Home > Articles

This chapter is from the book

Regulation of Insurance

Although some federal regulations affect insurance directly, such as the Fair Credit Reporting Act and a few programs that make coverage for catastrophic losses available, such as FEMA's (Federal Emergency Management Agency) National Flood Insurance Program, insurance is regulated primarily at the state level.

State Insurance Regulation

Insurance is closely regulated for the good of the insurance industry and the general public. Each state has its own laws and regulations to regulate the insurance business conducted within its boundaries.

Each state has an insurance department headed by an official charged with the responsibility for controlling insurance matters within that state. These officials are called directors, superintendents, or commissioners of insurance, depending on the state where they hold office, but they all perform similar duties. The term "commissioner" applies in most states.

Collectively, the commissioners of all states form a body known as the National Association of Insurance Commissioners (NAIC), which meets at regular intervals to exchange information and provide coordination of the regulatory measures of each state. Through its recommendations, much of the nation's insurance laws take shape. Although nonbinding on individual states, the NAIC's recommendations are generally followed.

Regulation of Companies

State regulation of insurance companies affects numerous aspects of their formation and operations, ranging from capital and surplus requirements to investment and marketing practices. State laws require the reporting of financial data and payment of premium taxes, and specifically prohibit a number of unfair or deceptive practices.

Admitted and Nonadmitted Companies

One of the duties of an insurance department is to determine which insurance companies will be allowed to do business in the state. A company that meets the insurance department's standards and is authorized to do business in a state is called an admitted or authorized insurer. An insurance company that is not authorized to do business in a state is a nonadmitted or unauthorized insurer. A nonadmitted insurer can only do business in the state under special circumstances.

Domestic, Foreign, and Alien Companies

Although a company can conduct business in several states, it is formed and incorporated in only one state. Within its home state, an insurance company is known as a domestic company. Within states other than the state in which it is incorporated, an insurance company is a foreign company. A company that is incorporated in a country other than the United States, but doing business in the states, is known as an alien company.

NOTE

In many areas, state laws specifically differentiate between domestic companies and foreign and alien companies. Many of these differences focus on financial and reporting requirements as well as provisions for resolving legal disputes. These requirements are designed to protect the public. Although foreign and alien companies are permitted to do business within a state, special regulatory provisions that do not apply to domestic companies are necessary because the insurers are based outside of the state's jurisdiction.

Financial Regulation

In addition to examining and authorizing companies to conduct business within the state, the state insurance department keeps close watch over the financial health of all companies doing business within its boundaries.

Various regulations are designed to preserve insurance company solvency, to detect financial problems, and to protect insureds in the event that insolvency occurs. State laws impose capital and surplus requirements on insurers, require the preparation of annual financial statements, and require periodic examinations of insurers. These laws establish initial financial requirements and help in the early detection of financial problems. If an insurer falls into a hazardous financial condition, the insurance department attempts to rehabilitate the company. If an insurer becomes insolvent, the insurance department will handle the liquidation.

In many states, the public is also protected by one or more insurance guaranty associations that provide funds for payment of unpaid claims when an insurer becomes insolvent.

Company Ratings

There are several organizations that rate the financial strength of insurance carriers, based on an analysis of a company's claims experience, investment performance, management, and other factors. These organizations include A.M. Best, Standard & Poor, and Moody's. These ratings are one of the most widely used indicators of financial health (or the lack of it) in the insurance industry.

Regulation of Agents

Many insurance regulations are directed toward governing the qualification and behavior of insurance agents. As the primary source of contact between insurance companies and members of the general public, it is important that agents be properly educated and act in an ethical and professional manner.

Licensing

The state insurance department devotes much of its time to working with insurance agents. One of its most important duties with regard to agents is licensing. It is illegal for someone to sell insurance without first obtaining a license from the state to do so.

To make sure that agents will be prepared to undertake their substantial responsibilities, each state requires its agents to pass a licensing exam to receive a license. This exam is administered by the state insurance department.

An agent may only offer insurance in the states where he or she holds the proper license. For example, an agent who is licensed to sell insurance only in his or her resident state of Indiana could not provide insurance on an Indiana customer's lake home located in Michigan. However, the Indiana agent could obtain a nonresident agent license from Michigan, and in that case he or she could sell coverage on property located in that other state.

Codes Regulating Agents

In addition to licensing, the state is responsible for the way agents conduct business within the state. State insurance codes are very specific about the standards agents must meet.

A fiduciary is a person who stands in a special relationship of trust to another person. Agents have fiduciary duties toward their clients, especially regarding the handling of premiums.

Agents cannot misrepresent or falsely advertise the terms or benefits of a policy or the financial condition of the company. Agents must make complete, accurate statements about the product being sold.

Twisting is a form of misrepresentation in which the agent convinces the client to cancel already existing insurance and buy another policy from the agent, to the detriment of the insured. Twisting is illegal.

Rebating is giving or offering some benefit other than those specified in the policy—such as cash, gifts, or securities—to induce a customer to buy insurance. For example, an agent might kick back part of a commission to the customer, thus lowering the price of the insurance in return for the business. Rebating is illegal in all but two states.

Agents can be in violation of the law if they unfairly discriminate against insured people. This means that an insured cannot be given a lower or higher rate than another insured in identical circumstances. It also means that the agent cannot accept a bribe from a client to provide insurance or lower the premium.

Form and Rate Filings

Another important function performed by state insurance departments is approval, or ratification, of the policy forms, endorsements, and rates used by companies doing business in their states. Rates are the basic charges an insurance company sets for various types of insurance.

In some states, called prior approval states, the insurance company must obtain official approval before using new forms and rates.

In file and use states, a company can begin using forms and rates as soon as they have been filed. The state eventually reviews the filing and officially accepts or rejects it. With use and file states, insurers must file rates and forms within a certain period of time after they are first used.

In open competition states, the state allows the companies to compete openly with the forms and rates they select, subject only to requirements of adequacy and nondiscrimination.

In some states, for some lines of insurance, the use of unique state forms or rates can be mandatory for any company doing business in the state.

Rating Organizations

Some states establish their own rates for certain types of insurance and require all companies to use these mandatory rates. For most types of insurance, however, the company must establish the rates and submit them to the state.

Rate-making involves collecting extensive and accurate financial, operational, premium, and loss records. To assist the insurance company in collecting these statistics, certain central service bureaus have been established. These organizations—made up of numerous individual insurance companies—gather, pool, and analyze statistics from all the member companies. The bureau then establishes loss costs based on these combined figures and files them with individual states. Loss costs represent the key component of an insurance rate—how much an insurance company needs to collect to cover expected losses.

Member companies can use these loss costs combined with factors covering their own expenses and profit margins to establish finished rates. Companies must file rates with the state but can do this by referencing the service bureau's loss costs and filing their own individual factors reflecting expenses and profit. Some companies do not belong to a service organization and collect their own statistics and file independently.

Companies that use bureau filings sometimes deviate from the published rates by charging something either higher or lower than the recommended rate. Deviations are usually permitted within a specified range, provided that the insurer is consistent in applying the same deviation to all similar risks.

One of the largest services bureaus is the Insurance Services Office, commonly referred to as ISO, which files both loss costs and standardized forms on behalf of its member companies. The National Council on Compensation Insurance, Inc. (NCCI) is a rating bureau that has jurisdiction over the workers compensation field. The Surety Association Of America functions as a rating bureau for surety bonds. There are numerous other rating bureaus.

Enforcement

An important area of regulatory responsibility for the state insurance departments is enforcement of the many laws and rules that apply to the conduct of the companies, agents, and types of insurance transacted within the state. The department is responsible for seeing that the insurance business within its jurisdiction operates in compliance with these codes and standards. Reported violations must be investigated, and appropriate penalties assessed. Violations can result in fines, license suspension or revocation, suspension or revocation of a company's authority to do business in the state, and, in some cases, imprisonment.

Federal Regulation

Although most insurance operations are regulated by the states, there are some areas where the federal government has exercised its regulatory authority. For example, federal law imposes penalties for fraud and false statements made in connection with insurance transactions. Anyone engaged in the insurance business who makes a false material statement or report or willfully and materially overvalues any land, property, or security in connection with financial reports or documents presented to an insurance regulatory official or agency for the purpose of influencing their actions can be subject to punishment. Any insurance officer, director, or agent who willfully embezzles, abstracts, purloins, or misappropriates any of the moneys, funds, premiums, credits, or other property of an insurer can be punished accordingly. Punishments can consist of substantial fines and/or periods of imprisonment for up to 10 years.

InformIT Promotional Mailings & Special Offers

I would like to receive exclusive offers and hear about products from InformIT and its family of brands. I can unsubscribe at any time.

Overview


Pearson Education, Inc., 221 River Street, Hoboken, New Jersey 07030, (Pearson) presents this site to provide information about products and services that can be purchased through this site.

This privacy notice provides an overview of our commitment to privacy and describes how we collect, protect, use and share personal information collected through this site. Please note that other Pearson websites and online products and services have their own separate privacy policies.

Collection and Use of Information


To conduct business and deliver products and services, Pearson collects and uses personal information in several ways in connection with this site, including:

Questions and Inquiries

For inquiries and questions, we collect the inquiry or question, together with name, contact details (email address, phone number and mailing address) and any other additional information voluntarily submitted to us through a Contact Us form or an email. We use this information to address the inquiry and respond to the question.

Online Store

For orders and purchases placed through our online store on this site, we collect order details, name, institution name and address (if applicable), email address, phone number, shipping and billing addresses, credit/debit card information, shipping options and any instructions. We use this information to complete transactions, fulfill orders, communicate with individuals placing orders or visiting the online store, and for related purposes.

Surveys

Pearson may offer opportunities to provide feedback or participate in surveys, including surveys evaluating Pearson products, services or sites. Participation is voluntary. Pearson collects information requested in the survey questions and uses the information to evaluate, support, maintain and improve products, services or sites, develop new products and services, conduct educational research and for other purposes specified in the survey.

Contests and Drawings

Occasionally, we may sponsor a contest or drawing. Participation is optional. Pearson collects name, contact information and other information specified on the entry form for the contest or drawing to conduct the contest or drawing. Pearson may collect additional personal information from the winners of a contest or drawing in order to award the prize and for tax reporting purposes, as required by law.

Newsletters

If you have elected to receive email newsletters or promotional mailings and special offers but want to unsubscribe, simply email information@informit.com.

Service Announcements

On rare occasions it is necessary to send out a strictly service related announcement. For instance, if our service is temporarily suspended for maintenance we might send users an email. Generally, users may not opt-out of these communications, though they can deactivate their account information. However, these communications are not promotional in nature.

Customer Service

We communicate with users on a regular basis to provide requested services and in regard to issues relating to their account we reply via email or phone in accordance with the users' wishes when a user submits their information through our Contact Us form.

Other Collection and Use of Information


Application and System Logs

Pearson automatically collects log data to help ensure the delivery, availability and security of this site. Log data may include technical information about how a user or visitor connected to this site, such as browser type, type of computer/device, operating system, internet service provider and IP address. We use this information for support purposes and to monitor the health of the site, identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents and appropriately scale computing resources.

Web Analytics

Pearson may use third party web trend analytical services, including Google Analytics, to collect visitor information, such as IP addresses, browser types, referring pages, pages visited and time spent on a particular site. While these analytical services collect and report information on an anonymous basis, they may use cookies to gather web trend information. The information gathered may enable Pearson (but not the third party web trend services) to link information with application and system log data. Pearson uses this information for system administration and to identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents, appropriately scale computing resources and otherwise support and deliver this site and its services.

Cookies and Related Technologies

This site uses cookies and similar technologies to personalize content, measure traffic patterns, control security, track use and access of information on this site, and provide interest-based messages and advertising. Users can manage and block the use of cookies through their browser. Disabling or blocking certain cookies may limit the functionality of this site.

Do Not Track

This site currently does not respond to Do Not Track signals.

Security


Pearson uses appropriate physical, administrative and technical security measures to protect personal information from unauthorized access, use and disclosure.

Children


This site is not directed to children under the age of 13.

Marketing


Pearson may send or direct marketing communications to users, provided that

  • Pearson will not use personal information collected or processed as a K-12 school service provider for the purpose of directed or targeted advertising.
  • Such marketing is consistent with applicable law and Pearson's legal obligations.
  • Pearson will not knowingly direct or send marketing communications to an individual who has expressed a preference not to receive marketing.
  • Where required by applicable law, express or implied consent to marketing exists and has not been withdrawn.

Pearson may provide personal information to a third party service provider on a restricted basis to provide marketing solely on behalf of Pearson or an affiliate or customer for whom Pearson is a service provider. Marketing preferences may be changed at any time.

Correcting/Updating Personal Information


If a user's personally identifiable information changes (such as your postal address or email address), we provide a way to correct or update that user's personal data provided to us. This can be done on the Account page. If a user no longer desires our service and desires to delete his or her account, please contact us at customer-service@informit.com and we will process the deletion of a user's account.

Choice/Opt-out


Users can always make an informed choice as to whether they should proceed with certain services offered by InformIT. If you choose to remove yourself from our mailing list(s) simply visit the following page and uncheck any communication you no longer want to receive: www.informit.com/u.aspx.

Sale of Personal Information


Pearson does not rent or sell personal information in exchange for any payment of money.

While Pearson does not sell personal information, as defined in Nevada law, Nevada residents may email a request for no sale of their personal information to NevadaDesignatedRequest@pearson.com.

Supplemental Privacy Statement for California Residents


California residents should read our Supplemental privacy statement for California residents in conjunction with this Privacy Notice. The Supplemental privacy statement for California residents explains Pearson's commitment to comply with California law and applies to personal information of California residents collected in connection with this site and the Services.

Sharing and Disclosure


Pearson may disclose personal information, as follows:

  • As required by law.
  • With the consent of the individual (or their parent, if the individual is a minor)
  • In response to a subpoena, court order or legal process, to the extent permitted or required by law
  • To protect the security and safety of individuals, data, assets and systems, consistent with applicable law
  • In connection the sale, joint venture or other transfer of some or all of its company or assets, subject to the provisions of this Privacy Notice
  • To investigate or address actual or suspected fraud or other illegal activities
  • To exercise its legal rights, including enforcement of the Terms of Use for this site or another contract
  • To affiliated Pearson companies and other companies and organizations who perform work for Pearson and are obligated to protect the privacy of personal information consistent with this Privacy Notice
  • To a school, organization, company or government agency, where Pearson collects or processes the personal information in a school setting or on behalf of such organization, company or government agency.

Links


This web site contains links to other sites. Please be aware that we are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of each and every web site that collects Personal Information. This privacy statement applies solely to information collected by this web site.

Requests and Contact


Please contact us about this Privacy Notice or if you have any requests or questions relating to the privacy of your personal information.

Changes to this Privacy Notice


We may revise this Privacy Notice through an updated posting. We will identify the effective date of the revision in the posting. Often, updates are made to provide greater clarity or to comply with changes in regulatory requirements. If the updates involve material changes to the collection, protection, use or disclosure of Personal Information, Pearson will provide notice of the change through a conspicuous notice on this site or other appropriate way. Continued use of the site after the effective date of a posted revision evidences acceptance. Please contact us if you have questions or concerns about the Privacy Notice or any objection to any revisions.

Last Update: November 17, 2020