Insurance regulatory law

Historically, the insurance industry has been regulated almost exclusively by the individual state governments. The first state commissioner of insurance was appointed in New Hampshire in 1851 and the state-based insurance regulatory system grew as quickly as the insurance industry itself.[4] Prior to this period, insurance was primarily regulated by corporate charter, state statutory law and de facto regulation by the courts in judicial decisions.[5][6] States coordinate through a nonprofit trade association of state regulatory agencies called the National Association of Insurance Commissioners, which proposes model laws which may be adopted by the members.

As the various state governments each developed its own set of insurance regulations, insurance companies with multi-state business were hampered by the inconsistency of the dissimilar rules and requirements, as well as localism by the state regulators. These companies and their stakeholders joined a growing movement for federal insurance regulation – but, considering the lack of any significant federal regulatory framework, this movement may have been more about avoiding regulation rather than actually promoting federal superiority.[7]

In 1869, the United States Supreme Court cemented state-based insurance regulation as the law of the land when it ruled in Paul v. Virginia[8] that the issuance of a policy of insurance was not the transaction of commerce, and therefore beyond the scope of federal legislation.[9]

More than 70 years, later, however, the Supreme Court overturned that decision in United States v. South-Eastern Underwriters Association, holding that insurance was subject to certain federal legislation such as the federal antitrust statute.[10] Although the South-Eastern case focused primarily on the application of federal anti-trust legislation (the Sherman Act) to the insurance industry, some thought the decision opened the floodgates to widespread federal regulation of the insurance industry and signaled the demise of the state-based insurance regulatory system.[11]

The United States Congress responded almost immediately: in 1945, Congress passed the McCarran-Ferguson Act. 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.[12]

After the McCarran-Ferguson Act, the business of insurance remained substantially regulated by state statutory and administrative laws through the years. Additionally, efforts such as the accreditation standards of the National Association of Insurance Commissioners, and other cooperative endeavors, have increased the uniformity of insurance regulation across the various states.[13]

In 1972, the model law Unfair Claims Settlement Act was written, which has since been adopted by most states with various modifications.[14]

Despite the long history of state-based insurance regulation, federal regulatory influence has been expanding in the past several decades.

Early federal laws passed included the National Flood Insurance Act of 1968, and a Federal Crime Insurance Program was implemented which the Government Accountability Office recommended terminating in 1982.[15]

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.[16]

In the 1980s, the ability to form risk retention groups which were exempt from state regulation was expanded.

From 1986 to 1992, there were 276 insurer bankruptcies. In response to the disruption, the National Association of Insurance Commissioners (“NAIC”) adopted several model reforms for state insurance regulation, including risk-based capital requirements, financial regulation accreditation standards,[17] guaranty associations and an initiative to codify accounting principles into the modern Statutory Accounting Principles. There was renewed discussion of federal insurance regulation, including new legislation for a dual state and federal system of insurance solvency regulation. However, as more and more states enacted versions of these model reforms into law, the pressure for federal reform of insurance regulation waned.[18]

In 1999, Congress passed the Gramm-Leach-Bliley Financial Modernization Act, which sets out certain minimum standards that state insurance laws and regulations were required to meet or else face preemption by federal law.[4]

Over the past decade, renewed calls for optional federal regulation of insurance companies have sounded, including the proposed National Insurance Act of 2006.[19]

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.[20]

Although rebating, which involves giving back some of the purchase price (or offering some sort of per customer discount) is common in some industries, as of 2009, 48 states and D.C. prohibited it in insurance by adopting a law based upon the NAIC Model Unfair Trade Practices.[24]