State Regulation and TDI

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.

Why states, not Washington, regulate insurance

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 where state regulation does not (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.

CORE IDEA — Why every state has its own insurance code

McCarran-Ferguson made state regulation the default. That is why Texas has its own Insurance Code, its own Commissioner, and its own rules — and why those rules can differ in important ways from the rules in California, Florida, or any other state. When the exam asks who regulates insurance, the answer is the state, not the federal government and not the NAIC.

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 all 50 states, the District of Columbia, and the 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 Unfair Claims Settlement Practices Act, and the Property and Casualty Insurance Guaranty Association Model Act.
• 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.

Sidenote

EXAM FOCUS — The NAIC's role

The NAIC is a coordinating body of state regulators that drafts model laws. It has no enforcement authority. If a question asks who regulates insurance, the answer is the state insurance department, not the NAIC.

Federal laws that reach insurance sales

Several federal laws apply to insurers and agents directly, alongside Texas law.

Fair Credit Reporting Act

The Fair Credit Reporting Act (FCRA, 15 U.S.C. 1681) regulates consumer reporting agencies and the use of consumer reports, such as credit reports, MIB records and investigative reports, including in insurance underwriting.

• When an insurer requests an investigative consumer report, it must disclose that to the consumer within 3 days of the request
• When an insurer takes adverse action based on a consumer report, it must notify the consumer and identify the reporting agency. The consumer then has 60 days to request a free copy of the report and may dispute inaccurate information

Gramm-Leach-Bliley Act (GLBA)

This law repealed the parts of the Glass-Steagall Act of 1933 that kept commercial banks and securities firms apart, and allowed the consolidation of commercial banks, investment institutions and insurance companies. GLBA established a framework of responsibilities of federal and state regulators for these financial industries. It permits financial services companies to merge and engage in a variety of new business activities, including insurance, while attempting to address the regulatory issues raised by such combinations.

Privacy of personal information

The federal Privacy Act of 1974 governs how federal agencies handle personal information. It does not apply to private insurers. An insurer’s use of an applicant’s personal information is governed by the FCRA, the Gramm-Leach-Bliley Act and state insurance privacy law.

Under Texas’s insurance privacy law, a request for authorization to disclose a consumer’s nonpublic personal health information must give notice of how long the authorization is valid, which may not exceed 24 months, and of the consumer’s right to revoke it at any time (TIC 602.051).

Telemarketing

The National Do Not Call Registry is a list of telephone numbers whose owners do not want to receive telemarketing calls. Telemarketers may not call registered numbers without the person’s permission or an established business relationship, and unsolicited sales calls:

• May be made only between 8 a.m. and 9 p.m. in the recipient’s local time
• Must give the caller’s name, the name of the company the call is made for, and a telephone number or address at which that company can be contacted

Commercial email (CAN-SPAM)

A commercial email must:

• Be identified clearly as an advertisement
• Carry accurate header information and a subject line that is not deceptive
• Include the sender’s valid physical postal address
• Offer a way to opt out, and the sender must honor an opt-out within 10 business days

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.

The Commissioner of Insurance

The Commissioner is the chief officer of TDI. Two features of the Texas Commissioner’s office are routinely tested:

• Appointed, not elected. The Governor of Texas appoints the Commissioner. The Texas Senate must confirm the appointment (TIC 31.022(a)).
• Two-year term. The Texas Commissioner serves a two-year term that expires on February 1 of each odd-numbered year (TIC 31.022(a)).

The Commissioner’s powers

The Texas Insurance Code gives the Commissioner broad enforcement authority:

• General powers and duties to administer and enforce the Insurance Code, adopt rules, supervise the conduct of insurers and agents, and protect the public. (TIC 31.001–31.022, 38.001, 4001.005, 404.003.)
• Examination of records of any insurer, with free access to its books and papers and its agents’ books and papers about its business, and the power to summon and examine witnesses under oath. (TIC 401.051–.056.)
• Investigation and notice of hearing before taking enforcement action. TDI may send an insurer or agent a reasonable inquiry, which must be answered in writing within 15 days (TIC 38.001). Unfair practice charges come with a statement of the charges and a notice of hearing, and the hearing may not be held before the sixth day after the notice is served (TIC 541.102–.103); a contested case hearing generally needs reasonable notice of at least 10 days (Gov’t Code 2001.051). Before revoking or modifying an insurer’s certificate of authority, the Commissioner gives the insurer written notice of the reason at least 10 days ahead (TIC 86.001–.002).
• Penalties under Chapter 84 — up to $25,000 per violation in most cases, unless the Code specifies a different amount. (TIC 84.022.)
• Cease-and-desist orders to halt prohibited activity, with notice-of-hearing protections. (TIC 83.051–.054, 541.107–.108.)

TIC CITE — Maximum civil penalty

The default cap on administrative penalties is $25,000 per violation under TIC 84.022, unless the Code or another insurance law sets a greater or lesser penalty. The exam sometimes pairs this number with TIC Chapter 82 (sanctions like suspension, revocation, and restitution) — Chapter 82 covers what the Commissioner may do; Chapter 84 sets how big the fine may be.

TDI-DWC: workers’ compensation sits inside TDI

Texas houses its workers’ compensation regulator — the Division of Workers’ Compensation, abbreviated TDI-DWC — within the insurance department, which administers the state’s workers’ compensation system under the Labor Code (TIC 31.002).

What TDI actually does

• Licensing insurers by issuing Certificates of Authority and policing solvency on an ongoing basis.
• Licensing agents and adjusters, including suspending or revoking licenses for cause.
• Reviewing rates and forms to ensure premium rates are not excessive, inadequate, or unfairly discriminatory, and that policy language is not unfair or deceptive.
• Conducting financial examinations of insurers’ books and reserves on a regular cycle.
• Conducting market conduct examinations (covered below).
• Handling consumer complaints through TDI’s Consumer Protection program.
• Enforcing the Insurance Code through fines, cease-and-desist orders, license discipline, and criminal referrals.

Market conduct regulation

A market conduct examination is an audit of how an insurer or agent actually behaves in the marketplace — not whether the company is financially sound (a separate solvency exam), but how it advertises, sells, underwrites, issues policies, pays claims, and responds to consumers. Reviewers look at:

• Sales and advertising materials, agent scripts, and solicitation practices.
• Underwriting and rating practices, including any signs of discrimination or redlining.
• Policy issuance, delivery, cancellation, and renewal procedures.
• Claims handling under TIC Chapter 542 — timeliness, fairness, accuracy.
• Consumer complaint patterns and how the insurer resolves them.

Violations can result in cease-and-desist orders, administrative penalties under Chapter 84 (up to $25,000 per violation unless the Code sets a different amount), license suspension or revocation under Chapter 4005, and criminal referral in serious cases.