Government Involvement
Government is deeply entangled with the insurance industry. In general, it's much like everything the government does: passes legislation with the best of intentions, then passes more legislation to address the problems caused by their previous legislation, then more legislation to correct the problems caused by the legislation intended to correct the problems of the initial legislation, and so on.
As a result, it's a gurgling bloody mess, worse in some locations than in others, and far too tangled to get into in much detail given the scope of the present document. However, some of the key instances/legislation is noted here.
McCarran-Ferguson Act
The McCarran-Ferguson Act (15 USC 1011) specifically relegates insurance to the various states:
Congress hereby declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States.
While the U.S. Code is not binding on the federal government (congress can change it at a whim), there have thus far been few instances in which the federal government interferes directly with commercial insurance, though there is some argument that the industry and citizens would benefit from central and consistent legislation.
However, it can be argued that the very nature of government, providing public goods funded by tax revenues, is an intrusion on the demesne of the insurance industry, especially in cases where the good in question is to provide aid to citizens who have suffered a loss.
Compulsory Insurance
In some instances, individuals are compelled by law to purchase insurance for various purposes. In virtually every state, individuals are required by law to obtain automobile insurance coverage in order to drive on public roads. In some states, homeowners insurance is required by law to obtain a mortgage loan. Small business owners may be required to carry liability insurance and obtain bonds in order to receive licenses. And so on.
There are negative as well as positive consequences - many of the current "controversies" in insurance (next section) are the result of government's involvement in compelling citizens to purchase insurance, then acting in order to help them cope with the cost of the insurance they have been forced to purchase.
No-Fault Insurance
To control insurance premiums, some states have implemented no-fault insurance. Fundamentally, this means that an insurance company that covers a vehicle must indemnify the driver and passengers for losses, even if the damage was the "fault" of another driver.
The goals of this scheme are to lower the cost of insurance by avoiding the expense of litigation over the cause of an accident and to provide quick payments for injuries and damages rather than making claimants wait for insurance companies to agree on who is responsible for indemnification.
However, this is generally bundled with language that restricts an insured's right to seek recovery through the justice system, and instead accept predefined settlements (regardless of the amount of their actual loss). The drawbacks are that drivers are required to accept predefined settlements (regardless of the amount of their actual loss), and that reckless or negligent drivers are spared the risk of costly settlements (and higher insurance premiums) as a result of their behavior.
Also, because the contract is between insurer and insured, it is usually not decided through the judicial system, and payment is subject to the limits and conditions set forth in the policy rather than what a judge-and-jury concludes is a fair settlement. Typically, this means that only out-of-pocket expenses are covered, and items such as lost wages, pain and suffering, and the costs for rehabilitation (which one can sue for, and often be awarded) are not covered in no-fault states. Also, an injured person who is a named insured cannot sure for the full amount of damages inflicted, but are subject to the policy limits.
Between 1970 and 1975, no-fault laws were enacted by 24 states, many of which have since repealed such legislation - but in some states, such clauses are still on the books.
National Flood Insurance Program
Insurers are unable to offer flood insurance to individuals in flood-prone areas at a reasonable rate (basically, because flood is inevitable in some areas, and not a threat at all in others), so the federal government has stepped in to provide insurance. Policies are still written by independent companies, but these companies are reinsured by the NFIP for all flood claims.
Insurance companies were, and remain, completely satisfied with letting the federal government step in and underwrite this risk. For those who wish to live in flood-prone areas, it has enabled them to obtain cheap insurance. For taxpayers who do not live in flood-prone areas, their tax dollars are used to pay off those who do. See "moral hazard" and "subsidization" under "controversies."