It all goes back to a Supreme Court ruling (Paul v. Virginia) just after the Civil War that said insurance was not interstate commerce. The ruling said that because the Constitution only provided for federal regulation of interstate commerce, insurance was not subject to federal control but was left to the separate states. The states recognized they needed consistency in how they interacted with insurers, so in 1871 the states formed the National Association of Insurance Commissioners to promote uniformity; the NAIC predates the other regulators by half a century.
The arrangement remained in place during the financial boom times and panics that developed over the next 70 years. During the federalization of the economy that occurred during World War II, the Court changed its mind and said insurance was subject to federal intervention, but before this could happen, Congress passed the McCarran-Ferguson Act, which left insurance regulation in the hands of the states, and this is where it sits today.
The state regulators have done much to improve the insurance landscape by requiring insurers to increase their reserves, reduce their risks and protect their capital. Every state has a guaranty fund providing an important safeguard for consumers if a carrier should go under. And every state works to ensure that consumers are treated fairly by carriers and agents. But there are those who question whether the states’ patchwork quilt of insurance regulation is the correct approach for the demands of the new century.
A survey a few years ago found insurers felt twice as strongly as insurance regulators that the current regulatory system was too time-consuming, too diverse and too politically motivated. Insurers were saying the state system results in duplication of costs without providing additional benefit to consumers.
In reaction to these concerns, a proposal for optional federal chartering of insurance companies was introduced by Senators John Sununu and Tim Johnson last summer (Senate Bill 2509, The National Insurance Act of 2006). The belief is that allowing insurers to select federal chartering would modernize the regulatory scene, create a stronger guaranty fund system, and provide parity between banks, broker/dealers and insurers.
In response, the states are moving toward addressing many of these concerns. As an example, the “Interstate Insurance Product Regulation Compact” has now been endorsed by more than half the states and is designed to provide uniform national product standards and regulatory efficiency.
Regardless of whether the industry continues on a state course or selects a federal charter, a more standardized regulatory system is needed. At the close of last year, the Federal Reserve said insurance company assets totaled $5.6 trillion, and that is too much money to be stuffed under a quilt.