Reason for Government Regulation of Insurance Business (Template)

Reason for Government Regulation of Insurance Business

Government regulation of the insurance business is facilitated for so many reasons. The insurance business consists of the activities of insurance and reinsurance companies (risk-bearing), insurance agents and brokers (intermediaries, conversing for insurance at commission), loss adjusters (assisting in claims adjustment), and other risk management consultants.

Insurance as an industry being vested in the public’s interest means that the insurance companies are there, along with government regulation, to help ensure that the public is protected and safeguarded from risk.

The activity that bring about government regulation in the insurance industry started in the year (1869) when congress sided with the state of Virginia, during the (Paul vs. Virginia case), stating that insurance was not a form of interstate commerce and subject to federal anti-trust laws.

However, insurance sales could be regulated by each individual state, and this was the reason behind each state regulating taxes and sales of insurance products for their own profit.

The following headings are the six major reasons for government regulation of the insurance business.

(a) To safeguard lives and property (safeguarding reason): Government is a reasonable institution or machinery whose primary role is to protect and safeguard the lives and property of its numerous citizens and to propel the safety of its national wealth invested in a different economic unit of the nation.

The government would make rules to safeguard the insurance fund in order to ensure the continual capacity of the insurer to pay claims promptly and to contribute meaningfully to economic development.

(b) Preventive reasons (loss minimization): Government regulation of the insurance business has not eliminated in total the adverse effect of financial losses but it has reduced to the barest minimum the high rate of loss occurrence, by minimizing some unwanted contingencies and failures. Proper supervision and examination of the insurance business by the government, definitely, can provide procedure early warning signals. Such warning signals would usually call for remedial actions to avoid system unwanted outcomes.

(c) Competent (submissive) reason: To carry out an effective and transparent insurance business, the government always seeks capable people that are disciplined, reliable, and without any track record of criminal involvement. the government ensures that such a person is disciplined enough to be involved in the insurance business. However, the government regulates to discourage incompetent and adventurous persons from participating in the insurance business.

(d) Efficiency Purpose: Here, the government helps to ensure continuous compliance of the insurance industry with the existing rules and laws regulating the existing insurance business. This is basically achieved through proper examination and supervision of their books and appraisal of the insurance business activities on a system of management practice, investment of insurance fund, internal control system, solvency level, pricing and other insurance worded documents such as policy, proposal forms, and cover notes.

(e) Upholding reason: In most cases, the government would want the insurance business to be carried out following the settled basic cause, indemnity, subrogation, and contribution. This is just to ensure fair and just practice in order to sustain the relevance of insurance in national and economic development. However, upholding reason is therefore one of the important reasons for government regulation of the insurance business.


The common functions of government are the security and welfare of the people. Among other economic objectives, the government controls the national economy in such a manner as to secure the maximum welfare, freedom, and happiness of every citizen on the basis of social justice and equity of status and opportunity.

The major reason for government regulation within insurance can be said to be consumer protection. Others may see it as a way for governments to interfere in the market, by proper examination of what sellers can offer to buyers.

However, the government’s regulation in the insurance industry has shown that it is there to protect consumers through insurance insolvency, the ability to reduce unequal distribution of knowledge and the bargaining power of the insurance agents, compatible insurance pricing, and the promotion of social goals by making insurance more widely available to those in need.


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