A Brief Chronicle of Insurance Regulation in the United States, Part II: From McCarran-Ferguson to Dodd-Frank

Although the insurance industry remains substantially regulated by the state government, federal regulation continues to encroach on the state regulatory system in spite of efforts by organizations such as the National Association of Insurance Commissioners, and other cooperative endeavors, to increase the uniformity of insurance regulation across the United States.
As previously discussed, the U.S. Supreme Court overturned the seminal case of Paul v. Virginia in 1944 in United States v. South-Eastern Underwriters Association, holding that the business of insurance was subject to federal regulation under the Commerce Clause of the U.S. Constitution. Many, including Chief Justice Stone in his dissenting opinion, felt that the South-Eastern decision largely pre-empted the state insurance regulatory system in favor of federal law.[1]

The United State Congress, however, responded almost immediately: in 1945, Congress passed the McCarran-Ferguson Act.[2] The McCarran-Ferguson Act specifically provides that the regulation of the business of insurance by the state governments is in the public interest. Further, the Act states that no federal law should be construed to invalidate, impair or supersede any law enacted by any state government for the purpose of regulating the business of insurance, unless the federal law specifically relates to the business of insurance.[3]

The McCarran-Ferguson Act specifically provides that the regulation of the business of insurance by the state governments is in the public interest.
Despite this declaration of the right of the state governments to regulate the insurance industry, the McCarran-Ferguson Act nevertheless provides that three (3) federal laws are specifically applicable to the business of insurance: the Sherman Act, the Clayton Act and the Federal Trade Commission Act. These federal laws are intended to prevent and restrict anticompetitive practices and unfair competition such as cartels and monopolies, and otherwise regulate trade and promote consumer protection.[4]

Even with the seemingly firm declaration of Congress’ intent that the states regulate insurance in the McCarran-Ferguson Act, federal regulation nevertheless continues to encroach upon the state regulatory system.

In the mid 1970s, for example, the concept of an optional federal charter for insurance companies was raised in Congress. With a wave of solvency and capacity issues facing property and casualty insurers, the proposal was to establish an elective federal regulatory scheme that insurers could opt into from the traditional state system, somewhat analogous to the dual-charter regulation of banks. Although the optional federal chartering proposal was defeated in the 1970s, it became the precursor for a modern debate over optional federal chartering in the last decade.[5]

A wave of insurance company insolvencies in the 1980s sparked a renewed interest in federal insurance regulation, including new legislation for a dual state and federal system of insurance solvency regulation.

Even with the McCarran-Ferguson Act's firm statement that the states should regulate the business of insurance, federal regulation nevertheless continues to encroach upon the state regulatory system.
In response, the National Association of Insurance Commissioners (“NAIC”) adopted several model reforms for state insurance regulation, including risk-based capital requirements, financial regulation accreditation standards and an initiative to codify accounting principles. As more and more states enacted versions of these model reforms into law, the pressure for federal reform of insurance regulation waned.[6]

In 1999, Congress passed the Gramm-Leach-Bliley Financial Modernization Act, which laid out a comprehensive framework for holding company systems and affiliations involving banks, securities firms and insurance companies, breaking down many of the prior restrictions against such affiliations. Although Gramm-Leach-Bliley acknowledged that states should regulate the insurance industry, it nevertheless set out certain minimum standards that state insurance laws and regulations were required to meet or else face preemption by federal law.[7]

Over the past decade, renewed calls for optional federal regulation of insurance companies have sounded, including the proposed National Insurance Act of 2006. [8]

The most recent challenges to the state insurance regulatory system are arguably the most significant, as well, showing further erosion of state primacy. Both the Patient Protection and Affordable Care Act (“PPACA”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) are material forays of federal law into the insurance industry. [9]

Significantly, PPACA is a comprehensive reform of the health insurance market that creates specific requirements for health benefit plans to be marketed through federally-mandated state-created insurance exchanges. Among myriad other requirements, PPACA mandates certain insurance coverage requirements, such as prohibiting pre-existing condition exclusions in certain instances and restricting limits on the dollar value of health benefit plans, and it requires that health insurers maintain specific medical-loss ratios as set by federal law.

Dodd-Frank has significant implications for the insurance industry.
Dodd-Frank is touted by some as the most sweeping financial regulation overhaul since the Great Depression and criticized as clumsy and incomplete by others.

Nevertheless, Dodd-Frank has significant implications for the insurance industry including, among others, the following:
  • Establishes the Federal Insurance Office (“FIO”) under the U.S. Department of Treasury, charged with studying and collecting information on the insurance industry and the state insurance regulatory system, and drafting a proposed federal insurance regulatory framework;
  • Establishes the Financial Stability Oversight Council (“FSOC”), which is charged with monitoring the financial services markets, including the insurance industry, to identify potential risks to the financial stability of the United States;
  • The FSOC is authorized to require a state insurance regulator to either apply new or heightened financial standards on insurance companies, or explain to the FSOC in writing why the regulator chose not to apply such standards;
  • The FSOC may declare that a “nonbank financial company” – including an insurance company under certain circumstances – poses a systematic risk such that it is subject to supervision by the United States Federal Reserve System;
  • Requires single-state regulation of surplus lines insurance placements and requires all states to apply uniform eligibility criteria for surplus lines insurers; and
  • Mandates certain requirements for reinsurance credits and generally preempts non-domiciliary state laws to insurers with respect to certain reinsurance issues.[10]


1United States v. South-Eastern Underwriters Association, 322 U.S. 533 (1944).
2. The McCarran–Ferguson Act, 15 U.S.C. §§ 1011-1015.
3. The McCarran–Ferguson Act, 15 U.S.C. §§ 1011-1012; State Insurance Regulation: History, Purpose and Structure; NAIC; http://www.naic.org/documents/consumer_state_reg_brief.pdf.
4. The McCarran–Ferguson Act, 15 U.S.C. §§ 1012(b); the Sherman Act, 15 U.S.C. §§ 1-7; the Clayton Act, 15 U.S.C. §§ 12-27, 15 U.S.C. §§52-53; the Federal Trade Commission Act, 15 U.S.C. §§ 41-58).
5Federal Insurance Regulation Optional Federal Chartering Bills Come to the Big Top: The Substance and Politics of Act II; Craig Berrington; September 2007; http://www.wileyrein.com/publications.cfm?sp=articles&id=4496.
6The Fatal Flaw of Proposals to Federalize Insurance Regulation; Elizabeth F. Brown; Research Symposium on Insurance Markets and Regulation: Optional Federal Chartering; 2008.
7State Insurance Regulation: History, Purpose and Structure; NAIC; http://www.naic.org/documents/consumer_state_reg_brief.pdf.
8Uniformity and Efficiency in Insurance Regulation: Consolidation and Outsourcing of Regulatory Activities at the State Level; W. Jean Kwon; Networks Financial Institute; Indiana State University; 2007.
9. The Patient Protection and Affordable Care Act, Pub.L 11-148, 124 Stat. 119; the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub.L 111-203, H.R. 4173.
10. The Dodd-Frank Act, Pub.L 111-203, H.R. 4173; Insurance Industry Implications of the Dodd-Frank Act, Willkie, Farr & Gallagher, LLP; A Decent Start, Financial Reform in America, The Economist, July 2010.

2 comments:

  1. Thanks for gathering all these information in one article. Insurance regulation is certainly vital in assuring that all these insurance companies are abiding all the rules set by the state.

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  2. I like how you describe it briefly. Thanks a lot for sharing that valuable information. It's nice to know the importance of insurance regulation.

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