Insurance Regulation: State and Federal Roles
Who regulates what
Insurance is regulated principally at the state level. The McCarran-Ferguson Act (1945) confirmed that the states regulate "the business of insurance," and Congress did not intend to occupy that field. Each state's Department of Insurance licenses producers, approves policy forms and rates (in Rhode Island, through the DOI), conducts market conduct examinations, and enforces unfair trade practice statutes. The NAIC drafts model laws and regulations, but it has no legal authority - a model law binds no one until a state adopts it. Trap: every "the NAIC requires..." answer choice is wrong unless the state adopted it.
Federal law still touches insurance: the SEC regulates variable life and variable annuities as securities (prospectus required, dual licensing), ERISA governs employer benefit plans, HIPAA sets portability and privacy rules, the ACA sets health market rules, and the Internal Revenue Code determines tax treatment (MEC rules, death benefit exclusions).
Producers
A producer must hold a license and be appointed by the insurer. Premiums belong to the insurer or the client - commingling or misuse is a fiduciary breach. Know the unfair trade practices: misrepresentation, twisting (inducing lapse through misrepresentation), churning (replacement to generate commission), rebating (returning part of the premium or commission as an inducement), coercion/boycott/intimidation, defamation, and unfair discrimination. Replacement rules require notice to the applicant and, generally, to the existing insurer.
Worked example
An agent says, "Sign today and I'll pay your first month's premium myself." This is rebating - an illegal inducement - even if the client benefits. By contrast, a policy feature available to all buyers (a dividend option, a standard discount) is not rebating. Rule of thumb: if the benefit exists only because of the agent's side deal, it is an illegal inducement.