Order Code IB10106
Issue Brief for Congress
Received through the CRS Web
Insurance Regulation and Competition:
Background and Issues
Updated August 28, 2002
S. Roy Woodall, Jr., Insurance Consultant
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Present Regulatory Structure
Factors Promoting Change
State Regulatory Response
Congressional Response
Legislation in the 107th Congress
Senate
House of Representatives
Congressional Hearings During the 107th Congress
June 4, 2002 Hearing
June 11, 2002 Hearing
June 18, 2002 Hearing
FOR ADDITIONAL READING


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Insurance Regulation and Competition: Background and Issues
SUMMARY
Insurance companies make up a major
sometimes takes 2 years or more for an insurer
segment of the U.S. financial services indus-
to obtain the necessary state approvals for a
try. However, unlike banks and other finan-
national launch of a similar product. As a
cial institutions that are regulated primarily at
result, many insurers selling such products are
the federal level, insurance companies are
calling upon Congress to pass legislation
regulated by the states. As financial services
reinstating the federal government’s insurance
have converged in response to globalization
regulatory role.
and other market factors, the seemingly arbi-
trary distinctions separating various financial
The House Financial Services Committee
products and services, as well as their provid-
has been looking into the current state insur-
ers, have broken down.
ance regulatory structure, and during the 107th
Congress its subcommittees held six hearings.
In 1999 Congress passed the Gramm-
The first three hearings focused on the ineffi-
Leach-Bliley Act (GLBA) to reflect market-
ciencies and lack of uniformity in current state
place changes and to overhaul the laws gov-
insurance regulation, and the second three
erning financial institutions. Rather than
hearings reviewed various proposals for re-
changing the regulatory structures in place for
form, including optional federal chartering
the various financial institutions, GLBA
and regulation of insurers. The insurance
embraced the concept of “functional”
industry is divided on the issue of whether the
regulation. In the process it specifically reaf-
federal government should assume any
firmed the regulation of insurance by the
regulatory role. Major trade groups of some
states as granted by the 1945 McCarran-Fer-
of the largest insurers and brokers are actively
guson Act. Since 1945 Congress has
advocating a dual state/federal insurance
reviewed the jurisdictional stewardship en-
regulatory system that would allow an insurer
trusted to the states under McCarran-Ferguson
the option of obtaining a federal charter and
on various occasions. However, until recently
being regulated at the federal level. Other
efforts to transfer insurance regulatory author-
segments of the insurance industry would
ity back to the federal government were op-
prefer to see the states modernize the current
posed by both the states and a united insur-
system, rather than establish any federal
ance industry.
system.
Some insurers now claim that in view of
Legislation in the House and Senate is
the growing convergence of financial services
modeled on the dual state/federal regulation
and products, they find themselves at a com-
that now exists for the banking industry, but
petitive disadvantage because of the ineffi-
most consider it very unlikely that the 107th
ciencies associated with being regulated by the
Congress will address either measure. It is
states. For example, life insurers selling
anticipated that additional proposals for a dual
products aimed at retirement and asset accu-
state/federal regulatory system, including
mulation must now compete with similar bank
additional optional federal chartering
products. While banks can roll out their new
proposals, will garner more consideration by
products nationwide in a matter of weeks, it
the 108th Congress.
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
During June 2002, the House Subcommittee on Capital Markets, Insurance, and
Government Sponsored Enterprises of the Committee on Financial Services, chaired by
Representative Richard Baker, held a series of three hearings on “Insurance Regulation and
Competition for the 21st Century.” The June 2002 hearings followed three previous hearings
in 2001 on the current structure of state insurance regulation, and reviewed various
proposals for insurance regulatory reform, including optional chartering of insurers at the
federal level. Legislation providing for optional federal chartering has been introduced in
the House (H.R. 3766), and also in the Senate, though the latter has not yet been assigned
a number. Representative Baker has announced that he intends to unveil legislation early
in 2003 to modernize and streamline insurance regulation. Various insurance interests are
also currently working on updating their own competing proposals to revamp and modernize
the regulation of insurance.

BACKGROUND AND ANALYSIS
Present Regulatory Structure
Insurance companies comprise a major segment of the U.S. financial services industry.
However, unlike banks and other financial institutions that are regulated primarily at the
federal level, insurance companies have been regulated by the states for the past 150 years.
The legal basis for insurance regulation by the states goes back to an 1868 decision of the
U.S. Supreme Court which held that insurance was not interstate commerce, and thus not
subject to regulation by the federal government under the Commerce Clause of the U.S.
Constitution. Courts followed that precedent for the next 75 years. Then, in 1944, the U.S.
Supreme Court reversed its 1868 ruling and held that insurance is, in fact, interstate
commerce, and subject to federal oversight. By that time, however, the state insurance
regulatory structure was well established, and a joint effort led by state regulators and
insurance industry leaders to overturn the decision legislatively led to the passage of the
McCarran-Ferguson Act of 1945. That act suspended federal powers to regulate insurance,
subject to “effective” insurance regulation by the states, and granted a limited federal
antitrust exemption to the insurance industry.
After 1945, the jurisdictional stewardship entrusted to the states under McCarran-
Ferguson was reviewed by Congress on various occasions. Each time proposals were made
to transfer insurance regulatory authority back to the federal government, they were met by
opposition from the states as well as from a united insurance industry. Generally, such
proposals for federal oversight spurred a series of regulatory reform efforts at the state level
and by the National Association of Insurance Commissioners (NAIC). Such efforts were
directed at correcting perceived deficiencies in state regulation in order to forestall a federal
regulatory takeover, and were generally accompanied by pledges from state regulators to
work for more uniformity and efficiency in the state regulatory process.
A major effort to transfer insurance regulatory authority to the federal government was
undertaken in the mid 1980s, following insolvencies of several large insurance companies.
Representative John Dingell, who at that time chaired the House Commerce Committee
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which had jurisdiction over insurance, questioned whether state regulation was up to the task
of overseeing such a large and diversified industry. He conducted several hearings on the
state regulatory structure and also proposed legislation that would have created a federal
insurance regulatory agency modeled upon the Securities and Exchange Commission (SEC).
State insurance regulators and the insurance industry opposed his proposal and worked
together on a series of reforms at the state level and at the NAIC, including a new state
Accreditation Program setting baseline standards for state solvency regulation. Under such
baseline standards, each state must have adequate statutory and administrative authority to
regulate an insurer’s corporate and financial affairs, and must also have the necessary
resources to carry out that authority. In spite of such reforms, however, another breach in the
state regulatory system occurred in the late 1990s, when Martin Frankel slipped through the
oversight of several states and effectively “looted” a group of small life insurance companies
of some $200 million. Such a breach was a major embarrassment to state regulation, but it
did not have a long-term impact or bring additional calls for a federal regulatory system.
Factors Promoting Change
In 1999, Congress passed the Gramm-Leach-Bliley Act (GLBA – P.L. 106-102), an
historic piece of legislation, which instituted a massive overhaul of the federal laws
governing U.S. financial institutions. Support for the measure came largely as a result of
changes in market forces, frequently referred to as “convergence.” Convergence in the
financial services context refers to the breakdown of distinctions separating different types
of financial products and services, as well as the providers of once discreetly separate
products. Drivers of such convergence are generally considered to be such emerging market
forces as globalization, new technology, e-commerce, deregulation, market liberalization,
increased competition, tighter profit margins, and the growing number of sophisticated
consumers. The goals behind these driving forces, in turn, appear to be the increasing efforts
of all financial services providers to find growth, gain market share, create new revenue
streams, and enter new markets. For example, U.S. banks have looked to adjunct non-
banking products such as insurance and pension products to increase their profitability,
pointing to European “bancassurers” that generate 20% to 30% of their profits from the sale
of insurance and investment products integrated into core retail banking businesses.
GLBA repealed federal laws that seemed inconsistent with the way that financial
services products were actually being delivered, and removed many barriers that kept banks
or securities firms from competing with insurance companies. The result was the creation
of a new competitive paradigm in which insurance companies now find themselves in direct
competition with brokerages, mutual funds, and commercial banks. GLBA did not, however,
change the basic regulatory structure for insurance or other financial products. Instead, it
specifically reaffirmed the 1945 McCarran-Ferguson Act which had granted insurance
regulatory authority to the states, thereby recognizing state insurance regulators as the
“functional” regulators of insurance products and those who sell them. Some insurance
companies believe that in this new environment, state regulation places them at a competitive
marketplace disadvantage. They maintain that their new non-insurer competitors in certain
lines of products have far more efficient federally based systems of regulation, while they are
subject to the perceived inefficiencies of state insurance regulation, such as the regulation
of rates and forms as well as other delays in getting their products to market. For example,
life insurers with products aimed at retirement and asset accumulation must now compete
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with similar bank products; however, banks can roll out such new products nationwide in a
matter of weeks, while some insurers maintain that it can take as long as 2 years or more to
obtain all the necessary state approvals for a similar national insurance product launch.
GLBA also addressed the issue of modernizing state laws dealing with the licensing of
insurance agents and brokers and made provision for a federal licensing agency, the National
Association of Registered Agents and Brokers (NARAB), which would come into existence
only if the states failed to enact the necessary legislation for state uniformity or reciprocity.
State Regulatory Response
Following the passage of GLBA, state insurance regulators working through the NAIC
embarked on an ambitious regulatory modernization program in response to both the
mounting criticisms of state insurance regulation and the recognition of the growing
convergence of financial services and financial services products. In early 2000, NAIC
members signed a Statement of Intent: The Future of Insurance Regulation, in which they
pledged “to modernize insurance regulation to meet the realities of the new financial services
marketplace” and “to work cooperatively with all our partners – governors, state legislators,
federal officials, consumers, companies, agents and other interested parties – to facilitate and
enhance this new and evolving market place as we begin the 21st Century.” New NAIC
Working Groups were formed and charged with addressing the various changes needed to
implement those provisions of GLBA requiring regulatory action such as that needed to
prevent NARAB from coming into existence, and also to update and modernize state
regulation in other ways not required by GLBA but needed to deter growing industry support
for federal oversight. The NAIC’s new groups addressed such key issues as state privacy
protections, reciprocity of state producer licensing laws, promotion of “speed to market” of
new insurance products, development of state-based uniform standards for policy form
filings, and other proposed improvements to state rate and form filing requirements.
According to NAIC, the states are now well underway in their efforts to modernize state
regulation in those areas where improvements are needed. NAIC maintains that states are
better positioned than the federal government to serve the interests of American insurance
consumers, emphasizing that state regulators are better able to make sure that the personal
interests of consumers are not lost in the arena of commercial competition. To support this
position, the NAIC points out that during 2000, a total of some 12,500 state insurance
regulatory personnel were employed by the states at a cost of $880 million, and the states
handled approximately 4.5 million consumer inquiries and complaints regarding their
policies and their treatment by insurance companies and agents. The NAIC reports that as
to GLBA’s NARAB provision on producer licensing reform, 46 states had enacted
legislation as of June 2002, and subsequently at least 35 were preliminarily certified as
having full reciprocity – far more than the 29 states needed under GLBA to prevent the
establishment of NARAB. Even though state regulatory uniformity has always been one goal
of the NAIC, it does concede that in view of differing state legal systems, complete
uniformity may be an illusory goal in many lines of insurance products, and not necessarily
required to maintain the degree of effective state regulation required by McCarran-Ferguson.
However, in the area of life insurance, the NAIC acknowledges that the more national nature
of life insurance products argues for true uniformity. As a result, the NAIC is currently
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drafting an interstate compact requiring such uniformity for certain life insurance products,
believing that such a compact is the best mechanism to achieve it.
State regulators, in carrying out their pledge to modernize state insurance regulation by
instituting the reforms needed in the state regulatory structure, hope to satisfy those within
the insurance industry who feel that their needs would be better served by a federal regulatory
structure, or by a dual regulatory structure where insurance companies could choose to be
regulated either at the state or federal level. One distinguishing feature of this latest effort
by the states to improve state insurance regulation and maintain their jurisdiction over it is
that this time the insurance industry itself is not united in its support of state regulation.
Instead, the industry is sharply divided, with some segments committed to an improved
state-based regulatory structure, and others firmly in support of obtaining from Congress the
option to be regulated at the federal level. Three industry trade groups, the American
Council of Life Insurers (ACLI), the American Insurance Association (AIA), and the
American Bankers Insurance Association (ABIA), have released draft legislative proposals
for the creation of an optional federal charter for insurance companies. Other industry
groups, including the Alliance of American Insurers (AII), the National Association of
Independent Insurers (NAII), and the National Association of Mutual Insurance Companies
(NAMIC), are opposed to any federal legislation, preferring that the needed regulatory
improvements be made by the states.
Congressional Response
In the wake of the passage of GLBA, the U.S. House of Representatives in the 107th
Congress reorganized its committee structure to reflect the convergence in the financial
services arena. Jurisdiction over most insurance matters was transferred to the newly formed
Financial Services Committee, which incorporated in its Oversight Plan or agenda, several
insurance-related issues that it intended to look into, including the following:
! Insurance Marketing: “...examine a number of consumer protection
issues...including the churning of life insurance, sales and marketing
representation, coercion and pressure tactics, product bundling, excessive
premium charges for credit insurance and mortgage insurance, and Internet
marketing of insurance products.”
! Insurance Solvency Regulation: “...examine the current accreditation
program of the NAIC that judges the adequacy of state insurance regulatory
systems.”
! Insurance Fraud: “...examine the efforts by the States, the NAIC, and other
entities, to locate and fight insurance fraud, particularly in implementing
reforms developed after the Martin Frankel scandal.”
! NARAB Implementation: “...determine whether a sufficient number of
States are implementing uniform or reciprocal insurance agency licensing
rules as required under the NARAB Title of GLBA, and what further
measures are necessary to promote uniformity in insurance licensing.”
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! Insurance Product Approval: “...review the 50 State approval process for
allowing new insurance products and forms to be admitted into the
insurance markets.”
! National Insurance Uniformity: “...review various alternatives for
modernizing the regulation of insurance, including reform efforts by the
NAIC, development of interstate and regional regulatory compacts,
facilitation of nationwide state – run insurance regulation programs,
proposals for an optional federal insurance charter, and other reforms for
improving the efficiency and effectiveness of insurance regulation.”
Legislation in the 107th Congress
Senate
Legislation first presented on December 20, 2001, by Senator Schumer to provide for
an optional federal charter for insurers has not been assigned a number. It is entitled “The
National Insurance Chartering and Supervision Act” (NICSA), and is modeled on the dual
state/federal regulation that now exists for the banking industry and would enable insurance
companies and agencies to choose between state or federal regulation. It provides that the
chartering, supervision, and regulation of National Insurance Companies(NICs) and
National Insurance Agencies (NIAs) be administered by the federal government in a newly
created federal agency within the Treasury Department. The new agency would be known
as the Office of the National Insurance Commissioner (ONIC), and it would be headed by
the National Insurance Commissioner, who would be appointed for a 5-year term by the
President, subject to Senate confirmation. In addition to chartering new NICs and approving
conversions of current state chartered insurers into NICs, NICSA provides that the National
Insurance Commissioner would have regulatory and supervisory powers that would include
the following:
! Regulation of all lines of insurance, including life, health, and
property/casualty;
! Establishment of a main office in Washington, DC, and six regional offices;
! Imposition of fees as necessary to cover the expenses of the ONIC;
! Establishment of insurance policy standards;
! Establishment of capital, reserve, and accounting standards for insurance
policies;
! Enforcement of financial and market conduct standards;
! Approval of any changes in control of NICs, and any merger and
consolidation if the NIC is the surviving entity;
! General enforcement authority, including license revocation or suspension,
cease and desist orders, and the imposition of civil money penalties;
! Licensing and regulation of NIAs and agents (producers) who sell insurance
for NICs;
! Licensing and regulation of federally qualified reinsurers; and
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! Requiring NICs to participate in “qualified” state insurance guaranty
associations and creating a federal backup guaranty association to cover
“non-qualifying” states.
The broad powers granted to the National Insurance Commissioner would not include
the authority to regulate rates or policy forms. Nor would the Schumer proposal exempt
federally chartered NICs from anti-trust laws, except for purposes of preparing policy forms
and participating in state residual market programs such as assigned risk pools in automobile
insurance.
NICSA provides that a NIC could be organized as a stock, mutual, or fraternal company,
allows the conversion of mutual companies to stock companies, and contains provisions for
the regulation of insurance holding companies. However, regardless of a NIC’s form, it
would not be able to engage in any underwriting activities until it received a license from the
National Insurance Commissioner. The license would specify the line or lines of insurance
the NIC could underwrite, and no single NIC could be licensed to underwrite both life/health
insurance and property/casualty insurance, although an affiliated group of insurance
companies (state and/or federally chartered) could have separate companies writing those
different lines of insurance. Receivership provisions for NICs are also included and provide
that the venue for receivership proceedings would be the U.S. District Court that has
jurisdiction over the NIC’s main office.
House of Representatives
H.R. 3766 was introduced on February 14, 2002, by Representative LaFalce, and is
entitled “The Insurance Industry Modernization and Consumer Protection Act” (IIMCPA).
It would also create an optional federal charter for National Insurers (NIs), but not for
insurance agencies, brokers, or agents. Like the Schumer proposal, it would create a new
federal agency within the Treasury Department, but the agency would be known as the Office
of National Insurers (ONI) and would be headed by a Director, rather than a Commissioner.
Although H.R.3766 is similar in some respects to the Schumer bill and the ACLI draft
proposal, H.R. 3766 has some significant differences, including the following:
! The charter could provide for a NI to underwrite both life insurance and
property/casualty insurance;
! The Director would have general regulatory authority over NIs, including
solvency oversight and policy forms, but rate regulation would be left with
state insurance regulators;
! Even though the legislation has no provision for the licensing of insurance
producers, the Director would have the authority to enforce unfair and
deceptive practices rules against state-licensed producers with respect to the
sale of insurance products issued by NIs, and all states would be subject to
federal minimum standards;
! NIs would be encouraged to invest in the communities in which they sell
policies;
! NIs would be required to file reports containing community sales data that
could be used by federal regulators to combat insurance redlining, and could
not refuse to insure, or limit coverage on, a property based solely on its
geographic location.
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Congressional Hearings During the 107th Congress
During the 1st Session of the 107th Congress, subcommittees of the Financial Services
Committee held three hearings to examine the current structure of insurance regulation and
assess its current inefficiencies. In May 2001, the Subcommittee on Capital Markets,
Insurance, and Government Sponsored Enterprises held a hearing on state efforts to comply
with the NARAB Title of GLBA, which requires a minimum of 29 states to institute
producer licensing reciprocity or face activation of a federal licensing agency, known as the
National Association of Registered Agents and Brokers (NARAB). In June 2001, the same
subcommittee held a hearing to review the state regulatory approval process for new
insurance products, referred to as “speed to market.” In August 2001, a third hearing to
review whether “over-regulation” of automobile insurance denies consumers choice and
competition was held by the Subcommittee on Oversight and Investigations. The committee
had originally planned for additional hearings to be held during 2001, but those plans were
put on hold following the events of September 11.
During the 2nd Session of the 107th Congress, the Subcommittee on Capital Markets,
Insurance, and Government Sponsored Enterprises transitioned from examining state
regulatory inefficiencies considered during the 1st Session to reviewing various proposals
for reform. It held a series of three hearings under the heading of “Insurance Regulation and
Competition for the 21st Century
.” A brief summary of the highlights from those hearings
follows.
June 4, 2002 Hearing.. Representative Richard Baker, chairman of the
subcommittee, indicated in his opening remarks that the hearings were to be the first step
toward legislative recommendations for action on insurance regulatory reform. He said that
it is clear that some sort of regulatory reform is in order because insurance products that are
not labeled as such can enter the marketplace more freely than those labeled as insurance.
Two panels of witnesses representing banking and insurance companies and agents agreed
that insurance regulation needs to be reformed, but they were divided over whether the best
way to accomplish the needed reform would be to establish an optional federal charter and
regulatory system, or to reform the current state regulatory system. Chairman Baker
emphasized that if states believe that they can adequately reform the existing state system,
they should be given a reasonable time limit in which to do so before Congress determines
that it must act. He also added that the hearings would be a “first step” toward his drafting
some type of proposed legislation to reform and streamline insurance regulation that could
be unveiled in 2003, but that he had no preconceived ideas as to any specific legislation at
this time.
June 11, 2002 Hearing. Representative Michael Oxley, chairman of the full
committee, gave an opening statement urging a “go-slow” approach to the task of reforming
insurance regulation, and expressing his hope that the necessary state-based reforms could
be set in place so that no federal action would be necessary. The witnesses, representing
individual insurers and various trade associations, again expressed differing opinions as to
whether Congress should pass optional federal chartering legislation, or take any action to
require the states to make specific reforms in order to improve the position of insurers in
competition with other financial institutions. Subcommittee Chairman Baker repeatedly
attempted to get witnesses to recommend a “time-line” during which the states would have
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to make the reforms necessary to obtain the goal of modernizing state regulation and create
a more level playing field for insurers in the financial services marketplace.
June 18, 2002 Hearing. Most of the witnesses at this hearing were again
representatives of insurance industry groups with definite positions for or against dual
chartering. However, one agent group announced it was developing a “middle ground”
approach under which the states would continue to regulate insurance, but under certain
federally mandated standards. The president of a small life insurance company gave concrete
examples of problems his company has experienced with the current state regulatory system
and asked that if Congress does enact federal chartering legislation, small companies like his
not be excluded by high capital or revenue minimums. The president of the NAIC testified
that state regulators are well on their way in their efforts to modernize state regulation, and
that any federal legislation dealing with insurance regulation would carry the risk of
undermining state consumer protections due to unintended or unnecessary preemption of
state laws and regulations.
Two other hearing-related events took place that had a bearing on the issues considered
at the June 18 hearing. First, the General Accounting Office (GAO) released a statement for
the record (GAO-02-842T) in which it concluded that even though the NAIC has made a
concerted effort in promoting more uniform regulatory processes and requirements, it may
not be able to achieve uniformity in certain areas, and that “... ongoing federal oversight and,
possibly, federal intervention may be needed to provide impetus for positive change and
continuing improvement in state regulation of insurance.” Second, a group of some of the
largest financial services trade groups favoring optional federal charter legislation (Financial
Services Coordinating Council, American Bankers Insurance Association, American Council
of Life Insurers, American Insurance Association, Council of Insurance Agents and Brokers,
and Financial Services Roundtable) announced prior to the hearing that they had formed a
coalition dedicated to establishment of “...a chartering system for insurers that mirrors the
existing dual banking system, which allows banks to choose between state and federal
regulators.”
FOR ADDITIONAL READING
For additional information on the background of state insurance regulation and
proposals before Congress, see CRS Report RS21153, Optional Federal Chartering for
Insurers: Legislation and Viewpoints
, by S. Roy Woodall, Jr.
For additional information on the major insurance industry groups and how they differ
in their positions on federal chartering of insurers, as well other organizations with an interest
in federal chartering and regulation of the insurance industry, see CRS Report RS21172,
Optional Federal Chartering for Insurers: Major Interest Groups, by S. Roy Woodall, Jr.
For additiional information on P.L. 106-102, see CRS Report RL30375, Major
Financial Services legislation, The Gramm-Leach-Bliley Act: An Overview, by William D.
Jackson and F. Jean Wells.
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