Property Casualty Insurance: Compliance Laws You Need To Know

Property and casualty insurance is a broad category of insurance coverage for individuals, employers, and businesses against loss of property, damage, or other liabilities. While some federal regulations affect insurance directly, such as the Fair Credit Reporting Act, insurance is primarily regulated at the state level. Each state has its own laws and insurance departments that regulate the insurance business conducted within its boundaries. This includes laws and policies related to property and casualty insurance, which encompasses various types of insurance such as homeowners insurance, renters insurance, auto insurance, and workers' compensation insurance.

Federal laws vs. state laws

Insurance in the United States is predominantly regulated at the state level, with each state having its own set of statutes and rules. This system of regulation stems from the McCarran-Ferguson Act of 1945, which describes state regulation and taxation of the industry as being in “the public interest” and gives it preeminence over federal law.

State insurance departments oversee insurer solvency, market conduct, and, to varying degrees, review and rule on requests for rate increases for coverage. They also ensure that insurance companies investigate and process claims in a timely manner, either by giving specific timelines to approve, deny, or pay a claim, or by prohibiting unnecessary delays.

However, there are some areas where federal law takes precedence. For example, federal law imposes penalties for fraud and false statements made in connection with insurance transactions. The Fair Credit Reporting Act is another example of federal regulation that directly affects insurance.

In terms of property and casualty insurance, each state has its own laws and regulations. For instance, in South Carolina, the Department of Insurance has a Property and Casualty Unit that reviews and analyzes rates, rules, and forms for property and casualty insurance products such as automobile, workers' compensation, and homeowners insurance.

While the specifics of the laws may differ across states, three principles guide every state's rate regulation system:

• Rates must be adequate to maintain insurance company solvency.
• Rates should not be excessive, nor result in exorbitant profits.
• Rates should not be unfairly discriminatory; price differences must reflect expected claim and expense differences.

Additionally, states have adopted various methods of regulating insurance rates, which can be broadly categorized into two systems: “prior approval," where rates must be approved by the regulator before use, and "competitive," which still allows for competition among approved rates.

Despite the current state-based system, there are proposals to modernize insurance regulation. One proposal suggests a dual (federal/state) chartering system, similar to the banking industry, which would allow companies to choose between the state system and a national regulatory structure. Another proposal advocates for a modernization of the state system, creating a framework for a national system of state-based regulation with uniform standards.

Agent qualifications and behaviour

Insurance agents are the primary point of contact between insurance companies and the general public, so it is important that they are qualified and act in an ethical and professional manner. Agents must be properly educated and licensed to sell insurance. Each state has its own licensing exam, and agents must be licensed in the state in which they are selling insurance. It is illegal to sell insurance without a license.

State insurance codes are very specific about the standards agents must meet. Agents have fiduciary duties toward their clients, especially regarding the handling of premiums. This means that agents must act in the best interests of their clients and not misrepresent or falsely advertise the terms, benefits, or financial condition of a policy. Complete and accurate statements about the product being sold are essential.

Twisting, or convincing a client to cancel their existing insurance and buy a new policy to the client's detriment, is illegal. Rebating, or offering incentives such as cash or gifts to induce a customer to buy insurance, is also illegal in all but two states.

Agents must not unfairly discriminate against insured people. This means that they cannot offer different rates to people in identical circumstances and cannot accept bribes to provide insurance or lower premiums.

Violations of these codes and standards can result in fines, license suspension or revocation, or, in some cases, imprisonment.

Financial regulation

Insurance is a highly regulated industry, with the goal of protecting both the insurance industry and the general public. While some federal regulations directly impact insurance, such as the Fair Credit Reporting Act, insurance is predominantly regulated at the state level. Each US state has its own insurance department, headed by a director, superintendent, or commissioner of insurance, who is responsible for controlling insurance matters within that state. These state insurance departments regulate insurance companies, agents, and the types of insurance transacted.

State regulation of insurance companies covers various aspects, including financial and reporting requirements, capital and surplus requirements, investment and marketing practices, and approval of policy forms, endorsements, and rates. State laws require insurance companies to report financial data, prepare annual financial statements, and undergo periodic examinations to monitor their financial health and detect financial problems. These regulations help preserve insurance company solvency and protect insured individuals in the event of insolvency.

In the context of property and casualty insurance, state insurance departments play a crucial role in reviewing and analyzing rates, rules, and forms for compliance with federal and state laws, regulations, and policies. For example, the South Carolina Department of Insurance's Property and Casualty Unit reviews filings for products like automobile, workers' compensation, and homeowners insurance.

To ensure the financial stability of insurance carriers, organizations like A.M. Best, Standard & Poor, and Moody's rate their financial strength based on factors such as claims experience, investment performance, and management. These ratings serve as a key indicator of financial health within the insurance industry.

Insurance company authorisation

Insurance companies are subject to various compliance laws and regulations that govern their operations and protect consumers. These laws vary by jurisdiction, but there are some common themes and requirements that insurance companies must adhere to in order to obtain and maintain their authorisation to operate.

In the United States, insurance is primarily regulated at the state level, with each state having its own laws and insurance department to oversee the industry. The insurance departments are typically headed by commissioners who are responsible for controlling insurance-related matters within their respective states. While federal regulations like the Fair Credit Reporting Act do have an impact on the industry, state laws and regulations play a more significant role in shaping the insurance landscape.

One critical aspect of insurance company authorisation is the requirement to obtain a licence or permission to operate. In the US, each state determines which insurance companies are allowed to conduct business within its boundaries. A company that meets the standards and is authorised to operate in a particular state is referred to as an admitted or authorised insurer. On the other hand, a company that is not authorised to do business in a state is considered a non-admitted or unauthorised insurer and can only operate under special circumstances.

State regulations cover numerous aspects of insurance company operations, including capital and surplus requirements, investment and marketing practices, financial reporting, and prohibition of unfair or deceptive practices. Additionally, state insurance departments monitor the financial health of insurance companies to protect consumers in the event of insolvency. They also play a crucial role in licensing and regulating the conduct of insurance agents, ensuring they are properly educated, ethical, and professional in their dealings with the public.

In the European Union (EU), insurance companies must obtain authorisation from the supervisor of their EU Member State to conduct their activities. This authorisation is valid throughout the EU. The EU's Directive 2009/138/EC, also known as Solvency II, sets out specific requirements for insurance and reinsurance companies. It mandates that companies hold sufficient financial resources and outlines governance, risk management, transparency, and supervisory rules. Solvency II also establishes capital requirements, including the minimum capital requirement and the solvency capital requirement, to ensure companies can withstand financial difficulties.

Overall, insurance company authorisation is a complex and highly regulated process that varies across jurisdictions. Compliance laws and regulations are in place to protect consumers, ensure fair competition, and maintain the financial stability of the insurance industry. By adhering to these requirements, insurance companies can maintain their authorisation to operate and provide essential services to their customers.

Compliance enforcement

State Insurance Regulation: In the United States, insurance is primarily regulated at the state level, with each state having its own laws and regulations governing the insurance business conducted within its boundaries. These regulations are designed to protect both the insurance industry and consumers. Each state has an insurance department headed by a director, superintendent, or commissioner, who is responsible for controlling insurance-related matters within the state. These state insurance departments play a crucial role in enforcing compliance by monitoring the financial health of insurance companies, setting capital and surplus requirements, and requiring the reporting of financial data and payment of premium taxes.

National Association of Insurance Commissioners (NAIC): The NAIC is a body formed by the commissioners of all states, who meet regularly to exchange information and coordinate regulatory measures. While the NAIC's recommendations are non-binding, they carry significant influence, and many of the nation's insurance laws are shaped by them. The NAIC plays a vital role in standardizing and promoting consistent compliance across different states.

Licensing and Agent Regulation: State insurance departments are responsible for licensing insurance agents, ensuring they are properly educated, and upholding ethical and professional standards. They enforce strict regulations on agent conduct, including prohibiting misrepresentation, false advertising, twisting (convincing clients to cancel existing insurance), and rebating (offering unauthorized benefits to induce purchases). These measures protect consumers from unethical sales practices and ensure fair competition among agents.

Form and Rate Filings: State insurance departments approve or ratify the policy forms, endorsements, and rates used by insurance companies operating within their states. This approval process ensures that insurance providers comply with state-specific requirements and offer fair and transparent rates to consumers. Some states have prior approval requirements, while others allow for file and use or use and file procedures.

Enforcement of Laws and Penalties: State insurance departments are tasked with enforcing the laws and rules that govern the conduct of insurance companies, agents, and the types of insurance transacted within their jurisdiction. They investigate reported violations and assess appropriate penalties, which can include fines, license suspension or revocation, and even imprisonment in some cases. This enforcement mechanism helps deter non-compliance and protects consumers from fraudulent or unethical practices.

Federal Regulations: While insurance is predominantly regulated at the state level, there are instances where the federal government exercises regulatory authority. Federal laws impose penalties for fraud and false statements made in connection with insurance transactions. Additionally, federal programs, such as FEMA's National Flood Insurance Program, also influence specific aspects of the insurance industry.

Frequently asked questions