Introduction to Financial Services: Insurance




Updated January 13, 2022
Introduction to Financial Services: Insurance
This In Focus provides a summary of the insurance market
investment products for both the consumer and the insurer.
and regulatory system in the United States.
Property/casualty insurance is typically a shorter-term
proposition with six-month or one-year contracts and
Market Structure
greater exposure to catastrophic risks.
Insurance companies constitute a major segment of the U.S.
financial services industry. The insurance industry is often
Health insurance has evolved in a different direction than
separated into two parts:
has life and property/casualty insurance. Many health
insurance companies are heavily involved with health care
1. life and health insurance, which also includes
delivery, including negotiating contracts with physicians
annuity products; and
and hospitals, rather than purely insurance operations. The
2. property and casualty insurance, which includes
health insurance regulatory system is much more influenced
most other lines of insurance, such as
by the federal government through Medicare, Medicaid, the
homeowners insurance, automobile insurance,
Employee Retirement Income Security Act (P.L. 93-406),
and various commercial lines of insurance
and the Patient Protection and Affordable Care Act (P.L.
purchased by businesses.
111-148) than life and property/casualty insurance is. The
following discussion focuses on property/casualty and life
According to the insurance rating agency A.M. Best, 2020
insurance.
net premiums for the more than 300 life/health companies
(with over 800 subsidiaries) in the United States totaled
Role of Federal and State Governments
$617.22 billion, with admitted assets totaling $7.98 trillion.
The role of the federal government in regulating private
The 2020 net premiums for the more than 1,000
insurance is relatively limited compared with its role in
property/casualty insurance companies (with over 2,800
banking and securities. Insurance companies, unlike banks
subsidiaries) totaled $643.85 billion, with admitted assets
and securities firms, have been chartered and regulated
totaling $2.31 trillion.
solely by the states for the past 150 years. There are no
federal regulators of insurance akin to those for securities or
Despite the large numbers of insurance companies, both
banks, such as the Securities and Exchange Commission
life/health and property/casualty insurances are also
(SEC) or the Office of the Comptroller of the Currency
reasonably concentrated industries, with the top 25
(OCC), respectively.
life/health company groups writing 55% of overall
premiums and the top 25 property/casualty company groups
Each state government has a department or other entity
writing 69% of overall premiums. Error! Reference
charged with licensing and regulating insurance companies
source not found. displays the market share of the top 25
and those individuals and companies selling insurance
insurers versus the rest of the market in 2020.
products. States regulate the solvency of the companies and
Figure 1. Insurance Market Concentration
the content of insurance products as well as the market
conduct of companies. Although each state sets its own
(net premiums; $ billions)
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 must be enacted
by the states before having legal effect, which can be a
lengthy and uncertain process. The states have also
developed a system of guaranty funds designed to protect
policyholders in the event of insurer insolvency.

The limited federal role stems from both Supreme Court
Source: Figure created by CRS using data from A.M. Best for 2020.
decisions and congressional action. In the 1868 case Paul v.
Virginia
, the Court found that insurance was not considered
Different lines of insurance present different characteristics
interstate commerce and thus not subject to federal
and risks. Life insurance is typically a longer-term
regulation. This decision was effectively reversed in the
proposition with contracts stretching over decades and
Court’s 1944 decision U.S. v. South-Eastern Underwriters
insurance risks that are relatively well defined in actuarial
Association. In 1945, Congress passed the McCarran-
tables. Annuity products, which are also usually offered by
Ferguson Act (15 U.S.C. §§1011 et seq.), specifically
life insurers, present similar long-term insurance risks.
preserving the states’ authority to regulate and tax insurance
Particular life insurance and annuity products, however,
and granting a federal antitrust exemption to the insurance
may be based on securities, such as stocks or bonds, and
industry for “the business of insurance.”
thus may present shorter-term risks more similar to
https://crsreports.congress.gov

Introduction to Financial Services: Insurance
In 2010, the Dodd-Frank Wall Street Reform and Consumer
is generally accepted that they require different capital
Protection Act (P.L. 111-203) significantly altered the
standards. In October 2019, the Federal Reserve put forth
overall U.S. financial regulatory structure, but it largely left
proposed rulemaking outlining possible capital standards
the state-centered insurance regulatory structure intact. The
for insurers, but no such standards have been finalized. In
act did affect insurance regulation in several areas: (1)
the 116th Congress, S. 3123 would have directed the Federal
enhanced systemic risk regulatory authority, including
Reserve to tailor its insurance capital standards and give
authority over insurers, was vested in the Federal Reserve
additional deference to the state insurance regulators.
and in the new Financial Stability Oversight Council
(FSOC); (2) oversight of bank and thrift holding
The Role of the Federal Insurance Office and the
companies, including companies with insurance
Federal Reserve. Dodd-Frank gave the FIO a number of
subsidiaries, was consolidated in the Federal Reserve with
roles both domestically and internationally. Exactly how the
new capital requirements added; and (3) a new Federal
mandates are applied and how the FIO interacts with
Insurance Office (FIO) was created within the Treasury
existing actors—such as the NAIC, the International
Department. Dodd-Frank also included measures affecting
Association of Insurance Supervisors (IAIS), and the U.S.
the states’ oversight of surplus lines insurance and
Trade Representative—is not clear from the statute. Dodd-
reinsurance.
Frank also gave the Federal Reserve a role in overseeing
many more insurers than it had in the past. Some frictions
Policy Issues
have been reported in this new system, particularly between
Recent congressional attention to insurance regulatory
state regulators and federal actors in the international arena.
issues can be broken into a number of broad areas:
In the 117th Congress, S. 524 and H.R. 4866 would abolish
FIO.
Pandemic Response. As public health measures, such as
widespread lockdowns, were implemented addressing the
Response to International Developments. In 2017, the
COVID-19 pandemic, many businesses faced denials of
United States and the European Union (EU) concluded a
their business interruption insurance claims. Such denials
covered agreement particularly addressing issues around
typically resulted from clauses requiring physical damage
U.S. collateral requirements for non-U.S. insurers and EU
for a claim or from language specifically excluding virus-
supervisory requirements for non-EU insurers under the EU
related claims. While some litigation on current claims is
Solvency II regulatory modernization program. This
ongoing, most court cases have resulted in no assistance for
agreement provoked opposition by the states and some
businesses making the claims. In the 117th Congress, H.R.
portion of the insurance industry but entered into force in
5823 would create a federal program addressing pandemic
2018. A similar covered agreement was concluded in 2018
insurance going forward.
between the United States and the United Kingdom (UK) in
light of the UK’s withdrawal from the EU. On a separate
Targeted Federal Legislation Changing the State
but somewhat interrelated track, the IAIS has been
Regulatory System. The 50-state system of insurance
developing new supervisory and capital standards for
regulation has been criticized on a variety of grounds,
insurers, which some fear could disadvantage the U.S.
including for inefficiency due to perceived duplicative and
system. P.L. 115-174 directed federal negotiators to achieve
burdensome regulation between states and for
consensus with the states in international standard-setting
ineffectiveness in ensuring nondiscriminatory outcomes for
negotiations.
insurance consumers. Such criticism has resulted in past
proposals ranging from a full federal chartering system for
CRS Resources
insurers to narrower targeted efforts to alter the state
CRS Insight IN11511, Insurance and Unexpected Risks:
system. Examples of such proposed legislation include
COVID-19 in 2020 and Terrorism in 2001
limited federal regulation of auto insurance rating factors in
the 117th Congress (H.R. 1270) and expansion of the federal
CRS Insight IN11295, Business Interruption Insurance and
Liability Risk Retention Act, which would have preempted
COVID-19
state insurance company licensure laws for a small subset
of insurance companies, in the 116th Congress (H.R. 4523).
CRS Insight IN11383, Business Interruption Insurance and
COVID-19: Federal Legislative Initiatives

The Treatment of Insurers Under Dodd-Frank’s
Systemic Risk Regime.
Under Dodd-Frank’s provisions,
CRS Report R45508, Selected International Insurance
the FSOC designated three of the largest insurers for
Issues in the 116th Congress
enhanced regulation by the Federal Reserve (known as
systemically important financial institutions or SIFIs)
CRS Report R41372, The Dodd-Frank Wall Street Reform
between 2013 and 2014. Since the initial designations, one
and Consumer Protection Act: Insurance Provisions
insurer’s designation was rescinded by a court decision, and
two were rescinded by FSOC. At this time, no insurer is
CRS Report RL32237, Health Insurance: A Primer
designated for enhanced regulation. In the 117th Congress,
H.R. 3099 would add a voting state insurance regulator
Baird Webel, Specialist in Financial Economics
representative to FSOC.
IF10043
Federal Reserve Capital Standards and Insurers.
Banking and insurance present different risk profiles, and it
https://crsreports.congress.gov

Introduction to Financial Services: Insurance


Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.

https://crsreports.congress.gov | IF10043 · VERSION 14 · UPDATED