Government Regulation in Insurance

The main reason for government regulation within insurance can be said to be for consumer protection. Others may see it as a way for governments to interfere in the market, by micromanaging what sellers can offer to buyers. However, the government’s regulation in the insurance industry has shown that it is there to protect consumers through insurance insolvency, the ability to reduce unequal distribution of knowledge and the bargaining power of the insurance agents, compatible insurance pricing, and the promotion of social goals by making insurance more widely available to those in need. (Dorfman and Cather)

            Insurance as an industry being vested in the public’s interest means that the insurance companies are there, along with government regulation, to help ensure that the public is protected from risk. The events leading up to government regulation in the insurance industry started in the year 1869 when congress sided with the state of Virginia, during the Paul vs. Virginia case, stating that insurance was not a form of interstate commerce and subject to federal anti-trust laws. Therefore, insurance sales could be regulated by each individual state. This allowed each state the authority to regulate and tax the sales of insurance as it saw fit. Although, most states did not focus as much on the regulation as they did the taxes. This was brought to light when the state of New York conducted the Armstrong Investigation in 1905 into its life insurance industry, and again when it conducted the Merritt Committee Investigation in 1910, which took a deeper look into its fire insurance providers. These investigations led to drastic changes in New York’s insurance regulations. In 1944 the South-Eastern Underwriters Association case was heard before the Supreme Court. The result of this trail was the overturn of Paul vs. Virginia, and the stating that the sale of insurance could be seen as interstate commerce and, therefore, federal anti-trust laws could be imposed on insurance companies in the U.S. This, however, left the insurance industry nearly unregulated due to nonexistent federal insurance codes. With this decision came disagreements between state regulators, insurers, and the federal government. Due to these disagreements, the McCarran-Ferguson Act was passed in 1945. (Dorfman and Cather)

            The McCarren-Ferguson Act gave states back the right to regulate the insurance industry as it chose with requirements in order to be exempt from federal anti-trust laws. Those requirements consisted of the following: the insurer’s actions must relate to the business of insurance, the actions must be an action regulated by state laws, and cannot be designed to boycott, coerce, or intimidate the insured. (Anti-trust Law and Insurance)

            Rate regulations in the property-liability fields are regulated by each state, and each one could have a different way to regulate those rates. Some states may require that insurance companies provide their rates for approval before offering them to the public. Others may impose constraints on rates, limiting them as to how high or low the insurance company can sell a policy for and which class they can sell it to. (Born and Cline)

            When it comes to rate regulations for overall insurance, according to state regulations they should not be excessive in any way. This means that they must be affordable, and are not set too high in relation to insurance claims. Insurance rates should also not be inadequate. This means that they should not be marketed at a rate that is too low. The Insurance rates should also not be discriminatory in any nature, meaning that all insureds are charged similarly for similar coverages. These rate regulations are imposed on insurance companies in order to protect consumers. (Dorfman and Cather)

            The insurance commissioner who is either elected by voters or appointed by state governments has the right to allow or decline anyone the right to sell insurance in his or her state. Consumers have the choice to either go with a domestic company, which is an insurance company licensed within their own state, or they can choose a foreign company, which is licensed to sell insurance in another state, but is selling insurance in the consumers state. Another option for consumers is to purchase insurance from an alien company. This happens when consumers purchase insurance within the United States from a non-U.S. insurance company. This policy is only enforceable when insurance is not offered within the consumers own state. (Dorfman and Cather)

            Each state has its own set of solvency laws that allow it to protect those that are insured from insurance companies with too little of funds to be able to pay out should claims be filed. Solvency funds are for insurance companies that are facing financial ruin, and not able to pay their insured claims. States use a guaranty fund to cover claims once an insurer’s finances have reached a point where they cannot be built back up to a point where claims can be covered. The funds come from payments the solvent insurer’s make to the fund in order to provide support for the insureds of an insolvent insurance company. This transfer of funds is mostly from insureds paying higher premiums than others who have purchased lower premiums with other companies. This causes those paying higher prices to pay more in order to make up the loss. The closure of the insurers forces some consumers to give up some of their policies, or even access to their own money which they pay premiums for. It could also force them to take lower returns on investments. (Dorfman and Cather)

            Arguments for those that support government regulation would be that it helps protect the consumer from overly priced coverages and unfair policies. It helps to protect against the discrimination of consumers. Those that oppose change would say that the regulations are in place to keep rates down, and assist in making insurance available for all those that are in need. Those that are for change would argue that a more competitive market would help drive the economy, and that the government should focus more on driving economies instead of regulating the rates and policies of insurance companies. (Dorfman and Cather)

            As mentioned earlier, every state has an insurance commissioner to oversee the insurance industry in that state. These commissioners can either be elected or appointed, but most are appointed. Having this office be an elected office would be better for consumers, because then they would have a chance to get to know candidates, and have the freedom to choose who they want to represent the insurance agencies in their state. The state appointed candidate may not always be the best person for the job.

            It is highly important when it comes to agents and brokers being required to pass qualification exams. These exams provide the agent or broker with a license to conduct business within their state. Some are now able to cross state lines. These certifications also help to protect the consumer, and hold the agents accountable for unlawful transactions between the two. From a personal opinion, the exam’s in North Carolina appear to be working just as they should. When it comes to being either too hard or too easy, they are right where they need to be.

            When it comes to unrestricted price competition among insurance competitors, I think that the price should continue to be regulated. Market competition between competing insurance agencies could cause prices to continue to rise, making insurance unaffordable for many. Government regulation keeps that from happening to an extent. The statement that claims that competition will keep rates from being too high, and that management will keep them from being too low, in my opinion is not a true statement. Government regulation does not intrude into the managers right to make decisions. It simply provides guidelines for those decisions to be made.

            When comparing state regulation verses federal regulation, the major role for the state is to protect the consumer. They are there to put in place regulatory measures in order to insure the consumer that they are being treated fairly against all other consumers. That prices are affordable, and that the insurance agency is solvent. The federal government is there should any situations arise that current governing laws need to be changed.  The down side to states having individual regulatory roles in the insurance industry is that every state has different regulation laws. This makes it hard for national insurance agencies to operate when they have to get approvals in all fifty states. If the federal government was more involved, laws could be passed to insure the same regulations were equal across the country, leaving states to mainly inforce the laws instead of creating different ones. (Dorfman and Cather)

In conclusion state regulations are put in place to protect the consumer. They do so by insuring prices are fairly distributed across similar policies. They are there to ensure that proper knowledge of the industry is provided to the consumer, assuring that all agents and brokers are schooled and licensed to do their job properly. They focus on social goals by having insurance be more widespread in availability, and eliminating discrimination. These regulations are also in place to insure the solvency of the insurer’s, so that the insured again is protected should the financial stability of the insurer crumble. (Dorfman and Cather)

Works Cited

• “Antitrust Law and Insurance.” III, Insurance Information Institute, www.iii.org/article/antitrust-law-and-insurance. 
• Born, Patricia, and Robert Cline. “ Best Practices for Regulating Property Insurance Premiums and Managing Natural Catastrophe Risk in the United States.” National Association of Mutual Insurance Companies, Nov. 2015. 
• Dorfman, Mark S., and David A. Cather. Introduction to Risk Management and Insurance. 10th ed., Pearson/Prentice Hall, 2013.