What are the regulations for car insurance companies?

Car insurance company regulations fall under multiple areas. Because they are businesses, they must obtain business permits, licenses, and tax permits from the states they operate in.

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Zaneta Wood, Ed.S. has over 15 years of experience in research and technical writing bringing a keen understanding of data analysis and information synthesis to reach a wide variety of audiences. She studied adult education and instructional technology at Appalachian State University as well as technical and professional communication at East Carolina University. Zaneta has prepared technical p...

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Joel Ohman is the CEO of a private equity backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Jo...

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Reviewed by Joel Ohman
Founder & CFP®

UPDATED: Jan 26, 2021

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Here's what you need to know...

  • Car insurance companies cannot operate without abiding by certain laws and regulations
  • For a number of reasons, car insurance providers interact with state and federal government daily
  • Insurers must stay in good graces with the law in order to as keep their business open and profitable

How heavily regulated are car insurance companies? Car insurance companies deal in two different worlds, financial and business, so they fall under multiple areas of regulation.

Certain car insurance companies operate as a financial institution, a business, the collection of business taxes, and financial loss coverage.

As a result, automobile insurers find their providers having to respond to multiple government agencies on a regular basis to address regulatory requirements.

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Insurance Companies are Licensed Businesses

 

Because car insurers operate as licensed businesses they must obtain business permits, licenses, and tax permits from the communities and states they operate in.

A business is not required to be licensed in all 50 U.S. states. However, where the business has operations, permits are necessary.

Insurance companies have to abide by the same regulations and laws as any other business in a given region or state.

A variety of business laws affect employment, property zoning, and managing financial activities for customers.

The majority of these laws are overseen and enforced by city, county, and state government agencies charged with these responsibilities.

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Insurance Providers Pay Taxes to the Government

 

Car insurers also must operate with relevant tax laws as well, weaving through requirements at both the state and federal level. Business income taxes, employee payroll tax withholding, and sales

Business income taxes, employee payroll tax withholding, and sales taxes, as well as insurance specific taxes, need to be collected and paid to the respective agencies to stay current with applicable tax law.

Federal and state tax agencies manage the oversight of such tax activities and enforce them as well with civil as well as criminal penalties.

Insurers are Subject to Financial Scrutiny for Consumer Protection

 

Because insurance companies have the ability to collect a large amount of customer money before any kind of coverage has to be paid, there is the risk that unscrupulous types can run off with the cash before a claim is filed.

As an added level of regulation, insurance companies undergo industry-specific regulation in most states to avoid this problem.

This regulation licenses the business to operate as an insurance provider and both audits and investigates inappropriate activity where identified.

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Solvency Shows an Insurer is a Legitimate Business

Insurance companies, including auto insurance providers, have to be able to show they have sufficient financial reserves to remain solvent.

They also need to be able to provide accounting records that can show where customers’ funds have been deposited, how funds have been spent, and that reserves are available to pay valid claims that are submitted.

Finally, many states collect various fees from insurance companies through policies.

These fees have to be deposited separately and then transmitted to the given state which also requires auditing and record-keeping for review.

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State Regulation Assigned to a Specific Agency

 

All 50 states have departments that are specifically dedicated to insurance company regulation by doing the following:

  • Manage insurance policies
  • Implement large insurance statutory codes
  • Audit and investigate insurance companies as necessary
  • Review insurance companies’ premium rates

Such agencies are led by an elected position which is filled by an insurance commissioner who is voted into office every four to six years.

In almost all insurance-specific regulation cases the federal government generally stays out of the review of car insurance companies except with taxes.

When federal taxes are due or payroll withholding needs to be collected, the Internal Revenue Service handles the oversight.

If the insurer becomes insolvent and must declare bankruptcy as a business, the federal bankruptcy court becomes the overseer through a court trustee officer.

Consumer Information From Government Agencies

 

Because state departments in charge of insurance regulation collect so much information on insurance companies, they produce a significant number of reports quarterly and annually.

This information is available to the public and can provide interesting details on how insurance companies are operating in a given state.

Most insurance state departments have adequately integrated operations with the Internet, so many of the reports can be obtained and downloaded easily.

While some of the reports can be highly technical in nature, they provide detailed information on how car insurance companies are managing their accounts, rates, and solvency.

Finding Car Insurance Quotes

 

Consumers can take the information from federal reports and add it to the details they can gain from insurance comparison websites to find the best car insurance companies for their needs.

Between government reports and Internet comparison sites, a treasure trove of data exists for informed comparison-shopping.

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Average Monthly Car Insurance Rates by State