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What is insurance in the US?

What is insurance in the US?

State-based insurance regulatory system edit

Historically, the insurance industry in the United States was regulated almost exclusively by individual state governments. The first state commissioner of insurance was appointed in New hampshire in 1851 and the state-based insurance regulatory system grew as quickly as the insurance industry itself. Prior to this period, insurance was primarily regulated by corporate charter, state statutory law and de facto regulation by the courts in judicial decisions.

Under the state-based insurance regulation system, each state operates independently to regulate their own insurance markets, typically through a state department of insurance or division of insurance. Stretching back as far as the Paul case in 1869, challenges to the state-based insurance regulatory system have risen from various groups, both within and without the insurance industry. The state regulatory system has been described as cumbersome, redundant, confusing and costly.

The United states found in the 1944 case of United States association that the business of insurance was subject to federal regulation under the Commerce Clause of the U.S. Constitution. The United states congress, however, responded almost immediately with the in 1945. The McCarran-Ferguson Act specifically provides that the regulation of the business of insurance by the state governments is in the public interest. Further, the Act states that no federal law should be construed to invalidate, impair or supersede any law enacted by any state government for the purpose of regulating the business of insurance, unless the federal law specifically relates to the business of insurance.

A wave of insurance company insolvencies in the 1980s sparked a renewed interest in federal insurance regulation, including new legislation for a dual state and federal system of insurance solvency regulation. In response, the national association  (NAIC) adopted several model reforms for state insurance regulation, including risk-based capital requirements, financial accreditation standards and an initiative to codify accounting principles. As more and more states enacted versions of these model reforms into law, the pressure for federal reform of insurance regulation waned. However, there are still significant differences between states in their systems of insurance regulation, and the cost of compliance with those systems is ultimately borne by insureds in the form of higher premiums. Company estimated in 2009 that the U.S. insurance industry incurs about $13 billion annually in unnecessary regulatory costs under the state-based regulatory system.

The NAIC acts as a forum for the creation of model laws and regulations. Each state decides whether to pass each NAIC model law or regulation, and each state may make changes in the enactment process, but the models are widely, albeit somewhat irregularly, adopted. The NAIC also acts at the national level to advance laws and policies supported by state insurance regulators. NAIC model acts and regulations provide some degree of uniformity between states, but these models do not have the force of law and have no effect unless they are adopted by a state. They are, however, used as guides by most states, and some states adopt them with little or no change.

There is a long-running debate within and among states over the importance of government regulation of insurance which is noticeable in the different titles of their state insurance regulatory agencies. In many states, insurance is regulated through a cabinet-level “department” because of its economic importance. In other states, insurance is regulated through a “division” of a larger department of business regulation or financial services, on the grounds that elevating too many government agencies to departments leads to administrative chaos and the better option is to maintain a clear chain of command.

Federal regulation of insurance edit

Nevertheless, federal regulation has continued to encroach upon the state regulatory system. The idea of an optional federal was first raised after a spate of solvency and capacity issues plagued property and casualty insurers in the 1970s. This OFC concept was to establish an elective federal regulatory scheme that insurers could opt into from the traditional state system, somewhat analogous to the dual-charter regulation of banks. Although the optional federal chartering proposal was defeated in the 1970s, it became the precursor for a modern debate over optional federal chartering in the last decade.

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