Framework for the Regulation of the Insurance Industry – New Appleman on Insurance Law Library Edition, Chapter 8

   By Gary M. Cohen

This is a time of unprecedented turmoil in the financial markets. The failure of Lehman Brothers and the federal bailout of AIG and other major financial institutions has led policymakers to consider wide-ranging changes to a regulatory system that dates back to the Great Depression and the New Deal. It seems certain that the role of the federal government in overseeing financial markets will increase, though precisely how has not yet been determined.

How will this affect regulation of the insurance industry? State regulators argue that the state-based system has been successful both in protecting consumers and in preventing the insolvencies that have stricken the federally-regulated banking system. Many in the industry, as well as the Treasury Department in its recent White Paper on regulatory reform, have criticized state regulation as inconsistent and outmoded, claiming that its lack of uniformity imposes an undue regulatory burden on market participants. Some argue for broad federal regulation of insurance, while others say that at a minimum, the federal government must have the authority to regulate firms that represent "systemic risk" to the financial system. Yet Treasury has acknowledged that there exists little expertise concerning the insurance industry within the federal government.
How is it that this enormous sector of the financial markets has avoided federal regulation? How does the state regulatory system work? What are its strengths; what are its weaknesses? What efforts are the states making to increase uniformity and to modernize the existing regulatory framework? What proposals for federal regulation have been made?
Chapter 8, the first chapter in Volume 2 of the new edition of Appleman, describes the "Framework of Insurance Regulation." It provides a clear, concise overview of the way in which the business of insurance is regulated. It describes the history of the state-based regulatory structure, and the broad powers that state insurance departments have over every aspect of the business, from determining who may write insurance in their state, to examinations of the financial condition and market conduct of licensees, to regulation of the types of products insurers may sell and the rates they may charge. It goes on to discuss the role that the National Association of Insurance Commissioners has played in attempting to establish greater uniformity and consistent standards among the states. It also describes the various proposals for increased federal involvement in regulation of the insurance industry currently being considered by Congress. It provides an excellent introduction and guide to understanding the way the industry is regulated and to where it may be headed in the future.