In the United States, insurance companies are subject to the same laws and regulations as any other business with regard to zoning and property laws, labor and wage laws as well as tax laws. In addition, the insurance industry is regulated at both the state and federal levels. Insurance regulations are designed to protect the financial integrity of the insurance company as well as the needs of its customers.
One of the main reasons for insurance regulation is to protect the financial solvency of the insurance company. An insurance company is in the business of spreading risk across a large number of individuals. The risk continuously shifts, and the insurance premiums paid by policyholders who are not accessing insurance benefits help cover the cost of benefits paid out to those who are currently drawing on the pool of funds. Insurance regulation limits the amount of benefits paid out to a policyholder in a calendar year and adjusts the cost of premiums, depending on a policyholder's risk factors. These regulations help the insurance company spread its risk and keep costs lower so the company can make a profit and remain in business.
Insurance regulation also helps protect consumer rights with respect to privacy and insurance coverage. Insurance regulation maintains a balance in the insurance industry, ensuring that the companies which provide insurance benefits are doing so in accordance with the law. Insurance regulation also sets a standard for the quality of medical care a patient can expect to receive, ensures that policyholders receive the benefits they paid for and protects a policyholder's account information and health status from being shared with unauthorized individuals.
Another benefit of insurance regulation is the protection offered to the health of a state's economy. Private insurance companies must be licensed and chartered by the states in which they do business. If an insurance company becomes financially unsolvent and stop doing business in a particular state, that state can lose revenue paid by the insurance company and also lose physical jobs. In addition, if an insurance company should close its doors and fail to meet its obligations to policyholders, the state would be obligated to provide coverage to those policyholders through state-run insurance programs. The increased burden could threaten the financial health of the state.