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 principal objective of the Act was to establish the primacy of the states in regulating the industry. The purpose clause of the Act states that the continued regulation and taxation of the business of insurance by states are in the public’s best interest.
What the Act provides
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.
Recent activity
Prompted in part by the debate and subsequent reform of the financial services industry, discussion regarding the effectiveness and cost of state regulation has surfaced in recent times.
Several highly publicized P/C insurance insolvencies in the mid-1980s prompted the introduction of federal legislation that would have transferred the responsibility of overseeing insurance company insolvency from state to federal regulators. Included as part of the bill were provisions for treating insurers of large commercial entities as a separate class of insurance companies to make it easier for them to compete internationally and provide the services that multinational policyholders needed. State commercial line deregulation will meet many of these needs.
Various segments of the financial services industry are assessing the state regulatory system. The American Bankers Association is proposing a dual charter system similar to the system in place for banks, giving insurers the option of state or federal regulation.
A December, 1998 preliminary study conducted by the American Council of Life Insurers suggested that federal regulation of the life and health insurance industries could save an estimated $66 million a year, mostly from the elimination of duplicate state financial examinations. However, there would be an offsetting loss of state tax deductions for fees and assessments for state guaranty funds. These funds, which are set up in all states, pay the claims of insurers that go insolvent.
Opposing viewpoints
Some critics of the McCarran-Ferguson Act argue that having fewer insurance companies would make the industry more efficient and therefore could mean lower rates, even though consumers would have fewer company choices.
Supporters of state regulation of insurance argue that insurance needs differ in various states. State regulation, they contend, brings the regulation closer to the insurance consumer and allows diversity in the laws that affect the special needs of their states. 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
As of September, 2000 the NAIC was finalizing its new model law for P/C insurance rates and policy forms. The changes will allow traditional insurers to compete with captives and others in the alternative market and insurers abroad and to offer customized, innovative products to commercial clients. Under current regulations, most states require companies to file products with the state insurance department and market them in all states in which they are licensed to conduct business.
The National Conference of Insurance Legislators also developed a model deregulation law similar to the NAIC’s.
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. These include, but are not limited to, premium level and number of employees.
Since the deregulation movement began, some 20 states have enacted laws deregulating commercial rate and/or form filing. It’s anticipated that the Ohio Department of Insurance will be considering some form of commercial deregulation in the upcoming year.
Portions reprinted from Insurance Information Institute’s “Insurance Issues Update,” September, 2000, Ruth Gastel, editor