Insurance Regulation and General Insurance Concepts
Risk and how insurance handles it
Insurance transfers pure risk (loss or no loss) from an individual to a pool of similar exposure units. Speculative risk (the chance of gain as well as loss) is not insurable. A peril is the cause of loss - fire, accident, death. A hazard increases the likelihood or severity of loss: physical hazards (icy steps), moral hazards (dishonesty, such as faking a claim), and morale hazards (carelessness because insurance exists). Insurable risks are measurable, accidental, shared among many similar units, definite in time, place, and amount, and unlikely to wipe out the whole pool at once.
Who regulates what
Insurance is regulated mainly by the states, a division of authority confirmed by the McCarran-Ferguson Act, which left supervision to the states and applies federal antitrust law only to the extent the states do not regulate. A state insurance department, headed by a commissioner or superintendent, licenses insurers and producers, examines financial condition, approves policy forms and rates, and enforces unfair trade practice laws. The NAIC writes model laws and collects data, but it has no regulatory authority - a very common trap.
A producer must hold a license for the line of business and be appointed by the insurer before soliciting. Premiums collected belong to the insurer; commingling them with personal funds is a breach of fiduciary duty. Prohibited practices include rebating (sharing commission or offering inducements not in the policy), twisting (misrepresentation to induce replacement), misrepresentation, defamation, coercion, and false advertising. Replacement triggers disclosure and notice requirements.
Rule of thumb
For any licensing question ask three things: licensed, appointed, and acting within the line of authority? If any one is missing, the act is a violation even when the sale itself was otherwise proper.