Insurance is regulated by the states. This system of regulation stems from the McCarran-Ferguson Act of 1945, which describes state regulation and taxation of the industry as being in “the public interest” and clearly gives it preeminence over federal law. Each state has its own set of statutes and rules.
State insurance departments oversee insurer solvency, market conduct and, to a greater or lesser degree, review and rule on requests for rate increases for coverage, among other things. In commercial insurance, workers compensation is the most highly regulated, largely because it is, with the exception of Texas, mandated by state law.
Licensing And Capital Requirements
An insurance company must be licensed before it can do business. This too is regulated by the states. Insurance companies that are licensed and authorized to do business in a particular state are known as “admitted” insurers and are said to be “domiciled” in the state that issued the primary license; they are “domestic” in that state. Once licensed in one state, they may seek licenses in other states as a “foreign” insurer. Insurers incorporated in a foreign country are called “alien” insurers in the U.S. jurisdictions in which they are licensed. Surplus lines insurers are subject to different licensing agreements than standard companies; they only need to be licensed and admitted in their domiciliary state where they are an admitted company and do business as a standard lines company and are overseen for solvency by that state. Elsewhere they are “nonadmitted” and are free of rate and policy regulation. (See Surplus lines in the Players Section).
All insurance companies, including surplus lines insurers, are subject to capital and surplus requirements, which vary widely by state. Some states have requirements for individual lines of insurance. For example, New York has capital and surplus requirements for workers compensation. Insurers writing workers compensation in New York must have $500,000 in capital and $250,000 in surplus. In Wyoming, there are different requirements for surplus lines companies according to company ownership, stock and mutual companies for example.
It is the responsibility of the National Association of Insurance Commissioners (NAIC) to develop model rules and regulations for the industry, many of which must be approved by state legislatures before they can be implemented. The NAIC moved to strengthen solvency regulation in the 1980s, developing an accreditation program that requires state insurance departments to meet certain prescribed standards. It also established minimum capital requirements for insurers, based on the riskiness of their business.
Solvency/Guaranty Funds
The regulation of insurance company solvency is a function of the state. State regulators monitor the financial health of companies licensed to provide insurance in their state through analysis of the detailed annual financial statements that insurers are required to file and periodic onsite examinations. When a company is found to be in poor financial condition, regulators can take various actions to try to save it. Insolvencies do occur, however, despite the best efforts of regulators.
All states have organizations known as guaranty funds through which the property/casualty insurance industry covers claims against insolvent insurers. Insurers are required to be members of guaranty associations as a condition of licensing. When there is an insolvency, they are assessed based on business they do in that state to pay unpaid claims. The exception is surplus lines insurers, which are not are not part of the guaranty fund system and whose policyholders have little protection against unpaid claims if their insurer becomes insolvent. New Jersey is the only state to have established a guaranty fund specifically for surplus lines insurers.
While all state guaranty funds cover homeowners, auto and workers compensation claims, some other types of insurance may not be covered.
Rate Regulation
States differ greatly on the extent of regulation of commercial lines. Some states allow insurers to be free of rate regulation in transactions with corporate entities that meet certain criteria establishing their size and sophistication as insurance buyers, but the range in size varies from state to state.
While the regulatory processes in each state varies, three principles guide every state's rate regulation system: that rates be adequate (to maintain insurance company solvency), but not excessive (not so high as to lead to exorbitant profits) nor unfairly discriminatory (price differences must reflect expected claim and expense differences).
In line with these principles, states have adopted various methods of regulating insurance rates, which fall roughly into two categories: "prior approval," meaning that they must be approved by the regulator before they can be used, and "competitive." This does not mean there is no competition in states using a prior approval system. Most approved rates in prior approval states are the rates used, but in some cases, particularly in commercial coverages, companies compete at rates below these approved ceilings.
As mentioned above, surplus lines insurers do not have to file rates and policy forms but must confirm to solvency and licensing regulations.
Proposals To Modernize The Regulation Of Insurance
Although insurance in the United States has traditionally been regulated by individual states, many in the insurance industry now see the current state system as overly complex, anticompetitive and unduly burdensome. Reform proposals at the national level are moving in two directions. One is a dual (federal/state) chartering system similar to the banking industry’s dual regulatory system that would allow companies to choose between the state system and a national regulatory structure and that would eliminate the need to comply with 51 sets of different regulations. The other is a modernization of the state system that would create a framework for a national system of state-based regulation with uniform standards in such areas as market conduct, licensing, the filing of new products and reinsurance.
Federal Insurance Office (FIO) Last Updated 8/25/2021 The Federal Insurance Office (FIO) was established by Title V of the federal Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). The FIO is housed within the U.S. Department of the Treasury and is headed by a director who is appointed by the secretary of the Treasury. The office provides expertise on insurance matters to the Treasury Department and other federal agencies and engages in international discussions relating to insurance. However, it is not a regulatory agency and its authorities do not displace the time-tested robust state insurance regulatory regime.
Scope and Functions
The FIO’s authorities extend to all lines of insurance other than health insurance, long-term care insurance(except that which is included with life or annuity insurance components) and crop insurance, which is governed by the Federal Crop Insurance Act. The FIO does not have supervisory or regulatory authority over the business of insurance.
The FIO is charged with monitoring all aspects of the insurance sector, including identifying activities within the sector that could potentially contribute to a systemic crisis to the broader financial system, and the extent to which under-served communities have access to affordable insurance products, and the sector's regulation. The director of the FIO serves as a non-voting member of the Financial Stability Oversight Council (FSOC). The FIO also plays a role in authorizing the resolution of troubled companies that pose a risk to the financial stability of the United States. In addition, the FIO is tasked with assisting the secretary of the Treasury in negotiating covered agreements.
The FIO advises the Secretary of the Treasury on major domestic and prudential international insurance matters. The FIO has authority to represent the U.S. federal government internationally at meetings of the International Association of Insurance Supervisors (IAIS) and other similar organizations. However, state insurance regulators, either directly or through their NAIC representatives, present the views of the insurance regulatory community internationally.
Powers
In order to carry out these functions, the FIO is authorized to receive and collect data and information on the insurance industry and can enter into information sharing agreements with state regulators. The FIO can also require an insurer or its affiliate to submit data to the office; however, the FIO must first determine whether any public or regulatory sources are available before requiring such information directly from an insurer. The law provides an exemption for small insurers that meet a minimum size threshold not yet defined by the FIO.
Reports
The FIO is responsible for issuing several one-time reports as well as annual reports to the U.S. Congress. The FIO recently released its latest Annual Report on the insurance industry. In addition, the United States Department of the Treasury issued a report on the Asset Management and Insurance Industries. A listing of available FIO reports can be found on the U.S. Department of the Treasury/FIO Webpage.
Status:
State insurance regulators support constructive working relationships with key federal agencies to advance the interest of the U.S. market and consumers. State insurance regulators relationship with the FIO has strengthened in recent months. In recently released reports, the Treasury Department endorsed the state insurance regulatory regime and acknowledged the need to recalibrate FIO's activities both domestically and internationally. Specifically, included among the recommendations the report recommended that the FIO defend the U.S. system of insurance regulation abroad and only advocate for international standards that are consistent with our system. State insurance regulators also educate Congress about the need to reform the FIO to ensure that Treasury's proposed reforms and focus of these entities are embedded into statute and not subject to the whims of any particular administration.
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