Insurance Regulation: Issues, Background,
and Legislation in the 111th Congress
Baird Webel
Specialist in Financial Economics
August 19, 2009
Congressional Research Service
7-5700
www.crs.gov
R40771
CRS Report for Congress
P
repared for Members and Committees of Congress
Insurance Regulation: Issues, Background, and Legislation in the 111th Congress
Summary
The individual states have been acknowledged as the primary regulators of insurance as far back
as 1868. Since the 1945 McCarran-Ferguson Act, this system has operated with the specific
blessing of Congress, but has also been subject to periodic scrutiny and suggestions that the time
may have come for Congress to take back the regulatory authority that it granted to the states. In
the late 1980s and early 1990s, congressional scrutiny was largely driven by the increasing
complexities of the insurance business and concern over whether the states were up to the task of
ensuring consumer protections, particularly insurer solvency.
Prior to the recent financial crisis, congressional interest in insurance regulation focused on the
inefficiencies in the state regulatory system. A major catalyst for congressional interest has been
the aftermath of the Gramm-Leach-Bliley Act of 1999 (GLBA), which modernized the regulatory
structure for banks and securities firms, but left the insurance sector largely untouched. Many
larger insurers, and their trade associations, had previously defended state regulation but consider
themselves at a competitive disadvantage in the current regulatory structure. They are now largely
arguing for an optional federal charter akin to that available to banks. The increased
internationalization of insurance has also brought more pressure on the current U.S. regulatory
system. Various pieces of insurance regulatory reform legislation have been introduced in the
current and past Congresses, including bills implementing an optional federal charter for
insurance and narrower more targeted bills.
The states, particularly working through the National Association of Insurance Commissioners
(NAIC), were not idle in the face of this increased scrutiny. They reacted quickly to the GLBA
requirements that related to insurance agent licensing and have since embarked on a wider
ranging project to modernize insurance regulation. This has included both regulatory aspects,
such as streamlining the process for rate and form filing, and more basic legal aspects, such as the
creation of an interstate compact to provide uniformity across states for some life insurance
products. Since every state legislature must pass the legal changes suggested by the NAIC, the
process typically does not move rapidly.
The large scale financial crisis, initially apparent in the sub-prime mortgage markets in 2007, has
had a significant impact on the debate surrounding insurance regulatory reform. Unlike many
financial crises in the past, insurers played a large role in this crisis. In particular, the failure of
the large insurer American International Group (AIG) spotlighted sources of risk that had been
previously unrecognized. The need for a risk regulator for the entire financial system, whether
through granting enhanced powers to a currently existing regulatory body or creating a new
entity, has been a common thread in many of the recent financial regulatory reform proposals. In
particular, the current broad federal insurance chartering bill, H.R. 1880, includes the designation
of a separate systemic risk regulator for insurers, whereas the regulatory reform proposal released
by the Treasury would give enhanced systemic risk regulatory authority, including oversight over
insurers, to the Federal Reserve and to a new Financial Services Oversight Council.
Although the financial crisis has changed the focus of the debate surrounding insurance
regulatory reform, many of the pre-crisis pressures for regulatory changes continue. Narrower
bills addressing insurance regulation and regulatory requirements have been introduced in the
111th Congress. These include H.R. 1583, H.R. 2554, H.R. 2571/S. 1363, H.R. 2609, and H.R.
3126. None of these have been considered on the floor of the House or the Senate in this
Congress. This report will be updated as legislative events warrant.
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Insurance Regulation: Issues, Background, and Legislation in the 111th Congress
Contents
Introduction ................................................................................................................................ 1
Insurance and the Current Financial Crisis................................................................................... 3
Pre-Crisis Factors Promoting Change .......................................................................................... 4
The Gramm-Leach-Bliley Act ............................................................................................... 4
The Market after the Gramm-Leach-Bliley Act...................................................................... 5
International Developments................................................................................................... 5
State Regulatory Modernization Efforts....................................................................................... 7
Administration Proposals for Regulatory Reform ........................................................................ 9
2008 Treasury Blueprint ........................................................................................................ 9
President Obama’s Financial Regulatory Reform Plan ........................................................... 9
Legislation in the 111th Congress ............................................................................................... 10
The Insurance Industry Competition Act of 2009 (H.R. 1583) ............................................. 10
The National Insurance Consumer Protection Act (H.R. 1880) ............................................ 11
The National Association of Registered Agents and Brokers Reform Act of 2009
(H.R. 2554)...................................................................................................................... 11
The Nonadmitted and Reinsurance Reform Act of 2009 (H.R. 2571/S. 1363) ...................... 11
The Insurance Information Act of 2009 (H.R. 2609)............................................................ 12
The Consumer Financial Protection Agency Act of 2009 (H.R. 3126).................................. 12
Contacts
Author Contact Information ...................................................................................................... 13
Congressional Research Service
Insurance Regulation: Issues, Background, and Legislation in the 111th Congress
Introduction
Insurance companies comprise a major segment of the U.S. financial services industry. Unlike
banks and securities firms, however, insurance companies have been chartered and regulated
solely by the states for the past 150 years. This stems from an 1868 decision of the U.S. Supreme
Court1 that insurance was not interstate commerce and thus was 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. In 1944, the U.S. Supreme Court effectively reversed its 1868
ruling and held that insurance was subject to federal oversight.2 By that time, the state insurance
regulatory structure was well established, and a joint effort by state regulators and insurance
industry leaders to overturn the decision legislatively led to the passage of the McCarran-
Ferguson Act of 1945.3 That act relinquished to the states federal authority to regulate insurance,
subject to “effective” insurance regulation by the states, and granted a federal antitrust exemption
to the insurance industry for “the business of insurance,” which has been determined not
synonymous with the “business of insurers.”4
After 1945, the jurisdictional stewardship entrusted to the states under McCarran-Ferguson was
reviewed by Congress on various occasions. Some narrow exceptions to the 50-state structure of
insurance regulation have been enacted such as that for some types of liability insurance in the
Liability Risk Retention Act.5 In general, however, when proposals were made in the past6 to
transfer insurance regulatory authority back to the federal government, they have been met by
successful opposition from the states as well as from a united insurance industry. Such proposals
for increased federal involvement usually 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 and forestalling federal
involvement. They 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 began in the
mid-1980s and was spurred by insolvencies of several large insurance companies, such as
Executive Life and Monarch Life. Former House Energy and Commerce Committee Chairman
John Dingell, whose committee had jurisdiction over insurance at the time, 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 on the Securities and
Exchange Commission (SEC). State insurance regulators and the insurance industry opposed his
proposal and worked together to implement a series of reforms at the state level and at the NAIC,
including a new state accreditation program setting baseline standards for state solvency
1
Paul v. Virginia, 75 U.S. (8 Wall.) 168 (1868).
2
U.S. v. South-Eastern Underwriters Association, 322 U.S. 533 (1944).
3 15 U.S.C. Sec. 1011
et seq.
4 See CRS Report RL33683,
Courts Narrow McCarran-Ferguson Antitrust Exemption for “Business of Insurance”:
Viability of “State Action” Doctrine as an Alternative, by Janice E. Rubin.
5 15 U.S.C. Sec. 3901
et seq. See CRS Report RL32176,
The Liability Risk Retention Act: Background, Issues, and
Current Legislation, by Baird Webel.
6 Most such proposals prior to the 1990s focused on relatively narrow amendments to McCarran-Ferguson rather than
large scale replacement of the state regulatory system.
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regulation. Under those standards, to obtain and retain its accreditation, each state must have
adequate statutory and administrative authority to regulate an insurer’s corporate and financial
affairs and the necessary resources to carry out that authority. In spite of these changes, however,
another breach in the state regulatory system occurred in the late 1990s. Martin Frankel, who had
previously been barred from securities dealing by the SEC, slipped through the oversight of
several states’ insurance regulators and looted a number of small life insurance companies of
some $200 million. Despite the embarrassment to state regulation, this did not bring long-term
change to federal policy.
In the middle and latter part of the 1990s, Congress’ general attention on insurance regulatory
matters waned. In recent Congresses, however, attention has again focused on the regulatory
structure of insurance. From the 107th through the 109th Congresses, the House Financial Services
Committee in particular held more than a dozen hearings at both the subcommittee and full
committee levels on insurance matters. Representative Michael Oxley, who chaired the
committee during this time, indicated a strong interest in pursuing legislation to change the
regulatory structure. A number of broad proposals for some form of federal chartering or other
federal intervention in insurance regulation were put forward in both houses of Congress, but
none were marked up or reported by the various committees of jurisdiction.
In the first session of the 110th Congress, Senators John Sununu and Tim Johnson and
Representatives Melissa Bean and Edward Royce introduced the National Insurance Act of 2007
(S. 40 and H.R. 3200) into their respective chambers. While differing slightly, both bills would
have created an optional federal charter and corresponding federal regulatory structure for
property/casualty and life insurance. Although it stopped short of endorsing these bills, the call
for an optional federal charter was echoed by the U.S. Department of the Treasury when it
released a “Blueprint for a Modernized Financial Regulatory Structure” on March 31, 2008. This
blueprint was for a complete reform of the entire financial regulatory system, as an intermediate
step, however it also called for an optional federal charter. A number of narrower bills affecting
different facets of insurance regulation and regulatory requirements were also introduced in the
110th Congress, including bills addressing surplus lines7 and reinsurance, as well as insurance
producer licensing.
As the 110th Congress approached its close, the financial crisis that began in 2007 reached panic
proportions with the nationalization of Fannie Mae and Freddie Mac, the failure of Lehman
Brothers, and the government rescue of American International Group (AIG) in September 2008.
This crisis has overlaid a range of new issues and arguments to the previously existing debate on
insurance regulatory reforms.
The 111th Congress has seen the introduction of insurance regulatory reform legislation to address
issues raised in the crisis as well as issues predating the crisis. Legislation has included a broad
federal chartering bill, the National Insurance Consumer Protection Act (H.R. 1880), as well as
narrower, more focused bills, such as the Insurance Industry Competition Act of 2009 (H.R.
1583), the National Association of Registered Agents and Brokers Reform Act of 2009 (H.R.
2554), the Nonadmitted and Reinsurance Reform Act of 2009 (H.R. 2571/S. 1363), the Insurance
Information Act of 2009 (H.R. 2609), and the Consumer Financial Protection Agency Act of 2009
(H.R. 3126).
7 Surplus lines insurance is insurance sold by insurance companies not licensed in the particular state where it is sold.
See CRS Report RS22506,
Surplus Lines Insurance: Background and Current Legislation, by Baird Webel.
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Insurance and the Current Financial Crisis
The ongoing financial crisis grew largely from sectors of the financial industry that had
previously been perceived as presenting little systemic risk, including insurers. Many see the
crisis as resulting from failures or holes in the financial regulatory structure, particularly a lack of
oversight for the system as a whole and a lack of coordinated oversight for the largest actors in
the system. This has increased the urgency in calls for overall regulatory changes, such as the
implementation of increased systemic risk regulation and federal oversight of insurance,
particularly larger insurance firms. The generally good performance of insurers in the crisis,
however, has also provided additional arguments for those seeking to retain the state-based
insurance system.
Although insurers in general appear to have weathered the financial crisis reasonably well so far,
the insurance industry has seen two significant failures, one general and one specific. The first
failure was spread across the financial guarantee or monoline bond insurers. Before the crisis,
there were only about a dozen bond insurers in total, with four large insurers dominating the
business. This type of insurance originated in the 1970s to cover municipal bonds but the insurers
expanded their businesses since the 1990s to include significant amounts of mortgage-backed
securities. In late 2007 and early 2008, strains began to appear due to exposure to mortgage-
backed securities. Ultimately some smaller bond insurers failed and the larger insurers saw their
previously triple-A ratings cut significantly. These downgrades rippled throughout the municipal
bond markets, causing unexpected difficulties for both individual investors and municipalities
who might have thought they were relatively insulated from problems stemming from rising
mortgage defaults.
The second failure in the insurance industry was that of a specific company, AIG.8 AIG had been
a global giant of the industry, but it essentially failed in mid-September 2008. To prevent
bankruptcy in September and October 2008, AIG was forced to seek more than $100 billion in
assistance from, and give 79.9% of the equity in the company to, the Federal Reserve. Multiple
restructurings of the assistance have followed, including up to $70 billion through the U.S.
Treasury’s Troubled Asset Relief Program (TARP). AIG is currently in the process of selling off
parts of its business to pay back assistance that it has received from the government; how much
value will be left in the 79.9% government stake in the company at the end of the process remains
an open question.
The near collapse of the bond insurers and AIG could be construed as regulatory failures. One of
the responsibilities of an insurance regulator is to make sure the insurer remains solvent and is
able to pay its claims. Because the states are the primary insurance regulators, some may go
further and argue that these cases specifically demonstrate the need for increased federal
involvement in insurance. The case of AIG, however, is a complicated one. Although AIG was
primarily made up of state-chartered insurance subsidiaries, at the holding company level it was a
federally regulated thrift holding company and thus overseen by the Office of Thrift Supervision
(OTS). The immediate losses that caused AIG’s failure came from both derivatives operations
overseen by OTS and from securities lending operations that originated with securities from state-
chartered insurance companies. OTS has claimed it had sufficient regulatory authority and
competence to oversee a complicated holding company such as AIG. Others, particularly the
8 See CRS Report R40438,
Ongoing Government Assistance for American International Group (AIG), by Baird Webel.
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Insurance Regulation: Issues, Background, and Legislation in the 111th Congress
Federal Reserve, have disputed this claim and argue that a single body is needed to oversee
systemic risk and large financial holding companies.
Pre-Crisis Factors Promoting Change
Prior to the financial crisis, three interrelated factors had provided impetus for broad change in
the insurance regulatory system. These were (1) previous legislation that revamped regulation for
the banking and securities industries; (2) changes in the insurance marketplace; and (3) regulatory
changes abroad. Taken together, these changes continue to have a significant impact on the
competitive position of companies both within the insurance industry and between insurers and
other financial service companies. Largely because of this impact, significant portions of the
insurance industry, which had previously supported the state regulatory system, are now calling
for federal intervention.
The Gramm-Leach-Bliley Act9
In 1999, Congress passed the Gramm-Leach-Bliley Act (GLBA), instituting 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 separate products. Drivers of
such convergence are generally considered to be market forces such 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 reaffirmed the McCarran-
Ferguson Act, recognizing state insurance regulators as the “functional” regulators of insurance
products and those who sell them. Some insurance companies believe that in this environment,
state regulation places them at a competitive marketplace disadvantage. They maintain that their
non-insurer competitors in certain lines of products have far more efficient federally based
systems of regulation, while they remain 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 with similar bank products. Banks can roll out such new
9 P.L. 106-102, 113 Stat. 1338.
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products nationwide in a matter of weeks, while some insurers maintain that it can take as long as
two years 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 federally backed licensing association, the National
Association of Registered Agents and Brokers (NARAB), which would have come into existence
three years after the date of enactment if at least 29 states failed to enact the necessary legislation
for state uniformity or reciprocity. Following GLBA, the requisite number of states enacted this
legislation, and thus the NARAB provisions never came into effect. The issue of insurance
producer licensing reciprocity or uniformity continued, however, as some saw and continue to see
problems in the actions taken by the individual states. Every state has not passed legislation
implementing reciprocity and, even in those states that did, it has not always been implemented as
smoothly as desired, particularly by the agents and brokers themselves.10
The Market after the Gramm-Leach-Bliley Act
Congress passed the Gramm-Leach-Bliley Act to enhance competition among financial services
providers. Though many observers expected banks and insurers to converge as institutions after it
passed, this has not occurred as expected. In fact, the major merger between a large bank,
Citibank, and a large insurer, Travelers, which actually spurred the passage of GLBA, has
effectively been undone. The corporation that resulted from the merger, Citigroup, has divested
itself of almost all of its insurance subsidiaries. The property/casualty divisions were sold first, to
the St. Paul’s Companies, and the large majority of the life insurance operations were sold to
Metlife. The only remaining sizeable bank-insurer merger is Chase Insurance, which is a part of
JPMorgan Chase.11
Although large bank-insurer mergers have not occurred as expected, significant convergence has
continued. Instead of merging across sectoral lines, banks began distributing—but not
“manufacturing”—insurance, and insurers began creating products that closely resembled
financing. Consolidation has also continued within each sector, as banks merged with banks and
insurers with insurers. Also, although Congress had instituted “functional regulation” in GLBA,
regulation since has still tended to track institutional lines.12
International Developments
Although banking, insurance and other financial services are not an industry that produces a
tangible good to be shipped across borders, the trade in such services makes up a large amount of
10 See, for example, the April 16, 2008 testimony by Tom Minkler on behalf of the Independent Insurance Agents and
Brokers made before the House Financial Services Subcommittee on Capital Markets, Insurance, and Government
Sponsored Enterprises at http://www.house.gov/apps/list/hearing/financialsvcs_dem/minkler041608.pdf.
11 In 2003, Bank One acquired Zurich Life, and then in 2004, Bank One merged into JPMorgan Chase, and the
insurance divisions were renamed.
12 See CRS Report RS21827,
Insurance Regulation After the Gramm-Leach-Bliley Act, by Carolyn Cobb. Functional
regulation would entail, for example, insurance regulators overseeing insurance products being offered by banks, while
banking regulators would oversee banking products offered by insurers. Institutional regulation tends to focus more on
the charter of the institution so, for example, banking regulators oversee all the activities of a bank even if the bank is
offering insurance products.
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international trade. The United States has generally enjoyed a surplus in trade in financial
services, other than insurance, but in insurance services the United States has consistently run a
deficit with the rest of the world.13 Consolidations in the insurance industry are creating larger
international entities with growing market shares, particularly in the reinsurance market. Some
have speculated that the growing “internationalization” of the financial services industry means
governments may find it difficult to reform their regulation in isolation from other jurisdictions
and international developments. The need for a single voice at the federal level to represent U.S.
insurance interests on the international stage is a frequently heard argument for increased federal
involvement in insurance regulation.
The European Union (EU), our biggest trading partner in insurance services, is continuing with its
Financial Services Action Plan, a comprehensive program to transform the EU into a single
market for financial services. The EU is putting forward an updated solvency regime for
insurers—known as Solvency 2—to more closely match the capital required by regulators to the
risks undertaken by insurers. It is
an ambitious proposal that will completely overhaul the way we ensure the financial
soundness of our insurers. We are setting a world-leading standard that requires insurers to
focus on managing all the risks they face and enables them to operate much more
efficiently.14
The European Parliament passed Solvency 2 legislation in April 2009 with implementation
foreseen in 2012. The EU has also adopted a reinsurance directive that creates a “single license”
or “passport” for EU reinsurers, which would enable reinsurers licensed under the proposed
standards in their home EU country to do business in all other EU countries without further
requirements or collateral.15 The reinsurance directive is seen as “a useful tool in international
trade negotiations as it could help improve access for European reinsurers to foreign markets”
such as the United States.16
Access to the U.S. market for insurance is a significant issue. Of particular concern have been the
state regulatory requirements that reinsurance issued by alien17 reinsurers must be backed by
100% collateral deposited in the United States. Alien reinsurers have asked state regulators to
reduce this requirement to as low as 50% for insurers who meet particular criteria, pointing out,
among other arguments, that U.S. reinsurers do not have any collateral requirements in many
foreign countries and that the current regulations do not recognize when an alien reinsurer cedes
some of the risk back to a U.S. reinsurer. In the past, the NAIC has declined to recommend a
13 U.S. exports of non-insurance financial services were $60.2 billion in 2008 vs. imports of $19.1 billion. Insurance
exports in 2007 totaled $10.8 billion vs. imports of $42.9 billion. See the Bureau of Economic Analysis website at
http://www.bea.gov/international/bp_web/simple.cfm?anon=71&table_id=22&area_id=3.
14 Charlie McCreevy, European Union Internal Market and Services Commissioner, quoted in “‘Solvency II’: EU to
take global lead in insurance regulation” available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/07/
1060&format=HTML&aged=0&language=EN&guiLanguage=en. The general EU website on Solvency 2 is
http://ec.europa.eu/internal_market/insurance/solvency/index_en.htm.
15 Text of and further information about the directive is available at http://ec.europa.eu/internal_market/insurance/
reinsurance_en.htm.
16 European Commission, “Commission Proposes a Directive To Create a Real EU-Wide Market for Reinsurance,”
Internal Market: Financial Services: Insurance: Press Release, http://europa.eu/rapid/pressReleasesAction.do?
reference=IP/04/513&format=PDF&aged=1&language=EN&guiLanguage=en.
17 In the United States, the term “foreign” insurer generally denotes an insurer that is chartered in a different state; those
insurers from a different country are called “alien” insurers.
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collateral reduction, citing fears of unpaid claims from alien reinsurers and an inability to collect
judgments in courts overseas. Recently, the NAIC has put forth draft federal legislation to create a
board with the power to enforce national standards for reinsurance collateral, including the
reduction of collateral for highly rated reinsurers.18 In addition to the reinsurance collateral
debate, the overall complexity of the regulatory system in the United States has been seen by
some as a barrier to overseas companies operating in the United States.19 This complexity may
also end up hindering U.S. companies in the EU as it is not clear that state supervision of U.S.
insurers will be sufficient to allow the same “single passport” access to all EU countries that EU
insurers will enjoy.
State Regulatory Modernization Efforts
Following the passage of GLBA, state insurance regulators working through the NAIC embarked
on an ambitious regulatory modernization program. These efforts were 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 2003, they set specific targets and an implementation schedule for their action plan
(entitled:
A Reinforced Commitment: Insurance Regulatory Modernization Action Plan).20
Highlights of the NAIC efforts include the following:
• Certification of 47 states (as of September 2006) as reciprocal jurisdictions for
producer licensing laws.21 This is substantially more than the 29 states needed
under GLBA to prevent the establishment of NARAB.
• Continued growth of the System for Electronic Rate and Form Filing, intended to
be a single, one-stop point of entry for insurers to file changes to rates and forms.
More than 318,000 filings were made through the system in 2007, up from about
18 The NAIC proposal can be found on their website at http://www.naic.org/committees_e_reinsurance.htm.
19 See, for example, p. 54 of the European Commission’s
US Barriers to Trade and Investment Report for 2007, at
http://trade.ec.europa.eu/doclib/docs/2008/april/tradoc_138559.pdf.pdf.
20 See http://www.naic.org/topics/topic_regulatory_mod_plan.htm.
21 See http://www.naic.org/urtt_utlr.htm.
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3,700 in 2001. 20 states now require insurers to file using SERFF or other
electronic means.22
• State approvals of the Interstate Insurance Product Regulation Compact. This
compact is intended to provide increased regulatory uniformity and a single point
of product filing for four insurance lines—life, annuities, disability income, and
long-term care. It came into effect in May 2006.23 Currently, 35 states24 have
joined the compact. Three additional states25 have current legislation pending to
endorse the compact.
NAIC maintains that states are better positioned than the federal government to serve the interests
of U.S. insurance consumers, emphasizing that state regulators are more 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 the total budget for the state insurance departments
in 2007 was nearly $1.4 billion. In 2006, the states handled nearly 394,000 official consumer
complaints and more than 2.5 million consumer inquiries regarding their policies and their
treatment by insurance companies and agents. In 2006, the states employed more than 13,600
employees to handle these complaints and perform the other functions of the state insurance
departments.26
In the aftermath of the financial crises, the NAIC has indicated support for federal efforts to
address systemic risk, “while preserving State-based insurance regulation” according to recent
testimony before the Senate. In particular, the NAIC is proposing a federal systemic risk regulator
operating in cooperation with the state regulators and generally deferring to the state regulators on
actions relating to an insurer’s capital, reserves or solvency. The systemic regulator’s preemptive
powers “should be limited to extraordinary circumstances that present a material risk to the
continued solvency of the holding company, or ‘enterprise,’ the demise of which would threaten
the stability of a financial system.”27
These regulatory modernization efforts by the states have not prevented a number of Members of
Congress, as well as successive presidential administrations, from putting forth federal insurance
regulatory reform proposals as detailed in the following section. The insurance industry has
remained split, with larger insurers and insurance producers tending to favor broader federal
action and smaller insurers and insurance producers tending to support targeted reforms that
would leave the state system largely intact.
22 See http://www.serff.org.
23 See http://www.insurancecompact.org.
24 AK, CO, GA, HI, IA, ID, IN, KS, KY, LA, MA, MD, ME, MI, MN, MO, MS, NC, NE, NH, NM, OH, OK, PA, RI,
SC, TN, TX, UT, VA, VT, WA, WI, WV, and WY. Puerto Rico is also a member.
25 CT, NJ, and NY.
26 Statistics provided by the NAIC.
27 Prepared Testimony of The Honorable Michael T. McRaith in U.S. Congress, Senate Committee on Banking,
Housing, and Urban Affairs,
Perspectives on Modernizing Insurance Regulation, 111th Cong., 1st sess., March 17,
2009. Available at http://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=9d32d178-0b51-
415d-989d-8bd87d6477e0.
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Insurance Regulation: Issues, Background, and Legislation in the 111th Congress
Administration Proposals for Regulatory Reform
2008 Treasury Blueprint
In March 2008, then-Secretary of the Treasury Henry Paulson released a “Blueprint for a
Modernized Financial Regulatory Structure.” Although the financial crisis had begun at that time,
the Treasury blueprint was not primarily a response to the crisis, but instead an attempt to create
“a more flexible, efficient and effective regulatory framework.”28 A wide-ranging document, the
blueprint foresaw a completely revamped regulatory structure for all financial services.
The 2008 Treasury model ultimately would have resulted in a prudential regulator overseeing the
solvency of individual companies, a business conduct regulator overseeing consumer protection,
and a market stability regulator overseeing risks to the entire system. As an intermediate step, it
made two specific recommendations on insurance regulation. First, it called for the creation of a
federal insurance regulator to oversee an optional federal charter for insurers as well as federal
licensing for agents and brokers. Second, recognizing that the debate over an optional federal
charter is ongoing in Congress, it recommended the creation of an “Office of Insurance
Oversight” in the Department of the Treasury as an interim step. This office would be charged
with two primary functions: (1) dealing with international regulatory issues, including the power
to preempt inconsistent state laws, and (2) collecting information on the insurance industry and
advising the Secretary of the Treasury on insurance matters.
President Obama’s Financial Regulatory Reform Plan
In June 2009, the Treasury Department under Secretary Timothy Geithner released a report
entitled “Financial Regulatory Reform: A New Foundation,” outlining President Obama’s plan to
reform financial regulation in the United States.29 Since the release of the overall plan, legislative
language to implement the plan has also been released. The plan could be seen as a middle of the
road approach to reforming the financial system as it does not foresee a complete revamp, but it
would substantially change the financial regulatory system. Specific changes called for include
explicitly introducing systemic risk oversight by the Federal Reserve, combining the Office of
Comptroller of the Currency and the Office of Thrift Supervision into a single banking regulator,
and creating a new Consumer Financial Protection Agency.
Although the June report states that the Administration is open to additional changes in the
insurance regulatory system, the specific regulatory changes called for in the released legislative
language would be focused on areas other than insurance. Most insurance products, for example,
are excluded from the jurisdiction of the new federal consumer protection agency. In general, the
states would continue their preeminent role in insurance regulation. Insurance regulation,
however, would be specifically affected through two other aspects of the President’s plan: the
regulation of large financial companies presenting systemic risk and the creation of a new Office
of National Insurance within the Treasury.
28 U.S. Treasury, “Treasury Releases Blueprint for Stronger Regulatory Structure,” press release, March 31, 2008,
http://www.ustreas.gov/press/releases/hp896.htm.
29 See the U.S. Treasury website at http://ustreas.gov/initiatives/regulatoryreform/.
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Insurance Regulation: Issues, Background, and Legislation in the 111th Congress
Systemic risk regulation as proposed in the legislation would be the primary responsibility of the
Federal Reserve in conjunction with a new Financial Services Oversight Council made up of the
heads of most of the federal financial regulators. The powers to regulate for systemic risk
enumerated in the draft legislation extend to all companies in the United States engaged in
financial activities. Although the draft legislation does not specifically name insurers as subject to
federal systemic risk regulation, it would seem to include them under federal jurisdiction.
Companies judged to be a possible threat to global or U.S. financial stability may be designated
Tier 1 Financial Holding Companies and subject to stringent solvency standards and additional
examinations. Such companies would also be subject to enhanced resolution authority rather than
standard bankruptcy provisions. Although the draft language does make reference in some places
to state functional regulatory agencies, it is unclear exactly how the Federal Reserve as regulator
of the financial holding company would interact with the state regulators of the individual
insurance subsidiaries. Under the current regulatory system, where there are some federally
regulated holding companies that are primarily insurers, the federal regulators generally defer to
the state insurance regulators. Whether this deferral would continue under the new proposed
legislation may be an open question.
Although systemic risk regulation would likely apply to a relatively small number of insurers, the
called-for creation of an Office of National Insurance could have a broader impact. Unlike the
similarly named office in other legislation, such as H.R. 1880, President Obama’s Office of
National Insurance would not oversee a federal insurance charter or have direct regulatory power
over insurers. Rather, this office would operate as a broad overseer and voice for insurance at the
federal level, including collecting information on insurance issues, setting federal policy on
insurance, representing the United States in international insurance matters, and preempting some
state laws where these laws are inconsistent with international agreements. These functions are
similar to those of the Office of Insurance Information to be created by H.R. 2609. The office
under President Obama’s plan would seem to have more authority, however, than that under H.R.
2609. For example, the Obama office would have subpoena power to require an insurer to submit
information rather than on relying voluntary submissions and publicly available information.
Legislation in the 111th Congress
Several pieces of legislation addressing insurance regulation or regulatory requirements have
been introduced in the 111th Congress, including both broad and narrow proposals. They are listed
here in chronological order.
The Insurance Industry Competition Act of 2009 (H.R. 1583)
Representative Peter DeFazio and five cosponsors introduced H.R. 1583 in the House on March
18, 2009. H.R. 1583has been referred to the House Judiciary Committee, House Financial
Services Committee and House Energy and Commerce Committee. No hearings or markups have
been held on the bill. Previous versions of the bill were introduced in the 110th Congress.
H.R. 1583would abolish the current exemption from federal antitrust laws for the “business of
insurance” that dates to the McCarran-Ferguson Act of 1945 and remove a prohibition on
investigations of insurance companies by the Federal Trade Commission. It would not change the
sections of the McCarran-Ferguson Act that give preeminence to state insurance regulators.
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Insurance Regulation: Issues, Background, and Legislation in the 111th Congress
The National Insurance Consumer Protection Act (H.R. 1880)
Representatives Melissa Bean and Edward Royce introduced H.R. 1880in the House on April 2,
2009. The bill was referred to the House Financial Services Committee, House Judiciary
Committee and House Energy and Commerce Committee. No hearings or markups have been
held on this bill.
This bill would create a federal charter for the insurance industry, including insurers, insurance
agencies, and independent insurance producers. The federal insurance regulatory apparatus would
be an independent entity under the Department of the Treasury and would preempt most state
insurance laws for nationally regulated entities. Thus, nationally licensed insurers, agencies, and
producers would be able to operate in the entire United States without fulfilling the requirements
of each individual 50 states’ insurance laws.
H.R. 1880would also address the issue of systemic risk by designating another entity to serve as a
systemic risk regulator for insurance. The systemic risk regulator would have the power to
compel systemically significant insurers to be chartered by the federal insurance regulator. Thus,
although the bill shares some similarities with past optional federal charter legislation, and would
allow some insurers to choose whether to obtain a federal charter, it can not be considered purely
an optional federal charter bill.
The National Association of Registered Agents and Brokers
Reform Act of 2009 (H.R. 2554)
This bill was introduced by Representative David Scott along with 34 cosponsors on May 21,
2009. A similar bill was introduced in the 110th Congress where it passed the House but was not
acted upon by the Senate. H.R. 2554was referred to the House Committee on Financial Services
and has not been acted on in the 111th Congress.
H.R. 2554would establish a National Association of Registered Agents and Brokers (NARAB).
NARAB would be a private, nonprofit corporation, whose members, once licensed as an
insurance producer in a single state, would be able to operate in any other state subject only to
payment of the licensing fee in that state. The NARAB member would still be subject to each
state’s consumer protection and market conduct regulation, but individual state laws that treated
out of state insurance producers differently than in-state producers would be preempted. NARAB
would be overseen by a board made up of five appointees from the insurance industry and four
from the state insurance commissioners. The appointments would be made by the President and
the President could dissolve the board as whole or suspend the effectiveness of any action taken
by NARAB.
The Nonadmitted and Reinsurance Reform Act of 2009 (H.R.
2571/S. 1363)
Representative Dennis Moore and 21 cosponsors introduced H.R. 2571on May 21, 2009, while
Senators Mel Martinez, Bill Nelson, and Mike Crapo introduced S.
1363http://www.congress.gov/cgi-lis/bdquery/z?d110:S.929: on June 25, 2009. Similar
legislation passed the House in both the 109th and 110th Congress but was not acted on by the
Senate.
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Insurance Regulation: Issues, Background, and Legislation in the 111th Congress
These bills would address a relatively narrow set of insurance regulatory issues. In the area of
nonadmitted, or surplus lines, insurance, the bills would harmonize, and in some cases reduce,
regulation and taxation of this insurance by vesting the “home state” of the insured with the sole
authority to regulate and collect the taxes on a surplus lines transaction. Those taxes that would
be collected may be distributed according to a future interstate compact, but absent such a
compact their distribution would be up to the home state. These bills also would preempt any
state laws on surplus lines eligibility that conflict with the NAIC model law and would implement
“streamlined” federal standards allowing a commercial purchaser to access surplus lines
insurance. For reinsurance transactions, they would vest the home state of the insurer purchasing
the reinsurance with the authority over the transaction while vesting the home state of the
reinsurer with the sole authority to regulate the solvency of the reinsurer.30
The Insurance Information Act of 2009 (H.R. 2609)
Representative Paul Kanjorski and four cosponsors introduced H.R. 2609on May 21, 2009. A
similar bill was introduced in the 110th Congress, where it was marked up by the House Financial
Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises.
H.R. 2609has been referred to this subcommittee but has not been acted upon in the 111th
Congress.
This bill would create an “Office of Insurance Information” for non-health insurance in the
Department of the Treasury. The Deputy Assistant Secretary heading this office would be charged
with collecting and analyzing insurance information and establishing federal policy on
international insurance issues, as well as advising the Secretary of the Treasury on major
insurance policy issues. State laws or regulations that the head of the office finds to be
inconsistent with the federal policy on international insurance issues would be preempted, subject
to an appeal to the Secretary.
The Consumer Financial Protection Agency Act of 2009 (H.R. 3126)
Representative Barney Frank and 12 cosponsors introduced H.R. 3126on July 8, 2009. It has been
referred to the House Financial Services Committee and House Energy and Commerce
Committee. No hearings or markups have been held on this bill.
H.R. 3126would create a new financial regulator focusing on consumer protection, similar to that
originally proposed by the Obama Administration. This regulator, however, would cover only a
small portion of insurance products, namely credit insurance, mortgage insurance, and title
insurance. For these lines of insurance, the bill would not preempt state consumer protection laws
that provide greater protections to consumers, but would preempt otherwise conflicting state laws.
Consumer protection for other lines of insurance would remain completely under state
supervision.31
30 See CRS Report RS22506,
Surplus Lines Insurance: Background and Current Legislation, by Baird Webel.
31 See CRS Report R40696,
Financial Regulatory Reform: Analysis of the Consumer Financial Protection Agency
(CFPA) as Proposed by the Obama Administration and H.R. 3126, by David H. Carpenter and Mark Jickling.
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Insurance Regulation: Issues, Background, and Legislation in the 111th Congress
Author Contact Information
Baird Webel
Specialist in Financial Economics
bwebel@crs.loc.gov, 7-0652
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