Insurance in the United States refers to the market for risk in the United States, the world's largest insurance market by premium volume. According to Swiss Re, of the $7.186 trillion of global direct premiums written worldwide in 2023, $3.226 trillion (44.9%) were written in the United States.
Insurance, generally, is a contract in which the insurer agrees to compensate or indemnify another party (the insured, the policyholder or a beneficiary) for specified loss or damage to a specified thing (e.g., an item, property or life) from certain perils or risks in exchange for a fee (the insurance premium).Black's Law Dictionary; Sixth Edition; Insurance; p. 802. For example, a property insurance company may agree to bear the risk that a particular piece of property (e.g., a car or a house) may suffer a specific type or types of damage or loss during a certain period of time in exchange for a fee from the policyholder who would otherwise be responsible for that damage or loss. That agreement takes the form of an insurance policy.
History
The first insurance company in the United States underwrote fire insurance and was formed in Charleston, South Carolina, in 1735.Insurance; The History of Insurance, Columbia Electronic Encyclopedia; 6th Ed. In 1752, Benjamin Franklin helped form a mutual insurance company called the Philadelphia Contributionship, which is the nation's oldest insurance carrier still in operation.Insurance Handbook; Insurance Information Institute (2010). Company History ; The Philadelphia Contributorship.
The first stock insurance company formed in the United States was the Insurance Company of North America in 1792.Stempel, Jeffery W. (2007). Stemple on Insurance Contracts, Vol. 1, §2.07, 3rd Ed. Massachusetts enacted the first state law requiring insurance companies to maintain adequate reserves in 1837. Formal regulation of the insurance industry began in earnest when the first state commissioner of insurance was appointed in New Hampshire in 1851. In 1859, the State of New York appointed its own commissioner of insurance and created a state insurance department to move towards more comprehensive regulation of insurance at the state level.Mayhall, Van, III, The Origins and History of Insurance, Part II: The History of Insurance in America , Insurance Regulatory Law . Retrieved June 10, 2011.
Insurance and the insurance industry has grown, diversified and developed significantly ever since. Insurance companies were, in large part, prohibited from writing more than one line of insurance until laws began to permit multi-line charters in the 1950s. From an industry dominated by small, local, single-line mutual companies and member societies, the business of insurance has grown increasingly towards multi-line, multi-state and even multi-national insurance conglomerates and holding companies.
Regulation
State-based insurance regulatory system Historically, the insurance industry in the United States was regulated almost exclusively by individual state governments. The first state commissioner of insurance was appointed in New Hampshire in 1851 and the state-based insurance regulatory system grew as quickly as the insurance industry itself.Insurance Regulation in the United States: Regulatory Federalism and the National Association of Insurance Commissioners; Susan Randall; Florida State University Law Review, Vol. 26:625, 1999 Prior to this period, insurance was primarily regulated by corporate charter, state statutory law and de facto regulation by the courts in judicial decisions.Stempel, Jeffrey W. (2007). Stemple on Insurance Contracts, Vol. 1, §2.07, 3rd Ed.
Under the state-based insurance regulation system, each state operates independently to regulate their own insurance markets, typically through a state department of insurance or division of insurance. Stretching back as far as the Paul v. Virginia case in 1869, challenges to the state-based insurance regulatory system have risen from various groups, both within and without the insurance industry. The state regulatory system has been described as cumbersome, redundant, confusing and costly.See, for example: Brown, Elizabeth F. (2007). The Fatal Flaw of Proposals to Federalize Insurance Regulation, from the SelectedWorks of Elizabeth F. Brown, Georgia State University.
The United States Supreme Court found in the 1944 case of United States v. South-Eastern Underwriters Association that the business of insurance was subject to federal regulation under the Commerce Clause of the U.S. Constitution.United States v. South-Eastern Underwriters Association, 322 U.S. 533 (1944). The United States Congress, however, responded almost immediately with the McCarran–Ferguson Act in 1945.The McCarran–Ferguson Act, 15 U.S.C. §§ 1011–1015. The McCarran-Ferguson Act specifically provides that the regulation of the business of insurance by the state governments is in the public interest. Further, the Act states that no federal law should be construed to invalidate, impair or supersede any law enacted by any state government for the purpose of regulating the business of insurance, unless the federal law specifically relates to the business of insurance.The McCarran–Ferguson Act, 15 U.S.C. §§ 1011–1012
A wave of insurance company insolvencies in the 1980s sparked a renewed interest in federal insurance regulation, including new legislation for a dual state and federal system of insurance solvency regulation. In response, the National Association of Insurance Commissioners (NAIC) adopted several model reforms for state insurance regulation, including risk-based capital requirements, financial regulation accreditation standards and an initiative to codify accounting principles. As more and more states enacted versions of these model reforms into law, the pressure for federal reform of insurance regulation waned.Brown, Elizabeth F. (2007). The Fatal Flaw of Proposals to Federalize Insurance Regulation, from the SelectedWorks of Elizabeth F. Brown, Georgia State University. However, there are still significant differences between states in their systems of insurance regulation, and the cost of compliance with those systems is ultimately borne by insureds in the form of higher premiums. McKinsey & Company estimated in 2009 that the U.S. insurance industry incurs about $13 billion annually in unnecessary regulatory costs under the state-based regulatory system.
The NAIC acts as a forum for the creation of model laws and regulations. Each state decides whether to pass each NAIC model law or regulation, and each state may make changes in the enactment process, but the models are widely, albeit somewhat irregularly, adopted. The NAIC also acts at the national level to advance laws and policies supported by state insurance regulators. NAIC model acts and regulations provide some degree of uniformity between states, but these models do not have the force of law and have no effect unless they are adopted by a state. They are, however, used as guides by most states, and some states adopt them with little or no change.About the National Association of Insurance Commissioners. NAIC. Retrieved October 18, 2010.
There is a long-running debate within and among states over the importance of government regulation of insurance which is noticeable in the different titles of their state insurance regulatory agencies. In many states, insurance is regulated through a cabinet-level "department" because of its economic importance. In other states, insurance is regulated through a "division" of a larger department of business regulation or financial services, on the grounds that elevating too many government agencies to departments leads to administrative chaos and the better option is to maintain a clear chain of command.
Federal regulation of insurance Nevertheless, federal regulation has continued to encroach upon the state regulatory system. The idea of an optional federal charter was first raised after a spate of solvency and capacity issues plagued property and casualty insurers in the 1970s. This OFC concept was to establish an elective federal regulatory scheme that insurers could opt into from the traditional state system, somewhat analogous to the dual-charter regulation of banks. Although the optional federal chartering proposal was defeated in the 1970s, it became the precursor for a modern debate over optional federal chartering in the last decade.Berrington, Craig (2007). Federal Insurance Regulation Optional Federal Chartering Bills Come to the Big Top: The Substance and Politics of Act II
In 1979 and the early 1980s the Federal Trade Commission attempted to regulate the insurance industry, but the Senate Commerce Committee voted unanimously to prohibit the FTC's efforts. President Jimmy Carter attempted to create an "Office of Insurance Analysis" in the Treasury Department, but the idea was abandoned under industry pressure.
Over the past two decades, renewed calls for optional federal regulation of insurance companies have sounded, including the Gramm-Leach-Bliley Act in 1999, the proposed National Insurance Act in 2006 and the Patient Protection and Affordable Care Act ("Obamacare") in 2010.
In 2010, Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act which is touted by some as the most sweeping financial regulation overhaul since the Great Depression. The Dodd–Frank Act has significant implications for the insurance industry. Significantly, Title V of created the Federal Insurance Office (FIO) in the Department of the Treasury. The FIO is authorized to monitor all of the insurance industry and identify any gaps in the state-based regulatory system. The Dodd–Frank Act also establishes the Financial Stability Oversight Council (FSOC), which is charged with monitoring the financial services markets, including the insurance industry, to identify potential risks to the financial stability of the United States.The Dodd-Frank Act, Pub.L 111-203, H.R. 4173Insurance Industry Implications of the Dodd-Frank Act; Willkie, Farr & Gallagher, LLP; A Decent Start, Financial Reform in America, The Economist, July 2010.
Organization
Admitted v. surplus An important artifact of the state-based insurance regulation system in the United States is the dichotomy between admitted and surplus insurers. Insurers in the U.S. may be "admitted", meaning that they have been formally admitted to a state's insurance market by the state insurance commissioner, and are subject to various state laws governing organization, capitalization, policy forms, rate approvals, and claims handling. Or they may be "surplus", meaning that they are nonadmitted in a particular state but are willing to write coverage there. Surplus line insurers are supposed to underwrite only very unusual or difficult-to-insure risks, to prevent them from undermining each state's ability to regulate its insurance market. Although experienced insurance brokers are well aware of what risks an admitted insurer will not accept, they must document a "diligent effort" at actually shopping around a risk to several admitted insurers (typically three, who will promptly reject it) before applying for coverage with a surplus line insurer.
To relieve insurers and brokers of that tedious and time-consuming chore, many states now maintain "export lists" of risks that the state insurance commissioner has already identified as having no coverage available whatsoever from any admitted insurer in the state. In turn, brokers presented by clients with those risks can immediately "export" them to the out-of-state surplus market and apply directly to surplus line insurers without having to first document multiple attempts to present the risk to admitted insurers. However, many states have refused to establish export lists, including Florida, Illinois, and Texas.