AARP Hearing Center
Background
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 has traditionally justified a substantial role for government regulation of the insurance industry. Government regulation is also necessary to ensure the solvency of companies to meet future obligations.
Regulatory structure: Insurance is largely governed by state law. State insurance departments are generally responsible for ensuring that rates are fair. This means that they are not excessive, inadequate, or unfairly discriminatory. State insurance commissioners in most states are, to varying degrees, empowered to enforce state laws governing pricing and claims handling. They oversee the financial condition of companies to ensure they are sufficiently capitalized to pay claims.
Insurance departments are led by insurance commissioners, who can be elected or appointed. Some departments have many staff, considerable resources, and extensive expertise. Others are small and underfunded. They need more 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.
Insurance Commissioners have a very active association, the National Association of Insurance Commissioners (NAIC), which often develops model laws, regulations, and bulletins that guide state legislatures and departments of insurance. The NAIC, however, is not a public body. It is not subject to open meeting laws.
Very large insurers, which could affect the systemic risk of the U.S. economy, are potentially subject to Federal Reserve Board regulation. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (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 vital 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. The act gave state insurance regulators a nonvoting 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.
INSURANCE: Policy
INSURANCE: Policy
Regulatory structure
State policymakers should create a regulatory structure to promote consumer protection. This includes establishing full-time, independent insurance consumer advocate offices. A nominal charge per insurance policy should fund this.
States should consider statutory changes that would bring reinsurers under the scope of state regulatory authority and require documentation of their financial status.
Federal insurance laws and regulations should not preempt stronger state consumer protection laws and regulations (see also Roles in financial services regulation).
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 be required to review rates for insurance policies designed to protect individuals and families from financial losses such as auto, homeowners, and life insurance. They should not approve rates that are excessive, inadequate, or discriminatory. As part of this process, insurance companies should be required to provide evidence to justify proposed rate increases and coverage decreases before they can take effect.
Any uniform state regulatory standards should prioritize consumer protection and be developed in coordination with consumer groups and industry.
The National Association of Insurance Commissioners (NAIC) and state insurance commissioners should:
- create a publicly accessible information clearinghouse for insurance statistics and data, particularly with respect to claims and payouts.
- regularly report comprehensive data in a timely and uniform manner to enable policymakers, researchers, and advocates to monitor the market in near real time.
- develop uniform reporting requirements.
- provide technical assistance to state insurance departments.
The Interstate Insurance Product Regulation Commission and the NAIC should also provide adequate resources for consumer representation.
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 Lobby Reform).
Agent compensation structures should ensure that consumers are offered the product that best suits their needs. Insurers should be prohibited from providing agents with incentives to steer consumers to less suitable products.
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 require consumer protections for risky consumer insurance products that are sold outside of the normal regulatory structure. This includes transparency that claims may not be paid if the insurer becomes insolvent.
Regulators should safeguard the financial stability of insurers. Insurers should be prohibited from making excessive payments to affiliates or other transfers that could jeopardize their solvency.