The McCarran-Ferguson Act: Regulating the Industry

The McCarran-Ferguson Act was adopted in 1945 after extended controversy over the jurisdiction of state and federal governments in regulating the business of insurance. The purpose clause of the Act states that the continued regulation and taxation of insurance by states are in the public’s best interest.

Recent activity

The state vs. federal regulation debate is long-standing. With the increasing globilization of financial services and intense competition from outside as well as inside the industry, state regulators are looking for ways to streamline state regulation. Two areas targeted for modernization are uniformity in rate regulation and faster approval of new products.

A dual charter approach is supported by a number of national trade groups, some representing the insurance industry and some the banking industry. Banks have had the option of federal oversight for nearly 140 years. Under the dual banking system, banks can select to be regulated by either the federal government or an individual state, depending on the product.

Supporters of state regulation question the logistics of a federal option. Several unknowns including whether it would be available to insurance companies of all sizes, how quickly a federal charter could be obtained, whether or not an insurer would be able to move back and forth between state and federal charters or hold dual charters, are just some of them.

Opposing viewpoints

Critics of the current regulatory environment feel that the need for a federal charter is driven by a need for regulatory and marketing efficiencies. The American Insurance Association’s proposal calls for companies be given the option of obtaining a single charter, enabling them to operate in 50 states and be subject to one-stop uniformity in laws.

The National Association of Independent Insurers, a longtime supporter of state regulation, now feels that some of its members see a benefit in federal involvement to the degree that it would provide greater uniformity in such areas as company licensing and market conduct examinations.

Supporters of state regulation believe that such proposals will lessen the power of state regulators, jeopardize company competitive market structure and hinder consumer protection.

They also contend that the industry and consumers are better off by reforming the state system than tossing it. State regulation, which has been around for more than 130 years, better brings the regulation closer to the insurance consumer and allows diversity in the laws that affect state-specific needs. Supporters believe additional federal regulation would add another layer of bureaucracy, imposing additional cost to the consumer. McCarran-Ferguson supporters also say that restriction or repeal would result in small, specialty insurers being driven out of business, affecting local economies and reducing competition.

Commercial lines deregulation movement

Many states have deregulated rates and forms for commercial lines. The changes allow traditional insurers to compete with captives and others in the alternative market to offer customized, innovative products to commercial clients. Prior to deregulation, most states required companies to file products with the state insurance department and then market them in all states in which they were licensed.

Laws differ by state on the extent of deregulation. In general, to come under the large commercial risk umbrella, commercial entities must meet at least two of a list of criteria that establish their size and sophistication as insurance buyers. Some 20 states have enacted laws deregulating commercial rate and/or form filing.

Legislative activity

With the introduction of bills, one in both the House and Senate, April 2002 marks the beginning of a long process. Optional federal chartering is the crux of Sen. Charles Shumer’s (D-NY) bill. The bill was introduced as the National Insurance Chartering and Supervision Act. It has not yet been assigned a number. Rep. John Lafalce’s (D-NY) bill puts the feds in charge of insurance regulation above state regulators. HR 3766 is being tagged as the Insurance Industry Modernization and Consumer Protection Act.

Portions from Insurance Information Institute’s “Insurance Issues Update,” April 2001 and Best Review, April 2002.