Insurance Regulation
Who regulates insurance
Insurance is regulated primarily by the states, not the federal government. The McCarran-Ferguson Act (1945) confirmed state authority over the business of insurance while permitting limited federal antitrust oversight. Each state insurance department, headed by a commissioner who may be appointed or elected, licenses insurers and producers, examines financial condition and market conduct, reviews policy forms and rates, and handles consumer complaints. The NAIC is an association of regulators that drafts model laws and gathers financial data; it has no legal authority itself - a model law is not law until a state adopts it.
Admitted versus non-admitted
An insurer needs a certificate of authority to be admitted in a state. Non-admitted (surplus lines) carriers write only through specially licensed surplus lines brokers when the risk cannot be placed in the admitted market, and their policyholders are not protected by the state guaranty association.
Producer duties
A producer must be licensed for the lines sold, appointed by the insurer, and typically must meet continuing education requirements. Premiums collected are held in trust; commingling them with agency or personal funds is a violation and may be a crime. Rebating, twisting, misrepresentation, and illegal inducements are prohibited unfair trade practices, as are unfair claim settlement practices such as failing to investigate promptly or offering far less than the claim is worth.
Rates and solvency
Rates must be adequate, not excessive, and not unfairly discriminatory. Rating laws include prior approval, file-and-use, use-and-file, and flex rating. Guaranty associations pay covered claims of insolvent admitted insurers up to statutory caps.
Trap: questions often credit the NAIC with enforcement power, or claim a policy is fully protected by the guaranty fund. Worked example: an agent who deposits client premiums into the agency operating account has commingled fiduciary funds even if every claim and refund is later paid.