INSURANCE OVERVIEW REGULATION ACCOUNTING
INSURANCE
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 insurance companies and is also available through government programs. A number of large insurers are expanding into other financial sectors, including banking and mutual funds.
REGULATION
All types of insurance are regulated by the states, with each state having its own set of statutes and rules. 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. The National Association of Insurance Commissioners develops model rules and regulations for the industry, many of which must be approved by state legislatures.
The McCarran-Ferguson Act, passed by Congress in 1945, refers to continued state regulation of the insurance industry as being in the public interest. Under the 1999 Gramm-Leach-Bliley Financial Services Modernization Act, insurance activities—whether conducted by banks, broker-dealers or insurers—are regulated by the states. However, there have been, and continue to be, challenges to state regulation from some segments of the federal government as well as from some financial services firms.
In March 2008 the Treasury Department proposed 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.
ACCOUNTING
Insurers are required to use statutory accounting principles (SAP) when filing annual financial reports with state regulators and the Internal Revenue Service. SAP, which evolved to enhance the industry’s financial stability, is more conservative than the generally accepted accounting principles (GAAP), established by the independent Financial Accounting Standard Boards. The Securities and Exchange Commission (SEC) requires publicly owned companies to report their financial results using GAAP rules. Insurers outside the United States use standards that differ from SAP and GAAP. As global markets developed, the need for more uniform accounting standards became clear. In 2001 the International Accounting Standards Board (IACB), an independent international accounting standards setting organization based in London, began work on a set of standards that it hopes will be used around the world. In November 2007, the SEC voted to stop requiring non-U.S. companies that use International Financial Reporting Standards (IFRS) to re-issue their financial reports for U.S. investors using GAAP. The IACB is also working on a separate set of international accounting standards for the insurance industry. (See Appendix, page ____ for a comparison of the GAAP and SAP systems.)
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 insurance companies and is also available through government programs. A number of large insurers are expanding into other financial sectors, including banking and mutual funds.
REGULATION
All types of insurance are regulated by the states, with each state having its own set of statutes and rules. 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. The National Association of Insurance Commissioners develops model rules and regulations for the industry, many of which must be approved by state legislatures.
The McCarran-Ferguson Act, passed by Congress in 1945, refers to continued state regulation of the insurance industry as being in the public interest. Under the 1999 Gramm-Leach-Bliley Financial Services Modernization Act, insurance activities—whether conducted by banks, broker-dealers or insurers—are regulated by the states. However, there have been, and continue to be, challenges to state regulation from some segments of the federal government as well as from some financial services firms.
In March 2008 the Treasury Department proposed 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.
ACCOUNTING
Insurers are required to use statutory accounting principles (SAP) when filing annual financial reports with state regulators and the Internal Revenue Service. SAP, which evolved to enhance the industry’s financial stability, is more conservative than the generally accepted accounting principles (GAAP), established by the independent Financial Accounting Standard Boards. The Securities and Exchange Commission (SEC) requires publicly owned companies to report their financial results using GAAP rules. Insurers outside the United States use standards that differ from SAP and GAAP. As global markets developed, the need for more uniform accounting standards became clear. In 2001 the International Accounting Standards Board (IACB), an independent international accounting standards setting organization based in London, began work on a set of standards that it hopes will be used around the world. In November 2007, the SEC voted to stop requiring non-U.S. companies that use International Financial Reporting Standards (IFRS) to re-issue their financial reports for U.S. investors using GAAP. The IACB is also working on a separate set of international accounting standards for the insurance industry. (See Appendix, page ____ for a comparison of the GAAP and SAP systems.)
Labels: INSURANCE
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