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How Is Insurance Regulated?

Have you ever wondered who is responsible for holding insurance companies accountable? The 2008 financial crisis made the SEC a household name and placed a high level of scrutiny on investment banks. No one wants investment banks to engage in unnecessarily risky activities with the large sums of money they control. However, insurance companies also deal in very large amounts of money. So, what structures are in place to ensure they handle those funds responsibly?

History of Insurance Regulation in the United States

The first insurance companies in the United States were formed in the 1730s. Over the next century, marine, fire and life insurance companies appeared as the need arose. The first state law to ensure companies held adequate reserves was passed in Massachusetts in 1837. From there, insurance regulation grew with the industry — the first state insurance commissioners were appointed in New Hampshire and New York, in 1851 and 1869, respectively.

A “tug-of-war” between federal and state regulation of insurance companies began in 1869 with Paul v. Virginia. New York insurance companies sought federal regulation in order to standardize the industry and attempted to prompt a court decision in their favor. The Supreme Court ruled that the jurisdiction of Congress did not extend to the insurance industry. In 1944, however, the Supreme Court held that federal anti-trust laws and the commerce clause did, in fact, apply to insurance companies. United States v. South-Eastern Underwriters Association ruled that Congress had the power to regulate the insurance industry. A year later, in 1945, Congress replied, “We don’t want it,” and passed the Mcarran Ferguson Act, declaring that state regulation of the insurance business was in the public’s best interest.

A compromise had begun to emerge in 1871, with the formation of the National Insurance Convention. In order to address the industry concern that state regulation led to an inefficient patchwork of laws, state insurance commissioners met to begin coordinating “model laws” that states could use as a guide for their insurance legislation. The NIC continued meeting, and became the National Association of Insurance Commissioners (NAIC) that exists today.

State Regulation

Almost every state has an insurance commissioner responsible for that state’s insurance regulations. Specifics vary from state to state: Commissioners may be appointed or elected, lead cabinet level “departments” or just “divisions,” and possess varying amounts of regulatory power. In general, an insurance commissioner:

  • Approves insurance rates
  • Conducts financial examinations of insurers
  • Ensures companies, agencies, agents and brokers are licensed to operate in the state


The National Association of Insurance Commissioners is a nonprofit, nongovernmental organization. It holds no official regulatory power. This may lead you to think that the NAIC NAIC isn’t very influential ¾ but that’s not the case. Although the organization cannot enact regulations, its members are the lead insurance regulators in their states. Thus, the NAIC’s model laws are widely adopted, with minor variation.

This semi-standardization of insurance helps consumers and insurance companies alike. Companies can offer similar products from state to state with a minimum of administrative hassle, which helps to lower costs. Consumers can have similar expectations for the operation of insurance companies across state lines, which means less time reading about changes in insurance if they move!

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