The Future of Insurance Regulation in the United States

The Future of Insurance Regulation: An Introduction

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 insurance and that insurance companies (and agents) were subject to federal antitrust law. The Court’s ruling caused the states and the industry to push for the McCarran-Ferguson Act (MFA) in 1945, which delegated the regulation of insurance to the states.2 At that time, the majority of insurance companies favored state over federal insurance regulation. However, since the passage of the MFA the bulk of insurance is now written by national (and international companies) operating across state borders. Many of these insurers have come to view state regulation as an increasing drag on their efficiency and competitiveness and now support a federal The Future of Insurance Regulation: An Introduction Martin F. Grace and Robert W. Klein 1 1 1. 322 U.S. 533 (1944). 2. 15 U.S.C. secs. 1011–15. regulatory system. This is reflected in recent proposals that would establish an optional federal charter (OFC) for insurance companies and agents that would allow them to choose to be federally regulated and exempt from state regulation. However, there is fierce opposition to an OFC among the states and state-oriented segments of the industry. Since the Gramm-Leach-Bliley Act (GLBA) was enacted in 1999, there has been increasing interest in Congress and significant sectors of the insurance industry to establish some form of federal insurance regulation. The GLBA provided the opportunity for banks, insurance companies, and other types of financial intermediaries to be owned by the same holding company. In addition, each type of firm was still subject to regulation by the particular intermediary’s regulator. Although the GLBA was a significant step forward, a number of experts have criticized the division of regulation among various agencies and levels of government. In this sense, insurance is marked as the area most out of line with a modern, integrated system of financial regulation. The demand for federal regulation arises from not only the high cost of state regulation but also other problems associated with it. The high cost of state regulation derives from the fact that insurers must comply with the specific regulations in each state in which they do business. Insurers are burdened by duplicative yet often inconsistent regulation of many aspects of their operations, including solvency , products, prices, and market conduct.3 While solvency regulation is relatively uniform (albeit enforced by each state), the regulation of insurers’ other activities (that is, market regulation) varies greatly among the states. Many insurers are concerned about the hurdles they must overcome in getting prices and products approved and the constraints and mandates imposed on various aspects of their market activities, which they view as excessive and unnecessary.4 These concerns have grown as the industry has becoming increasingly national and international in its scope of operations and as financial convergence has spurred competition between insurance companies and other institutions in the sale of certain financial products with similar attributes. The U.S. system of state insurance regulation is viewed as substantially undermining insurers’ efficiency and ability to compete in national and international markets. At the same time, any move to federal insurance regulation is strongly opposed by certain stakeholder groups, including state officials, state and regional insur2 martin f. grace and robert w. klein 3. Grace and Klein (2000). 4. For a series of case studies on the effects of automobile insurance price regulation, see Cummins (2002). ance companies, and many insurance agents. Opponents of federal regulation raise concerns about the possibility of weakened regulation, reduced consumer protection , and lack of proper attention to local issues. State regulators, understandably, also may fear significant erosion of their authority if large segments of the industry become subject to federal regulation. Additionally, state-oriented insurance companies and agents may be concerned about the competitive advantages that would be gained by national insurers and agents that opt for federal regulation. Hence proposals to establish some form of federal insurance regulation, principally an OFC, have been mired...