Why is the insurance industry subjected to government regulations?

The insurance industry is subjected to government regulations primarily because it affects public interest. Insurance provides essential services that help individuals and businesses manage risks, and failures in this sector can have widespread consequences for the economy and society at large. Therefore, governments implement regulations to ensure that insurance companies remain solvent, treat policyholders fairly, and maintain sufficient reserves to pay claims. This regulatory oversight helps protect consumers from unfair practices and ensures that companies act responsibly, maintaining trust in the industry.

The necessity of regulation is underscored by the impact that insurance has on the financial stability of individuals and communities. For example, a failure of large insurance companies can lead to significant monetary losses for policyholders, potentially jeopardizing their financial security and access to necessary services.

Though accounting practices and tax obligations are important aspects of any industry, they do not primarily define the reason for the regulatory framework in insurance. Additionally, while the insurance industry plays a significant role in society, it is not classified as a charitable institution; rather, it operates on principles of risk management and profit-making, albeit with a mandate to safeguard the interests of policyholders due to its crucial role in public life.