This country-specific Q&A gives a pragmatic overview of the law and practice of insurance & reinsurance law in the United States.
It addresses topics such as contract regulation, licensing, penalties, policyholder protection, alternative dispute resolution as well as personal insight and opinion as to the future of the insurance market over the next five years.
This Q&A is part of the global guide to Insurance & Reinsurance. For a full list of jurisdictional Insurance & Reinsurance Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/insurance-reinsurance
How is the writing of insurance contracts regulated in the jurisdiction?
The McCarran-Ferguson Act (the “Act”), passed by Congress in 1945, explicitly provides for state regulation of insurance. The insurance industry is, therefore, almost exclusively regulated by the individual fifty states’ governments. Each state has an insurance or financial services department which implements and administers regulations concerning a wide variety of matters, including insurers’ (i) finances, (ii) market conduct, (iii) premium rates and policy forms, and (iv) the amount and type of capital insurers must hold as security for their policy obligations. Insurers are generally regulated by the insurance department of the state in which they are domiciled.
Most state regulators are members of the National Association of Insurance Commissioners (“NAIC”) which is a regulatory support and standard-setting organization that promulgates model laws and regulations in an effort to standardize and coordinate insurance regulation across the fifty states, the District of Columbia, and U.S. territories.
Are types of insurers regulated differently (i.e. life companies, reinsurers)?
State regulators apply different rules to different types of insurance. For example, with respect to property and casualty policies sold to individual consumers, most states require insurers to submit for approval premium rates and policy forms before the policies are made available in the personal lines marketplace. Similarly, many state regulators require prior approval of premium rates for health insurance.
On the other hand, a number of state regulators have a more hands-off approach when it comes to life insurance products and commercial property and casualty business, allowing insurers to sell policies without pre-approval of rates. Those policies and rates, however, are subject to review and disapproval upon a finding that they are not competitive and/or are unfairly priced relative to the coverage provided.
As for reinsurers, although they must comply with licensure and other rules that exist in the state of their domicile, they are generally subject to less regulation than direct insurers because their product offerings are sold to sophisticated customers who do not need protection from state regulators. Accordingly, reinsurers’ policy wordings and rates (no matter the line of business) are typically not subject to review or approval by state regulators. Reinsurers, however, are subject to capital requirements and financial regulation to safeguard their solvency.
Reinsurers do not have to be licensed in every state where they reinsure direct insurers; a number of states authorize reinsurers to issue reinsurance contracts provided they are certified or accredited by the state if they file an application and meet certain requirements. States may also permit reinsurers that are not licensed, accredited, or certified in their state to reinsure risks if they post sufficient collateral securing those risks.
Are insurance brokers and other types of market intermediary subject to regulation?
Insurance agents and brokers (often referred to collectively as insurance “producers”) must be licensed by the insurance department of each state in which they operate. Insurance agents are typically representatives of insurance companies whereas insurance brokers generally negotiate and procure insurance coverage on behalf of policyholders.
Typically, there are separate licensing requirements for different lines of business.
Licensing requirements frequently include pre-licensing educational course work, the successful completion of written examinations and continuing education after licensing. Applicants for producer licenses are also often subject to criminal background and credit checks.
Other entities that may be subject to regulation include general managing agents (“MGAs”) assisting in the underwriting of policies and third party claims administrators (“TPAs”). These entities are frequently required to be registered and appointed by an insurer and must have a certificate of registration issued by state regulators. Reinsurance intermediaries are also required to be licensed in many jurisdictions in the U.S.
State regulators may revoke or suspend the licenses and/or certifications of producers, MGAs, TPAs and consultants for violations of insurance and other laws and for fraudulent or other misconduct. Typically, regulators must provide fair notice and a hearing to the producer, MGA, TPA, or consultant accused of wrongdoing before taking action against them.
Is authorisation or a licence required and if so, how long does it take on average to obtain such permission?
Licenses for insurance brokers and agents are required, and the time to obtain them depends on the licensing requirements of each state in which the broker or agent seeks a license. For example, many states’ pre-licensing educational requirements include a minimum number of hours of coursework depending upon the line of business; e.g., New York State requires at least 40 hours of coursework prior to issuing a life, accident and health insurance license.
Other issues impacting the length of time to obtain a license include the completion of background checks and obtaining prior approval of any trade name used for licensees’ businesses. In instances where a person is licensed as an insurance agent or broker in the state of their home residence, they may apply for the same types of licenses in other states without having to complete any of the pre-licensing coursework, examinations or background checks.
Many states have streamlined the application process by allowing for the submission of online applications.
Are there restrictions over who owns or controls insurers (including restrictions on foreign ownership)?
Restrictions concerning the ownership or control of insurers are generally found in the laws governing the formation of insurance companies or the change in their corporate structure or control. The specific requirements for forming new insurance companies or changing control vary from state to state. The requirements of the state where the company is or will be domiciled govern.
Many states, however, have adopted the Uniform Certificate of Authority Applications (“UCAA”) – a system established by the NAIC which streamlines the application process by creating standardized application forms. Nevertheless, some states continue to have specific filing requirements and each state performs an independent review of all applications. The UCAA Primary Application, which a newly formed company would use to seek a certificate of authority to do business in its domicile state, calls for the disclosure of information related to minimum capital and surplus requirements, statutory deposit requirements, name approval, a plan of operation (which includes financial statements and projections), any holding company financial information, biographical information regarding officers and directors, and other similar matters.
Is it possible to insure risks without a licence or authorisation? (i.e. on a non-admitted basis)?
Insurers that are not licensed or admitted in a state may cover insureds in that state in one of two ways: (1) the insured purchases a policy out-of-state, with no part of the transaction taking place in the state, e.g., solicitation of the policy, correspondence, and issuance and delivery of the policy; or (2) a non-admitted insurer writes a policy on an excess and surplus lines basis to policyholders that have unique risk profiles or poor loss history and cannot obtain standard coverage from insurers admitted in their state of domicile. While excess and surplus lines insurers are not licensed in the state where they sell their policies, they are allowed to write risks in that state through a broker after the risk is declined by admitted insurers.
A number of states restrict the sale of personal lines business on an excess and surplus lines basis; e.g., individuals in the State of Texas cannot obtain personal automobile insurance from the excess and surplus lines market.
What penalty is available for those who operate without appropriate permission?
Persons or entities that sell insurance policies or engage in other regulated insurance activities without a license in a state may be subject to monetary penalties. State regulators may also issue orders prohibiting them from engaging in insurance activities in their state. Persons or entities operating without a license may also be subject to criminal prosecution depending upon the nature of the activities in which they engaged.
How rigorous is the supervisory and enforcement environment?
Enforcement of insurance rules by regulations varies depending upon the state in which any infraction takes place as well as other factors including the nature, severity, and scope of the infraction and any harm that it causes. As noted above, regulators have a broad array of enforcement actions that they may take in response to violations of their states’ laws, including monetary penalties, the suspension or revocation of licenses, and issuance of cease and desist orders.
How is the solvency of insurers (and reinsurers where relevant) supervised?
States monitor insurers’ solvency in various ways. Among the primary monitoring tools is the requirement that insurers file quarterly and annual financial statements with state insurance departments that include substantial details regarding insurers’ assets, investments, liabilities, and income. Other tools include the mandatory submission by insurers to (i) annual audits by independent certified public accountants and (ii) periodic examinations by state regulators.
States have also adopted the NAIC’s risk based capital (“RBC”) method that was developed as an additional tool for regulators to analyze the finances of insurance companies and to assess the minimum amount of capital appropriate to support each insurer’s business operations, taking into account various risk factors such as credit, asset, underwriting, and other risks (e.g., interest rate risk). The RBC approach requires a company with a higher amount of risk to hold a higher amount of capital.
What are the minimum capital requirements?
There are no uniform minimum capital requirements for insurers in the U.S. Instead, each state’s regulator sets the minimum level of capital and surplus that insurers are required to maintain. The minimum capital and surplus lines requirements are set depending upon the types of business that a company writes with different requirements typically set for property/casualty insurance companies and accident and health insurers.
In addition to these minimum requirements and under the RBC approach discussed above, insurers may be required to maintain additional capital and surplus levels based upon various risk factors applicable to their business operations as determined by the regulators.
Is there a policyholder protection scheme?
Every U.S. state has a guaranty fund that protects policyholders from the insolvency of life and health insurance companies, as well as property and casualty insurers. These guaranty funds are overseen and run by each state’s regulator, and are usually operated by a not-for-profit association. Membership in a state’s guaranty fund association is often compulsory for insurers licensed to do business in that state, and member insurers are required to make periodic payments into the guaranty fund.
The claim payouts to insureds by guaranty funds are often subject to limits under the state insurance law in order to ensure that the fund remains solvent.
How are groups supervised, if at all?
Most states’ regulation and supervision is focused on the individual insurance or underwriting companies that make up an insurance group or holding company rather than on the group or holding company. As for those groups or holding companies that own non-insurance company affiliates, states have, after the financial crisis in 2008, adopted NAIC model rules which establish walls between insurers and non-insurer affiliates to protect policyholders from insolvency risks relating to the non-insurer affiliates. That supervisory framework allows regulators to assess the potential impact of a group’s activities on the ability of its insurance members to pay claims.
Do senior managers have to meet fit and proper requirements and/or be approved?
Most states require that directors, executive officers, and owners of 10% or more of the voting securities of insurance companies submit certain biographical information, pass criminal background checks, and be approved by the state insurance regulator.
Are there restrictions on outsourcing parts of the business?
How are sales of insurance supervised or controlled?
Each state regulates insurance sales practices and marketing within its jurisdiction. State laws often require certain terms and conditions to be included in, or omitted from, insurance policies. The types of terms and conditions vary by state and line of business, but generally they relate to the following: (1) cancellation and renewal; (2) notice of loss requirements; (3) incontestability clauses in life insurance policies; and (4) appraisal clauses in fire or property policies providing for the right of each party to a loss appraisal.
State insurance laws also prohibit insurers from unfair and discriminatory market practices such as selling, underwriting, or adjusting claims based on impermissible factors, including a policyholder’s race, religion or credit history.
As an additional protection, courts have also interpreted terms to be implied in policies. For instance, courts have implied into policies a duty on the part of insurers to carry out their policy obligations in good faith and deal fairly and honestly with their policyholders. Various states recognize a cause of action against insurers (independent and separate from breach of contract claims) for violations of their duty of good faith and fair dealing, allowing insureds to seek exemplary or punitive damages beyond the limits of a policy.
Are consumer policies subject to restrictions? If so, briefly describe the range of protections offered to consumer policyholders.
Many states have rules protecting personal lines policies issued to individual consumers. These rules vary from state to state but may include protections limiting insurers’ abilities to cancel policies, especially during the policy period, requiring certain minimum levels of benefits/coverage and restricting the use of mandatory arbitration clauses.
Are the courts adept at handling complex commercial claims?
Insurance coverage lawsuits may be brought in state or federal courts in the U.S. Federal courts, however, may preside over insurance disputes only in certain circumstances, including, for instance, where the amount in controversy is $75,000 or more and there is a complete diversity of citizenship between the parties to the lawsuit. Courts’ knowledge and experience in handling insurance coverage disputes varies by state and locality within a state. Courts in states with larger commercial centers, such as New York, California, and Illinois typically have numerous insurance coverage disputes pending on their dockets.
Some states have established courts to handle complex commercial cases, including insurance coverage cases that exceed various minimum amounts in dispute. The period of time it takes for coverage cases to be resolved depends on the jurisdiction in which a case is brought as well as the type and number of issues and parties involved. The length of time may also depend upon the individual judge assigned to preside over the case.
Is alternative dispute resolution well established in the jurisdiction?
Alternative dispute resolution is well-established in most states. Arbitration clauses, where permissible under state law, are frequently found in policies. As a general rule, courts favor arbitration, and any doubt as to whether a dispute is arbitrable is generally resolved by courts in favor of arbitration. Courts will rarely interfere with an ongoing arbitration proceeding, and it is very difficult in most states to overturn an arbitration award.
In addition, courts often encourage parties to mediate their disputes. Many courts have discretionary authority to compel the parties to mediate and/or have mandatory mediation programs for certain cases based on the type of case or the monetary amount. In some jurisdictions, courts will impose adverse cost sanctions on parties who unreasonably refuse to comply with mandatory mediation procedures.
However, a number of states have laws prohibiting or limiting the enforceability of mandatory arbitration clauses in certain types of insurance policies. Many, but not all courts, have upheld these laws and ordered insurers to litigate rather than arbitrate coverage disputes with their policyholders.
What are the primary challenges to new market entrants?
Among the primary challenges to forming new insurance companies is complying with numerous and burdensome laws and regulations of up to 50 states where a new insurer would like to write business. Other challenges include raising and maintaining sufficient capital and surplus requirements as well as competing against well-established and trusted competitors.
To what extent is the market being challenged by digital innovation?
Digital innovation is having an increasing, although not rapid, impact on the insurance market in the U.S. Although there are a growing number of insurers with digital capabilities and InsurTech entities, most insurance today is still distributed offline. Perhaps one of the greatest challenges for insurers is to meet the growing demands of the millennial generation, whose members notoriously favor online, personalized products and services that suit their individual needs and requirements.
Over the next five years what type of business do you see taking a market lead?
Although there is no certainty as to which lines of insurance will become market leaders, there is no question that cybersecurity and data protection coverages will continue to grow rapidly. Similarly, there will be marked increases in the amount of products offered to cover quickly evolving technological advancements, including the growing personal and commercial use of drones and autonomous vehicles.
Also, with a substantial number of the U.S. population reaching retirement age, health and annuity insurers are likely to see increased sales in covers designed to offset ever growing health care and retirement costs.