Although insurance existed in the United States prior to the American Revolution, the insurance industry did not start to mushroom until the mid 1800s when the country was experiencing rapid expansion of its territory, population and business activity. Following the Civil War, insurers began to provide a wide variety of insurance coverages including fire and life insurance. Insurance became a popular economic device. Unfortunately, not all of these early insurers were adequately capitalized or competently managed. Conflagrations and other disasters pushed several insurers into insolvency leaving policyholders without payments for their losses. Consequently there arose sufficient demand on state legislatures for a regulatory response.

Initially, regulatory devices tended to be simply mandates for periodic reports and publicity as to the financial condition of the insurer as a basis for legislative action, judicial relief, taxation and information for the buyer to determine the safety of the enterprise. First, such financial reports were filed with the state legislature, and, second, with the executive branch of government.

Such disclosure proved inadequate protection for the insuring public which had difficulty in drawing intelligent conclusions from the financial statements even if they were clear and truthful, which was not always the case. This, in turn, led to the creation of independent administrative agencies to supervise the insurance business. In 1851 New Hampshire created a full-time board appointed by the governor and charged with annually examining the affairs of all insurers licensed in the state. Massachusetts and Vermont passed similar legislation in 1852, as did Rhode Island in 1865. In 1859 New York established the first separate insurance department. This set the pattern. Over the following decade 35 states delegated insurance regulatory responsibility to either a special department or specified state official. Now all states (including the District of Columbia) have an insurance department in some form.

It is not surprising that regulation emerged at the state level. The concept that supervision should be the exclusive function of states was founded upon the Tenth Amendment of the United States Constitution which provides: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States are reserved to the States respectively, or to the people."

As the new insurance industry spread across the continent, inevitably problems and abuses emerged. With individual states attempting to regulate insurers conducting business across state lines, conflicting and discriminatory legislation and administrative actions arose. The ability of the states to effectively control an industry functioning regionally and nationally, as well as locally, was questioned. Factors such as these generated sentiment for reform.

Although efforts were made to obtain the enactment of federal legislation, such efforts proved unsuccessful. Consequently proponents of federal regulation financed a test case involving an agent of an out-of-state insurer refusing to comply with a licensing requirement contending that insurance was commerce and, when conducted across state lines, was beyond the power of the state to regulate. In the 1869 landmark decision Paul v. Virginia, the United States Supreme Court held that "[i]ssuing a policy of insurance is not a transaction of commerce" and that insurance policies "do not constitute a part of commerce between the states." For the next 75 years, this case was generally deemed to mean that insurance was not interstate commerce and hence not subject to federal jurisdiction under the congressional power over interstate commerce. After Paul the Supreme Court consistently held that the insurance industry could not be regulated by Congress under the Commerce Clause and upheld the right of a state to regulate the business of insurance in a series of cases in which insurers sought to avoid features of state law to which they objected. Consequently, coming in the early years of insurance regulation, Paul served as the foundation of the evolving body of state insurance regulation to the virtual exclusion of the federal government.

The period from the 1840s to the early 1900s was highly volatile in American history. This was the era of the robber barons in which private enterprise enjoyed a broad range of freedom to act as it saw fit. Within this climate life insurance companies grew rapidly. Excesses developed as insurers pushed for market share and control over assets. Acquisition costs seemingly knew no limits and the excessive commissions encouraged misrepresentation (especially of expected dividends) by agents to write more and more business.

Eventually adverse publicity led to the famous Armstrong investigation (conducted by a committee of the New York State Legislature chaired by Senator William W. Armstrong). The Armstrong Committee uncovered a host of insurer abuses and squandering of funds resulting in substantial policyholder losses. The seven-volume Armstrong Report identified abuses and recommended legislation to develop sound financial management of insurers and responsible treatment of policyholders. The Committee’s recommendations were enacted by the New York legislature and they set the pattern for the adoption of legislation that followed in other states. In the process, the Armstrong Report became the foundation of much of modern life insurance regulation.