CE- Claims Adjuster Academy

Individual states are more responsive to the needs of their own citizens. Although state regulations do differ from state-to-state, most follow the guidelines set out for all state governments and their respective insurance commissions (Texas Department of Insurance [TDI], 2021i). As such, the differences between the state regulations are minor in detail. There may be great upset caused to individuals if a switch over from the state-governed system to a federally governed system was to ensue.

UNIT 1 Insurance and Ethical Responsibility - 5

Chapter 1 – Regulations Part 1.1:

Why Regulate?

The Purpose of Regulation

State regulations governing the insurance industry are designed primarily to (a) protect the consumer from abuses and (b) promote fair competition among the insurers. Not all consumer abuses are the direct result of fraud or willful intent. In many cases, increased competition drives a business environment to move too quickly, and incompetence results. So, the regulations also include guidelines for how an insurance practice should be operated to maintain a minimum standard of competence (TDI, 2021i). The state regulates practices in the insurance industry in these speci fi c areas (www.tdi.texas.gov): • Financial condition of the insurer (TDI, 2021f) • Licensing (TDI, 2021a) • Rates (TDI, 2021f) • Standard provisions in contracts (TDI, 2021h) An insurer’s financial stability is of great importance, as its financial strength shows how viable the company is, and it shows a proven track record of performance and service to its customers. All insurance companies must meet basic requirements to continue to do business. For example, insurers are required to keep reserves of funds to be used to pay future claims. These funds are earmarked for future use and cannot be part of the assets of the company (TDI, 2021f). Handling assets is also regulated. Most states do not allow insurers to invest in risky investment vehicles, such as certain types of securities. Instead, the insurers are required to invest in conservative financial vehicles. Insurers are also required to report their financial condition to the state annually. The state systematically audits each insurer on a regular basis. Financial Condition of the Insurer

Regulating Insurance

Until 1944, insurance was not considered as commerce and as such was not subject to federal authority. Each state regulated policy language and rates. However, the States v. the South-Eastern Underwriter Association, a landmark case in 1944, forced a reversal in the insurance industry; the Supreme Court ruled that insurance was indeed commerce and subject to federal authority. By that time, each state had already implemented programs and policies for governing insurance on the state level, and leaders of the federal government were reluctant to step in and take over the process.

Licensing

Licensing relates to the power of the insurance department to do the following (TDI, 2021a): • Issue licenses • Renew licenses

• Suspend licenses • Revoke licenses

In 1945, Congress passed the McCarran-Ferguson Act, which turned over control of the insurance industry to the state, rather than the federal, authorities. The federal government would only

Both individuals and insurance companies must be licensed to participate in the insurance industry in a state. Companies must have a license to do business in the state. Agents must hold a valid license to sell insurance in the state, and many states now require insurance adjusters to be licensed. Licensing regulations (a) ensure that the state insurance department can maintain the standards it has set for individuals and companies alike, and (b) allows the department to have an avenue for removal of any individuals or companies from the state insurance industry if they are found to violate the regulations. In this way, the insurance department can stop fraud, consumer abuse, and remove individuals who are unscrupulous or unethical in their dealings within the insurance industry.

intervene in insurance matters if a state’s governing regulations were proved to be

inadequate. Today, the role of the state is still to oversee the insurance industry. From time to time, state regulations are challenged by supporters of a

federally controlled system. Supporters of federal regulation of the insurance industry point to a level of overall uniformity that could be achieved by bringing all the regulations under one governing body, instead of 50 individual bodies. Supporters of the state-regulated industry counter this thinking with the following arguments: