agent attempting to abide by state and federal law or a consumer dealing with an uncooperative insurance company, help is available. Reach out to an experienced local insurance attorney for legal advice. They can explain the applicable regulations and help protect your interests.

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