United States: 2017 Insurance Practice Guide

1. Regulation

1.1 Regulation of insurers and reinsurers

Historical background

The insurance regulatory framework in the United States has a rich history that dates back to the 19th century. In the 1869 Paul v. Virginia case, the Supreme Court held that "issuing a policy of insurance is not a transaction of commerce" and, as such, regulating and taxing the insurance business is a state responsibility. The states immediately began brainstorming regulatory approaches, which led to the 1871 formation of the National Insurance Convention, now known as the National Association of Insurance Commissioners (NAIC).


The NAIC is the US standard-setting and regulatory support organisation, created and governed by the 56 chief insurance regulators from the states, the District of Columbia and five US territories. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer review and co-ordinate their regulatory oversight. Regulators also draft and consider model laws and regulations in the individual jurisdictions via a public involvement process. NAIC staff support these efforts and represent the collective views of state regulators domestically and internationally. NAIC members, together with the central resources of the NAIC, form the US national system of state-based insurance regulation.

State regulators

State insurance regulators' responsibilities have grown in scope and complexity as the industry has evolved over the past 150 years. The Paul v. Virginia decision was overturned in another Supreme Court case, United States v. Southeastern Underwriters, in which the Supreme Court held that insurance was, indeed, commerce. The resulting market disruption and apparent regulatory void led Congress to enact the McCarran-Ferguson Act in 1945, which clarified that the states should continue to regulate and tax the business of insurance, and affirmed that the states' continued regulation of the industry was in the public's best interest.

The general rule is that the states are responsible for the regulation of insurance unless the federal government duly enacts legislation specifically pre-empting some aspect of the states' authority. An example of this federal pre-emption at work was the Financial Services Modernization Act of 1999, also known as the Gramm- Leach-Bliley Act (GLB), which created a comprehensive regulatory framework to permit affiliations among banks, securities firms and insurance companies. By declaring that the McCarran-Ferguson Act remained in effect, GLB once again affirmed that states should regulate the business of insurance, but Congress also called for state reforms that would allow insurance companies to compete more effectively in a newly integrated financial service marketplace, and respond with greater innovation and flexibility to consumers' evermore demanding needs. GLB also established the concept of functional regulation (ie, where each functional regulator is responsible for regulation of its functional area).

It is the state legislatures that establish and set broad policy for the regulation of insurance by enacting legislation providing the regulatory framework under which the regulators will operate. They establish laws, often based on model laws prepared through the NAIC, that grant authority to state regulators and contain mechanisms for overseeing state insurance departments. State legislatures also approve regulatory budgets. State insurance departments employ 11,209 regulators to implement state-based legislation (2016 figures). Increases in staff and advancements in technology have allowed regulators to substantially improve the quality and effectiveness of their financial oversight of insurers, and to expand their consumer protection activities. Additionally, state regulation of insurance has become a major source of revenue for the states, primarily through state premium taxes.

Regulation of the insurance industry

The fundamental reason for government regulation of insurance is to protect American consumers. Insurance is more heavily regulated than other types of business because of the complexity of insurance contracts, because of the lack of sufficient information for insurance consumers to adequately shop, price and judge the adequacy of coverage, and because insurance contracts are generally viewed as contracts of adhesion. Conceptually, insurance regulation is very simple, focusing most heavily on monitoring the financial health of insurers to ensure that companies will be able to pay claims when they come due, and compliance/ conduct of insurers and all other licensees to ensure that policyholders are treated fairly. Put another way, all regulatory functions fall under either solvency regulation (ie, sustaining the solvency of insurers so they are financially able to make good on the promises they have made) or market regulation (ie, creating a framework where policyholders and claimants are treated fairly). State insurance regulatory systems are generally accessible and accountable to the public, and sensitive to local social and economic conditions. State regulation has proven effective at protecting consumers and ensuring that promises made are kept. Insurance regulation is structured around several key functions, including insurer licensing, producer licensing, product regulation, market conduct, financial regulation and consumer services. Through NAIC peer review and accreditation, financial regulation is "substantially similar" among the states, in order to diminish any perceived regulatory arbitrage.

Broadly speaking, market regulation consists of analysis and oversight of insurers' behaviour and conduct in the market, including the treatment of policyholders and claimants in product development and pricing, competition, statistical reporting, the administration of residual markets, the licensing of insurance producers, and consumer assistance and information services. Market regulators employ a variety of oversight techniques, from analysis conducted within the agency to on-site examinations.

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