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Updated January 8, 2019
Introduction to Financial Services: Insurance
This In Focus provides a summary of the insurance market
Health insurance has evolved in a very different direction
and regulatory system in the United States.
than life and property/casualty insurance. Many health
insurance companies are heavily involved with healthcare
Market Structure
delivery, including negotiating contracts with physicians
Insurance companies constitute a major segment of the U.S.
and hospitals, rather than purely insurance operations. The
financial services industry. The insurance industry is often
health insurance regulatory system is much more influenced
separated into two parts: life and health insurance
by the federal government through Medicare, Medicaid, the
(life/health), which also includes annuity products, and
Employee Retirement Income Security Act of 1974
property and casualty insurance (property/casualty), which
(ERISA; P.L. 93-406), and the Patient Protection and
includes most other lines of insurance, such as homeowners
Affordable Care Act (ACA; P.L. 111-148). The following
insurance, automobile insurance, and various commercial
discussion addresses primarily property/casualty and life
lines of insurance purchased by businesses. According to
insurance.
the insurance rating agency A.M. Best, 2017 net premiums
for the more than 300 life/health companies (with over 800
Role of Federal and State Governments
subsidiaries) in the United States totaled $592.2 billion,
The role of the federal government in regulating private
with admitted assets totaling $7.07 trillion. The 2017 net
insurance is relatively limited compared with its role in
premiums for the more than 1,000 property/casualty
banking and securities. Insurance companies, unlike banks
insurance companies (with over 2,800 subsidiaries) totaled
and securities firms, have been chartered and regulated
$556.1 billion, with admitted assets totaling $1.98 trillion.
solely by the states for the past 150 years. There are no
Despite the large numbers of insurance companies, both
federal regulators of insurance akin to those for securities or
life/health and property/casualty insurance are also
banks, such as the Securities and Exchange Commission
reasonably concentrated industries, with the top 25
(SEC) or the Office of the Comptroller of the Currency
life/health company groups writing 61% of overall
(OCC), respectively.
premiums and the top 25 property/casualty company groups
writing 69% of overall premiums. Figure 1 displays the
Each state government has a department or other entity
market share of the top 25 insurers versus the rest of the
charged with licensing and regulating insurance companies
market in 2017.
and those individuals and companies selling insurance
products. States regulate the solvency of the companies and
Figure 1. Insurance Market Concentration
the content of insurance products as well as the market
(Net Premiums; $ billions)
conduct of companies. Although each state sets its own
laws and regulations for insurance, the National Association
of Insurance Commissioners (NAIC) acts as a coordinating
body that sets national standards through model laws and
regulations. Models adopted by the NAIC, however, must
be enacted by the states before having legal effect, which
can be a lengthy and uncertain process. The states have also
developed a coordinated system of guaranty funds,
designed to protect policyholders in the event of insurer
insolvency.
Source: CRS using data for 2017 from A.M. Best.
The limited federal role stems from both Supreme Court
Different lines of insurance present very different
decisions and congressional action. In the 1868 case Paul v.
characteristics and risks. Life insurance typically is a
Virginia, the Court found that insurance was not considered
longer-term proposition with contracts stretching over
interstate commerce, and thus not subject to federal
decades and insurance risks that are relatively well defined
regulation. This decision was effectively reversed in the
Court’s
in actuarial tables. Annuity products, which are also usually
1944 decision, U.S. v. South-Eastern Underwriters
offered by life insurers, present similar long-term insurance
Association. In 1945, Congress passed the McCarran-
risks. Particular life insurance and annuity products,
Ferguson Act (15 U.S.C. §§1011 et seq.) specifically
however, may be based on securities like stocks or bonds,
preserving the states’ authority to regulate and tax insurance
and thus may present shorter-term risks more similar to
and also granting a federal antitrust exemption to the
insurance industry for “the business of insurance.”
investment products for both the consumer and the insurer.
Property/casualty insurance typically is a shorter-term
proposition with six-month or one-year contracts and
The Dodd-Frank Wall Street Reform and Consumer
greater exposure to catastrophic risks.
Protection Act (Dodd-Frank, P.L. 111-203) in 2010
significantly altered the overall financial regulatory
https://crsreports.congress.gov
Introduction to Financial Services: Insurance
structure in the United States, but it largely left the state-
Targeted Federal Legislation Changing the State
centered insurance regulatory structure intact. The areas
Regulatory System. The 50-state system of insurance
where the act did affect insurance regulation include (1)
regulation has been particularly criticized on efficiency
enhanced systemic risk regulatory authority, including
grounds due to perceived duplicative and burdensome
authority over insurers, was vested in the Federal Reserve
regulation between states. This has resulted in past
and in the Financial Stability Oversight Council (FSOC), a
proposals ranging from a full federal chartering system for
new council of regulators headed by the Treasury Secretary;
insurers to narrower targeted efforts to simplify the state
(2) oversight of bank and thrift holding companies,
system. Examples of such proposed legislation from recent
including companies with insurance subsidiaries, was
Congresses has included (1) creation of a National
consolidated in the Federal Reserve with new capital
Association of Registered Agents and Brokers (NARAB) to
requirements added; and (3) a new Federal Insurance Office
reduce the need for multiple licensures of insurance agents
(FIO) was created within the Treasury Department. The
and (2) expansion of the federal Liability Risk Retention
Dodd-Frank Act also included measures affecting the
Act, which preempts state insurance company licensure
states’ oversight of surplus lines insurance and reinsurance.
laws for a small subset of insurance companies. The 114th
Congress included NARAB provisions in Title II of H.R.
Policy Issues
26, which was enacted as P.L. 114-1 on January 12, 2014.
Recent congressional attention to insurance regulatory
Congress has not acted on bills to expand the Liability Risk
issues can be broken into three broad areas:
Retention Act, such as in the 115th Congress.
Dodd-Frank Act Implementation. Among these issues are
Response to International Developments. In 2017, the
United States and the European Union (EU) concluded a
1. The treatment of insurers under Dodd-Frank’s
covered agreement particularly addressing issues around
systemic risk regime. Under the act’s provisions, the
U.S. collateral requirements for non-U.S. insurers and EU
FSOC designated three insurers for enhanced
supervisory requirements for non-EU insurers under the EU
regulation by the Federal Reserve (known as
Solvency II regulatory modernization program. This
systemically important financial institutions or SIFIs).
agreement provoked opposition by the states and some
Since the initial designations, one insurer’s designation
portion of the insurance industry. On a separate but
was rescinded by a court decision and two were
somewhat interrelated track, the IAIS has been developing
rescinded by FSOC.
new supervisory and capital standards for insurers which
2. The application of new holding company capital
some fear could disadvantage the U.S. system. The 115th
standards to insurers. Banking and insurance present
Congress held hearings on the covered agreement but did
different risk profiles, and it is generally accepted that
not take direct legislative action to change the agreement.
they require different capital standards. The Federal
P.L. 115-174 was passed directing federal negotiators to
Reserve put forth an advance notice of proposed
achieve consensus with the states in international standard
rulemaking outlining possible capital standards for
setting negotiations.
insurers, but no such standards have been finalized.
CRS Resources
3. The role of the Federal Insurance Office and the
CRS Report R44958, Insurance Regulation: Legislation in
Federal Reserve. Dodd-Frank gave the FIO a number
the 115th Congress, by Baird Webel
of roles both domestically and internationally. Exactly
how the mandates are applied and how the FIO
CRS Report R44820, Selected International Insurance
interacts with existing actors like the NAIC, the
Issues in the 115th Congress, by Baird Webel and Rachel F.
International Association of Insurance Supervisors
Fefer
(IAIS), and the United States Trade Representative
(USTR), however, are not clear from the statute. Dodd-
CRS Report R41372, The Dodd-Frank Wall Street Reform
Frank also resulted in the Federal Reserve taking a role
and Consumer Protection Act: Insurance Provisions, by
overseeing many more insurers than it had in the past.
Baird Webel
Some frictions have been reported in this new system,
CRS Report RL32237, Health Insurance: A Primer, by
particularly between state regulators and the new federal
Bernadette Fernandez
actors in the international arena. To date, neither the FIO
nor the Federal Reserve have used significant portions of
their authority, such as FIO’s preemption authority related
to international covered agreements or the actual
Baird Webel, Specialist in Financial Economics
application of Federal Reserve capital standards to some
insurers. At this time, no insurer is designated for enhanced
IF10043
regulation.
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Introduction to Financial Services: Insurance
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