Federal and State Laws and Regulations Affecting Life Insurers

Insurance companies are entrusted with huge amounts of money—in the $50 billion to $200 billion range in the case of the largest life insurance companies (e.g., Prudential, Metropolitan Life, and New York Life). The insurance business thus is regulated in an effort to ensure that the public and its funds are dealt with honestly, and to prevent the insurers from taking unwarranted risks with the money they are holding.

The primary purposes of insurance regulation historically have been (1) to maintain the insurers’ financial solvency and soundness so they can carry out their long-term obligations to policyholders and pay claims; and (2) to guarantee the fair treatment of current and prospective policyholders and beneficiaries by both insurers and the people who sell their policies. Insurance companies in the United States are primarily regulated by individual states. There is no one federal regulatory agency that specifically oversees insurance companies.

Securities and Exchange

The commission has a central role in regulating the securities industry or the Comptroller of the Currency who oversees national banks). The name of the state insurance regulatory agency typically is the “Insurance Department,” “Division of Insurance,” “Insurance Bureau,” or something similar. A state government official—usually called the “Commissioner of Insurance,” “Superintendent of Insurance,” “Director of Insurance” or something similar— heads these state agencies. The governor of the state appoints the head of the insurance regulatory agency in most states. However, in some states, the insurance commissioner is an elected office.

Each state assumes primary responsibility for overseeing the financial operations and management of insurance companies that are incorporated in that state. For example, Prudential is incorporated in New Jersey, so that state has a primary role in its regulation. Metropolitan is incorporated in New York, which has the primary regulatory role for that company. (Companies have their statutory home office in the state where they are incorporated.) Each state also regulates the local operations of insurance companies it has licensed to do business within the state, particularly as they relate to policy forms, rates, sales agents, and their practices.

The National Association of Insurance Commissioners (NAIC), made up of the state’s insurance regulators, is a group that coordinates the regulatory processes for each of the fifty states and the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. This organization discusses current issues and works to cooperate (more or less) in developing a common form for financial statements. In addition, it suggests model laws that the states’ legislatures then sometimes enact and it promulgates model regulations that the state regulators sometimes adopt.

Most states have laws regulating the conduct of insurance businesses to ensure fairness in the way companies deal with applicants for insurance and policyholders. One of the functions of a department of insurance is to enforce these so-called “unfair trade practices” and “unfair claims practices” laws by investigating complaints by consumers and taking action, when appropriate, to get companies to stop conduct that violates the laws and impose penalties for violations. Other duties of a department of insurance include reviewing and approving the policy forms used by insurance companies and approving rates charged for various types of insurance to assure compliance with state laws that regulate insurance rates.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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