Regulation | III


Insurance is regulated by the states. This system of regulation stems from the McCarran-Ferguson Act of 1945, which describes state regulation and industry taxation as being in the “public interest” and clearly gives it precedence over federal law. each state has its own set of statutes and rules.

State insurance departments monitor insurers’ solvency, market conduct, and, to a greater or lesser degree, review and rule on rate increase requests for coverage, among other things. In commercial insurance, workers’ compensation is the most highly regulated, largely because, with the exception of Texas, it is mandated by state law.

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licenses and capital requirements

An insurance company must be licensed before it can do business. this is also 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 can apply for licenses in other states as a “foreign” insurer. Insurers incorporated in a foreign country are called “foreign” insurers in the US. uu. jurisdictions in which they are licensed. surplus lines insurers are subject to different license agreements than standard carriers; They just need to be licensed and admitted in their state of domicile where they are an admitted business and do business as a standard lines business and are supervised by that state for creditworthiness. elsewhere, they are “unsupported” and free from policy and fee 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 excess. In Wyoming, there are different requirements for surplus lines companies based on company ownership, corporations and mutuals, for example.

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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 risk of their business.

solvency/guarantee funds

The regulation of the solvency of insurance companies is a function of the state. State regulators monitor the financial health of companies licensed to provide insurance in their state through review of the detailed annual financial statements that insurers are required to file and periodic on-site examinations. When a company is found to be in poor financial condition, regulators can take various steps to try to save it. however, insolvencies do occur, 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 must be members of guaranty associations as a condition of being licensed. when there is an insolvency, they are assessed based on the business they do in that state to pay unpaid claims. the exception is surplus lines insurers, which are not part of the guarantee fund system and whose policyholders have little protection against unpaid claims in the event of their insurer’s insolvency. new jersey is the only state that has established a guarantee fund specifically for surplus lines insurers.

While all state guarantee funds cover workers’ compensation, auto, and homeowners claims, some other types of insurance may not be covered.

rate regulation

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States differ widely in the scope of regulation of commercial lines. Some states allow insurers to be exempt from rate regulation in transactions with corporate entities that meet certain criteria establishing their size and sophistication as purchasers of insurance, but the size range varies from state to state.

Although the regulatory processes in each state vary, three principles guide the rate regulation system of each state: that the rates be adequate (to maintain the solvency of the insurance company), but not excessive (not so high such as to generate exorbitant profits) nor unfairly discriminatory (price differences should reflect expected differences in claims and expenses).

In accordance with these principles, states have adopted various methods of regulating insurance rates, which fall roughly into two categories: “pre-approval”, meaning they must be approved by the regulator before they can be used , and “competitive”. This is not to say that there is no competition in states that use a pre-approval system. Most approved rates in pre-approval states are the rates used, but in some cases, particularly commercial coverage, carriers compete. with rates below these maximum approved limits.

As mentioned above, surplus lines insurers do not have to submit rates and policy forms, but must comply with solvency and licensing standards.

proposals to modernize insurance regulation

Although insurance in the United States has traditionally been regulated by individual states, many in the insurance industry now view the current state system as overly complex, anti-competitive, and unduly burdensome. reform proposals at the national level are moving in two directions. One is a dual (federal/state) licensing 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 eliminate the need to comply with 51 different sets of regulations. the other is a modernization of the state system that would create a framework for a national system of state regulation with uniform standards in areas such as market conduct, licensing, introduction of new products, and reinsurance.

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