A primary function of each state's Department of Insurance is to assure that insurance companies operating in the state are financially sound, so that the company will have the financial ability to meet its obligations to pay claims. Insurance companies are required to meet certain financial requirements and are required to demonstrate periodically (at least annually) to a state's Department of Insurance that they continue to meet or exceed the minimum financial requirements in order to continue to conduct business in the state. The Department of Insurance can take various actions against an insurance company that fails to conduct its business in a financially sound manner, including action to cause the company to cease operation in the state.

Most states have laws regulating the conduct of insurance business to ensure fairness in the way companies deal with applicants for insurance and policyholders. One of the functions of a Department of Insurance is to enforce these so-called "unfair trade practices" and "unfair claims practices" laws by investigating complaints by consumers and taking action, when appropriate, to get companies to stop conduct that violates the laws and impose penalties for violations. Other duties of a Department of Insurance include reviewing and approving the policy forms used by insurance companies and approving rates charged for various types of insurance to assure compliance with state laws that regulate insurance rates.