Insurance Regulation 101
Fossil fuel projects, which are large and risky, typically cannot obtain financing or operate without insurance. With the premiums they collect, insurers also make investments, profiting when their investment returns exceed the claims they pay out. Fossil fuel companies depend on property and casualty insurance to cover their risky projects, and they benefit from insurers investing in them as well. Because they collect so much money in premiums, insurers are some of the largest fossil fuel investors in the world, with $582B invested in coal, oil, and gas interests.
The State-Based Regulatory System
Insurance companies are primarily regulated by the states, in contrast to the rest of the U.S. financial system. Each state has a department that regulates insurers, usually led by a commissioner or director who is either elected or appointed. Insurance commissioners have the authority to enforce laws and issue regulations. While responsibilities vary slightly among states, most state regulatory responsibilities focus on insurer solvency and consumer protection.
Solvency regulation. State regulators are responsible for making sure insurers remain solvent, meaning that they have enough money to pay out claims, especially in the event of major losses like severe hurricanes or wildfires. To do so, regulators require insurers to keep a minimum level of capital based on their size and the riskiness of their operations. Because most insurers also rely on reinsurance (insurance for their insurance) to spread risks in the event of big, concentrated losses, states also regulate reinsurers to ensure they maintain sufficient capital as well.
Consumer protection. State regulators also protect consumers by preventing insurers from charging excessive rates, by monitoring market practices (like sales techniques and claims payments), and by responding to consumer complaints. Regulators in most states also seek to prevent “unfair discrimination” (treating risks differently based on factors like race or religion), although insurers are not held accountable for disparate impacts.
The National Association of Insurance Commissioners (NAIC). State insurance commissioners coordinate extensively through the NAIC, an association that represents state regulators. The NAIC develops model laws for state regulators or legislatures to consider adopting. While the NAIC’s duties are quasi-regulatory, the NAIC receives funding from the industry and is not accountable to the public.
Federal Oversight & Monitoring
After the financial crisis, Congress created the Financial Stability Oversight Council (FSOC) and the Federal Insurance Office (FIO) to address gaps in the state-based regulatory system and monitor systemic risks. FSOC has the authority to determine whether insurance companies could pose a threat to U.S. financial stability due to size or complexity and to subject them to more stringent federal regulation by the Federal Reserve.
While FIO is not a regulator, it monitors the industry for systemic risks and advises FSOC. FIO also evaluates risks that could threaten access to affordable insurance, such as the increasing cost of climate-related disasters. To do so, FIO is authorized to collect data from the industry and issue reports to Congress.
When Insurance Markets Fail
When the industry deems certain risks “uninsurable,” the government may step in. For example, after insurers excluded flood risks, Congress created the National Flood Insurance Program to offer flood coverage. And to address a lack of insurance in redlined areas in the 1960s, Congress also authorized the creation of state Fair Access to Insurance Requirements (FAIR) plans, which provide last-resort coverage to consumers who are not able to find it on the standard market. These plans are now commonly used by consumers who cannot afford other options due to wildfire or hurricane risks. For example, in Florida, the Florida Citizens Property Insurance Corporation provides windstorm coverage excluded by other insurers, as well as standard homeowners insurance for those who cannot find coverage elsewhere.