Insurance Regulation and General Insurance Concepts
Who regulates
Insurance in the United States is regulated primarily by the states. In Maryland the regulator is the Maryland Insurance Administration (MIA), headed by the Insurance Commissioner, who is appointed by the Governor. The Commissioner licenses insurers and producers, examines company finances, reviews policy forms and rates, investigates consumer complaints, and can impose fines, suspend or revoke licenses, issue cease-and-desist orders, and place an insurer into rehabilitation or liquidation.
The insurance contract
Life insurance is a contract of utmost good faith, of adhesion (the insurer drafts it; ambiguities are construed against the insurer), aleatory (unequal exchange of value), unilateral (only the insurer makes an enforceable promise), and conditional (benefits depend on conditions). Insurable interest in a life policy must exist at the time of application; it need not continue until death. Life insurance is a valued contract, not a contract of indemnity.
Risk vocabulary
Only pure risk (loss or no loss) is insurable; speculative risk is not. Adverse selection is the tendency of poorer-than-average risks to seek coverage. A peril is the cause of loss; a hazard increases the chance of loss and may be physical, moral (dishonesty), or morale (carelessness). Risk-management techniques are avoidance, retention, reduction, sharing, and transfer.
Market conduct
Rebating, twisting, misrepresentation, defamation, unfair discrimination among like risks, commingling of premium funds, and illegal inducements are prohibited. A producer holds money in a fiduciary capacity and must be appointed by the insurer.
Traps: items claiming insurable interest must exist at death (false for life), that speculative risk is insurable (false), or that twisting is a claims practice (it is a sales practice).
Rule of thumb: most regulation questions turn on who (owner, insured, beneficiary, Commissioner) and when (application, issue, death).