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Insurance Regulation Overview

For those of us who have insurance, we count on it to be there when we need it most. Whether you’ve contracted a serious illness, lost your home in a natural disaster, or caused a major car accident, you’re relying on those insurance policies to help you through. Because the insurance industry affects so many people as well as the financial system as a whole, there are many state and federal laws regulating how the business is conducted. Read on to gain a general understanding of how insurance regulation seeks to protect consumers and promote fairness and the financial health of the insurance industry.

State vs. Federal Insurance Regulation and the McCarran-Ferguson Act

In the U.S., the states have been the primary regulators of the insurance industry. However, in the mid-20th century, the Supreme Court ruled that the insurance industry was subject to federal legislation, including federal antitrust laws.

In response, Congress enacted the McCarran-Ferguson Act, which stated that no federal law could supersede state insurance regulations unless that federal law specifically addressed the business of insurance. Furthermore, the Act specifically exempted the insurance industry from federal antitrust laws as long as the state had its own antitrust statute which applied to the insurance industry operating there. The McCarran-Ferguson Act remains in effect, though there have been efforts to repeal or amend it, especially with regard to the health insurance industry.

Federal Insurance Regulation

Despite the fact that the states are the primary regulators of the insurance industry, there are continued efforts to give the federal government more of a role in regulating the business of insurance, especially with regard to maintaining the systemic and financial solvency of the industry. Some important federal insurance regulations and oversight entities include the following:

  • Dodd-Frank Act: Initiated many reforms after the 2008 financial crisis, including the creation of the Federal Insurance Office, charged with the authority to monitor the insurance industry.
  • Affordable Care Act ("Obamacare"): Instituted health insurance reforms, including requiring most individuals to have health insurance; prohibiting insurance companies from denying coverage to people with pre-existing conditions; initiating minimum requirements for health care policies.
  • National Flood Insurance Act: Makes flood insurance available through the federal government.
  • Gramm-Leach-Bliley Financial Modernization Act: Allows affiliations among insurance companies, securities firms, and banking institutions, and reaffirms the McCarran-Ferguson Act in that states are the primary regulators of the insurance industry.

In addition to federal insurance regulations, organizations like the National Association of Insurance Commissioners encourage states to adopt more uniform rules and regulations.

State Rate-Setting Regulation

One of the key areas of state insurance regulation pertains to rate-setting. Rate-setting refers to the means by which companies decide on the costs for the insurance coverage they provide. The state laws in this area usually require that insurance rates be adequate, non-excessive, and non-discriminatory. Rates must be adequate so that the company can pay for claims filed and remain solvent. However, they shouldn’t be so excessive that they are unfair or result in exorbitant profits. And lastly, state laws may prohibit unfair discrimination in which rates are based on factors other than actuarial risk.

State Insurance Agent Regulations

Individual states also regulate how insurance is sold to consumers. For example, states dictate certain requirements for becoming an insurance agent, such as fingerprinting, background checks, mandatory training courses, and state licensing exams. Additionally, states set rules for how insurance can be marketed, seeking to avoid deceptive marketing practices in an effort to protect the average consumer and instill confidence in the insurance industry.

Insurance Fraud

Another area of insurance regulation is insurance fraud. Insurance fraud includes acts by individuals filing false or illegitimate claims with their insurance company, and insurance companies or agents who engage in misconduct, such as the sale of unlicensed insurance products. Some instances of insurance fraud are treated as criminal acts and may be prosecuted accordingly. If you believe an insurance company has committed fraud or other misconduct, you can 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 have to abide by state contract laws, such that a failure to honor the terms of the policy may constitute a breach of contract. Insurance companies are also required to act in good faith by investigating claims, defending policyholders in lawsuits according to the insurance policy, and paying for legitimate insurance claims, among other responsibilities. Insurance companies who act in bad faith may find themselves facing a breach of contract or bad faith lawsuit.

Get Help Understanding Insurance Regulation and Your Rights

Between state and federal law, the world of insurance regulation is complicated and ever-expanding. It can be very difficult to know exactly what your rights are under your own insurance policy, let alone the wide array of insurance rules and regulations and their various exceptions. Whether you’re an insurance agent attempting to abide by state and federal law, or a consumer dealing with an uncooperative insurance company, contact an experienced, local insurance attorney who can explain the applicable regulations and help protect your interests.

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