In the years following enactment of the McCarran-Ferguson Act, the National Association of Insurance Commissioners (NAIC), together with representatives of the insurance industry, drafted model legislation intended to place the regulation of insurance among the several states on a more uniform and adequate basis. Of course, the intent was to meet the challenge of the proviso clause of the act.
Today the states retain primary responsibility for the regulation of the insurance industry. Congress, however, retains oversight responsibility of state insurance regulation. In recent years, the adequacy of state insurance regulation has come under increasing scrutiny. Particular attention has been given to the continued validity of the antitrust exemption now afforded to the insurance business, the effectiveness of the states’ solvency regulation, and inconsistencies in regulation among the states.
The issue of whether the public interest is best served by state regulation is an old one. The controversy could result in (1) the states continuing to be the primary regulators of insurance, (2) the federal government becoming the primary regulator of insurance, or (3) some system of dual regulation. The states could continue their primacy role, yet alter aspects of the system in an effort to be more efficient and effective. For example, the states could adopt a mutual regulatory recognition policy akin to that of the EU.
Such a policy would continue state regulation but place much greater reliance on home state control. Under another proposal, the states would enter into a regulatory interstate compact. An interstate commission would be established with authority to promulgate statutes, regulations, and rules that would bind competing states. There is concern about state sovereignty, but many proponents see this as a vehicle for promoting greater regulatory uniformity while retaining the best aspects of state regulation. The state regulators have undertaken activities to strengthen the regulatory oversight role of the NAIC itself and to enhance programs in education and training, financial services, research, and other areas.
Under still another proposal, a two-tier insurance regulatory system would allow insurers to choose state or federal regulation. Insurers that elected federal regulation would be exempt from most state regulation. Insurers could elect to remain under state supervision, but state regulation itself would be subject to minimum federal solvency standards. Large insurers could be expected to be drawn to federal oversight, whereas smaller insurers could be expected to choose the state option.
ARGUMENTS FOR AND AGAINST U.S. STATE REGULATION OF INSURANCE
Some of the arguments for continuing state regulation include:
- State regulation already exists. It would be expensive to change and great uncertainty exists as to whether any other approach would be superior.
- Decentralization of government is a virtue in itself and consistent with U.S. citizens’ views as to the appropriate locus of responsibility.
- States can be more responsive to local needs.
- There is no reason to believe that other regulation arrangements would be more effective or efficient than state regulation, especially given the unsatisfactory federal banking regulators experience.
- Whatever uniformity is desirable can be achieved through the NAIC.
- The effects of ill-advised insurance legislation are localized.
- States serve as laboratories for insurance regulation.
Arguments advanced in favor of some form of national, including federal, regulation include:
- The expense of having to file financial reports in and deal with each jurisdiction’s insurance department is high and leads to insurer inflexibility, ultimately hindering U.S. domestic insurers in their competition with international insurers.
- Ill-advised legislation can be passed easily in states where legislators cannot devote resources to studying legislation, as can the U.S. Congress.
- The political nature of the appointment or election of state insurance commissioners may produce poorly qualified regulators.
- Insurance commissioners and state legislatures are sometimes overly responsive to domestic insurance companies’ pressures, to the point of placing extra burdens on non-domestic companies (e.g., discriminatory premium taxes).
- Conflicts arise between standard federal regulations and state rulings that adversely affect insurer operations.
- States find it increasingly difficult to solve regulatory problems involving non-U.S. insurers.
Whereas U.S. insurers wishing to do business in other nations typically need deal with only one national regulator, non-U.S. insurers wishing to do business in the United States must deal with dozens of regulators.