The insurance industry is one of the most regulated industries in the economy. Insurance firms are regulated by state agencies rather than the federal government.

The insurance industry is one of the largest and fastest-growing industries in the United States. The products sold by firms in this industry are considered services and include health insurance, fire insurance, automobile insurance, life insurance, and many other types of insurance.

In the United States, insurance has been regulated by state governments since the end of the nineteenth century, after several massive bankruptcies followed major urban fires. States enforced a price ceiling—to prevent "excessive" prices and ensure the wide availability of insurance—and in some cases a price floor—to provide adequate reserves to all insurance companies, including those that were inefficient and, thus, more likely to go bankrupt.

Insurance regulation, however, is more complicated than setting price floors and ceilings. It usually involves setting investment standards and nondiscriminatory risk classes. Other countries intervene even more actively in the insurance sector, limiting the entry of firms to the market or promoting a policy of transfer from wealthier individuals to poorer individuals.

Governments also sometimes require that people buy insurance. For example, many states require drivers to buy automobile insurance. The federal government requires that all workers "buy" disability insurance through social security as well as unemployment insurance.

The problem of adverse selection explains some of these government requirements. With adverse selection, people with high risk (unobserved by the insurance firms) tend to buy insurance; but this tends to drive up insurance rates so that people with lower risks do not buy. In extreme cases of adverse selection, no insurance will be provided. Requiring that everyone buy eliminates the adverse selection problem.