NAIC stands for the “National Association of Insurance Commissioners.” It was created in order to provide a standardization process for insurance companies across all 50 states, Washington, D.C., and five US territories: Puerto Rico, Guam, American Samoa, the Northern Mariana Islands, and the Virgin Islands.
How does the NAIC work and why is it necessary? The NAIC standardizes practices for the insurance market and provides resources for potential insurance customers that some companies may be reluctant to provide. It acts as a checks and balances of sorts so that the consumer is protected and has protection against insurance companies that may try to take advantage of the customer without safeguards in place.
What is the NAIC?
The National Association of Insurance Commissioners was formed in 1871. Insurance companies are currently not federally regulated, but each state and territory has its own rules and regulations regarding insurance companies operating within its borders. That is why there are representatives from each and every state and territory as well as D.C. in the NAIC.
State-level insurance commissioners are essentially defenders of consumers and make sure that the insurance companies under their jurisdiction follow through on providing services should a covered event occur. The NAIC uses this model but on a national level, with each state being looked after by its representative chief insurance commissioner. The NAIC is actually a 501(c)(3) non-profit; normally with non-profits, the motivation to be as trustworthy and accountable as possible is higher than if a governing body were operating as a for-profit organization. This helps maintain the integrity of both the organization’s members and the homeowner’s insurance, auto insurance and other types of insurance providers it oversees.
What Does the NAIC Do?
The main duty and purpose of the National Association of Insurance Commissioners is to protect the consumer. The organization was formed after the ruling of Supreme Court case Paul v. Virginia, whose verdict established that Congress (a federal body) could not regulate insurance or create any laws regarding insurance. Thus, the NAIC was born to fill the regulatory gap in the industry left by this ruling.
Since insurance can be an intimidating subject despite the fact that most people are encouraged (or required, in the case of auto insurance) to purchase it as a protection, the NAIC steps in to provide educational resources and support so that each consumer can understand how insurance works and which plan or company is best for them. If you have any questions or concerns about the insurance plans available in your state or territory, the NAIC can address those as well.
One singularly important role of the NAIC is to advise the public on their choices and rights regarding insurance. They publish model rules that the insurance companies are meant to follow. They also address public policy if it’s seen to benefit the insurance company more than policy holders or those looking to purchase policies. The NAIC also sends out bulletins so that the public can stay informed and updated on the current regulations as well as their rights under the NAIC. States have the option of adopting laws that the NAIC makes with its own legislators to further support consumers.
Each state or territory insurance commissioner should make sure that insurance companies in the state are operating within their boundaries both legally and financially. The NAIC does this on a national level — each insurance commissioner part of the NAIC has the support of the entire organization. Since each state and territory is regulated by a national entity, consumers have a better chance to get equal treatment and information about insurance policies, no matter their place of residence.
Why Does the Function of the NAIC Matter?
Contrary to popular belief, the function and regulation put into place by the NAIC actually makes it easier for insurance companies to operate in their respective states and territories. By providing laws each state can adopt if they so choose, the pressure of self-legislation is off the table. The NAIC’s chief job is to standardize the US insurance industry and to protect consumers, but by providing basic standards and regulations to insurance companies, the NAIC ensures that the market is fair and that insurance companies begin on a level playing field.
Besides providing the space for insurance companies to operate in a fair market, the NAIC does promote competition between companies — since the NAIC backs consumers first, this encourages companies to provide the best policies for their customers. The NAIC’s consumer support is motivation for insurance providers to operate with accountability and to find the balance between acting in their own financial interests and attracting potential policyholders. Periodically, the NAIC may complete independent interior reviews to be sure that no insurance company is skirting regulations.
Not only does the NAIC provide accreditation to states which abide by its prescribed guidelines; it also peer reviews insurance companies so that standards of service are being met, and it has established a standardized financial reporting system so that insurance providers can give the best service possible to their policyholders.
Insurance companies must meet the NAIC-created Statutory Accounting Principles (SAP) when preparing their financial reports to be reviewed. Since state law oversees these SAP, that means that the chief insurance commissioner, a member of the NAIC, will ultimately check to see that the company’s assets are solvent enough that they can continue to provide service to their policyholders.
GAAP, Generally Accepted Accounting Principles, are industry-specific guidelines that insurance companies must follow in order to provide the basic standard of services to consumers. The SAP are definitely more conservative than the GAAP, all in the interest of protecting consumers in the often misunderstood realm of the insurance industry.
If you ever have issues with your individual state insurance commissioner or your insurance company, the NAIC is your advocate. You can file complaints online and their website is easy to read and understand. The information is at your fingertips, whether you want to know about your rights under the NAIC, check if your insurance provider is regulated (you can search their NAIC number that’s found on your insurance card), or even look up past complaints to see if any are relevant to your situation so you can continue to make informed decisions about your providers.
Protection Within the Insurance Industry
The NAIC performs many functions within the insurance industry. Some of the primary roles of the commission include protecting consumers, setting standards for the many types of insurance you can purchase and resolving disputes between insurance companies and their customers. You can learn more about the function of the NAIC by visiting its website here.
Frequently Asked Questions
What are NAIC states?
As mentioned above, the National Association of Insurance Commissioners is made up of the chief insurance commissioners from all 50 US states, Washington, D.C., Guam, Puerto Rico, the Virgin Islands, American Samoa, and the Northern Mariana Islands.
However, there are a few more policies recently adopted which are worth mentioning because sometimes states which adopt these policies can be categorized as “NAIC states” in certain contexts. For example, in 2017, the NAIC came up with a new cybersecurity law and ten states so far have put it into effect: Alabama, Connecticut, Delaware, Louisiana, Michigan, Mississippi, New Hampshire, Ohio, South Carolina, and Virginia. The NAIC also recently accredited the insurance departments of Florida, Arizona, and California. This means that these states must abide by more stringent insurance regulations and meet minimum requirements for consumer protection.
Why was the NAIC created?
The NAIC was created in order to regulate and standardize insurance companies across the US. Since it was founded in 1871, many more states and territories have been added to its collection of representatives. The NAIC has set and is still setting the standard for insurance companies’ policies and what coverage they offer at what prices. The chief commissioners who are part of the NAIC conduct peer review of insurance company polices all over the country and they establish best practices to follow.
Essentially, the NAIC was created to standardize insurance companies, protect consumers, and create legislation regarding these matters since it was decided before the NAIC’s inception by the Supreme Court that Congress cannot interfere with insurance legislation.
About Sarah Horvath
Sarah Horvath is a highly respected freelance senior copywriter specializing in insurance content. With a wealth of experience, she is recognized as one of the top insurance copywriters in the industry. Sarah’s expertise encompasses various aspects of insurance, including home warranties, life insurance, health insurance, and more. Her insightful articles and guides are regularly featured on major finance sites, providing invaluable information to readers seeking to navigate the complexities of insurance policies. Known for her clear, concise writing style and comprehensive understanding of insurance products, Sarah is dedicated to empowering individuals with the knowledge they need to make informed decisions about their insurance coverage.