How Insurance is Regulated

Written by Fred McConnell

Every industry needs regulation to provide a counterbalance to the negative behaviors that entreperurial exuberance can generate to the detriment of consumers, and the automobile insurance industry is no exception. Federal law does little to regulate the industry, leaving much of the task up to each state and territory in the U.S.

The impact of this non-standardized regulation structure is wildly varying rules for the automobile insurance industry throughout the 50 states. Some states strictly regulate the automobile insurance industry, while others are more business friendly. While it may intuitively seem that a more rigid approach to regulating the automobile insurance industry would result in lower premiums and better customer service, this is not always the case, as more regulation can sometimes lead to increased bureaucracy and less innovation and competition among insurers.

The following is a brief overview of what state departments of insurance do, and what aspects of the industry they regulate.

State departments of insurance

To provide regulation of car insurers and other insurers under their jurisdiction, the states each have a department of insurance. The state department of insurance, usually led by an elected or appointed insurance commissioner, adopts and enforces rules for insurers operating in its state, such as regulations concerning minimum coverage, fair competition among insurers, consumer rights, solvency, etc. The state department of insurance often serves as a place where insureds can begin the process of seeking redress of grievances with their insurer.

California has one of the strongest regulatory authorities in the U.S. while states in the South and the Midwest tend to have more lassiez-faire regulatory climates. While California's tough regulatory culture has resulted in stronger consumer protections, the state is in the top half of the nation (#17) for car insurance rates. Some industry analysts have argued that the tough regulations cost consumers more, while others state that California's regulations actually keep premiums down, as the insurers must request permission to increase their rate card.

(Almost) Universal Coverage

While regulations differ from state to state, one general rule of thumb among almost all states is that drivers are required to purchase coverage for their vehicles. Only two states don't require drivers to buy car insurance, but even these states have laws making drivers financially responsible for any damage their vehicle may cause to property or persons, making the purchase of insurance highly advisable.

Competition

State regulators protect consumers by enacting laws that are intended to foster and promote competition among insurers, the theory being that the more insurers there are seeking business, the lower costs will be as the competing insurers decrease prices and increase service to attract more customers. States in general try to prevent insuers from colluding to set prices and resist tactics by insuers to set up monopolies or capture a high enough share of the market to render competition ineffective.

Solvency

State departments of insurance require insurers to keep a certain amount of cash and other assets on hand in order to enable them to pay claims. Each state sets a different minimum for this, but the general purpose is to ensure that insurers are able to pay the claims their customers may file with them, avoiding the necessity of lawsuits or a taxpayer bailout in the event of a catastrophic loss event, such as a natural or manmade disaster that results in multiple claims.

Minimum insurance requirements

Each state sets rules regarding how much and what kind of insurance its residents are required to purchase. Some states require only barebones liability or no-fault policies while others ask their residents to purchase higher limit policies that include coverage for injuries that the other party may suffer.

Fraud

State insurance regulators not only protect customers, but also the industry by investigating and prosecuting those who attempt to defraud insurers. In the long run, this is good for consumers too, because the more claims insurers must pay out, the higher that state's average premium will be, so discouraging fraud will reduce claims.

When considering moving your company or yourself to another state, it pays to check out that area's insurance regulations, including those for auto insurance. While it probably won't be the deciding factor in your decision to move, if you're considering several locations, lower car insurance premiums for yourself or for the vehicles your business uses can be something to mark in the pro or con column for each locale.