The Regulatory Structure

Why states, not Washington, regulate insurance

Almost everything about how an insurance company operates in the United States — what it can sell, who can sell it, what rates it can charge, how it must handle claims — is governed by state law, enforced by a state insurance department. That arrangement is not an accident of history; it was deliberately set in place by Congress.

The McCarran-Ferguson Act of 1945

In 1944, the U.S. Supreme Court ruled in United States v. South-Eastern Underwriters Association that insurance written across state lines was interstate commerce and therefore reachable by federal regulation. The states’ insurance departments — well established by that point — were suddenly at risk of being preempted. The next year, Congress responded with the McCarran-Ferguson Act, which still defines the federal-state relationship today:

• State law controls. The business of insurance is governed by the laws of each state. States set the rules, license the companies and the agents, and supervise the market.
• Federal antitrust laws step aside — to the extent states regulate. The Sherman Act, the Clayton Act, and the Federal Trade Commission Act apply to insurance only to the extent that state law does not regulate it (15 U.S.C. 1012(b)). That conditional carve-out gives states a strong incentive to maintain active oversight. Two limits apply: the Sherman Act still reaches any boycott, coercion, or intimidation (15 U.S.C. 1013(b)), and since 2021 the carve-out does not cover the business of health insurance, including dental insurance, apart from narrow activities such as sharing historical loss data (15 U.S.C. 1013(c)).
• Federal law still governs where Congress has spoken specifically to insurance. McCarran-Ferguson does not shield state insurance law from a federal statute that specifically relates to the business of insurance (15 U.S.C. 1012(b)) — for example, HIPAA, the Affordable Care Act, and Gramm-Leach-Bliley.

The NAIC: influential, but not a regulator

The National Association of Insurance Commissioners is a voluntary body whose members are the chief insurance regulators of the 50 states, the District of Columbia, and five U.S. territories. The NAIC’s mission is to coordinate, not to govern. Its main outputs are:

• Model laws and regulations. Standardized statutory and regulatory language that any state legislature may adopt, modify, or reject. Examples include the Producer Licensing Model Act, the Unfair Trade Practices Model Act, the Life Insurance Replacement Model Regulation, and the Suitability in Annuity Transactions Model (with its 2020 best interest amendment).
• Data systems and tools. The NAIC operates databases that let regulators share solvency data, license verification, complaint records, and the Insurance Regulatory Information System (IRIS) financial ratios.
• Consumer education resources that states and consumers can use, though these have no force of law.

What the NAIC cannot do is also frequently tested: it cannot license a producer, cannot fine or discipline an insurer, cannot pay a claim, and cannot enforce any regulation directly. Those powers belong to the state departments of insurance.

The Texas Department of Insurance

Texas insurance regulation is centered at the Texas Department of Insurance (TDI). TDI administers the Texas Insurance Code, licenses agents and adjusters, approves policy forms, monitors insurer solvency, runs market conduct examinations, and handles consumer complaints. Texas is one of the largest insurance markets in the country, which gives TDI’s decisions national weight even though TDI’s authority stops at the state line.