Insurance Regulation: State vs. Federal Oversight

The debate over state versus federal regulation of insurance continues to evolve. After a decade of no real congressional dialogue on insurance reform measures, the U.S. House of Representatives began the process with a modest federal policy review through a House Judiciary Committee-initiated federal commission. The House Financial Services Committee's Subcommittee on Capital Markets, Insurance and Government followed with hearings and draft legislation. The House Financial Services Committee and the Senate Commerce Committee also held hearings on the issue of insurance regulation. Now the Senate Judiciary Committee has scheduled a review of the repeal of the McCarran-Ferguson Act.

First, a brief review of insurance regulatory policy: In 1944, the U.S. Supreme Court found that insurance was interstate commerce and, thus, subject to antitrust and other federal statutes. The case was U.S. v. South-Eastern Underwriters Association, 322 U.S. 533, 562, 568-71 (1944). This case was a product of anti-competitive activities of the insurance industry during the early 1940s. The U.S. attorney general investigated a six-state association of more than 200 insurance companies that were jointly setting their rates.

Although the Supreme Court decision did not abolish state regulation of the insurance industry, many in the insurance industry thought tough federal regulation would soon follow. The insurance industry moved quickly to block federal regulation. In 1945, Congress passed the McCarran-Ferguson Act. The Act said that the states could go ahead and continue regulating the insurance industry, and that no act of Congress could supercede state laws in that area unless it specifically related to the insurance business. The Act also exempted the "business of insurance" from federal antitrust laws, so long as it was regulated by the states.

Court cases have refined this law over time but not eliminated the exemption. Over the years, the insurance industry sought expansion of the definition "business of insurance." In taking a look at the history of insurer regulation, it's important to view the collision repair industry's policy during this period. Clearly, in the 1980s the policy debate relative to McCarran-Ferguson kicked in. The Automotive Service Association presented testimony in Congress, formed coalitions with consumer and small business organizations, conducted public relations efforts and hired outside counsel to assist in repealing or reforming McCarran-Ferguson.

One quote from ASA's Washington, D.C., representative at that time, Don Randall, read as follows: "Repealing McCarran-Ferguson is important because it still provides a partial shield to the overall liability of insurance companies for antitrust violations. It muddies and confuses the issue of their behavior and liability under the law."

Later, in the 1990s, ASA provided educational panels in Chicago, at the 1996 Northern Autobody Congress and also at the ASA Annual Meeting in Washington, D.C. ASA offered much information about state versus federal regulation of insurance; i.e., state insurance regulators, the U.S. Department of Justice, private sector attorneys specializing in the field of insurance regulation, etc. ASA took a team of shop owners to the U.S. Justice Department to meet with its top attorney specializing in insurance matters to discuss options in dealing with insurers. During the early part of President Clinton's first term, ASA was able to place an amendment on House health care reform legislation that "reformed" - not "repealed" - McCarran-Ferguson. It was not to become law.

In the mid-1990s, two key insurance policy reform members left Congress: House Judiciary Committee Chair Jack Brooks, D-Texas, and Senate Judiciary Subcommittee Chair Howard Metzenbaum, D-Ohio. They were the two biggest advocates of repealing or reforming McCarran-Ferguson. Since that time, efforts on insurance reform have been quite limited in the Congress. ASA continued to be active for a number of years with other small business and consumer groups on this issue but little interest was shown in the Congress. Several years ago, ASA met with the House Judiciary Committee to discuss insurance reform. The Committee eventually passed legislation providing for national antitrust review by the Antitrust Modernization Commission, a blue ribbon commission.

Rep. Richard Baker, R-La., chairman of the House Financial Services Committee's Subcommittee on Capital Markets, Insurance, and Government, has been a strong advocate of changing the way insurers are regulated. This included, during hearings, a strong emphasis on a federal charter for insurance. Eventually draft legislation (SMART) that called for changing the way the insurance industry is regulated, but not to the degree as originally discussed by many reformers, was reviewed in the House Financial Services Committee.

Life insurance groups, and others, have been supportive of federal regulation versus state regulation of the insurance industry in the last few years. The American Council of Life Insurers is supporting legislation that would allow the option for a new federal agency that would supervise the regulation of insurance. This year, Sens. John Sununu, R-N.H., and Tim Johnson, D-S.D., introduced legislation that would do just that. The federal option is also supported by the American Insurance Association, the American Bankers Association and the Financial Services Roundtable. It is opposed by the Independent Insurance Agents and Brokers of America and the Property and Casualty Insurers Association.

This is an opportune time for the collision industry to discuss historical policy positions and whether state or federal regulation of the insurance industry is best for collision shops. Clearly this is the most activity on insurance reform since the mid-1990s.

It is unlikely the 109th Congress will move insurance reform legislation this year due to the brevity of time in the session and upcoming elections but the 110th Congress could be a different story.

A Summary of S.2509

S.2509

Title: A bill to authorize the issuance of charters and licenses for carrying on the sale, solicitation, negotiation, and underwriting of insurance or any other insurance operations, to provide a comprehensive system for the regulation and supervision of National Insurers and National Agencies, to provide for policyholder protections in the event of an insolvency or impairment of a National Insurer, and for other purposes.
Sponsor: Sen. Sununu, John E., R-N.H. (introduced 4/5/2006)
Latest Major Action: 4/5/2006 Referred to Senate committee. Status: Read twice and referred to the Committee on Banking, Housing and Urban Affairs.

Summary As Of: 4/5/2006

National Insurance Act of 2006 - Establishes in the Department of the Treasury the Office of National Insurance, headed by a commissioner.

Establishes within such office: (1) the Division of Insurance Fraud; (2) the Division of Consumer Affairs; and (3) the Office of the Ombudsman to act as liaison between the Office and any person adversely affected by the Office's supervisory or regulatory activities.

Authorizes the commissioner to: (1) provide for the registration of an insurance self-regulatory organization; and (2) supervise and regulate any registered insurance self-regulatory organization.

Prescribes guidelines for: (1) examinations of National Insurers and National Agencies; (2) examination fees and other assessments; and (3) disclosure standards.

Removes national insurers, national agencies, and federally licensed insurance producers from state oversight of insurance business practices.

Retains the applicability of certain state laws, including tax and escheat.

Subjects violations of this Act to civil and criminal penalties. Permits cooperation between the commissioner and foreign or state commissioners.

Grants the commissioner investigative authority regarding insurance fraud.

Prescribes implementation requirements for: (1) the organization, operation, and regulation of national insurance companies and agencies; (2) federal licensing of reinsurers; (3) acquisitions of control, mergers, bulk transfers, and domestication; (4) conversions; and (5) state taxation of national insurers and agencies.

Provides for federal licensing and oversight of insurance producers.

Sets forth federal registration requirements for each national insurer that is a member of an insurance holding company system.

Cites circumstances under which the Office of National Insurance shall be appointed as receiver for a national insurer.

Prescribes implementation guidelines for national insurer participation in guaranty associations.

Establishes the National Insurance Guaranty Corporation to provide benefits to policyholders of a national life insurer placed in federal receivership.