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INSURANCE |
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OVERVIEW
The insurance industry safeguards the assets of its policyholders by transferring risk from an individual or business to an insurance company. Insurance companies act as financial intermediaries in that they invest the premiums they collect for providing this service. Insurance company size is usually measured by net premiums written, that is, premium revenues less amounts paid for reinsurance.
There are three main insurance sectors: property/casualty, life/health and health insurance. Property/casualty consists mainly of auto, home and commercial insurance. Life/health consists mainly of life insurance and annuity products. Health insurance is offered by private health insurance companies, as well as by some life/health and property/casualty insurers. In addition, there is significant government coverage of health care costs through government programs such as Medicare and Medicaid. A number of large insurers across all sectors are expanding into other financial sectors, including banking and mutual funds.
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REGULATION
All types of insurance are regulated by the states, with each state having its own set of statutes and rules. The McCarran-Ferguson Act, passed by Congress in 1945, refers to continued state regulation of the insurance industry as being in the public interest, but there have been, and continue to be, challenges to state regulation, including proposals for a federal role in creating a more uniform system and allowing insurers the choice between a federal or state charter similar the options available to banks.
State insurance departments oversee insurer solvency, market conduct and, to a greater or lesser degree, review and rule on requests for rate increases for coverage, among other things. The National Association of Insurance Commissioners develops model rules and regulations for the industry, many of which must be approved by state legislatures before they can be implemented.
On March 29, 2008 the Treasury Department unveiled plans for a sweeping overhaul of the regulation of the U.S. financial services industry, aimed at strengthening consumer protections, promoting market stability and enhancing financial innovation. The proposal included a provision supporting the establishment of an optional federal charter (OFC) for insurers. An OFC would allow insurance firms to opt for a system of federal chartering, licensing, regulation and supervision or to continue to be regulated by individual states. The Blueprint for a Modernized Financial Regulatory Structure is posted on the U.S. Treasury Web Site at http://www.treas.gov/offices/domestic-finance/regulatory-blueprint/ .
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ACCOUNTING
Insurers are required to use statutory accounting principles (SAP) when filing annual financial reports with state regulators and the Internal Revenue Service. The SAP system is more conservative than generally accepted accounting principles (GAAP), as defined by the Financial Accounting Standards Board. GAAP standards are widely used by most industries in the United States. (See Appendix, page ____ for a comparison of the two systems.)
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