Insurance Industry Regulation and the McCarran
Ferguson Act
Background
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.
The federal law does several things:
- It allows insurers to share related information that
lowers costs of doing business. This includes joint development
of insurance forms and the sharing
of loss data to help with policy pricing.
- It provides insurers with a narrow
and limited exemption from federal antitrust laws as long as
the activity is state regulated.
- It explicitly empowers states
to regulate and tax insurance.
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.
Reform proposals
at the national level are moving in two directions. One is a dual
(federal/state) chartering system similar to the
banking industry’s dual regulatory system that would allow
companies to choose between the state system and a national regulatory
structure that would eliminate the need to comply with 51 sets
of different regulations. Banks have had the option of federal
oversight for 140-plus 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. Among
those supporting an optional charter are large insurers that sell
coverage to major corporations, reinsurers, brokerage firms, life
insurers and banks that are moving into the insurance business.
The
other proposal calls for modernization of the state system. One
proposal would create a framework for a national system of
state-based regulation, which would create uniform standards in
such areas as market conduct, licensing, the filing of new products
and reinsurance.
Under the 1999 Gramm-Leach-Bliley Financial Services
Modernization Act, insurance activities — whether conducted
by banks, broker-dealers or insurers — are regulated by the
states. The Act specifically protects 13 specific areas of state
insurance regulation from federal
preemption. These areas, known as safe harbors, protect states
from federal interference in state laws and practices, if they
remain within boundaries that protect against discrimination.
However, it spurred the enactment of uniform insurance agent licensing
laws or reciprocity measures. Under the Act, if within three years
(of 2002) a majority of states had not enacted uniform insurance
agent licensing laws or reciprocity measures, a private national
licensing organization would be created. This National Association
of Registered Agents and Brokers would function as a self-regulating
organization much like the National Association of Securities Dealers.
The states met that goal. As of June 2005, 42 states had passed
licensing reforms.
SMART Act proposal
In August 2004 US Congress Rep. Michael Oxley, chairman of the
House Financial Services Committee, and Rep. Richard Baker, chairman
of the Subcommittee on Capital Markets, Insurance and Government
Sponsored Enterprises, released a draft of the State Modernization
and Regulatory Transparency (SMART) Act. The report addresses 15
regulatory areas including market conduct, licensing, life and
health insurance, commercial and personal lines property/casualty
insurance, reinsurance and antifraud data exchanges, among others.
The Oxley-Baker “roadmap” is intended to result in
legislation that will guide the financial services industry from ‘former’ state-based
insurance regulation to “reformed” state-based insurance
regulation. The proposed reform legislation is intended to amend
the McCarran-Ferguson Act.
The SMART plan would require states to comply with uniform standards
and resolve disputes, speed up the process of getting new products
to the market and move toward a system of market-based rates, without
creating a federal regulator to monitor compliance. Instead it
would establish a seven-member panel consisting of insurance commissioners
and appointees from several federal agencies, including the Securities
and Exchange Commission. Since the panel would have no regulatory
authority, federal courts would enforce compliance with standards.
The proposal would mandate that states adopt flex rating, which
allows insurers to raise rates as long as they are kept within
a certain percentage range for the year. The plan also calls for
states to develop and implement procedures on market conduct and
standards. Concerning licensing, the plan would require states
to adopt a “single point-of-entry” system, whereby
an insurance company licensed by and in good standing with a model
state could submit a uniform application to do business.
Insurance industry trades have been generally supportive of the
SMART Act proposal, calling it a good first step toward modernization.
The American Insurance Association, Property Casualty Insurers
Association of America and the Independent Insurance Agents and
Brokers of America have shown support. However the National Association
of Insurance Commissioners, in spite of proposal input, has taken
a hard line against the bill. The NAIC is taking issue with aspects
of the Act that mandate federal preemption of state laws and regulations,
federal supervision of state regulation, and complete rate deregulation
for all states.
Dual charter proposal
After the passage of the Gramm-Leach-Bliley
Act of 1999, a series of proposals, reactions and counterproposals
for the creation
of a system of dual (state/federal) insurance charters by
banking groups, life insurance trade organizations, property/casualty
insurance
trade associations, agent groups and members of Congress were
proffered. In March 2004, researchers at the University of
Massachusetts issued
a report supporting a strong federal role in insurance regulation.
The study, funded by the life insurance industry, suggested
federal
action was needed to spur reform of the regulatory process.
A two-tiered process, similar to dual regulation in the banking
industry, would
benefit consumers by enhancing competition and reducing the
cost
of oversight, the report said.
Life insurers continue to support the creation of dual insurance
charters, arguing that the current system requires them to operate
without uniformity and subjects them to laws and regulations whose
applications vary from state to state. Their September 2004 testimony
in favor of the dual system before the Senate Banking Committee
was met by opposition from state regulators, who said that modernization
of the current system was on time and on target.
NAIC modernization
proposal
In response to the critics of the current system, the
NAIC has embarked on modernizing and streamlining insurance regulation.
Besides agent licensing reforms, the NAIC 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. NAIC’s
Q & A on the compact, “A Reinforced Commitment: Insurance
Regulatory Modernization Action Plan" can be found at www.naic.org/topics/topic_compact_faq.htm.
The
NAIC revised its initial implementation goals to at least 26 states
or by states representing 40% of the life and annuities
market by year-end 2008. As of July 2005, 18 states had adopted
the compact and 13 had it under consideration. A chart depicting
the status of states adopting and expected to consider the plan
can be found at www.naic.org/topics/topic_compact.htm.
Source: Excerpts
from “Issues Update,” Insurance
Information Institute.
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Following passage of Sarbanes-Oxley in 2002,
the average cost of directors & officers insurance for
public companies with less than $1 billion in annual revenue
almost doubled
year over year, with the 2003 rate of $850,000 being 158% more
than the 2001 average rate of $329,000.
(BestWeek, 6/4/04) |
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