How Insurance Companies Are Regulated

Find out who keeps an eye on your insurance company.

For the most part, insurance company regulation is left to the individual states as the result of the federal McCarran-Ferguson Act. The McCarran-Ferguson Act was passed at the urging of insurance companies after the U.S. Supreme Court ruled that insurance companies were subject to federal antitrust and price fixing laws. By passing McCarran-Ferguson, Congress effectively overruled the Supreme Court's decision, and exempted insurance companies from federal regulation.

But while state insurance departments have the responsibility of overseeing insurance companies who sell policies in their state, the way in which these departments sometimes operate raises questions about just who they are in business to protect -- the insurance companies' customers, or the insurers themselves. Suspicions about where the loyalty of the insurance regulators' lies is raised even further when you realize that many state insurance commissioners who manage these insurance departments are themselves former insurance company executives. And in some cases, insurance department regulators who leave government service soon find themselves employed by the very companies they had authority over only weeks or months before.

Under state laws, insurance departments are responsible for setting the licensing requirements for insurance companies, as well as setting standards for insurance brokers and agents. They also have the authority to investigate complaints and impose fines and other punishments, including suspending or revoking authorization to do business in the state, on insurance companies that break the law or fail to abide by department regulations.

State insurance departments vary pretty widely in just how effectively they protect consumers from the abuses practiced by insurers. In some states, such as California and New York, insurance regulators are generally quite diligent about investigating complaints against insurers. Other states do very little. Virtually all state insurance departments are understaffed and overburdened when it comes to dealing with the complaints of insurance companies' policy holders.

Still, if you ever feel that you've been unfairly denied payment of a legitimate claim, or if you believe that an insurance salesman has misrepresented a policy to you, you should file a complaint with the state insurance department. Doing so puts the insurer on notice that you will not stand for being treated unjustly. And in some states, it may even lead to a public inquiry about the insurance company's business practices.