Insurance Regulation: Purpose, Structure, and the North Carolina Department of Insurance
Why insurance is regulated
Insurance is treated as a business affected with a public interest. Buyers pay in advance for a promise they may not test for decades, and that promise is worthless if the insurer becomes insolvent. State regulation therefore pursues three goals: insurer solvency, fair treatment of policyholders, and availability of coverage at fair prices.
The McCarran-Ferguson Act (1945) confirmed that the states, not the federal government, primarily regulate insurance, and shielded insurer activity from federal antitrust law to the extent the states regulate it.
Who does what in North Carolina
- The General Assembly writes the insurance statutes.
- The Commissioner of Insurance is an elected official serving a four-year term, and also serves as State Fire Marshal. The Commissioner heads the NC Department of Insurance, issues rules, licenses insurers, producers and adjusters, examines insurers' books, holds hearings, and imposes fines, cease-and-desist orders, suspensions and revocations.
Classifying insurers
Domestic = chartered in NC. Foreign = chartered in another state. Alien = chartered outside the U.S. Stock insurers are owned by shareholders; mutual insurers are owned by policyholders and may pay dividends (a return of premium, not taxable until it exceeds basis). Admitted insurers hold a certificate of authority; non-admitted (surplus lines) insurers write only through specially licensed brokers when admitted markets decline the risk.
Rate and solvency regulation
Rates must be adequate (to pay claims and expenses), not excessive, and not unfairly discriminatory. Solvency tools include reserves, minimum capital and surplus, periodic examinations, annual statements and risk-based capital.
Trap: Unfairly discriminatory does not mean different. Charging smokers more is lawful because it reflects expected loss; charging two identical risks different rates for no reason is not.
Rule of thumb: The legislature writes statutes, the Commissioner writes rules and enforces them - and "domestic/foreign/alien" describes where the insurer is chartered, never the type of insurance it sells.