When Congress debates financial regulation, most Americans assume insurance companies are regulated much like banks or mutual funds. They are not.
During my seven years as an officer of seven Transamerica insurance companies, I learned an uncomfortable truth. Insurance companies don’t simply compete for customers—they compete for regulators. When management decided where to domicile a new insurance company, one of the first questions was not, “Which state has the toughest consumer protections?” Instead, it was, “Which state offers the most favorable regulatory environment?” More often than not, the answer was Iowa.
That experience fundamentally changed how I view insurance regulation. It also explains why I believe so many retirement savers remain exposed to risks and fees they never see. Most plan sponsors and and their consultants much less participants even know which state regulates the annuity contracts they hold.
Most financial products sold to retirement investors are regulated at the federal level. Mutual funds operate under the Securities and Exchange Commission. Public companies answer to federal securities laws. Banks are supervised primarily by federal banking regulators. Insurance, however, remains largely a state-regulated business.
On paper, that sounds like local control. In reality, it has created fifty competing regulatory systems, each with its own political pressures and economic incentives.
The National Association of Insurance Commissioners (NAIC) attempts to create consistency by developing model laws and regulations. But the NAIC is not a federal regulator. It has no independent enforcement authority. States decide whether to adopt its models and often modify them to suit local priorities. As a result, insurance companies have long been able to organize themselves in states viewed as having lower capital requirements, more accommodating regulators, or a more business-friendly approach.
This is not an accidental feature of the system. It is one of its defining characteristics.
States have powerful incentives to attract insurance companies. Large insurers generate premium tax revenue, create well-paying jobs, support local law firms and accounting firms, and enhance a state’s reputation as an insurance center. The result is an uncomfortable but unavoidable reality: states compete for insurance domiciles.
Anyone who has watched Delaware dominate corporate charters will recognize the pattern. Insurance regulation developed its own version of the same competition with prime examples Iowa and Connecticut.
The consequences extend far beyond where an insurance company keeps its headquarters. They shape how much capital companies must hold, how aggressively they can use affiliated transactions, how they account for investment risks, and ultimately how secure policyholders’ retirement savings may be.
Ironically, the financial crisis of 2008 did not fundamentally change this structure.
Most Americans think of the Dodd-Frank Act as legislation that strengthened financial regulation after the collapse of Lehman Brothers and AIG. In many respects it did. Yet buried within Title V was the Non admitted and Reinsurance Reform Act (NRRA), a little-known provision that significantly strengthened the authority of an insurer’s home state over key reinsurance decisions.
Sections 531 and 532 effectively established that, if an insurer was domiciled in an NAIC-accredited state, that state’s treatment of reinsurance would largely govern. Other states could no longer impose their own competing standards in many important areas. What appeared to be a technical legal change dramatically increased the importance of choosing the right domicile.
That federal framework became the foundation for everything that followed.
Beginning in 2011, the NAIC created the “certified reinsurer” framework, allowing qualified foreign reinsurers to post substantially less collateral than had historically been required. Covered Agreements negotiated with the European Union and later the United Kingdom eliminated collateral requirements for many qualifying foreign reinsurers altogether. Subsequent revisions extended similar treatment to other reciprocal jurisdictions, including Bermuda, Switzerland, and Japan.
Individually, each regulatory change appeared technical. Collectively, they transformed the economics of life insurance.
Today, many private-equity-owned insurance companies routinely transfer large blocks of liabilities to affiliated offshore reinsurers. Whether one believes those structures increase efficiency or increase risk, they became possible because the regulatory framework steadily evolved to permit them. Ironically, one of the laws sold as strengthening financial oversight after the financial crisis also became an important legal foundation for today’s offshore affiliated reinsurance model.
The weakness of state regulation becomes even more apparent when consumers ask the most basic question: “Who guarantees my annuity if my insurance company fails?”
Most Americans assume there is an insurance equivalent of the FDIC. There is not.
Instead, every state maintains its own guarantee association with different coverage limits and different rules but overall it is in many peoples opinion a joke. These associations are generally funded passing the hat after an insolvency occurs through assessments on surviving insurers rather than through a large pre-funded national reserve. The protection is far less uniform and far less transparent than most consumers believe. There are $0 in reserves so if S&P or Moodys would put a rating on these pools it would be junk at best. https://commonsense401kproject.com/2025/06/24/state-guarantee-associations-behind-annuities-are-a-joke/
That matters because retirement savers are increasingly encouraged to place larger portions of their retirement assets into insurance products.
It also matters because insurance regulation has tolerated something that would never be accepted in the SEC-regulated mutual fund world.
Hidden fees.
Outside the largest 401(k) plans, annuities still represent a significant share of retirement assets. Yet participants frequently never learn the insurer’s spread income—the difference between what the insurer earns on its investments and what it credits to participants. This spread often represents the insurer’s largest source of compensation, but unlike mutual fund expense ratios, it generally remains invisible to participants. I have argued previously that this represents one of the Department of Labor’s biggest blind spots under ERISA’s participant disclosure rules. Insurance products also enable secret commissions paid to advisors/consultants to the plan. 404(a)(5) https://commonsense401kproject.com/2026/07/20/dols-biggest-blind-spot-404a5-fee-disclosures-ignore-annuities-the-largest-fees-in-many-401k-plans/
Most advisor/consultants disclose in their ADV2’s an affiliation with an insurance compay which allows them to take secret commissions from recommending insurance products.
Wall Street has discovered that the state-regulated insurance model can be highly profitable. It should therefore surprise no one that similar regulatory approaches are now appearing in state-regulated collective investment trusts and other retirement products that seek to move assets away from the transparency of SEC regulation. I have discussed that trend extensively in prior articles and will not repeat it here.
For decades, insurance companies have been allowed to choose the regulators they prefer. Dodd-Frank unintentionally reinforced important parts of that structure. Subsequent regulatory changes expanded offshore affiliated reinsurance. Hidden spread fees remain largely undisclosed. State guarantee associations provide a deceptive smokescreen that many consumers mistakenly believe is equivalent to federal insurance.
Insurance lobbyists are too powerful, so regulatory relief is a false hope. However, ERISA litigation is moving in this direction with several cases labeling these one sided contracts as prohibited transactions.
The CommonSense 401k Project 