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.
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