Insurance is an essential financial product intended to protect people and their property against significant financial loss. Its purchase is often a prerequisite for access to or acquisition of important products and services such as health care, a car, a home, and credit. The complexity of insurance contracts, as well as the need to ensure the solvency of companies to meet future obligations, has traditionally justified a substantial role for government regulation of the insurance industry.
Government regulation of insurance lies mostly with the states. Very large insurers, which could affect the systemic risk of the U.S. economy, are potentially subject to Federal Reserve Board regulation. But state regulators set the standards for most insurers as well as for consumers purchasing insurance. And state regulators require resources to fulfill their mission effectively, including their need to:
- establish appropriate insurance rates for each type of business,
- analyze financial information,
- investigate insurance problems,
- increase consumer protections, and
- publicize complaint procedures, with special efforts to reach diverse communities.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) established the Federal Insurance Office (FIO) in the Department of the Treasury to monitor the insurance industry. This includes identifying gaps in insurance regulation that could lead to systemic crises in the financial services industry. Another important role of the FIO is monitoring the extent to which traditionally underserved communities and consumers have access to affordable insurance products.
Dodd-Frank also authorized the Financial Stability Oversight Council (FSOC) to bring “systemically important” insurers under the solvency regulatory authority of the Federal Reserve Board (FRB). The act gave state insurance regulators a non-voting seat on FSOC. The act also established a voting FSOC member with expertise in the business of insurance.
Many insurers are trying to introduce new products into the marketplace more easily. They are pressing state regulators to establish more uniform standards and filing procedures to speed that process. Some are pressing for full rate deregulation. They are also pressing Congress to weaken the ability of states to protect consumers. Specifically, Congress has proposed establishing a dual regulatory and optional federal charter system for insurance. Like the federal preemption of state banking regulation, these proposals could weaken consumer protection currently afforded under state law.
Maintaining insurer solvency is a key function of state insurance regulation. It is essential to ensuring that an insurance company remains in business to pay insurance claims. All states have guaranty funds that pay claims in the event of insurer insolvency. Insurance regulators go to great lengths to avoid or mitigate claims against state guaranty funds, including facilitating takeovers of financially troubled insurers.
Each state has a separate guaranty fund for property and casualty insurers and for life and health insurers. The coverage amounts are set by state law. They vary by line of insurance and state. Coverage for annuities comes through the life and health guaranty funds. Generally, coverage for annuities has followed the account insurance limit of the Federal Deposit Insurance Corporation (FDIC). Although Congress increased the FDIC insurance coverage to $250,000, not all states have followed suit to increase their limits beyond $100,000.
Credit insurance—older borrowers are often the target of aggressive sales pitches for lump-sum credit and non-credit insurance products. These include life, accident, disability, unemployment, and property insurance. These products are often packaged into a loan without the borrower’s knowledge or consent. Lenders may fail to inform borrowers that credit insurance is optional. Lenders frequently receive commissions on the sales of these products. The commissions may be added to the loan amount and generate additional interest income for the lender (see also the Banking, Credit, and Debt section in this chapter). Dodd-Frank prohibits including a lump-sum premium in the loan amount if the loan is secured by the borrower’s principal residence.
Regulatory structure to promote consumer protection
State regulators should create a regulatory structure to promote consumer protection. This includes establishing full-time, independent insurance consumer advocate offices. This should be funded by a nominal charge per insurance policy.
States should consider statutory changes that would bring reinsurers under the scope of state regulatory authority and require documentation of their financial status.
Federal law should not preempt state law with regard to insurance. Federal law should serve as the floor. Congress should not weaken state government oversight and consumer protections for insurance customers. Congress should not remove or weaken state laws guaranteeing consumer protections.
Conflicts of interest
States should establish strong conflict-of-interest regulations and revolving door limits. Public officials and staff should be independent from the industries they regulate. These regulations should apply to insurance commissioners, their staff, and any contractors working in insurance departments.
Commissioners and key staff should be restricted from obtaining employment with or consulting for regulated companies after leaving or retiring from public service, for a period long enough to ensure that conflicts of interest are avoided (see also Chapter 1, Government Integrity and Civic Engagement—Lobby Reform for additional revolving door policies).
States should also prohibit commissions or incentives to steer consumers to a particular insurance product.
Maintaining insurer solvency
States should strengthen regulatory oversight of the safety and soundness of insurance companies. They should ensure that consumer funds are protected in the event of insurance company failure. State life insurance guaranty funds should cover, at a minimum, annuity losses of up to $250,000. Future coverage increases should follow the lead of bank account coverage by the Federal Deposit Insurance Corporation.
States should authorize their insurance commissioners to regulate all insurance companies conducting business in the state. This should be the case regardless of whether the companies have a physical presence within state borders.
States should increase the authority and resources of their insurance commissioners and departments.
States should create and publicize a consumer appeals process.
Insurance commissioners should review rates for personal lines of insurance before they are implemented. As part of this process, insurance companies should explain proposed rate increases and coverage decreases before they can take effect.
State regulators, consumer groups, and industry should work toward a set of uniform state regulatory standards that ensure high-quality market oversight. This includes the Interstate Insurance Product Regulation Commission (IIPRC) and the National Association of Insurance Commissioners (NAIC).
The NAIC should:
- create a publicly accessible information clearinghouse for insurance statistics and data, particularly with respect to claims and payouts;
- develop uniform reporting requirements; and
- provide technical assistance to state insurance departments.
The IIPRC and the NAIC should also provide adequate resources for consumer representation.
Policymakers should ensure consumer protections in credit insurance. This includes prohibiting the use of loan proceeds to pay for credit insurance products. In addition, policymakers should require lenders to inform borrowers that credit insurance is optional and prohibit lenders from receiving commissions for selling credit insurance.
Financial institutions should also be forbidden from selling credit insurance to their borrowers through an affiliate or a subsidiary insurer.
The Dodd-Frank Wall Street Reform and Consumer Protection Act prohibition on lump-sum insurance financing in mortgage loans should be extended to all types of consumer loans.