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.