Insurance is regulated by the individual states.
Because each state is responsible for its own insurance laws there is no one set of government regulations that auto insurance companies must follow, but rather each company must comply with the laws of each state in which it wants to do business. The department or bureau of insurance in each state is responsible for a handful of primary oversight roles, including regulation of an auto insurance company's financial solvency, underwriting guidelines, compliance with unfair trade practices laws, policy language and in some cases premium rates.
Financial Solvency
Each auto insurance company must prove to its state regulators that it is financially solvent enough to conduct business in that state. A detailed financial statement including the insurer's balance sheet, income statement and a number of schedules and exhibits must be delivered to the department or bureau of insurance in every state annually. In many states, smaller quarterly reports are also required. The regulatory agencies track financial patterns to determine which insurance companies are at risk of insolvency so action can be taken appropriately.
Underwriting
State laws dictate how auto insurance companies may underwrite risks. For example, in certain states including California it is not legal to use a person's credit rating to determine his auto premiums, though this practice is common elsewhere. The National Association of Insurance Commissioners (NAIC), consisting of the regulators of all 50 states, Washington D.C. and several U.S. territories, exists in part to establish certain consistencies between the various states' regulations including underwriting.
Unfair Trade Practices
Each state defines what it considers to be "unfair trade practices" in how insurance companies deal with their customers. The state's insurance commissioner is responsible for executing this oversight in two primary ways: through routine monitoring of the business operations of auto insurance companies, and through investigation of complains received from customers. Imposing financial penalties against insurance companies that violate the unfair trade practices is one of many administrative powers of oversight given to the commissioner.
Policy Approval
An insurance company must submit its auto policies to each state's department or bureau of insurance for review before selling those policies through its agents. The state reviews the policies to verify the policies are competitive and fair, in compliance with the state's laws, and do not have large gaps in coverage that may mislead or confuse the public. The state can refuse to allow a policy to be sold if it does not meet these criteria.
Premium Regulation
Many states require approval of each insurance company's premium rates for auto insurance. Where this applies, proposed premium increases or decreases that apply to all customers uniformly must still be competitive in the state's marketplace, and the state reserves the right to disapprove rate changes if competition will be compromised.
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