Dimensions: 6.5'' x 8.5'' 200 pages AEI Press  (Washington) Publication Date: September 2000 Paperback ISBN: 0844741469 Price: $ 17.00 Add to Cart   Examination Copies

September 2000
Optional Federal Chartering and Regulation of Insurance Companies
Edited by Peter J. Wallison

Since its inception, the insurance business in the United States has been regulated at the state level, and insurers have generally fought against and prevented significant federal-level regulation. But the balkanized state regulatory system that has served well in the past is an impediment to the industry today, and it is not clear that the political will exists at the state level to bring about a modernized regulatory structure. Federal regulation is the only practical alternative, and both life insurers and property and casualty insurers--through their industry associations--are beginning to give serious consideration to that option.

This book is a collection of papers and views delivered at a 1999 AEI conference whose purpose was to raise the major issues and policy questions associated with optional federal chartering and regulation and to outline the likely positions of the principal players in any future debate on specific legislation.

Insurance companies, like other financial services firms, must confront a radically evolving marketplace. Once the source of a unique and frequently local service, many insurers now compete nationally and globally with banks, securities firms, and even unregulated financial institutions. The enactment of the Gramm-Leach-Bliley Act in November 1999, which allowed banks, securities firms, and insurance companies to affiliate, simply ratified what was already a reality. This challenge has forced the industry to look more critically than in the past at the way it is regulated, and some insurers have concluded that change is vitally necessary.

The volume begins with a historical overview, by Scott Harrington, of the regulation of insurance in the United States--from the 1868 Supreme Court ruling that insurance was not interstate commerce, through the McCarran-Ferguson Act (1945) and recent Supreme Court decisions allowing banks to enter areas previously thought to be the exclusive province of insurance companies.

Harrington's analysis shows that much of the change in insurance regulation at the state level has been stimulated by federal threats to enter the field. These threatened intrusions generally arose in response to regulatory failures by the states and were successfully fought by the states and the industry together. Now, however, the interest in federal regulation is coming from the industry itself--not as a result of any regulatory failure, but because state regulation is seen as impeding the industry's ability to compete with other financial services firms or in the global marketplace.

The arguments for and against federal regulation are presented from the slightly differing perspectives of life insurers and property and casualty insurers. The life industry seems focused on the difficulties of competing against banks and securities firms--which generally seem to enjoy more freedom to innovate--and thus looks to federal regulation as a way of escaping the need for fifty-state approval of its products. The dual system of federal and state chartering and regulation--which is what would result from an optional federal chartering structure--seems to have worked particularly well for banks.

On the other hand, the property and casualty industry, while also encountering difficulties with a fifty-state approval process, seems more concerned about the state-level rate regulation, which impairs its ability to compete for the business of a financially sophisticated customer base. The principal benefit of federal regulation for property and casualty companies would be relief from rate regulation, but there is of course no assurance that a federal regulatory structure would be established without a rate-regulation component.

Interestingly, even those at the conference who argued against federal chartering and regulation have little praise for the current, state-regulatory system. In theory, they point out, a local regulatory system should work best for companies and consumers--and should avoid the danger of a national insurance industry resulting from the blanket policies of a single national regulator--but they did agree that reforms are necessary. In general, the proponents of continued state regulation believe that the state system can modernize itself without the need for another layer of government control.

The views of the National Association of Insurance Commissioners (NAIC)--the organization of state-level insurance regulators--are presented by Jack Chesson, the NAIC's senior legislative counsel. Chesson points out that any move in the direction of federal chartering and regulation would be strongly opposed by state governors, whose states would lose the substantial revenues they obtain from insurance regulation. He also notes that the difficulties of creating a new federal regulatory body--such as determining its location within the federal structure and working out the jurisdiction of congressional committees--pose serious practical obstacles to federal regulation.

Chesson notes that the NAIC is taking steps that would make federal chartering and regulation unnecessary; the NAIC is well aware that it must move to create both uniformity and efficiency of regulation at the state level, and introducing such reforms will, in his view, make a federal program unnecessary.

Martin F. Grace and Robert W. Klein address one point that has been a major element of the insurance industry's support for federal regulation: the view that complying with the regulations of fifty states is highly inefficient and costly. Grace and Klein conclude, however, that while a single federal regulator might substantially reduce compliance costs--especially if federal regulation is accompanied by the elimination of many nonessential regulatory burdens--the total compliance costs of the current, state-regulated industry add up to less than 1 percent of premiums. Accordingly, even if bringing the industry under federal regulation produced savings, they would not be financially significant.

The prospect of federal chartering and regulation of insurance companies involves a large number of thorny policy questions. Many of these are reviewed by Bert Ely, who focuses on the question of whether and how to organize guaranty funds in a dual federal-state regulatory system, and Robert Eager and C. F. Muckenfuss, who discuss the problematic organizational and policy issues that would arise in connection with the establishment of a federal insurance regulatory system. Among these is the question whether a federal regulator would have the authority to preempt state laws and regulations. This authority has been used by the comptroller of the currency to improve the competitive position of banks, but is likely to be highly controversial if proposed for a federal insurance regulator today. Yet, without authority to preempt state regulation, many of the benefits thought to derive from federal chartering and regulation might not be obtainable.

Other groups that hold stakes in the outcome of any debate over federal chartering and regulation contribute their views to the volume. Among these groups are large and small insurance agents, consumers, and cross-industry competitors.

Joel Wood of the Council of Insurance Agents and Brokers (CIAB) speaks here from the vantage point of larger brokers and broker organizations. He views federal chartering and regulation as necessary to spur state action. The members of the CIAB, who operate interstate and internationally, are heavily burdened by state regulation, and Wood believes that the new global competitive environment for insurance--especially property and casualty lines--requires a broader regulatory perspective than the states are ever likely to provide.

Michael Kerley of the National Association of Life Underwriters (NALU), an organization of independent agents, takes a different view. He sees regulation as necessary to maintain the reputation of insurance agents and companies and believes that the states have been largely successful in that effort. The members of the NALU have found that dealing with a local regulator is better for them and their clients, and the NAIC appears to be responding to some of the larger companies and agent groups who believe that changes should be made at the state level.

Robert J. Hunter of the Consumer Federation of America concludes that, from the standpoint of consumers, the states have not been effective regulators and that the changes occurring in the market--sales over the Internet, globalization, international trade agreements and mergers, and deterioration of the walls separating different kinds of financial services providers--will make state regulation even less effective. As a result, he believes that Congress has an obligation to review the policies underlying the McCarran- Ferguson Act, which affirmed the states' regulatory authority over the insurance industry.

Finally, a representative of the banking industry, Larry LaRocco of the ABA Insurance Association, presents the outlines of the group’s legislative proposal for a single federal chartering authority and regulator of insurance companies. The proposal, modeled after the Office of the Comptroller of the Currency, would create a single administrator heading a subordinate agency within the Treasury Department. The banking industry, which--after the Gramm-Leach-Bliley Act--is able to affiliate with insurance companies, favors a federal chartering and regulatory authority.

The preponderance of presentations at the conference and in this volume suggest that reform at the state level is vital for the insurance industry and that federal chartering and regulation, despite its many difficulties and uncertainties, may be the only reasonable course if state regulation is not significantly overhauled.