How Does the Government Affect What You Pay for Car Insurance?

insurance industry regulation


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With auto insurance rates on the rise over the last five years, I’m constantly asked who’s responsible for auto insurance industry regulation and what individuals can do about the rising costs to insure their vehicles. The answer isn’t exactly straightforward, but it is incredibly important for consumers to know who and what impacts their insurance rates – and what they can do about it.

What role does government play in the insurance industry?

You hear about it occasionally in the news. In December, the California Insurance Commissioner issued an order to State Farm requiring that they reduce rates for their customer base in the Golden State by $84 million and issue refunds to existing customers totaling $110 million. The order issued by the insurance commissioner – and the notice of noncompliance issued the next month for failing to implement the order – shows government regulation in action.

Why is the insurance industry regulated?

The simple answer is to protect consumers from unfair price increases and also to ensure that insurance companies remain financially solvent so they can pay for claims as they arise. Government regulation, both federal and state, ensures that our cars are safe to drive, our food is safe to eat, and our bank accounts are protected.

Who is responsible for regulating the insurance industry?

A collaborative effort between legislators, insurance companies, and yes, consumers, keeps the industry in check.

insurance industry regulation

The federal government does not regulate car insurance

The truth is, the U.S. Constitution makes it all but impossible for a federal agency to mandate or regulate car insurance. However, you may have heard of the NAIC (National Association of Insurance Commissioners) or the FIO (Federal Insurance Office). These two entities essentially gather data and information from insurance companies and advise state regulators on their findings. They provide oversight, but have no authority to regulate insurance laws.

From the NAIC: “The NAIC coordinates closely with the FIO to serve as an information resource for the federal government and to engage in international discussions in conjunction with US insurance regulators. The NAIC hopes to work with the incoming administration to advocate for changes to the FIO in 2017.”

So if the federal government isn’t the watchdog regulating the insurance industry, who is?

States’ authority to regulate auto insurance

Ultimately the regulation of auto insurance companies and rates is determined by each individual state. State insurance departments, carrying a variety of designations like “Division of Insurance” or “Insurance Department,” set the minimum coverage level required to drive legally in the state. They also decide how insurance companies can assess risk and determine pricing for state residents.

As with many laws, insurance regulation and required coverage is specific to each state based on the legislature’s best understanding of the needs of its constituency. For example, some states, like California, Hawaii, and Massachusetts, do not allow insurance companies operating in their states to use credit as a factor in determining rates. Or in states like Arizona, the Department of Insurance requires agents to offer a $0 glass deductible to customers purchasing a “full coverage” policy because windshield damage caused by sand and rocks is so common in that environment.

Who oversees insurance industry regulation at the state level?

Insurance commissioners, along with the assistance of state insurance departments, are essentially the sheriffs in the Wild West of the insurance industry. The insurance commissioner of each state is either appointed by the governor or voted into office at state-specific voting intervals and is in charge of monitoring insurance companies’ compliance with state laws.

If an insurance company is operating outside of its legal obligation in a particular state, it is up to the insurance department (and more specifically the insurance commissioner) to intervene and assess penalties, fines, and even refunds to customers when rates are charged incorrectly.  Insurance companies implement the legislation passed down from the state, or risk being fined or sanctioned for noncompliance. This includes what insurance companies are allowed to use as rating factors to determine pricing, such as credit, highest level of education, and home ownership.

What Factors Affect What You Pay for Car Insurance?

Assuming insurance companies comply with their respective state regulations, they then calculate what to charge customers for their individual premiums using complicated rating algorithms. They’re businesses, so they have to pay taxes, wages, and other expenses to keep their doors open, and of course they’re working to turn a profit in one of the most competitive markets.

What does this ultimately mean for consumers? We don’t get to see exactly how each individual insurance company calculates rates, but state regulatory departments do, so we should all remain informed about what factors can be used in those algorithms so we can find the coverage, service, and pricing that suits our unique needs.


What Consumers Can Do about the Rising Cost of Car Insurance

Your wallet is more powerful than you think

In addition to state insurance departments, insurance companies are also regulated by the market in which they operate. Insurance companies are in business to make money; not lose it. This competitive market can be beneficial to consumers if they shop around and compare rates regularly. If companies start losing customers because their rates are are too high, they will have to adjust or risk going out of business altogether. Just make sure you are still getting the coverage and service you need, too.

Tips to help lower your car insurance rate

  • Drive safely – Just one speeding ticket causes rates to increase by an average of more than 20%
  • Improve your credit – Moving your credit score up just one tier saves drivers an average of 17% on their annual premiums
  • Maintain continuous coverage – Insurance companies consider you a lower-risk customer if you have a history of keeping yourself and your vehicle insured (and paying your premiums) – even a short gap in coverage could hurt your rates
  • Keep your vehicle safe from harm –Parking in a garage or under an awning can help you avoid costly claims due to weather damage
  • See 50 research-based tips to help you save on car insurance

Know Your State Insurance Officials

You can also take action to lower your car insurance rates by contacting your district representative or your state’s insurance department. Elected officials are public servants and answer to the people they represent, so sending a letter or making a phone call to your representative can result in changes in insurance legislation.


StateInsurance Department NameContact Info
AlabamaAlabama Department of Insurance
AlaskaAlaska Division of Insurance
ArizonaArizona Department of Insurance
ArkansasArkansas Insurance Department
CaliforniaCalifornia Department of Insurance
ColoradoColorado Division of Insurance
ConnecticutConnecticut Insurance Department
DelawareDelaware Department of Insurance
FloridaFlorida Office of Insurance Regulation
GeorgiaGeorgia Department of Insurance
HawaiiHawaii Insurance Division
IdahoIdaho Department of Insurance
IllinoisIllinois Department of Insurance
IndianaIndiana Department of Insurance
IowaIowa Insurance Division
KansasKansas Insurance Department
KentuckyKentucky Department of Insurance
LouisianaLouisiana Department of Insurance
MaineMaine Bureau of Insurance
MarylandMaryland Insurance Administration
MassachusettsMassachusetts Division of Insurance
MichiganMichigan Department of Insurance and Financial Services
MinnesotaMinnesota Department of Commerce
MississippiMississippi Insurance Department
MissouriMissouri Department of Insurance
MontanaOffice of the Montana State Auditor, Commissioner of Securities and Insurance
NebraskaNebraska Department of Insurance
NevadaNevada Division of Insurance
New HampshireNew Hampshire Insurance Department
New JerseyNew Jersey Department of Banking and Insurance
New MexicoNew Mexico Office of Superintendent of Insurance
New YorkNew York State Department of Financial Services
North CarolinaNorth Carolina Department of Insurance
North DakotaNorth Dakota Insurance Department
OhioOhio Department of Insurance
OklahomaOklahoma Insurance Department
OregonState of Oregon Division of Financial Regulation
PennsylvaniaPennsylvania Insurance Department
Rhode IslandState of Rhode Island Department of Business Regulation
South CarolinaSouth Carolina Department of Insurance
South DakotaSouth Dakota Division of Insurance
TennesseeTennessee Department of Commerce and Insurance
TexasTexas Department of Insurance
UtahUtah Department of Insurance
VermontVermont Department of Financial Regulation
VirginiaVirginia Bureau of Insurance
WashingtonWashington State Office of the Insurance Commissioner
West VirginiaWest Virginia Offices of the Insurance Commissioner
WisconsinWisconsin Office of the Commissioner of Insurance
WyomingWyoming Department of Insurance