The insurance industry is highly regulated.

Each state has different laws, and they can vary quite a bit across the country. Here are a few reasons how and why the insurance industry is regulated.

Policies and practices

Unlike most products, it can be difficult for consumers to easily research the price and quality of insurance policies. Insurance policies entail complicated contracts that the average consumer may have trouble interpreting.

Regulation helps to prevent the use of unfair sales and claim practices and misleading or deceptive policies. Each type of policy an insurance company underwrites requires approval from regulatory agencies, to make sure it is fair and is in the best interest of the consumer.

Insolvency

The most important reason for regulating the insurance industry is to prevent insolvency.

After several insurers became insolvent in the 1980s, the National Association of Insurance Commissioners, along with state regulators, enacted standards tied to risks and accreditation programs to prevent insurers from going bankrupt.

These laws protect consumers, especially in the case of large disasters, from the potential for an insurance company to become insolvent and unable to pay out on a claim.

It would be unfair and damaging to the economy, for policyholders to pay years of premiums, then file a claim in the wake of natural disaster only to find the insurance company was out of money.

Insurers are required to set aside a significant portion of their earnings in the case of large payouts.

Availability

It isn’t profitable to insure homes, vehicles, or other items in certain areas. This is especially true in areas prone to disaster or areas with high rates of crime.

Regulations ensure that insurance companies don’t offer policies to only the most profitable consumers, who face lower risks. Without regulation, insurers could stay out of particular regional markets or even certain parts of town they deemed unprofitable.

How regulation works

Each state has a regulatory body that determines laws related to insurance. It is usually called the Department of Insurance.

States regulate rates and financial requirements, in addition to factors such as minimum liability requirements. Regulations can vary greatly between states. For example, some states may require minimum auto liability coverage of about $10,000, while others may require $50,000. In most cases, if you are driving across state lines, your coverages will change to meet the minimum requirements.

To learn more about the insurance industry and regulations that may affect you, speak with an expert at John B. Wright Insurance.