The Future of Insurance Regulation in the United States
Publication Year: 2009
Important changes have buffeted the insurance industry over the past decade. The 1999 repeal of key provisions of the Glass-Steagall Act unleashed a wave of conglomeration in financial services, as bank holding companies acquired insurance and securities businesses and, to a much lesser degree, insurance companies acquired securities firms and banks. Rivalry within the sector has intensified: insurance companies have developed products that compete directly with the offerings of banks and securities firms and vice versa. In addition, the industry has become increasingly global.
Against this backdrop, pressure has been building for fundamental changes to the structure of insurance regulation in the United States. Despite several court challenges over the years, insurance continues to be regulated by the states. Many insurance companies view state regulation as an increasing drag on their efficiency and competitiveness and support a federal regulatory system. However, powerful stakeholders, including state officials, state and regional insurance companies, and many insurance agents, oppose federal regulation. As a result, proposals to establish an optional federal charter (OFC) for insurance companies and agents remain mired in fierce debate.
The Future of Insurance Regulation in the United States gathers some of the country's leading experts on financial regulation to assess the case for an enhanced federal role in the insurance sector. They pay particular attention to the merits of an OFC and how it might be designed. They also consider the principles that should guide insurance regulatory policies, regardless of the institutional framework, and examine the implications of financial convergence and the internationalization of insurance markets for an optimal regulatory structure.
The debate over insurance regulation has only grown in complexity and intensity since the financial crisis began in the fall of 2008. This book will both inform and help to shape those critical discussions.
Contributors: John A. Cooke (International Financial Services London), Robert Detlefsen (National Association of Mutual Insurance Companies), Martin F. Grace (Georgia State University), Robert W. Klein (Georgia State University), Robert E. Litan (Ewing Marion Kauffman Foundation and Brookings Institution), Phil O'Connor (PROactive Strategies), Hal S. Scott (Harvard Law School), Harold D. Skipper (Georgia State University), Peter J. Wallison (American Enterprise Institute).
Published by: Brookings Institution Press
Table of Contents
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The issue of whether the insurance industry in the United States should be regulated by the states or by the federal government has been the subject of considerable debate over the last century and a half. The states have success-fully defended the primacy of their authority, but an increasing number of insurers have come to favor an optional federal charter. The debate over an optional federal charter is lodged within a broader discussion of who should reg-...
The Future of Insurance Regulation: An Introduction
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The question of who should regulate the insurance industry has been debated in the United States since the time of the Civil War. Insurance continues to be regulated by the states despite several challenges to their authority over the years. The states’ authority over insurance was supported in various court decisions until the Southeastern Underwriters case in 1944.1 In that case, the Supreme Court determined that the commerce clause of the Constitution applied to...
The Insurance Industry and Its Regulation: An Overview
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Insurance regulation in the United States has been steeped in controversy over its 200-year history. In its early years, industry and regulatory failures prompted reforms and the coalescence of insurance oversight into a state regulatory framework. Beginning in the mid-1800s both the industry and its state regulators have been subject to a series of federal challenges. The states’ regulatory authority was reaffirmed in these challenges, most recently with the passage of the...
Part I: Framework for Insurance Regulation
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An Optional Federal Charter for Insurance: Rationale and Design
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Since the early nineteenth century the states have been the principal authority for the regulation of the U.S. insurance industry. In contrast to other financial services such as securities and banking, Congress has not sought to exercise either concurrent or preemptive authority over insurers on a wide scale.1 Indeed,the McCarran-Ferguson Act of 1945 explicitly found state regulation of insurance to be in the public interest and provided that no federal law should “invalidate,...
Dual Insurance Chartering: Potential Consequences
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The release in March 2008 of the U.S. Treasury Department’s Blueprint for a Modernized Financial Regulatory Structure added fuel to a long-simmering debate over the relative merits of state and federal insurance regulation.1 The blue-print was developed in response to concerns expressed by some policymakers and capital market participants that the current financial services regulatory structure is ill suited to the globalization of capital markets and the increasing complexity...
Part II: Insurance Regulatory Policies
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Insurance Regulation: The Need for Policy Reform
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Beyond the push for increasing the federal role in insurance regulation, there is strong pressure for reforming insurance regulatory policies. Indeed, proponents of an optional federal charter (OFC) for insurance envision that federal officials would adopt policies that would significantly diverge from current state regulatory policies in a number of key areas. At the same time, the creation of an OFC would still leave an optional state framework in place, and the states would...
Consumer Benefits of an Optional Federal Charter: The Case of Auto Insurance
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A key element of most legislative proposals to establish an optional federal charter (OFC) for insurers is that market competition rather than government regulation would set insurance rates. Insurers choosing the federal charter,therefore, would be free to set premiums based on their actuarial calculations of risk and other competitive considerations. The market would discipline insurers and, as in other sectors, would keep premiums in line with claims, other expenses,...
Part III: Insurance Regulation, Financial Convergence, and International Trade
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Convergence in Financial Services Markets: Effects on Insurance Regulation
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Convergence in financial services refers to two quite different developments,each of which is likely to have a different but cumulative effect on regulatory structure. The most obvious form of convergence is conglomeration among banks, securities firms, and insurance companies, an effect that is largely the result of banking organizations—freed to do so by the Gramm-Leach-Bliley Act of 1999 (GLBA)—acquiring insurance and securities affiliates. To a much lesser extent,...
U.S. Insurance Regulation in a Competitive World Insurance Market: An Evaluation
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There are long-standing charges that U.S. insurance regulation acts as a barrier to entry and discriminates unfairly against foreign insurers, resulting in a less competitive and robust national insurance market. Simultaneously, many U.S. insurers believe that the U.S. regulatory system hampers them in international competition and that other countries cite it to justify their own trade barriers against them. This chapter addresses these and related issues in the context...
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Page Count: 240
Publication Year: 2009