Final answer:
Insurance claim settlement practices are governed by state insurance departments, which set and enforce standards for insurers. State insurance regulators aim to keep premiums low and ensure coverage is available, but strict regulations on premium prices can lead to insurers withdrawing from markets.
Step-by-step explanation:
Insurance claim settlement practices are under the oversight of state insurance departments, which maintain the authority to establish and enforce standards that insurers must adhere to, including those related to claim settlements. In the United States, since the creation of the National Association of Insurance Commissioners in 1871, state insurance regulators have been collaborating to exchange information and strategies in regulating the insurance industry. One of their primary objectives is to balance the need to keep insurance premiums affordable with the necessity to ensure accessibility to insurance coverage for all constituents.
However, when state legislatures impose stringent regulations to maintain low premiums, it may lead to unintended consequences. Insurers may choose to avoid covering high-risk or medium-risk individuals to prevent financial losses. In extreme cases, such as the events in New Jersey and Florida, insurance companies have exercised their option to withdraw from the market altogether, rather than operate under conditions they find economically unfeasible.
Ultimately, the insurance industry operates on the principle that the average amount paid out in claims cannot surpass the average premiums collected from policyholders. This fundamental law of insurance underscores the challenge faced by regulators who must carefully craft legislation to avoid market disruptions while aiming to protect consumers and maintain industry solvency.