United States insurance refers to the United States risk market, which is the largest insurance market in the world by premium volume. According to Swiss Re, of the $6.861 trillion in global direct premiums written worldwide in 2021, $2.719 trillion (39.6%) were written in the United States.
Insurance is generally a contract under which the insurer agrees to compensate or indemnify another party (the insured, the policyholder or a beneficiary) for a specific loss or damage to a specific thing (for example, an object , property or life) against certain dangers. or risks in exchange for compensation (the insurance premium). For example, a property insurer may agree to assume the risk that a particular property (for example, a car or a house) may suffer a certain type of damage or loss during a certain period of time in exchange for compensation. of the insured who would otherwise be responsible for that damage or loss. This agreement takes the form of an insurance policy.
History
The first insurance company in the United States to underwrite fire insurance was founded in 1735 in Charleston, South Carolina. In 1752, Benjamin Franklin helped found a mutual insurance company called Philadelphia Contributionship, the nation's largest insurance company still in existence today. operation. Franklin's company was the first to contribute to fire prevention. His company not only warned of certain fire risks, but also refused to insure certain buildings where the fire risk was too great, such as all wooden houses.
The first stock insurance company formed in the United States was the Insurance Company of North America in 1792. Massachusetts enacted the first state law in 1837 requiring insurance companies to maintain adequate reserves. Formal regulation of the insurance industry began in earnest when the first state commissioner The In 1851, the Department of Insurance was established in New Hampshire. In 1859, New York State appointed its own insurance commissioner and established a state insurance department to provide more comprehensive insurance regulation at the state level.
Since then, insurance and the insurance industry have grown, diversified and developed significantly. Insurance companies were largely prohibited from writing more than one line of insurance until laws began allowing multi-line contracts in the 1950s. have grown into multiline, multistate and even multinational conglomerates and insurance companies.
Regulation
State-based insurance regulatory system
Historically, the insurance industry in the United States has been regulated almost exclusively by individual state governments. The first state insurance commissioner was appointed in New Hampshire in 1851, and the state insurance regulatory system grew as rapidly as the insurance industry itself. Prior to this period, insurance was regulated primarily by corporate statutes, state laws, and de facto regulation by courts in judicial decisions.
Under the state insurance regulatory system, each state operates independently to regulate its own insurance markets, usually through a state insurance department or division. Since the case Paul v. Virginia since 1869, various groups, both within and outside the insurance industry, have raised challenges to the state's insurance regulatory system. The state regulatory process has been described as cumbersome, redundant, confusing and costly.
The United States Supreme Court ruled in the 1944 case United States v. Southeastern Insurers Association that insurance activities were subject to federal regulation under the Commerce Clause of the United States Constitution. However, the United States Congress responded almost immediately with the McCarran-Ferguson Act of 1945. The McCarran-Ferguson Act specifically states that regulation of insurance activities by state governments is in the public interest. Additionally, the law provides that no federal law shall be construed to override, impair, or supersede any law enacted by a state government for the purpose of regulating the business of insurance, unless the federal law specifically relates to the business of insurance. insurance.
A wave of insurance company insolvencies in the 1980s led to renewed interest in federal insurance regulation, including new legislation for a dual, federal system of insurance solvency regulation. In response, the National Association of Insurance Commissioners (NAIC) adopted several reform models for state insurance regulation, including risk-based capital requirements, accreditation standards for financial regulation, and an initiative to codify accounting principles. . As more and more states passed versions of these reform models into law, pressure for federal insurance regulatory reforms decreased. However, there are still significant differences between states in their insurance regulatory systems, and the costs of complying with those systems are ultimately borne by policyholders in the form of higher premiums. McKinsey & Company calculated in 2009 that the U.S. insurance industry incurs approximately $13 billion annually in unnecessary regulatory costs under the state regulatory system.
The NAIC serves as a forum for making model laws and regulations. Each state decides whether to adopt any NAIC model law or regulation, and each state can make changes in the promulgation process, but the models are widely, if somewhat irregularly, adopted. The NAIC also acts at the national level to promote laws and policies supported by state insurance regulators. The NAIC model laws and regulations provide a degree of uniformity among states, but these models do not have the force of law and are ineffective unless adopted by a state. However, most states use them as a guide and some states are adopting them with little or no changes.
There has been a long-standing debate within and among states about the importance of government regulation in insurance, which is evident in the various titles of their state insurance regulatory agencies. In many states, insurance is regulated through a cabinet-level “department” because of its economic gravity. In other states, insurance is regulated through a "division" of a larger department of business regulation or financial services, with the reason that elevating too many government agencies to departments leads to administrative chaos and the best option is to maintain a chain clear command.
Federal regulation of insurance
However, federal regulations continue to encroach on the national regulatory system. The idea of an optional federal charter first emerged following a series of solvency and capacity problems that affected property and casualty insurers in the 1970s. This OFC concept sought to establish an elective federal regulatory system that insurers could choose from the traditional state system. , something analogous to the dual regulation of banks. Although the optional federal constitution proposal was rejected in the 1970s, it became the precursor to a modern debate on the optional federal constitution in the past decade.
In 1979 and the early 1980s, the Federal Trade Commission attempted to regulate the insurance industry, but the Senate Commerce Committee voted unanimously to ban the FTC's efforts. President Jimmy Carter attempted to create an "Office of Insurance Analysis" at the Treasury Department, but the idea was abandoned under industry pressure.
Over the past two decades, there have been renewed calls for optional federal regulation of insurance companies, including the Gramm-Leach-Bliley Act of 1999, the proposed National Insurance Act of 2006, and the Patient Protection and Health Care Act. Obamacare") in 2010.
In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is considered by some to be the most sweeping overhaul of financial regulation since the Great Depression. The Dodd-Frank Act has important implications for the insurance industry. Significantly, Title V created the Federal Insurance Office (FIO) in the Treasury Department. The FIO is empowered to oversee the entire insurance industry and identify any gaps in the government regulatory system. The Dodd-Frank Act also establishes the Financial Stability Oversight Council (FSOC), which is charged with monitoring financial services markets, including the insurance industry, to identify potential risks to the financial stability of the United States.
Organization
Admitted v. surplus
A key artifact of the state insurance regulatory system in the United States is the dichotomy between admitted and surplus insurers. Insurers in the U.S. may be "admitted," meaning they are 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 they are not allowed to enter a particular state but are willing to report there. Surplus line insurers are supposed to insure only very unusual or difficult-to-insure risks, to avoid undermining each state's ability to regulate its insurance market. Although experienced insurance brokers are well aware of the risks that a licensed insurer will not accept, they must document a "diligent effort" to compare prices between several licensed insurers (usually three, who will reject you immediately) before granting coverage. . to a surplus line insurer.
To relieve insurers and brokers of that tedious and time-consuming task, many states now maintain “export lists” of risks for which the state insurance commissioner has already determined that there is no coverage available from any licensed insurer in the state. state. In turn, brokers who present these risks to clients can immediately “export” them to the out-of-state surplus market and apply directly to surplus lines insurers without first having to document multiple attempts to present the risk to licensed insurers. However, many states have refused to make export lists, including Florida, Illinois and Texas.
By their nature, export lists illustrate what U.S. insurers consider difficult-to-insure risks. For example, California's list of exports includes ambulance services, amusement parks, fireworks shows, building moves, demolitions, hot air balloons, medical billing, product recalls, sawmills, security guards, and tattoo shops, as well such as certain types of insurance such as employment practices. Liability and Kidnapping and Rescue.
Although surplus lines insurers are still regulated by the states (or countries) in which they are actually admitted, the disadvantages of obtaining insurance from a surplus lines insurer are that the policy will usually be written in a non-standard form (i.e. not on a Bureau of Insurance Services basis), and if the insurer goes bankrupt, its insureds in states where it is not admitted will not benefit from certain types of protection available to insureds in states (or countries) where the insurer is admitted. However, for people trying to obtain coverage for unusual risks, the choice is often between a surplus line insurer or no coverage at all.
A long-standing problem with the concept of redundant lines is that it makes less sense when applied to sophisticated affiliates with many risks spread across multiple states. Congress passed the Reinsurance and Noninsured Reform Act of 2010 in an effort to clarify which state can regulate the sale of surplus insurance to such policyholders and exempt certain elite categories of insurance buyers from the normal requirement of a diligent effort to obtain available coverage from recognized insurers.
Insurance groups
Only the smallest insurers exist as one company. Most Chief insurance companies actually exist as insurance groups. They consist of holding companies that own multiple insurers licensed in different jurisdictions, including in some cases surplus and surplus insurers and reinsurance companies. Some insurance groups also include non-risk bearing businesses, such as agencies and adjusters. There are major differences between insurance groups in the division of business functions between the parent company and its subsidiaries.
An example of how insurance groups work is that when people call GEICO and request a quote, they are actually connected to the GEICO Insurance Agency, which can then issue a policy to any of GEICO's nine insurance companies. When the customer writes their premium check to “GEICO,” the premium is deposited with one of those nine insurance companies (the one that issued their policy). Likewise, any claim against the policy is the responsibility of the issuing company. However, as far as most retail customers subjectively know (unless they read their insurance policies carefully), they are simply dealing with GEICO.
Obviously, it is more difficult to manage an insurance group than a single insurance company. Employees must be thoroughly trained to observe corporate formalities so that courts do not treat group entities as alter egos of each other and allow plaintiffs to pierce the corporate veil. For example, all insurance policies and claims-related documents must systematically refer to the relevant company within the group, and premium and claim payment flows must be carefully recorded in the books of the appropriate company.
Because of the systemic risk of insurance groups, regulators and the National Association of Insurance Commissioners have become interested in comprehensive supervision of insurance groups. The GAO published a study in 2013 that found large insurance groups had weathered the 2008 financial crisis well, but recommended additional regulatory reforms and oversight of the risks associated with non-insurance entities. All major U.S. insurance groups that transact insurance in California maintain on their websites a publicly accessible list of the actual insurance entities within the group, as required by Section 702 of the California Insurance Code.
The advantage of the group insurance system is that a group has a greater chance of long-term survival than a single insurance company. If a company in the group receives too many claims and goes bankrupt, the company can be quietly moved into the 'second round' (where it continues to exist only to process old claims and no longer underwrites new coverage), but the rest from the group . The group remains active. This phenomenon is so common that some groups have split their inherited liabilities for so-called 'long tail' claims into separate settlement companies, which will be managed by third-party specialist companies that do nothing other than settlement activities. This in turn gives an insurance group's employees time to focus on operating its currently profitable subsidiaries.
In contrast, when small insurers fail, they often do so in a rather wild and spectacular manner, as was common during the economic cycles of the 1970s and 1980s. Sometimes the result can be a state-supervised takeover, in which a state agency may have to assume some of its remaining obligations.
Types
A common typology of insurance in the United States is to divide the industry into life and health insurers, on the one hand, and property and casualty insurers, on the other:
- life, health
- Health (dental, ophthalmological, medicine, others)
- Life (long-term care, accidental death and dismemberment, hospital reimbursement)
- Annuities (securities)
- Life and annuities
- Property and Casualty (P&C)
- Property (flood, earthquake, house, car, fire, boiler, title, pet)
- Accident (errors and omissions, workers' compensation, disability, liability)
Reinsurance is generally treated as a separate category from the above types.
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