Insurance Regulation in Transition

Introduction The business of insurance in the United States is regulated principally by the states. Each state has an insurance official who oversees the solvency of insurers doing business in the state as well as their rates and market practices. A considerable institutional framework has been developed over the years to assist insurance commissioners in performing these regulatory responsibilities. This framework comprises laws, regulations, procedures, personnel, knowledge, and physical facilities designed to oversee a $600 billion industry that affects the well-being of every citizen. Insurance regulation in recent years has been subject to increasing external and internal forces that have forced the states to respond. Fundamental changes in the structure and performance of the insurance industry have complicated regulators' jobs. Competitive pressures have led insurers to assume greater risk in order to offer consumers more attractive prices and products, resulting in larger and more frequent insurer failures. Insurance markets have become increasingly national and international in scope as insurers have widened the boundaries of their operations. High costs in some lines of insurance and natural disasters have intensified political pressure to constrain insurance prices and maintain availability of coverage. The increase in insurer failures and other market problems have raised serious concerns about whether state insurance regulation provides adequate consumer protection. Congressional investigators have questioned whether the states are able to effectively regulate a diverse and global insurance industry (U.S. General Accounting Office, 1989, 1991). A report issued by the House Energy and Commerce Committee in 1990, then chaired by Rep. John Dingell (D-MI), criticized state insurance regulators for lacking adequate resources, using unreliable financial information, failing to coordinate, and performing infrequent and poorly prioritized examinations (U.S. Congress, 1990).(1) Various proposals suggest imposing a greater federal role in areas such as solvency, health insurance, property insurance underwriting, and catastrophe insurance. This recent activity is only the latest chapter in a long history of federal-state clashes over the regulation of the insurance industry. These forces have had a considerable effect on insurance regulatory institutions. Some farsighted insurance commissioners, cognizant of the shortcomings of the insurance regulatory system, initiated a number of significant reforms before the problems generated criticism. Over the last decade, the states have engaged in an unprecedented program to rebuild the framework for insurance regulation. This effort has been directed primarily at strengthening solvency regulation by establishing more stringent capital standards, expanding financial reporting, improving monitoring tools, and certifying insurance departments. Other initiatives are underway to improve the efficiency of agent licensing and the regulation of rates and policy forms and to expand consumer protections against market abuses. State insurance departments have greatly increased their resources in terms of both people and technology to support these efforts. The National Association of Insurance Commissioners (NAIC) has played a key role in state regulators' efforts to coordinate and strengthen their oversight of the insurance industry. The objective of this article is to acquaint researchers with the significant changes in state insurance regulation that have occurred over the last decade and discuss some of the economic and political forces that have prompted these changes. The next two sections provide an overview of the basic motivations, objectives, and principal functions of insurance regulators. This is followed by a discussion of the most important factors affecting public policy toward insurance and the devices used to carry out that policy. …