In the United States, insurance stands among the financial services regulated by each State, member of the Union. There are as many regulations as federated States and territories (Puerto Rico, the Virgin Islands,…). The market is totally balkanized with a plethora of companies that are operating within an extremely complex system.
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The American system depends on a full decentralization of power. Each State of the Union is qualified to draft its legislation and supervise the activity of insurance companies established in its territory, with the federal State’s role being reduced to that of a coordinator.
Liberalism, competition and limited federal power constitute the foundation of the insurance system in USA.
The insurance industry in USA: Organization at the level of the federated States
In order to operate within a State, an insurer is required to be registered there and to be granted a license. An insurer, the company keen on operating in another State is required to apply again for license from local authority of that State.
An insurer of national scale willing to operate in the whole American territory, the 57 States and territories is required to obtain 57 licenses. In USA, each State has its own insurance legislation, which is not the same in all parts of the States.
Insurance supervisory bodies
At the top of each State there exists an insurance supervisory body with various names: “the Insurance Department”, “Division of Insurance”, “Office of Insurance, etc.
By January 1, 2018, there are 57 insurance control bodies with each one being completely independent of the others. The commonality about all the States is that all oversight bodies are tasked with more or less the same duties, that is, to:
- protect consumers
- grant licenses to insurance companies and intermediaries
- set the market’s operating rules
- ensure insurers’ solvency
- verify companies’ accounts
- etc.
The size of insurance oversight bodies in the United States varies considerably from State to another. The economically powerful States such as New York, California, Florida, Texas, etc) are endowed with a high number of staff members.
Other States, less better off, are required to settle with a small staff. For instance, Texas and California oversight bodies are employing 1459 and 1415 staff members respectively whereas the offices of Idaho and Rhode Island are endowed with just 76 and 38 staff respectively.
- The commissioner
The commissioner, the person in charge of the insurance oversight body, is either nominated directly by the governor or elected on the basis of the suffrage of the designation of governors.
The oversight body and its commissioner are set under the authority of the local executive power whose names may also vary: Office of the Governor, Department of Commerce, Financial Service Commission, etc.
- Legislation
The legislative and regulatory provisions promulgated by the oversight body of each State are the source of insurance laws of the State. This specificity triggers variations at the level of the legislation of the different States, thus, compounding the hardships of numerous players on the insurance industry.
Each federated State has, therefore, absolute control over the insurance business under its area of jurisdiction.
Read also | Distribution of insurance companies in USA per State
The insurance industry in the USA: Organization at the federal level
Three bodies play a key role at the federal level:
- Le Federal Insurance Office (FIO)
The 2010 Act incorporated the Federal Insurance Office (FIO) which depends on the Department of the Treasury. The FIO president is nominated by the Secretary of Finance of the Federal State. FIO is tasked to monitor at the federal level the activity of insurance companies with the exception of health schemes and crop plans.
This body is entrusted with a second duty, that of enabling underprivileged classes to have access to insurance (apart from health plans).
FIO also manages terrorism risks through the “Terrorism Insurance Program”.
- Le Federal Advisory Committee on Insurance (FACI)
FACI is a major federal agency of advisory purpose providing assistance and support to FIO in its statutory duties.
- The National Association of Insurance Commissioners (NAIC)
To oversee the structure, the different federal authorities founded in 1871 the National Association of Insurance Commissioners (NAIC) whose task is to assist oversight bodies in each State and territory.
NAIC is also tasked to promote market competitiveness, strengthen financial solvency and soundness of insurers and ensure quality service to consumers, etc.
Moreover, NAIC is constantly striving to ensure harmonization of certain activities of the insurance sector in USA (technical, financial ratios…), the standardization of some practices and working norms as well as the sharing of information among States.
Classification of insurance companies in USA
By December 31, 2017, the Unites States market was made up of 6 000 local companies, accounting for 50% of global premiums. Endowed with a turnover of 1 333 billion USD, the United States stand as the first insurance market all classes of business together, well ahead of China, the emerging power, coming in the second position.
In the United States, the insurance companies are classified into three categories:
- Local (or domestic) insurance companies: They are insurance companies that are domiciled in the State where they operate.
- Foreign insurance companies: A foreign company is an American insurance company domiciled in a State other than the one where it operates. According to the official regulation, there are tens of thousands of this kind of company.
- The alien insurers are included in this category of totally foreign companies operating in the United States, for instance, Allianz, Axa, etc.
Apart from these three categories of companies, there are other forms of companies that are so typical of the American market. They are, among others, Risk Retention Groups, Purchasing Groups:
- Purchasing Group: a structure which is quite similar to a mutual which gathers persons sharing common interests (belonging to certain faith, trade union, …).
- Risk Retention Group: an entity, also a kind of mutual that underwrites on behalf of its members affiliated third party liability insurance.
Insurance industry in the USA : Main highlights (2000-2017)
| 2000 | 2007 | 2017 | |
|---|---|---|---|
| GDP | 10 285 billion USD | 14 480 billion USD | 19 391 billion USD |
| GDP growth | 1% | 1.8% | 2.3% |
| Population | 282 162 000 inhabitants | 301 231 000 inhabitants | 325 719 180 inhabitants |
| Total life and non life premiums | 633.1 billion USD | 1 166.3 billion USD | 1333.8 billion USD |
| Total life premiums | 308.1 billion USD | 666.7 billion USD | 691.3 billion USD |
| Total non life premiums | 325 billion USD | 499.6 billion USD | 642.5 billion USD |
| Share of the global insurance market | 25.42% | 28.72% | 27.27% |
| Insurance penetration rate | 8.4% | 8.9% | 7.23% |
| Market density | 3 076 USD | 4 086 USD | 4 216 USD |