¶ … independent owner of a six-story hotel in the business district in a major city (population at least 100,000) near where I live. I wish to apply for insurance for my hotel. The first part lays out my finances whilst the following sections detail basis for my confidence of insurance company's reliability as well as the requirements for the formation of a valid insurance contract. With this information in hand, I can confidently proceed to complete the transaction. This is the information of my capital:

Total invested assets $50,000,000

Loss reserves 40,000,000

Total liabilities 70,000,000

Bonds 35,000,000

Unearned premium reserve 25,000,000

Total assets 90,000,000

Based on this information, I calculate that the Hotel's policyholders' surplus for Delta Insurance Company is 150,000,000

The three principle ways of regulating insurance companies are by: (a) legislation, (b) court rulings, and (c) regulations and rulings issued by state insurance departments.

(a) legislation

States regulate insurance by regulating the companies that develop the policies and sell the insurance.

According to the McCarran-Ferguson Act of 1945, every state, for instance, has an insurance department that monitors and regulates insurance within the state.

States regulate the following:

insurance companies their formation insurance rates policy forms taxation financial requirements to maintain solvency

rehabilitation or liquidation procedures for an impaired or insolvent insurer, agents and brokers their licensing sales and claims procedures

There is also some federal regulation of insurance policies too. The hotel's interests is protected by this since it can rely on state and federal government to monitor the dealings of Delta Insurance Company. In this way, they can be more confident of their dealings with the company.

The court in other words steps in for the hotel making sure those precedents match and are just. When not so, the court appeals for amendment.
(b) regulations and rulings issued by state insurance departments

These include obligation for audits and solvency testing where the possibility of the insurer becoming insolvent could substantially hurt the hotel. Each state, therefore, regularly reviews domestic insurers for signs of financial problems.

Every insurance company, too, must file annual reports with the insurance department of each state that it does business with, and with the National Association of Insurance Commissioners (NAIC) that reviews industry regulations and drafts model laws and policy forms for the states. Each insurer is audited every 3 years by the state and there may be representatives from other states that are involved too. Agents and brokers, too, have to be licensed and the states also require that policy forms be approved by the state insurance department before they can be used in the state. This is particularly helpful for the hotel since it would be difficult for them to compare the policy rates of Delta Insurance Company with policy rates of other insurers aside from which they may have difficulty in reading the same print of the Delta company and the Delta company may also omit certain essential points. The state's reviewing the policy ensures that none of this occurs. (thismatter.com)

One requirement for the formation of a valid insurance contract is that the contract must be for a legal purpose. To be legally binding, the insurance contract needs to have at least five factors. These are:

1) Offer and Acceptance

The offer must be stated in explicit, clear terms with no ambiguous reading. The one accepting does…