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.

Regulatory reform proposals

While the industry has traditionally been regulated by individual states, critics of the current system say it stifles competition and that it’s overly complex and burdensome. Many life insurers and some large P/C companies endorse an optional federal charter (dual charter), similar to the system regulating banks where companies would have the option of either federal or state regulation.

Banks have had the option of federal oversight for about 140 years. Under the dual banking system, banks can select either federal or state regulation, depending on the product. As a result, the financial services industry has been able to bring new products to market in a matter of weeks.

Those opposing a federal charter say that providing such an option would allow insurers to play state and federal regulators off of each other, whereby companies would jump back and forth to whichever standard is more lenient.

Another proposal calls for state regulatory reform within standards set by the federal government. In March 2004 Michael Oxley (R-Ohio), chairman of the House Financial Services Committee, announced plans to introduce legislation that creates a state and federal council to oversee the industry, with states as the primary regulator. Oxley’s proposal calls for uniform agent licensing, a uniform market conduct law and elimination of P/C product price controls.

Although it appears to address some of the efficiency concerns, at least one consumer group (Consumer Federation of America-CFA) has voiced concerns as to whether or not states could protect consumers if not given full regulatory authority. Insurance protection during and after regional disasters is another concern. Some groups contend that state regulators are better equipped to supervise coverage in such events.

Receiving CFA support is S. 1373 introduced by Senator Fritz Hollings (D-South Carolina). According to CFA, the bill calls for a unitary federal regulatory system under which interstate insurers would be regulated. Intrastate insurers would fall under state regulation. It also calls for repeal of the industry’s anti-trust exemption under McCarran Ferguson, federal approval of pricing and annual market conduct exams.

National trade 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. Federal charter proponents include the American Insurance Association, Ameri-can Council of Life Insurers and Ameri-can Bankers Insurance Association.

Supporters of state regulatory reform with some level of federal intervention (such as the Oxley proposal) include the Property Casualty Insurers Association of America, National Association of Mutual Insurance Companies, National Association of Professional Insurance Agents, Independent Agents & Brokers of America and the National Association of Insurance Commissioners (NAIC).

These trade groups, mostly long-time supporters of state regulation, contend that a dual charter not only lessens the power of state regulators, but jeopardizes company competitive market structure and hinders consumer protection. They also contend that the industry and consumers are better off with state system reforms rather than tossing it and that federal involvement would provide greater uniformity in such areas as company licensing and market conduct examinations.

NAIC modernization movement

In response to the critics of the current system, the NAIC has embarked on modernizing and streamlining insurance regulation. In accordance with a provision of the Gramm-Leach-Bliley Act of 1999, the group was mandated to certify whether or not states met certain agent reciprocity requirements. As of December 2001, 48 states had passed some type of licensing reform legislation.

The NAIC also issued a modernization act in September 2003 emphasizing the need to continue state insurance regulation reforms, including the implementation of an interstate compact plan to create uniform product standards. The NAIC hopes to have implementation by least 30 states or by states representing 60% of the life and annuities market by year-end 2008.