How Insurance Regulation Works
Every state has its own regulations. Insurance companies cannot charge whatever they want.
The most highly regulated industry in the U.S. is financial services. Insurance companies are in that category and face oversight on the state, federal and international levels, just like banks. For insurers, state regulation ranks supreme, dating back to 1945 when the McCarran-Ferguson Act declared regulation at the state level as being in the “public interest.”
Serving public interest means state insurance departments scrutinize all aspects of insurers’ business. The most important responsibility is to ensure that companies remain solvent so they are able to pay anticipated claims. Regulators also ensure that policyholders receive fair treatment in both sales and claims practices, that those selling and servicing policyholders maintain the proper licenses to do so, and that consumer complaints are heard and addressed.
Each state also sets capital requirements for how much money and surplus is one hand for claims obligations.
If a company does business in all states and the District of Columbia, then it has 51 regulators looking over its shoulders.
An aside: Back in the day when direct mail was the preeminent way to build business, I wrote product marketing materials for a major insurer. The sales brochures and advertising fliers for insurance products required multiple versions, with very specific language necessary to comply with various state regulations. There might be a dozen different versions of the same brochure, with details added as required by state insurance law. Yes, it was a nightmare, but the upside is it honed a skill for attention to detail.
In addition to ensuring that insurance companies can pay claims, state regulators oversee market conduct and review rate increase requests. The degree to which state’s oversee rate reviews differs. Some states take a free market approach, while others strive to control rate increases in the interest of consumer protection. Consumer protections sometimes conflict with the realities of business costs. When this happens, an insurer can negotiate compromise or may feel the need to look for other ways to control costs, which may mean restricting the amount of new business it will write or nonrenewing some policies to control risk exposure.
There are very few industries that refuse to take a customer’s money. But when an insurer decides to non-renew or limit the number of new insurance policies they offer, it is saying, “We cannot afford to take your risk.” In other words, the insurer’s data foretells a strong likelihood of a major loss event. It has concerns about not being able to charge enough to accept the transfer of risk from the property owner onto their book of business.
State regulators do pool their knowledge through the National Association of Insurance Commissioners (NAIC), an organization that develops model rules and provides data and analysis. The NAIC also has a mission to protect consumers, with a responsibility to set standards for the capital requirements necessary for insurers to launch a new business and maintain sufficient financial resources to pay claims obligations.
While state regulators may have different ways to provide oversight to insurance companies, every state is guided by the same three principles regarding insurance rates:
· Rates must be adequate (to ensure companies have funds to pay claims)
· Rates must not be excessive (to keep profits in check)
· Rates must not be unfairly discriminatory (prices must reflect anticipated claims and expense for each policyholder category)
The bottom line: Insurance companies cannot charge whatever they want.