State Regulation of Insurance

In the United States, insurance is primarily regulated at the state level rather than the federal level. This state-based regulatory system is the foundation of insurance oversight in America.

The McCarran-Ferguson Act

The McCarran-Ferguson Act of 1945 (15 U.S.C. §§ 1011-1015) is the cornerstone federal law that establishes state authority over insurance regulation.

Historical Background

Before 1944, insurance was considered a local matter exempt from federal regulation. However, in United States v. South-Eastern Underwriters Association (1944), the Supreme Court ruled that:

• Insurance transactions that crossed state lines constituted interstate commerce
• The federal government could regulate insurance under the Commerce Clause
• Federal antitrust laws applied to the insurance industry

This decision threatened to bring insurance under extensive federal regulation.

Congressional Response

In response, Congress passed the McCarran-Ferguson Act in 1945, which declared that:

"The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business."

Key Provisions of the McCarran-Ferguson Act

Exam Tip: The McCarran-Ferguson Act doesn't prohibit federal regulation—it gives states the primary authority to regulate insurance. Federal law can still apply if it specifically mentions insurance.

2021 Amendment for Health Insurance

The Competitive Health Insurance Reform Act of 2020 (signed January 2021) amended the McCarran-Ferguson Act to:

• Remove the antitrust exemption for health and dental insurers
• Add federal FTC oversight for anti-competitive practices
• Maintain state regulatory authority over other insurance aspects

State Insurance Departments

Each state has an insurance department (or division) responsible for regulating the insurance industry within its borders.

Structure and Organization

• Department Name: May be called Department of Insurance, Division of Insurance, or Office of Insurance Regulation
• Funding: Primarily funded through fees and assessments on licensed insurers
• Staff: Includes examiners, actuaries, attorneys, and consumer specialists

Core Functions of State Insurance Departments

The Insurance Commissioner

The Insurance Commissioner (or Superintendent, Director, or Commissioner of Insurance) is the chief insurance regulator in each state.

Selection of Commissioners

Key Point: In most states (39 of 50), the insurance commissioner is appointed rather than elected.

Powers and Duties of the Insurance Commissioner

The commissioner's authority varies by state but generally includes:

Regulatory Powers

Administrative Duties

• Consumer Protection: Investigate complaints and protect policyholders
• Fraud Investigation: Detect and prosecute insurance fraud
• Education: Provide public education about insurance
• Policy Development: Recommend legislation and regulatory changes
• Receivership: Take control of troubled insurers when necessary

Licensing Requirements

Producer (Agent/Broker) Licensing

To sell insurance, individuals must obtain a license from each state where they conduct business:

Exam Tip: Insurance licensing is handled at the state level. Producers must be licensed in each state where they sell insurance, although reciprocity agreements exist.

Lines of Authority

Producers are licensed for specific lines of authority (types of insurance they can sell):

• Life Insurance
• Health Insurance (Accident and Health/Sickness)
• Property Insurance
• Casualty Insurance
• Variable Contracts (requires additional securities licenses)