Compliance Management Solutions Blog | 3H Corporate Services

What Are the Different Types of Insurance Compliance?

Written by Gary Harker, Esq. and David Haar | May 9, 2024 9:12:39 PM

Insurance regulatory compliance is a fact of life for all those involved in transacting insurance – carriers, agents/agencies, brokers/brokerages. As a result, it’s valuable for insurance professionals to understand the basics – who’s doing the regulating, what constitutes compliance, and how it is best achieved.

Let’s start with the obvious: no one likes regulation. But a completely unregulated market would be chaotic and untenable. So, kicking and screaming, we’re forced to accept the value of some regulation (leaving the topic of how much is too much to another day).

And since regulation without compliance is useless, we’re also forced to concede the necessity of regulatory compliance. In today’s landscape, that entails navigating a maze that’s constructed out of multiple federal and state laws, rules, and regulations, which are administered and enforced by numerous, independent, federal and state agencies and departments.

Because these laws, rules and regulations are always changing, regulatory compliance demands a diligent, ongoing process and the expertise of an insurance compliance manager and/or a regulatory compliance professional.  

What Does Insurance Compliance Mean?

Simply put, insurance compliance means adhering to relevant state and federal laws, rules, and regulations. This applies to individuals and entities alike. 

Since most insurance regulation is enacted and administered at the state level, these rules and regulations are different in every state. This means those engaged in transacting insurance in multiple states, including both admitted and non-admitted carriers, must be compliant with the specific rules and regulations of each of those states.

Understanding the Types of Insurance Compliance 

Multiple state and federal agencies regulate the insurance industry, setting standards and regulations, and overseeing insurance activities. These include, but are not limited to:

  • Department of Insurance (DOI): The state DOI, or its equivalent, is the primary regulatory authority for the insurance industry within each state. Headed by the state insurance commissioner, it is responsible for overseeing insurance products and activities, including chartering insurance carriers, licensing agents and brokers, enforcing compliance regulations, and monitoring market conduct. A handful of states have consolidated their insurance regulatory functions under a Department of Financial Services (DFS) or a similar entity.
  • Department of State: In some states, the department of state, or an agency performing the same function, may play a role in regulating insurance carriers and entity licensees. This department is responsible for overseeing areas such as business registrations and corporate filings.
  • Department of Taxation: In most states the department of taxation is involved in regulating the taxation of insurance. The tax revenues they collect contribute to state revenues and are used for various purposes, including public services and initiatives. 

Corporate income taxes may be collected from insurance agencies that have generated revenues sufficient to establish a financial nexus within the state. Insurance premium taxes are levied on admitted insurance carriers based on premiums collected from policyholders within the state.

And, in the case of non-admitted carriers, the department of taxation may be the recipient of, but is not the entity charged with overseeing the collection of surplus lines taxes. That’s typically done through each state’s surplus lines association, which is acting pursuant to the state legislature and operating under the aegis of the insurance laws.

  • Department of Banking (DOB): In select states, the department of banking may be involved in regulating certain insurance-related entities operating in the insurance space. For instance, if an entity’s legal name contains a restricted word that is regulated by the department of banking, the DOB will need to approve the legal name for it before it can be used in the state.  

While all insurance products and annuities are regulated by state insurance commissioners, variable annuities, and registered indexed-linked annuities (RILAs) are also regulated at the national level by the U.S. Securities and Exchange Commission (SEC) and FINRA Financial Industry Regulatory Authority.

Between the standards and rules set by these agencies, compliance can be a complex and multifaceted process for insurers, agents, and brokers.

To remain compliant, these entities and individuals must possess a thorough understanding of all relevant federal and state law and agency’s regulatory requirements.  That level of specialized knowledge and expertise is typically the responsibility of an insurance compliance manager and/or an insurance regulatory professional.

What is an Insurance Compliance Manager?

Insurance compliance managers are professionals who help ensure that insurance carriers and agencies comply with current regulatory standards, rules, and laws.

They ensure this by overseeing and implementing various compliance programs to bring the entity up to date on ever-changing regulations, mitigate regulatory risks, and promote ethical conduct. In most carriers and agencies, the compliance manager sits within either the Operations or Legal departments.

Their role generally encompasses various core duties, including:

  • Regulatory monitoring to remain current with changes in state and federal laws and regulations
  • Internal policy development to ensure compliance with relevant laws and regulations
  • Training and education to keep employees current on compliance-related matters, such as internal policies, new regulatory requirements, and ethical standards
  • Audits and assessments to evaluate the efficacy of current compliance programs and pinpoint areas for improvement
  • Reporting and documentation to track compliance activities, such as audit reports, procedures, policies, training manuals, and regulatory correspondence 

Insurance Compliance: In Summary

To many in the industry, insurance regulatory compliance is a “necessary evil.” But because it is essential to a stable, functional insurance marketplace, it’s valuable for insurance professionals to have a basic understanding of the regulatory landscape. 

The insurance industry is regulated by multiple state and federal agencies, each with specific responsibilities. These agencies apply statutory laws and set various regulatory rules and standards, aiming to strike a balance between consumer protection obligations, the needs of entities transacting insurance, and the state’s revenue collection objectives.

Given the number of governmental bodies exercising oversight over the insurance marketplace, navigating this landscape requires diligence, expertise, and a commitment to upholding compliance across all insurance operations.

The skills of a professional insurance compliance manager can prove vital, ensuring companies remain up-to-date and compliant with applicable standards and laws. 

Should you find yourself uncertain about any aspect of regulatory compliance, or if you need assistance with corporate filings, insurance licensing, surplus lines tax reporting and filing or any other similar matter, please don’t hesitate to contact us. We’d be delighted to help!