Insurance Regulation: History, Background, and Recent Congressional Oversight

Insurance Regulation: History, Background, and Recent Congressional Oversight

Order Code RL31982
CRS Report for Congress
Received through the CRS Web
Insurance Regulation: History, Background,
and Recent Congressional Oversight

Updated February 11, 2005
Baird Webel
Analyst in Economics
Government and Finance Division

Carolyn Cobb
Insurance Consultant
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

Insurance Regulation: History, Background, and
Recent Congressional Oversight
Summary
Since the current insurance regulatory framework was established by Congress
in the McCarran-Ferguson Act of 1945, various proposals have been advanced to
revise this system. In the past few years, Members of Congress and various interest
groups have put forward ideas including a full-scale federal insurance regulator, an
optional federal charter, and a federally mandated, but state controlled, harmonization
of state regulation. Proponents of federal involvement have argued that the current
system puts insurers at a significant disadvantage in competing with other financial
institutions, both nationally and internationally, who have more streamlined
regulatory systems. Opponents have argued that the federal option is unnecessary
and would weaken consumer protection. Congressional committees have held
numerous hearings examining the arguments and evidence put forth by the various
sides in the debate.
Insurance regulation began in the states in the early 19th century. In the mid-19th
century, the Supreme Court decided Paul v. Virginia, which foreclosed federal
regulation of insurance. State regulation of insurance grew in scope and scale during
the next 80 years.
The Court reversed itself in 1945 in South-Eastern Underwriters v. U.S.,
establishing that Congress did have authority to regulate insurance and insurers. At
the time, many worried that South-Eastern Underwriters vitiated state authority to
tax and regulate insurers, so Congress enacted the McCarran-Ferguson Act. The act
ceded to states the authority to regulate insurance and exempted insurers from most
federal antitrust laws.
Since 1945, several trends have emerged. Courts have circumscribed the
antitrust exemption substantially, congressional involvement in and oversight of
insurance has increased, and the National Association of Insurance Commissioners
(NAIC) has adopted a national role in establishing standards for states’ regulation of
insurers’ financial solvency. The NAIC has also become involved in establishing
international standards for insurance regulation.
This report provides the historical background for examining the arguments in
this debate. It shows that state regulation of insurance is largely a historical artifact,
that Congress has become increasingly involved in both regulating insurance and
overseeing states’ regulation of insurance, and that the National Association of
Insurance Commissioners has assumed a national role. It will be updated only
following major legislative action.

Contents
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Basics of Insurance Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Why Regulate Insurers? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
How Does State Regulation Work? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
What Is the NAIC? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
How is NAIC Funded? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
How State Regulation Evolved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
States Begin Chartering Insurers in 1795 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Court Says Insurance Is Not “Interstate Commerce” . . . . . . . . . . . . . . . . . . . 6
Court Reverses; Says Insurance Is “Interstate Commerce” . . . . . . . . . . . . . . 7
McCarran-Ferguson Act: Congress Cedes Regulation to the States
and Exempts Insurers from Most Antitrust Laws . . . . . . . . . . . . . . . . . 8
State Regulation Occupies the Field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Courts Narrow Scope of McCarran-Ferguson Act . . . . . . . . . . . . . . . . . . . . 11
Congress Reoccupies Major Parts of the Field . . . . . . . . . . . . . . . . . . . . . . 12
Congress Oversees State Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
McCarran-Ferguson Act to Representative Dingell’s Reports . . . . . . . . . . 14
Representative Dingell’s Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Congress Draws New Lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Oversight Continued in Recent Congresses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
How Federal Courts Narrowed the McCarran-Ferguson Act’s
“Reverse Preemption”: Major Historical Cases . . . . . . . . . . . . . . . . . 25
What Is “Insurance” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
What Is the “Business of Insurance” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Must State Regulation Be Effective to Preempt Federal Law? . . . . . . . . . . 28
What Is “Boycott, Coercion, or Intimidation”? . . . . . . . . . . . . . . . . . . . . . . 28

Insurance Regulation: History, Background,
and Recent Congressional Oversight
Overview
States are now the primary regulator of insurers. Some insurers — joined by
some banks with insurance affiliates — believe that current state insurance regulation
hinders their effective competition with other financial intermediaries. They want
a more uniform system and many have called for the option of obtaining a federal
charter and subjecting themselves to a single, federal regulator. State insurance
regulators and other insurers disagree, believing that state regulation can provide
more uniform and efficient regulation and does provide better consumer protection.
Congress has several interests in any examination of state insurance regulation.
In the 1945 McCarran-Ferguson Act it ceded that insurance regulatory authority to
the states, but it also committed to assessing the effectiveness of this regulation.
Another is to assess the marketplace after the Gramm-Leach-Bliley Act, which
dramatically revised regulation for most of the financial services industry, but left
insurance regulation essentially unchanged.
The objective of this report is to frame these issues in their historical and
substantive contexts. The frame will have several parts. One is that insurance
regulation developed at the state level largely because most companies were local.
A second is that, until 1945, the courts said that Congress did not have the
constitutional authority to regulate insurance. Third, since the 1950s, Congress and
the National Association of Insurance Commissioners (NAIC) have been engaged in
a ongoing dialogue about the nature and quality of state regulation, which has led
both to the substantial growth of the NAIC and to increasing federal legislative
involvement in insurance regulation. Fourth, insurance is now regulated at both the
state and national level.
Basics of Insurance Regulation
Only a state may charter an insurer. Once chartered by a state, an insurer must
obtain a license in each state where it plans to sell policies. Its external business
practices — such as its marketing, advertising, and policyholder services — are
regulated separately in each state where it sells policies, under laws and rules that
often vary state to state. In theory, only the state that charters the insurer regulates
its internal business practices. This principle is generally observed in the breach,
however, as the largest states (such as New York and California) regulate the
solvency and internal business practices of each insurer doing business in their states,
under laws and rules that also vary state to state. Some observers would say that an

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insurer selling policies in 50 states and the District of Columbia has 51 regulators,
each with slightly different or very different requirements. The National Association
of Insurance Commissioners sets standards for both market practices and solvency,
though individual states may modify or ignore any NAIC standard.1
Why Regulate Insurers?
The purpose of insurance regulation, stated classically, is to protect consumers
by monitoring the solvency of insurers and their business practices. The idea was
that consumers were not in an equal bargaining position with insurers, so it was
necessary for the government to regulate the terms of insurance contracts. Likewise,
it was necessary, since the consumer was purchasing a promise that the insurer would
perform in the future, for the government to regulate prices in order to prevent
insurers from charging either too little — which would endanger the insurer’s
solvency and render the promise illusory — or too much — which would be unfair.
Insurance has also been regulated for economic, social, and political purposes.
Since the 1960s, Congress has stepped in when markets have actually failed or when
its constituencies have perceived that the market has failed.2 In some cases Congress
has created new programs, such as Medicare, or has revised insurance regulation to
expand availability, such as authorizing risk retention groups. In other cases
Congress has created new standards for insurance, such as those for Medigap
insurance. State legislators have responded to market failures, or the perception of
market failures, by mandating certain benefits in health insurance policies or by
creating special programs, such as California’s earthquake pool and Florida’s
windstorm pool.3 These decisions represent regulation to make insurance available
and affordable to anyone who wants its benefits — federal and state efforts to make
health insurance both available and affordable is the classic example.
Insurance has also been regulated to protect the insurance franchise. State
insurance regulators have litigated for many years to maintain exclusive jurisdiction
over federal banks’ insurance activities, for example. Historically, insurers wanted
regulation to protect their franchise — that is, to exclude other entities from the risk
financing market. As alternative markets for financing risk have expanded, however,
large insurers have found that current state insurance regulation is not a barrier-to-
entry against their competitors not organized as insurers.
Some are now suggesting that insurance should be regulated, as are banks and
capital markets, for macroeconomic purposes. After the terrorist attacks in New
1 See Emmett J. Vaughan and Therese M. Vaughan, Fundamentals of Risk and Insurance
(New York: John Wiley & Sons, Inc., 1996), pp. 103-110.
2 A classic market failure is a lack of equilibrium in supply and demand. That
disequilibrium can be caused by market structure, imperfect information, or externalities
(e.g., terrorism). A perception of market failure can include a lack of equity, which is
subjective. Robert S. Pindyck and Daniel L. Rubinfeld, Microeconomics, (Macmillan
Publishing Co.: New York, 1989), pp. 617-644. See also Vaughan and Vaughan, supra note
2, pp. 97-98.
3 Vaughan and Vaughan, supra note 2, pp. 96-100.

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York City on September 11, 2001, for example, global financial regulators — such
as the Financial Stability Forum4 — have insisted on regulating international insurers
for financial soundness and transparency. Other macroeconomic purposes would be
to avoid regulatory arbitrage among financial sectors and to maximize efficiency of
capital allocation.
Much of the debate about whether chartering of insurance companies should
continue as solely a state function arises from the absence of a consensus on the
purpose(s) of regulating insurance or types or insurance.
How Does State Regulation Work?
The solvency of each insurer is regulated primarily but not exclusively by its
domiciliary commissioner. Each state requires the insurer to prepare its quarterly and
annual financial statements in a very conservative format unique to insurance, known
as “statutory accounting.”5 The NAIC as an organization sets the rules for statutory
accounting and determines the content of the statements. Each insurer must file its
statement with its domiciliary commissioner, with the commissioner in each state
in which it is licensed or does business, and with the NAIC corporate office. Though
the formats are usually similar to the NAIC’s, they are not identical, particularly
among the larger states. Each state may make its own assessment of the solvency of
insurers; in practice, many states rely heavily on the NAIC corporate office’s
extensive financial database analysis in making that assessment.
Each state regulates the terms of each insurance contract sold to consumers in
that state. Every insurer, as a condition of retaining its license to operate in that state,
must obtain the insurance department’s prior approval of insurance policies to be
marketed there. In many states, property-casualty companies selling personal lines
coverage — such as automobile and homeowners insurance — must obtain prior
approval of the rates they plan to charge as well as of the terms of the policies they
plan to market. States’ regulation of commercial coverages is also extensive, though
not all require prior approval of both rates and forms. All states regulate advertising;
many require prior approval of advertising. In an attempt to reduce the regulatory
burden on individual states and on insurers, the NAIC has recently established an
online system for electronic rate and form filing (SERFF) and an online coordinated
rate and form review authority (CAFRA).6 Observers disagree on whether these on-
line filing and approval systems are providing or can provide regulatory uniformity
and efficiency.7
4 The Financial Stability Forum ([http://www.fsforum.org]) is the group of central bankers,
national financial authorities, and international regulatory and supervisory groups that
cooperates in monitoring and promoting international financial stability.
5 Vaughan and Vaughan, supra note 2, pp. 140-156.
6 Further information is available at [http://www.serff.org/] and [http://www.carfra.org/].
These systems incorporate current state requirements.
7 See Lynna Goch, “Switching gears: Electronic rate and form filing can hasten product
approvals, but adaptation is hampered by technological incompatibility and administrative
(continued...)

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Each state regulates the internal and external business practices of insurers
domiciled in that state, and many also regulate those licensed in their states as well.
Often the NAIC has established standards for those business practices; most — but
not all — states enact or promulgate those standards.8 These standards are known as
the NAIC model laws and regulations. In the late 1980s and early 1990s, states’
ability and commitment to regulate insurers for solvency was in question, subject to
substantial criticism during the 103rd Congress. In response the NAIC began a
voluntary program to encourage states to adopt those standards. States that adopted
certain standards that the NAIC considered to be fundamental to solvency regulation
were said to be “NAIC-accredited.” Currently all states but New York are NAIC-
accredited.9
What Is the NAIC?
The National Association of Insurance Commissioners (NAIC) is a private,
voluntary association of the chief insurance regulatory officials of the 50 states, the
District of Columbia, and the territories of American Samoa, Guam, Puerto Rico, and
the Virgin Islands. Its “overriding objective is to protect consumers and help
maintain the financial stability of the insurance industry by offering financial,
actuarial, legal, computer, market conduct, and economic expertise [to insurance
regulators].”10 It began in 1871 — and continued for nearly a century — as a
cooperative effort by the appointed or elected regulators to share information and
knowledge among themselves. The regulators were supported in their collective
efforts by their own staffs, employed by the various states.11
In 1968, a former regulator founded a support-and-services office to augment
the regulators’ state staffs. The office grew slowly; in 1978, for example, it had a
budget of $842,790.12 It has now grown to 422 authorized staff positions and a
budget of $54 million, as of 2003. It is organized as a Delaware corporation and is
headquartered in Kansas City, Missouri, with offices in New York City and
Washington, DC. The term “NAIC” now also refers not only to the voluntary
association of state regulatory officials but also to its professional and support staff,
as well as their activities. The term “corporate NAIC” is used here to include the
collective actions of the state insurance regulators, their own staffs of state
7 (...continued)
procedures,” in Best’s Review, vol. 102, Apr. 2002, p. 101.
8 See NAIC, Model Laws, Regulations, and Guidelines, vols. 1-5, (Kansas City, MO: 2003).
9 See NAIC, “Accredited States,” updated June 2004, available at
[http://www.naic.org/frs/accreditation/map.htm].
10 NAIC News Release, “NAIC Members Approve 2003 Budget,” Dec. 8, 2002, available
at [http://www.naic.org/pressroom/releases/rel02/120802_budget.htm].
11 Eric C. Nordman, “The Early History of the NAIC,” Journal of Insurance Regulation,
vol. 19, Winter 2000, pp. 164-178.
12 Comptroller General of the United States, Issues and Needed Improvements in State
Regulation of the Insurance Business, PAD-79-72 (Washington: GPO, 1979), p. 174.

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employees, and to their private, non-state staff employed by the corporation
organized in Delaware.13
How is NAIC Funded?
The NAIC funds its corporate and collective activities by assessing fees for its
services and publications. States require insurers to file their annual financial
statements with the corporate NAIC for its analysis, and it charges each insurer a
filing fee based on its premium volume. In 2003, those filing fees were 42% of the
total corporate NAIC’s revenue, which was $58,234,435. Another 23% of its
revenue came from sales of its publications, such as its guides on statutory
accounting, examiners’ handbooks, meeting reports, its model laws and regulations,
and data compilations.14 Another 15% came from fees charged insurers for rating
securities held in their portfolios and for admitting non-U.S. insurers into the U.S.
market.15 In 2003, about 3% of the budget of NAIC’s corporate activities — or
$1,815,610 — was funded by the states.16
How State Regulation Evolved
States Begin Chartering Insurers in 1795
States first created corporate insurers in the late 18th century by enacting
individual statutes or charters for each insurer. These charters created rules that
applied to that particular insurer. Successive charters developed a pattern, which
became the rudiments of state insurance regulation. Massachusetts was the first state
to require its insurers to submit annual informational reports, in 1818, and New
Hampshire was the first state to set up an agency to regulate insurance, in 1851.17
Fire insurance and marine insurance were critical to early 19th century American
businesses.18 They bought most marine insurance from European insurers and most
13 Some observers view as an anomaly a private, non-governmental entity having a “central
and national role in insurance regulation, acting in many ways as a federal agency [but
without power to] sanction regulators or insurers .... “ Susan Randall, “Insurance Regulation
in the United States: Regulatory Federalism and the National Association of Insurance
Commissioners,” 26 Florida State U. L. Rev. 625, 639 (Spring 1999).
1 4 NAIC, Insurance Products and Services Division, available at
[http://www.naic.org/insprod/index.htm].
15 NAIC, “Statement of Financial Position,” in Annual Report 2002, available at
[http://www.naic.org/about/docs/03_annual_report.pdf], p. 24.
16 Ibid.
17 Spencer L. Kimball and Barbara P. Heaney, Federalism and Insurance Regulation: Basic
Source Materials (Kansas City, MO: National Association of Insurance Commissioners,
1995), pp. 1-7.
18 Kenneth J. Meier, The Political Economy of Regulation: The Case of Insurance, (Albany:
(continued...)

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fire insurance from the growing number of American insurers. State governments
taxed those policies for revenue, and in an effort to protect their local insurers, they
taxed polices bought from out-of-state insurers at a much higher rate.19 In years with
few large fires, fire insurers profited; after large fires, many local fire insurers became
insolvent. The fire insurers addressed the insolvencies — what they perceived to be
“destructive competition” — by establishing cartels to keep rates high enough to
provide adequate reserves to cover future fires. State legislatures responded to the
insolvencies by establishing administrative agencies to set reserve requirements and
to collect information about company solvency. 20
Court Says Insurance Is Not “Interstate Commerce”
Insurers objected to the discriminatory taxes and to regulation, and in 1866 they
challenged — in Congress and in the courts — the states’ authority to impose them.
They were unsuccessful in persuading Congress to enact legislation21 and
unsuccessful in a test case charging that states were depriving them of equal
protection under the law and impeding interstate commerce.
In that test case, the U.S. Supreme Court disagreed with the insurers, holding
in Paul v. Virginia22 in 1868 that a corporation was not entitled to the protections
accorded a citizen under the Constitution and that an insurance contract was not an
article of commerce within the meaning of its Commerce Clause. Therefore, the
Court reasoned, the Commerce Clause did not deprive states of the power to tax and
regulate out-of-state corporate insurers. Some analysts believe the Court may have
reached this conclusion to curtail the growing power of corporations generally and
to avoid “upset[ting] a host of state regulatory and taxing laws [which] would have
left the insurance companies free for the time being from all control.”23 The decision
in Paul v. Virginia meant not only that states could continue to subject insurers from
other states to requirements not imposed on local insurers but also that Congress
arguably had no authority to regulate insurance policies. Paul v. Virginia was upheld
in later challenges.
18 (...continued)
State Univ. of New York Press, 1988), pp. 50-56. Life and health insurance did not begin
to grow until much later in the century. Ibid.
19 Paul R. Nehemkis, Jr., “Paul v. Virginia: The Need for Re-Examination,” 27 Georgetown
L. J. 519, 524 (March 1939). This practice continued until the U.S. Supreme Court decided,
in Metropolitan v. Ward, 470 U.S. 869 (1985), that it violated the Equal Protection Clause
of the Constitution.
20 Meier, supra note 20, p. 51-53.
21 Nehemkis, supra note 21, pp. 524-527. Later Congresses also declined to create a national
insurance regulator or to endorse a constitutional amendment defining insurance as interstate
commerce. Michael Rose, “State Regulation of Property and Casualty Insurance Rates, 28
Ohio State L. J. 669, 673-674 (1967); Sen. Walter, remarks in the House, Congressional
Record, vol. 90, June 22, 1944, p. 6524.
22 75 U.S. (8 Wall.) 168 (1868).
23 Nehemkis, supra note 21, p. 534.

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The National Association of Insurance Commissioners (NAIC) met for the first
time in 1871, as the National Insurance Convention, to discuss how to harmonize
regulation among the states. They agreed to adopt a uniform annual financial
statement for life insurers.24 States themselves began mandating policy forms for fire
insurance. In New York, the Armstrong Committee scrutinized the growing life
insurers, found serious abuses, and in 1906 recommended sweeping new laws to
govern their internal operations. Some states followed New York’s lead in enacting
governance laws for insurers. The 1906 San Francisco earthquake bankrupted many
fire insurers, and New York’s Merritt Committee recommended collaborative rate
setting for fire insurers to prevent future insolvencies. Most states followed New
York’s example in encouraging collaborative rate setting boards or bureaus.25
Court Reverses; Says Insurance Is “Interstate Commerce”
Missouri did not follow New York’s lead in allowing collaborative rate setting.
Instead in 1922 it attempted to curtail fire insurance rate increases, but the fire
insurers bribed the Pendergast political machine to maintain them. When the
Missouri Attorney General discovered that in 1939, he and the U.S. Attorney General
obtained a criminal indictment against the largest rate-setting bureau, the South-
Eastern Underwriters Association, for violations of federal antitrust laws. The fire
insurers challenged the charges on the ground that insurance was not commerce,
based on Paul v. Virginia, and that therefore the federal court had no jurisdiction over
them.
A divided Supreme Court disagreed with the insurers once more. It found, in
U.S. v. South-Eastern Underwriters Association,26 that the federal court did indeed
have jurisdiction over them because insurance was clearly interstate commerce and
Congress had authority under the Constitution to regulate interstate commerce.
Congress had not acted to regulate insurance specifically, said the Court, but it
certainly had the power to include insurers within the scope of the antitrust law,
which four of the seven Justices voting determined Congress had done.27 The
Court’s decision, though it did not do so expressly, effectively overruled Paul v.
Virginia.
Because South-Eastern Underwriters held that insurance was interstate
commerce, it caused consternation among insurers, regulators, and state legislators.
The decision created uncertainty about whether and to what extent states could tax
or regulate and about whether insurers could continue to use rating bureaus. Insurers,
regulators, and the states asked Congress to clarify these issues quickly, and in March
24 Randall, supra note 15, pp. 630-631.
25 Meier, supra note 20, pp. 54-61.
26 322 U.S. 533 (1944); two justices took no part in the consideration of the case.
27 Ibid. at 533-562. A fifth justice agreed that the challenged conduct violated the antitrust
laws but did not think it necessary to determine whether insurance was commerce. He
thought that if the conduct in question adversely affected commerce, then precedent allowed
Congress to regulate it. Ibid. at 584-585 (opinion of Justice Jackson). See Rep. Hancock,
remarks in the House, Congressional Record, vol. 91, Feb. 14, 1945, p. 1087.

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1945 — nine months after South-Eastern Underwriters — Congress enacted the
McCarran-Ferguson Act.28
McCarran-Ferguson Act: Congress Cedes Regulation to the
States and Exempts Insurers from Most Antitrust Laws
To many, South-Eastern Underwriters “threatened state jobs and state
revenue.”29 Seeking to preserve both, the NAIC drafted a bill to nullify the decision,
and Senators McCarran of Nevada and Ferguson of Michigan introduced it. Though
each house passed a slightly different bill, the conference committee’s version
followed the NAIC’s draft closely.30 The new law — known as the McCarran-
Ferguson Act — emphasized congressional deference to the states’ taxation and
regulation of the business of insurance and imposed a moratorium on enforcement
of the federal antitrust laws.
In the act, Congress declared, as a matter of policy, “that the continued
regulation and taxation by the several States of the business of insurance is in the
public interest, and that silence on the part of the Congress shall not be construed to
impose any barrier to the regulation or taxation of such business by the several
states.”31 Congress implemented this policy in the act in three ways:
! It clarified that the states did have the power to tax insurance
policies,32 which was vitally important to state coffers.33 Though
28 P.L. 79-15, 59 Stat. 33 (codified at 15 U.S.C. §§1011 et seq.).
29 Kimball and Heaney, supra note 19, p. 35. See also Sen. Homer Ferguson, remarks in the
Senate, Congressional Record, vol. 91, Jan. 25, 1945, pp. 478-479.
30 Meier, supra note 20, pp. 68-69. Sen. Hatch, extension of remarks in the Senate,
Congressional Record, vol. 90, Nov. 16, 1944, pp. A4403-A4408 (containing the NAIC’s
draft, its cover letter, and its memorandum of explanation).
31 P.L. 79-15, sec. 1 (codified at 15 U.S.C. §1011). Both the House and Senate versions
contained this declaration, which had been drafted by the NAIC. The NAIC, in transmitting
the draft, had said to Congress:
The National Association of Insurance Commissioners sincerely believes that the
States can adequately regulate the insurance business, and because of legal
considerations and the close proximity of State supervisory officials to the people
affected, are in a better position to regulate that business than the Federal
Government. In that regard it has regulatory machinery available, including
regulatory statutes and trained personnel.
Sen. Hancock, remarks in the Senate, Congressional Record, vol. 91, Feb. 14, 1945, p. 1087.
32 Ibid., sec. 2(a) (codified at 15 U.S.C. §1012(a)).
33 See, for example, remarks of Sen. Ferguson, Congressional Record, vol. 91, Jan. 25, 1945,
p. 484 (noting that the state of North Carolina paid its pensions with revenue from insurance
company premium taxes), and remarks of Rep. Gwynne, ibid., Feb. 14, 1945, p. 1090
(noting that premium taxes paid to the states totaled about $120 million annually).

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the act’s legislative record is not extensive, it appears that cession of
this authority to the states was not controversial.34
! It limited the short-term application of the federal antitrust laws to
the business of insurance by granting an immediate moratorium on
their enforcement.35 The purpose was to allow states to decide,
during the period of the moratorium, whether to allow insurers to set
rates collectively.36 The breadth of the three-year moratorium was
debated intensely on the House and Senate floors.37 In both bodies,
the majority agreed that the act would allow states — for the period
of the temporary moratorium — to enact laws to regulate insurance
that otherwise would not be allowed under federal antitrust laws,
limited only by the act’s prohibition on boycotts, coercion, and
intimidation.38 They felt this time-limited exemption was necessary
to give the insurance industry time “to make necessary adjustments”
to the South-Eastern Underwriters decision.39
! It also limited the long-term application of the antitrust laws to the
business of insurance. In an amendment drafted in conference, the
conference committee proposed extending the exemption from
federal antitrust laws indefinitely, as long as and “to the extent” that
state law regulated “the business of insurance.”40 The amendment
34 See, for example, President Roosevelt’s letter to Senator Radcliffe averring that “this
administration is not sponsoring Federal legislation to regulate insurance or to interfere with
the continued regulation and taxation by the States of the business of insurance.” Sen.
Radcliffe, remarks in the Senate, ibid., Jan. 25, 1945, p. 482.
35 P.L. 79-15, sec. 3(a) (codified at 15 U.S.C. §1013(a)) (“Until June 30, 1948, the ...
Sherman Act, ... the Clayton Act, ... the Federal Trade Commission Act, [and] the Robinson-
Patman Anti-Discrimination Act, shall not apply to the business of insurance or to acts in
the conduct thereof.”).
36 Sen. Ferguson, remarks in the Senate, Congressional Record, vol. 91, Jan. 25, 1945, p.
479.
37 Sen. O’Mahoney, remarks in the Senate, Congressional Record, vol. 91, Jan. 25, 1945,
p. 483; Rep. Bailey, ibid., Feb. 14, 1945, p. 1091; Sen. Pepper, ibid., Feb. 27, 1945, pp.
1477-1478.
38 P.L. 79-15, sec. 3(b) (codified at 15 U.S.C. §1013(b))(“Nothing contained in this chapter
shall render the said Sherman Act inapplicable to any agreement to boycott, coerce, or
intimidate, or act of boycott, coercion, or intimidation.”).
39 Sen. O’Mahoney, remarks in the Senate, Congressional Record, vol. 91, Jan. 25, 1945,
p. 480 (quoting the unanimous report of the Senate Committee on the Judiciary (U.S.
Congress, Senate Committee on the Judiciary, Expressing the Intent of the Congress with
Reference to the Regulation of the Business of Insurance, report to accompany S. 340, 79th
Cong., 1st sess., S.Rept. 20 (Washington: GPO, 1945))).
40 The conference report amendment was that “after June 30, 1948 ... the Sherman Act, and
... the Clayton Act, and ... the Federal Trade Commission Act ... shall be applicable to the
business of insurance to the extent that such business is not regulated by State Law.” P.L.
(continued...)

CRS-10
engendered debate between Senator Pepper — who agreed with the
moratorium but wanted insurers to conform their subsequent
behavior to the federal antitrust laws — and Senator Ferguson.
Senator Ferguson agreed with Senator Pepper that the amendment
would give states the authority to enact laws permitting insurers to
take action forbidden by federal antitrust laws.41 Unlike Senator
Pepper, he thought that was an appropriate cession, since the act also
said that no agreement to boycott, coerce, or intimidate, nor any act
of boycott, coercion, or intimidation would be legal — whatever the
states did42 — and since Congress could override any state law it
found not in the public interest.43 The majority of the Senate favored
Senator Ferguson’s view, by a vote of 68 to 8.44 The McCarran-
Ferguson Act became effective March 9, 1945.
State Regulation Occupies the Field
By March 10, 1945, the NAIC had completed a model law on insurance rating
in order to implement the preemption in McCarran-Ferguson. The model allowed
cooperative rate-making, though it prohibited rates that were “excessive, inadequate,
or unfairly discriminatory.”45 It required rating bureaus to be licensed and to allow
nondiscriminatory access to bureau rates, and it permitted any insurer that deviated
from bureau rates to file and defend each deviation separately. No rate could be used
40 (...continued)
79-15, sec. 2(b) (codified at 15 U.S.C. §1012(b)). This is often referred to as “reverse
preemption,” meaning that Congress ceded its legislative authority over insurance to the
states, absent any subsequent, specific, and express declaration from Congress to the
contrary.
The exemption in the conference report amendment was more limited than the blanket
exemption from the Sherman Act and the Clayton Act that Congress had considered in the
industry-sponsored Walter-Hancock bill (H.R. 3270, introduced in the 78th Congress).
Though the House had passed the Walter-Hancock bill, the Senate had not — under threat
of veto. See Rose, supra note 23, pp. 693-694; Meier, supra note 20, pp. 68-69. See also
Rep. Walter, remarks in the House, Congressional Record, vol. 90, June 22, 1944, p. 6524
(“The purpose of [H.R. 3270] is ... to reassert the intention which Congress had when it
adopted the Sherman Act and the Clayton Act, and from which it has never deviated, that
those acts shall not be applicable to the insurance business .... “).
41 “What we saw as wrong was the fixing of rates without statutory authority in the States;
but we believe that State rights should permit a State to say that it believes in a rating bureau
.... [as] all the wisdom is not here in Congress.” Sen. Ferguson, remarks in the Senate,
Congressional Record, vol. 91, Feb. 27, 1945, p. 1481.
42 Ibid., citing Sec. 3(b) of the act.
43 “[T]here is no attempt here to have Congress throttled in the future in acting upon
insurance legislation.” Ibid., p. 1487.
44 Ibid., p. 1489.
45 Kimball and Heaney, supra note 19, pp. 78-79.

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without the insurance commissioner’s prior approval.46 Within a year, 37 states had
enacted statutes similar to the NAIC’s model. By 1951, all states had enacted laws
to regulate property-casualty insurance rates.47
In 1946, the NAIC drafted a model law to preempt the application of the Federal
Trade Commission Act to the business of insurance.48 The model — known as an
Act Relating to Unfair Methods of Competition and Unfair and Deceptive Practices
in the Business of Insurance — prohibited certain marketing and sales practices and
gave the enacting state’s insurance commissioner broad powers to investigate
insurers.49 All states enacted the model, though not as quickly as they had the rating
laws.
NAIC intended to “occupy the field” of insurance regulation and thereby
preempt federal law pursuant to the McCarran-Ferguson Act that it had advocated.50
The relevant section of the act, however, granted the reverse preemption only “to the
extent” that the “business of insurance” was regulated by state law.51 The scope of
the reverse preemption depended, therefore, on several factors. One was the
definition of “insurance:” Was “insurance” any contract issued by an entity chartered
as an insurer? And who should decide that — state insurance regulators? A second
was the breadth of the term “the business of insurance:” Did the “business of
insurance” include any and all activities of insurers, or only some subset of them?
The third factor was the meaning of the phrase “to the extent:” Could states gain
preemption merely by enacting a statute, or did preemption depend on some level of
enforcement of that statute? These were questions for the courts.
Courts Narrow Scope of McCarran-Ferguson Act
In the years since the passage of the McCarran-Ferguson Act, courts have
substantially narrowed its scope. The important cases have arisen when insurers or
the NAIC have asserted that the act exempts some activity or product from federal
46 Meier, supra note 20, pp. 74-75.
47 Meier, supra note 20, p. 76. Life insurance rates are not regulated, since historically life
insurers did not set rates collectively or use rating bureaus.
48 Randall, supra note 15, p. 634.
49 Scott E. Harrington, “The History of Federal Involvement in Insurance Regulation,” in
Optional Federal Chartering and Regulation of Insurance, Peter J. Wallison, ed.
(Washington, DC: AEI Press, 2000), p. 26.
50 Kimball and Heaney, supra note 19, pp. 62-62, 84.
51 P.L. 79-15, sec. 2(b) (codified at 15 U.S.C. §1012(b) (“No Act of Congress shall be
construed to invalidate, impair, or supersede any law enacted by any State for the purpose
of regulating the business of insurance ... unless such Act specifically relates to the business
of insurance: Provided that after June 30, 1948, [the federal antitrust laws] shall be
applicable to the business of insurance to the extent that such business is not regulated by
State Law.”) (all emphasis added).

CRS-12
antitrust law or federal regulation or interference.52 The cases have, in effect,
increasingly circumscribed the reverse preemption granted to state legislatures by the
McCarran-Ferguson Act — or, as is sometimes said, they have led to “increasing
federal involvement in insurance regulation.”53
The courts have established that interpretation of McCarran-Ferguson is a
federal question, not a state one. They have narrowed the definition of insurance —
and therefore state insurance regulators’ jurisdiction — by subjecting some contracts
issued by insurers to federal securities laws. They have narrowed the scope of the
antitrust exemption by narrowing the definition of “the business of insurance” and
by broadening the exemption’s exception for boycott.54 In general, judicial
interpretation of McCarran-Ferguson has substantially limited the antitrust exemption
and circumscribed state authority exercised under the act. Courts have declined,
however, to assess the quality or extent of state regulation.55
Congress Reoccupies Major Parts of the Field
In the years since the 79th Congress ceded authority to regulate insurance,
subsequent Congresses have reclaimed major parts of that authority from the states.
Congress has intervened most often when the private insurance market has failed or
its constituencies have perceived it was failing. The most notable example is, of
course, health insurance — which many Congresses have addressed.
Past Congresses have been active in health insurance regulation. The 89th
Congress passed the comprehensive health insurance plans known as Medicare56 and
Medicaid in 1965.57 The 93rd Congress passed the Employee Retirement Income
Security Act of 1974,58 which placed employee benefit plans — including health
plans — primarily under federal jurisdiction. That Congress also passed the HMO
Act,59 which set standards for health maintenance organizations wanting to become
federally qualified. In 1980, the 96th Congress enacted minimum standards for
52 Kimball and Heaney, supra note 19, pp. 63-78.
53 Ibid., p. 170. See also Dep’t of the Treasury v. Fabe, 508 U.S. 491, 507-508 (1993) (“The
McCarran-Ferguson Act did not simply overrule South-Eastern Underwriters and restore
the status quo. To the contrary, it transformed the legal landscape by overturning the normal
rules of preemption .... [It is therefore] impossible to compare our present world to the one
that existed at a time when the business of insurance was believed to be beyond the reach
of Congress’ power under the Commerce Clause.”)
54 Harrington, supra note 51, pp. 26-27.
55 See the appendix to this report for a review of the major historical cases.
56 P.L. 89-97, 79 Stat. 290.
57 P.L. 89-97, 79 Stat. 343.
58 P.L. 93-406, 88 Stat. 829.
59 P.L. 93-222, 87 Stat. 914.

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Medigap insurance60 to be enforced in cooperation with the National Association of
Insurance Commissioners. In 1986, the 99th Congress enacted Title X of the
Consolidated Omnibus Budget Reconciliation Act [COBRA],61 which required
employers to make temporary health insurance available to employees that lose their
jobs. In 1996, the 104th Congress passed the Health Insurance Portability and
Accountability Act,62 which established minimum federal standards of availability
and renewability for health insurance. Most of these measures have required
extensive coordination among the states, the NAIC, and the federal government —
subject to federal standards. Some observers have praised the resulting federalism,63
others have criticized it.64
In the 1980s — in reaction to the lack of availability of liability insurance —
Congress enacted legislation to expand its availability.65 The Product Liability Risk
Retention Act of 1981 allowed businesses to self-insure their product liability risks
collectively, and it exempted such special-purpose insurers from most state insurance
regulation. Each special-purpose insurer — known as a risk retention group — was
to be subject to limited regulation only in the state that chartered it. The act also
allowed groups of businesses — known as purchasing groups — to purchase product
liability insurance collectively. The 99th Congress expanded the scope of the
preemption to allow risk retention groups to provide all types of liability insurance.
Purchasing groups were similarly authorized.66 As of February 2005, about 177 risk
retention groups and 654 purchasing groups were operating in the United States,
providing coverage for professionals, manufacturers, and property developers. Total
premiums written by risk retention groups grew from $250 million in 1988 to $2.1
billion in 2004, and total premiums paid by purchasing groups grew from $575
million in 1988 to an estimated $4.6 billion in 2004.67
60 P.L. 96-265, 94 Stat. 476.
61 P.L. 99-272, 100 Stat. 222.
62 P.L. 104-191, 110 Stat. 1936.
63 Len M. Nichols and Linda J. Blumberg, “A Different Kind of ‘New Federalism’? The
Health Insurance and Portability and Accountability Act of 1996,” in Health Affairs,
May/June 1998, pp. 39-40. See also Earl R. Pomery and Carole Olson Gates, “State and
Federal Regulation of the Business of Insurance,” Journal of Insurance Regulation, vol. 19,
Winter 2000, pp. 179-188.
64 Randall, supra note 15, pp. 667-684, 699 (arguing that the NAIC’s central role — as a
private, non-governmental organization “closely identified with the insurance industry” —
erodes federalism).
65 The Product Liability Risk Retention Act of 1981, P.L. 97-45, 95 Stat. 45, which was
amended by P.L. 98-193, 97 Stat. 1344, and by the Risk Retention Amendments of 1986,
P.L. 99-563, 100 Stat. 3170 (all codified at 15 U.S.C. §3901 et seq.). For additional
information see CRS Report RL32176: The Risk Retention Acts: Background and Issues,
by Baird Webel.
66 P.L. 99-563, 100 Stat. 3170.
6 7 S t a t i s t i c s f r o m T h e R i s k R e t e n t i o n R e p o r t e r , a va i l a b l e a t
[http://www.rrr.com/education/growth.cfm].

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Other examples of Congress acting to address actual or perceived failures in the
private insurance market are flood insurance and crop insurance, which subsidize
both the availability and affordability of coverage. A more recent example is the
Terrorism Risk Insurance Act of 2002,68 in which Congress provided a temporary
backstop for insurers issuing property-casualty coverages of acts of international
terrorism.
Congress Oversees State Regulation
Continuing congressional oversight has affected states’ insurance regulation
substantially. Since the early 1950s, Congress and state insurance regulators have
engaged in a dialectic: Congress investigates the effectiveness or efficiency of state
regulation, state regulators change regulation in response, and then interest and
attention wane — until the cycle begins again.69 The cycle has occurred several times
since 1945.
McCarran-Ferguson Act to Representative Dingell’s Reports
Congress began investigating the effectiveness of state insurance regulation in
1958 under the oversight of Senator O’Mahoney, who had been a principal architect
of the McCarran-Ferguson Act.70 The purpose was to assess “whether the States have
faithfully honored the mandate of the McCarran-Ferguson Act ... by regulating the
insurance industry in the public interest.”71 The majority reports found state
regulation lacking, incapable of dealing with interstate and international issues, and
unwilling or unable to “bring the blessings of competition”72 to insurance rate-
making. The state insurance regulators responded by holding their own hearings to
address the rate-making issues noted in the Senate hearings and by recommending
changes to their model rating law to increase competition.73
68 P.L. 107-297, 116 Stat. 2322. See CRS Report RS21444, The Terrorism Risk Insurance
Act of 2002: A Summary of Provisions, and CRS Report RS21979, Terrorism Insurance: An
Overview, both by Baird Webel.
69 Harrington, supra note 51, pp. 21-22 and pp. 36-37; Randall, supra note 15, p. 640.
70 U.S. Congress, Senate Committee on the Judiciary, Subcommittee on Antitrust and
Monopoly, The Insurance Industry: Aviation, Ocean Marine, and State Regulation, report
pursuant to S.Res. 238, 86th Cong., 2nd sess., S.Rept. 1834, (Washington: GPO, 1960), p. III
(letter of transmittal from Senator Joseph C. O’Mahoney to Senator James Eastland, June
27, 1960); U.S. Congress, Senate Committee on the Judiciary, Subcommittee on Antitrust
and Monopoly, The Insurance Industry: Insurance: Rates, Rating Organizations and State
Rate Regulation, report pursuant to S.Res. 52, 87th Cong., 1st sess., S.Rept. 831,
(Washington: GPO, 1961), p. III (letter of transmittal from Senator Estes Kefauver to
Senator James Eastland, dated July 28, 1961).
71 S.Rept. 1834, p. 2.
72 S.Rept. 831, p. 7.
73 Rose, supra note 23, p. 726. See also Meier, supra note 20, pp. 77-82.

CRS-15
In the late 1960s, insolvencies among insurers writing automobile coverage
prompted a proposal to create a federal guaranty system for insurers, modeled on
federal bank deposit insurance.74 In response, state regulators drafted laws
establishing state-run guaranty funds; and many states enacted them during the
1970s.75 State regulators also established the first centralized early warning system
to enable regulators to detect financially unstable insurers.76 The NAIC
commissioned a study by McKinsey & Co., which was presented in 1974. The report
recommended specific improvements in financial regulatory practices and creation
of market conduct supervision.77 These efforts forestalled congressional action on
a bill (S. 3884) introduced by Senator Brooke to create a federal guaranty fund and
an optional federal charter for insurers.78
NAIC’s efforts did not, however, forestall congressional interest. Senator
Metzenbaum, then chairman of the Subcommittee on Antitrust, Monopoly and
Business Rights, held several hearings in the late 1970s on unfair discrimination in
insurance rating.79 The GAO issued a contemporaneous report criticizing states’
failure to protect insurance consumers from, among other things, unfair
discrimination by age and sex in automobile insurance.80 A number of states
responded by refusing to allow insurers to raise automobile insurance rates or by
trying to eliminate sex as a rating factor.
In 1979, the Federal Trade Commission issued a staff report on life insurance
cost disclosure, concluding that life insurers should disclose rates of return on
policies.81 The FTC chairman testified in the Senate that the life insurance industry
74 Sen. Thomas J. Dodd, remarks in the Senate, Congressional Record, vol. 112, Feb. 17,
1966, pp. 3373-3374.
75 Harrington, supra note 51, pp. 27-28. All states now have these statutes, known as
guaranty fund laws, which assess insurers to fulfill promises of their insolvent competitors
and allow them to offset those assessments against their state premium taxes. A detailed
history is Spencer L. Kimball and Noreen J. Parrett, “Creation of the Guaranty Association
System,” Journal of Insurance Regulation, vol. 19, Winter 2000, pp. 259-272.
76 Harrington, supra note 51, p. 28.
77 McKinsey & Co., Inc., Final Report on Strengthening the Surveillance System, (New
York: McKinsey & Co., 1974). Also printed in 1974 NAIC Proceedings, vol. II, pp. 225-
346.
78 Harrington, supra note 51, p. 28. Senator Brooke introduced S. 3884, Federal Insurance
Act, in the 94th Congress (1975-76).
79 See, for example, U.S. Congress, Committee on the Judiciary, Subcommittee on Antitrust,
Monopoly and Business Rights, 96th Cong., 1st sess., hearing on state insurance regulation,
Oct. 9, 1979 (Washington: GPO, 1979).
80 Comptroller General of the United States, Issues and Needed Improvements in State
Regulation of the Insurance Business, PAD-79-72, (Washington: GPO, 1979), included
cover transmittal letter from the Comptroller General to the President of the Senate and the
Speaker of the House of Representatives (undated letter and page not numbered).
81 Bureau of Consumer Protection and Bureau of Economics, U.S. Federal Trade
Commission, Life Insurance Cost Disclosure: Staff Report to the Federal Trade
(continued...)

CRS-16
was not competitive because consumers lacked that information.82 Both industry and
regulators protested, and by May 1980 Congress had curtailed the FTC’s authority
to investigate the business of insurance.83
Rates for commercial liability coverage spiked in the mid-1980s,84 and calls for
repeal of the insurance industry’s antitrust exemption rose in tandem. In response,
state insurance regulators persuaded the rating bureaus to stop promulgating rates that
included profit and expense loadings; only data on the historical development and
trends in pure losses were published thereafter.85 Individual states tried to control
rates, and insurers began to withdraw from states that legislated rate-control.86
Congress considered, but did not enact, a bill to revise McCarran-Ferguson to apply
the federal antitrust laws to the insurance industry.87
Representative Dingell’s Reports
In 1990, Representative John Dingell, who was then chair of the House Energy
and Commerce Committee, released a report entitled “Failed Promises: Insurance
Company Insolvencies.”88 It described the huge property-casualty insolvencies of the
late 1980s,89 detailed the “scandalous mismanagement and rascality”90 that caused
them, and determined that state insurance regulation was “seriously deficient.”91 It
found “an appalling lack of regulatory controls to detect, prevent, and punish ...
81 (...continued)
Commission, July 1979 (Washington: GPO, 1979).
82 U.S. Congress, Committee on Commerce, Science, and Transportation, Federal Trade
Commission’s Study of Life Insurance Cost Disclosure, hearings, 96th Cong., 1st sess., July
10 and Oct. 17, 1979 (Washington: GPO, 1980), pp. 6-7.
83 Federal Trade Commission Improvement Act of 1980, P.L. 96-252, 94 Stat. 374, 375-376
(codified at 15 U.S.C. §46, last paragraph).
84 Meier, supra note 20, pp. 90-93, details the causes, which included an explosion of
asbestos litigation and a contraction in the reinsurance market.
85 Harrington, supra note 51, p. 30.
86 Meier, supra note 20, pp. 98-99.
87 Ibid., p. 101. Sen. Simon introduced S. 2458, Insurance Competition Act of 1986, in the
99th Congress.
88 U.S. Congress, Committee on Energy and Commerce, Subcommittee on Oversight and
Investigations, Failed Promises: Insurance Company Insolvencies, 101st Congress, 2nd sess.,
Committee Print 101-P (Washington: GPO, 1990) (hereinafter Failed Promises).
89 The California receiver of Mission Insurance Company estimated its insolvency would
cost the public $1.6 billion. Ibid., p. 12. The Missouri receiver of Transit Casualty
Company estimated its losses at $3 billion to $4 billion. Ibid., p. 31.
90 Ibid., p. III (letter of transmittal).
91 Ibid.

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[wrongdoers].”92 It criticized state insurance regulation for allowing insurers to hand
over management authority to agents and for failing to prevent holding company
affiliates from “milking” insurers. It said that “[s]olvency regulation in the United
States suffers from inadequate resources, lack of coordination, infrequent regulatory
examinations, poor information and communications, and uneven implementation.”93
It deplored how little state regulators actually knew about non-U.S. reinsurers and
about insurers’ estimates of their own future losses. Finally, it admonished state
insurance regulators for not pursuing and punishing persons responsible for insurance
company insolvencies, stating that their efforts were “hampered by resource
deficiencies, procedural and jurisdictional problems, limited penalties, and
unwillingness to pursue wrongdoers.”94 Not only did the report substantively
criticize the effectiveness of state insurance regulation, it also discussed imposing
federal solutions.95
The report — together with contemporaneous GAO reports96 — galvanized state
regulators and the insurance industry. State insurance regulators agreed to endorse
a set of financial regulation standards, which it recommended that each state adopt
and implement. These included critical NAIC model laws and regulations, staff
qualifications, funding and resource requirements, as well as essential departmental
practices and procedures.97 Teams of knowledgeable regulators would assess each
state insurance department’s implementation of them; any state that met the standards
would then be accredited by the NAIC.98 State regulators felt this process would not
only assure effective solvency regulation but also stave off federal regulation.99 By
1992 year-end, 10 states were accredited. That did not stop the insolvencies —
among them Executive Life, Inter-American, and Mutual Benefit.
92 Ibid.
93 Ibid., p. 4.
94 Ibid., p. 5.
95 Ibid., pp. 75-76.
96 The General Accounting Office also criticized state insurance regulation. U.S. General
Accounting Office, Insurance Regulation: State Reinsurance Oversight Increased, but
Problems Remain, GAO Report GGD-90-82 (Washington: May 1990); U.S. Congress,
Senate Committee on Commerce, Science and Transportation, statement of Johnny C. Finch,
Director for Planning and Reporting, General Government Division, GAO, Insurance
Industry: Questions and Concerns about Solvency Regulation, GAO Testimony T-GGD-91-
10 (Washington: Feb. 27, 1991)
97 See 1989 NAIC Proceedings, vol. II, June 4-8, 1989, pp. 33-37.
98 A full description of the NAIC’s accreditation process, as it has evolved, is available at
[http://www.naic.org/financial_services/accreditation/docs/frsa3-031.pdf].
99 1992 NAIC Proceedings, vol. I, Dec. 9-12, 1991, at 6 (remarks of Commissioner Harold
Duryee).

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Congress scrutinized the accreditation process100 and the major life insurer
insolvencies that were occurring.101 In 1994 Representative Dingell issued another
major report entitled “Wishful Thinking: A World View of Insurance Solvency
Regulation.”102 The majority report warned that “solvency regulation in the United
States is based in many ways on wishful thinking.”103 It found that, although the
NAIC had expended massive efforts and resources, it lacked the national and
international authority to “achieve the promises made to its members and the
public.”104 According to the chairman, the subcommittee reached these conclusions:
! “Rascality, speculative excess,” and incompetence will always chase
the money in insurance.
! “Insurance regulation ... is a supervisory Babel .... “
! Insurance company operations reach around the globe and “form a
closely interwoven network that responds to money and markets,
rather than political boundaries.”
! As the world’s largest market, the U.S. relies heavily on foreign
insurance capacity, “and the responsibility for protecting its citizens
is spread among 50 States and a passel of foreign governments.”
! NAIC must have federal assistance because it lacks “the necessary
authority and resources.”
100 U.S. Congress, House Committee on Energy and Commerce, Subcommittee on Oversight
and Investigations, statement of Richard L. Fogel, Assistant Comptroller General, General
Government Programs, GAO, Insurance Regulation: Assessment of the National Association
of Insurance Commissioners, GAO Testimony T-GGD-91-37 (Washington: May 22, 1991);
U.S. Congress, House Committee on Energy and Commerce, Subcommittee on Oversight
and Investigations, statement of Richard L. Fogel, Assistant Comptroller General, General
Government Programs, GAO, Insurance Regulation: The Financial Regulation Standards
and Accreditation Program of the National Association of Insurance Commissioners, GAO
Testimony T-GGD-92-27 (Washington: Apr. 9, 1992); U.S. Congress, House Committee on
Energy and Commerce, Subcommittee on Oversight and Investigations, statement of Richard
L. Fogel, Assistant Comptroller General, GAO, Insurance Regulation: The National
Association of Insurance Commissioners’ Accreditation Program Continues to Exhibit
Fundamental Problems, GAO Testimony T-GGD-93-26 (Washington: June 9, 1993).
101 U.S. Congress, Senate Committee on the Judiciary, Subcommittee on Antitrust,
Monopolies and Business Rights, statement of Richard L. Fogel, Assistant Comptroller
General, General Government Programs, GAO, Life/Health Insurer Insolvencies and
Limitations of State Guaranty Funds, GAO Testimony T-GGD-92-15 (Washington: April
28, 1992); U.S. Congress, House Committee on Energy and Commerce, Subcommittee on
Oversight and Investigations, report to the Chairman, Insurance Regulation: Weak Oversight
Allowed Executive Life to Report Inflated Bond Values, GAO Report GGD-93-35
(Washington: Dec. 1992); U.S. Congress, House Committee on Energy and Commerce,
Subcommittee on Oversight and Investigations, report, Insurance Regulation: Shortcomings
in Statutory Asset Reserving Methods for Life Insurers, GAO Report GGD-94-124
(Washington: June 3, 1994).
102 U.S. Congress, Committee on Energy and Commerce, Subcommittee on Oversight and
Investigations,, Wishful Thinking: A World View of Insurance Solvency Regulation, 103rd
Cong., 2nd sess., Committee Print 103-R (Washington: GPO, 1994).
103 Ibid., p. 1.
104 Ibid., p. 10.

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! Insurance regulators should focus on solvency regulation and
actively search for rule-breakers.105
Wishful Thinking’s minority report made significant observations as well. It
agreed with the majority’s goals of “(1) uniform national minimum solvency
standards, (2) meaningful enforcement, and, (3) controlling alien insurers and
reinsurers.”106 It objected, however, to the majority’s implication that only a federal
regulator could accomplish these goals, favoring instead “strengthening, not
dismantling, the current State regulatory system.”107 It proposed three possible
models for improving solvency regulation:
! Congress might grant the NAIC authority to register foreign insurers
and reinsurers.
! Congress could consent to a compact among states to regulate an
aspect of insurance regulation.
! Congress could enact federal minimum standards or could direct that
minimum standards be developed, subject to oversight by the
Secretary of Commerce.108
In response, the NAIC continued to expand its accreditation program, and it
assisted in creating the International Association of Insurance Supervisors.109
Congressional pressure receded in 1995, as the majority and minority reversed in the
House.
Congress Draws New Lines
In 1999 — after decades of litigation over who regulated the insurance activities
of banks — Congress enacted the Gramm-Leach-Bliley Act (GLBA)110 to modernize
the regulation of financial services. GLBA permitted banking, insurance, and
securities firms to affiliate, subject to regulation-by-activity — now known as
“functional regulation.”111 The act expressly reaffirmed the McCarran-Ferguson
105 Ibid., p. IV (transmittal letter from Representative John Dingell to the Committee on
Energy and Commerce, dated Oct. 19, 1994).
106 Ibid., p. 128.
107 Ibid.
108 Ibid., pp. 128-130.
109 The IAIS is now headquartered in Basel, Switzerland, and works to establish
internationally applicable standards for insurance supervision. The text of principles,
standards, and guidance papers that the IAIS has endorsed is available at
[http://www.iaisweb.org/framesets/pas.html].
110 P.L. 106-102, 113 Stat. 1338.
111 CRS Report RL30375, Major Financial Services Legislation, the Gramm-Leach-Bliley
Act (P.L. 106-102): An Overview, by F. Jean Wells and William D. Jackson.

CRS-20
Act,112 reserved for state insurance regulators areas of authority over banks’ insurance
sales,113 and required state and federal regulators to share information.114 It also
expedited legal review of any regulatory conflict between a state insurance regulator
and a federal regulator, under an unusual standard: The reviewing court must show
equal deference to both state and federal regulators.115 This standard has put state
insurance regulators and federal regulators on an equal footing in federal court in
disputes about insurance activities of federal banks.116
GLBA did have a conditional preemption. It would have created a new
organization called the National Association of Registered Agents and Brokers
(NARAB) to implement national uniformity of insurance agent licensing
requirements unless a majority of the states enacted either uniform or reciprocal laws
within three years.117 To prevent creation of NARAB, the NAIC drafted a model law
implementing reciprocity and urged state legislatures to enact it. The NAIC certified
38 states as meeting GLBA’s reciprocity standard by the deadline, which forestalled
NARAB’s creation.118
GLBA’s Title V imposed comprehensive, minimum federal privacy standards
on all financial institutions, both federal and state.119 It delegated rule-making to the
functional regulators,120 and required state and federal regulators to consult and
coordinate with each other to make their privacy regulations as consistent and
comparable as possible.121 The NAIC drafted a model regulation on consumer
financial and health information in 2001, amended it in 2002, and in 2003 reported
112 P.L. 106-102, sec. 104(a), 113 Stat. 1352 (codified at 15 U.S.C. §6701(a)) (stating that
the McCarran-Ferguson Act “remains the law of the United States.”).
113 Ibid., sec. 301, 113 Stat. 1407 (codified at 15 U.S.C. §6712) (stating that the “insurance
activities of any person (including a national bank ... ) shall be functionally regulated by the
states ....” ).
114 Ibid., sec. 307, 113 Stat. 1415-1417, (codified at 15 U.S.C. §6716). See National
Association of Insurance Commissioners, “Coordinating with Federal Regulators,” available
at [http://www.naic.org/GLBA/coordinating_fed.htm].
115 Ibid., sec. 304(e), 113 Stat. 1410, (codified at 15 U.S.C. §6714(e)) (“The court shall
decide a petition filed under this section based on its review on the merits of all questions
presented under State and Federal law, including the nature of the product and activity and
the history and purpose of its regulation under State and Federal law, without unequal
deference.”) (emphasis added).
116 This is known as the “jump ball” provision. See Martin E. Lybecker, “Bank Insurance
Provisions of the Gramm-Leach-Bliley Act,” in Financial Services Modernization 2003:
Implementation of the Gramm-Leach-Bliley Act (Philadelphia: The American Law Institute,
2003), p. 235.
117 P.L. 106-102, secs. 321-340, 113 Stat. 1422-1434 (codified at 15 U.S.C. §§6751-6766).
118 National Association of Insurance Commissioners, “Responding to the NARAB
Requirements,” available at [http://www.naic.org/GLBA/narab.htm].
119 P.L. 106-102, secs. 501-527, 113 Stat. 1436-1451 (codified at 15 U.S.C. §§6801-6827).
120 P.L. 106-102, sec. 504(a)(1), 113 Stat. 1439 (codified at 15 U.S.C. §6804(a)(1)).
121 Ibid., sec. 504(a)(2), 113 Stat. 1439-1440 (codified at 15 U.S.C. §6804(a)(2)).

CRS-21
that 50 states and the District of Columbia have privacy standards meeting GLBA
requirements.122
The NAIC also 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.”123 At about that time, it became apparent
that insurers controlled by Martin Frankel had been swindled out of some $200
million, allegedly by Mr. Frankel himself. Some said that showed state insurance
regulation to be ineffective.124
The NAIC continued with its accreditation program.125 It also followed up on
its pledge to modernize state regulation by undertaking significant efforts to
streamline agent licensing, company licensing, and policy form approval by
centralizing the function in its corporate office.126 Since the NAIC cannot impose
uniformity or standards on states, it has proposed to state legislatures an interstate
compact to set uniform standards for life insurance and annuity products, to receive
filings for them, and to give regulatory approval.127
Oversight Continued in Recent Congresses
In the 107th Congress, Senator Schumer and Representative LaFalce each
offered legislation to create an optional federal charter for insurers. There were no
hearings or markups on these bills, though there were four hearings, including one
over three separate days, in the House Financial Services Committee on insurance
regulatory issues. Senator Schumer’s proposal,128 which was never assigned a
122 National Association of Insurance Commissioners, “Implementing Privacy Protections,”
available at [http://www.naic.org/GLBA/privacy.htm].
123 Text of the pledge is available at [http://www.ins.state.ny.us/naicsoi.htm].
124 U.S. Congress, House Committee on Commerce, Subcommittee on Finance and
Hazardous Materials, statement of Richard J. Hillman, Associate Director, Financial
Institutions and Market Issues, General Government Division, GAO, Insurance Regulation:
Scandal Highlights Need for States to Strengthen Regulatory Oversight, GAO Testimony
T-GGD-00-209 (Washington: Sept. 19, 2001).
125 U.S. General Accounting Office, Regulatory Initiatives of the National Association of
Insurance Commissioners, GAO Report GAO-01-885R (Washington: July 6, 2001); U.S.
General Accounting Office, Insurance Regulation: The NAIC Accreditation Program Can
Be Improved, GAO Report GAO-01-948 (Washington: Aug. 2001).
126 The NAIC’s description of their efforts to modernize insurance regulation is available at
[http://www.naic.org/GLBA].
127 For additional information about the compact, see [http://www.naic.org/compact/].
128 Mark A. Hoffman, “Chartering Bill Introduced,” Business Insurance, Jan. 7, 2002, p. 1.
Text of the National Insurance Chartering and Supervision Act is available at
(continued...)

CRS-22
number, would have created a new federal agency but would not have given that
agency authority to regulate rates or policy forms. All federally chartered insurers
would have been required to participate in either state guaranty associations or a
backup federal one. It would not have exempted federally chartered insurers from
federal antitrust laws. Representative LaFalce’s bill — H.R. 3766 — would have
allowed a federally chartered insurer to underwrite both life and property-casualty
insurance in the same company, encouraged community investment, retained state
insurance regulators’ authority over rates, and imposed federal standards on state-
licensed insurance agents.
In the 108th Congress, both the House and the Senate held hearings on insurance
regulation and one bill on the topic, S. 1373, was introduced by Senator Ernest
Hollings. S. 1373 would have created a federal commission within the Department
of Commerce to regulate the interstate business of property/casualty and life
insurance and would have required federal regulation of all interstate insurers. It thus
would have preempted most current state regulation of insurance. Single state
insurance companies would have continued to be regulated by the state where the
company is domiciled and operates. The federal commission would have had full
regulatory powers, including licensure, rate and form approval, regulation of
solvency, and regulation of market conduct. S. 1373 also would have repealed the
antitrust exemptions in the McCarran-Ferguson Act and created a federal guaranty
fund. S. 1373 was referred to the Commerce Committee; no hearings or markups on
the bill were scheduled, although the committee did hold a hearing on insurance
regulation as discussed below.
The House Financial Services Subcommittee on Capital Markets, Insurance, and
Government Sponsored Enterprises held its first hearing on insurance issues during
the 108th Congress on April 10, 2003, entitled: The Effectiveness of State Regulation:
Why Some Consumers Can’t Get Insurance. Witnesses at the hearing addressed the
general financial challenges facing the insurance industry as well as specific states’
market experiences. A particular focus was on various states’ regulatory policies.
Positive experiences were highlighted in states, such as Illinois and South Carolina,
which have less regulation, especially less direct regulation of rates. Negative
experiences were highlighted in states, such as Louisiana and New Jersey, which
have a greater amount of regulation and generally require prior approval for insurance
rates. Much of the questioning revolved around what sort of role the federal
government might play in this area that has traditionally been left to the states.
General support was expressed for continuing a state role in regulation of insurance,
but various ideas for federal intervention were mentioned, including an optional
federal charter, direct federal preemption of some state regulation, and a NARAB-
like approach where threatened federal preemption might lead to changes by the
states themselves.
The House Financial Services Subcommittee on Oversight and Investigations
also held a hearing addressing insurance issues. The May 6, 2003 hearing was
entitled Increasing the Effectiveness of State Consumer Protections. This hearing
128 (...continued)
[http://www.aba.com/ABIA/ABIA_Reg_Mod_Page.htm].

CRS-23
focused on market conduct examinations, which are exhaustive reviews by state
insurance regulators of individual insurance companies’ business practices and
policies. The Government Accountability Office (GAO; formerly named the General
Accounting Office) and the National Council of Insurance Legislators (NCOIL)
separately have been studying issues relating to market conduct regulation and both
presented preliminary findings of their studies at this hearing. There was general
agreement among the witnesses that the current system of market conduct regulation
needs improvement. Of particular concern was the lack of uniform standards and
coordination between the states in how and when the examinations are conducted.
Both NCOIL and NAIC are undertaking efforts to improve the current system.
Questions were raised by GAO, however, as to the effectiveness and speed of these
efforts; even when NCOIL or NAIC produce model legislation or practices, these
must be then adopted by each state individually. Continued state regulation was
strongly defended, but it was suggested that continuing congressional pressure might
be necessary to encourage adoption of suggested changes.
The Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises returned to the question of insurance regulation on November 5, 2003,
with a hearing entitled: Reforming Insurance Regulation — Making the Marketplace
More Competitive for Consumers. This hearing focused particularly on the NAIC’s
recently released “Insurance Regulatory Modernization Action Plan,” and other
efforts to modernize the state regulatory system. In addition to testimony from the
NAIC, the subcommittee heard from NCOIL and a number of insurers on the
modernization effort and the costs and benefits of the current system. General
support for the NAIC reform efforts was expressed; however, concerns about the
length of time that these efforts would take and whether or not they would result in
effective uniformity of regulation were also voiced.
On March 31, 2004, the Subcommittee on Capital Markets held what was
described as the committee’s 14th meeting of some kind on the question of insurance
regulation in the past three years. Entitled Working with State Regulators to Increase
Insurance Choices for Consumers, this hearing focused on a “road map”for insurance
legislation developed by full committee Chairman Oxley and subcommittee
Chairman Baker and publicly proposed by Chairman Oxley at the NAIC spring
meeting on March 14, 2004.129 While not a fully formed legislative proposal at the
hearing, the concept calls for allowing states to continue regulating insurance while
enacting some federal requirements on what the state regulation should look like.
The model seems to be the NARAB provisions that were in GLBA, but expanded to
other areas such as commercial form preapproval, company licensing, market
conduct examinations, and general rate regulation. Both industry groups and
representatives of the states expressed general support for the concept, although some
noted that it falls short of the federal charter that parts of the industry have sought.
A letter from a number of consumer groups, presented at the hearing by Robert
Hunter of the Consumer Federation of America, expressed concern that the road map
would override what they see as critical consumer protections enacted by the states,
129 Full text of Chairman Oxley’s speech was included in the March 15, 2004 press release
entitled “Oxley Outlines Road Map to State-Based Insurance Regulatory Reform” and can
be found at [http://financialservices.house.gov/news.asp].

CRS-24
particularly regulation of insurance rates. Mr. Hunter indicated his support of greater
uniformity, but stressed that this uniformity should not come at the expense of such
consumer protections.
The Senate Committee on Commerce, Science and Transportation signaled its
interest in insurance issues with a hearing on October 22, 2003, entitled Federal
Involvement in Regulation of The Insurance Industry. Although the hearing was not
specifically called to examine S. 1373, discussion of the bill was prominent during
the hearing. Senator Hollings expressed the rationale behind the bill, namely his
conviction that state regulation of insurers has failed to oversee the industry and
protect consumers sufficiently, and that it is time to federalize the system in order to
do so. Reaction to this proposal was mixed, with, for example, one of the two
consumer advocates on the panel, Robert Hunter of the Consumer Federation of
America, supporting federalization. The other, Douglas Heller of the Foundation for
Taxpayer and Consumer Rights, expressed his belief that, if done properly, state
regulation is sufficient to protect consumers as demonstrated in California’s
Proposition 103. The witnesses from the insurance industry generally supported
either a federal charter that is optional, not mandatory, or continued state regulation
of insurance.
The Senate Committee on Banking, Housing, and Urban Affairs held the last
hearing focusing on insurance regulatory issues in the 108th Congress on September
22, 2004. Entitled Examination and Oversight of the Condition and Regulation of
the Insurance Industry, this hearing covered a wide range of issues relating to federal
intervention in the insurance regulatory system. Particularly distinguishing this
hearing compared to earlier ones was the discussion of the draft legislation that had
been circulated in the House the month before. Some skepticism was expressed over
lack of enforcement provisions in the House draft and Mr. Hunter’s testimony
included another letter criticizing the draft for lack of consumer protection,
particularly the preemption of state rate regulation.

CRS-25
Appendix
How Federal Courts Narrowed the McCarran-Ferguson
Act’s “Reverse Preemption”: Major Historical Cases
Congress passed the McCarran-Ferguson Act in 1945 as a compromise after the
Walter-Hancock bill — which would have imposed an absolute preemption of
federal law — failed in 1944.130 Not only did the compromise leave many
unanswered questions but also — as time passed and the industry changed — new
ones arose. Supreme Court decisions on those questions have narrowed the scope of
the McCarran-Ferguson “reverse preemption,” as this review of the historically
important cases shows.
This analysis omits the long line of cases interpreting the preemption in the
Employees Retirement Income Security Act (ERISA) of state insurance laws, such
as mandated benefits. In those cases, employers and insurers argued that ERISA
excluded completely any and all state insurance regulation of employee health plans,
notwithstanding the McCarran-Ferguson Act. The line ended — in theory, at least
— in the recent Supreme Court decision in Kentucky Association of Health Plans
v. Miller,131 which separated the ERISA analysis from reference to McCarran-
Ferguson.132
What Is “Insurance”
SEC v. VALIC133 established that the definition of “insurance” under McCarran-
Ferguson is a federal question, not a state one. In this case, the Securities and
Exchange Commission wanted insurers issuing variable annuity contracts to register
them as securities under the federal securities laws.134 The insurers refused, asserting
both that the McCarran-Ferguson Act shielded them from federal regulation and that
even if it did not, they qualified for the insurance exemptions from the federal
securities laws. The Court held that neither state regulation of variable annuities nor
their issuance by insurers qualified them as insurance. This meant both that insurers
and regulators could not prevent federal regulation using McCarran-Ferguson nor
avail themselves of the exclusion for “insurance” from the federal securities laws.
130 See note 42 supra.
131 Ky. Ass’n of Health Plans, Inc. v. Miller, 538 U.S. — , 1238 S.Ct. 1471 (Docket No. 00-
1471)(Apr. 2. 2003), available at [http://www.supremecourtus.gov/opinions/02pdf/00-
1471.pdf].
132 See CRS Report RS21497, Reconciling McCarran-Ferguson (Insurance) Case Law and
ERISA Preemption: Kentucy Ass’n of Health Plans, Inc. v. Miller, by Janice E. Rubin.
133 SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65(1959).
134 Under a variable annuity contract, annuity payments are not fixed but vary according to
the performance of an underlying investment portfolio; these contracts did not exist in 1933
and 1934 when the federal securities laws were enacted. Ibid. at 67-69.

CRS-26
NationsBank v. VALIC135 established that — for purposes of federal banking law
— selling fixed annuities is the business of banking and is not exclusive to insurers.
In this case the Comptroller of the Currency had by letter ruling determined that fixed
annuities were not insurance but rather were “financial investment instruments of the
kind congressional authorization permits [banks] to broker.”136 An insurer issuing
and selling annuities challenged the Comptroller’s authority to allow banks to sell
insurance. The Court agreed with the Comptroller that the presence of mortality risk
does not qualify an investment as “insurance” and that “federal banking law does not
plainly require automatic reference to state [insurance] law ....”137 This decision
affirmed that the definition of “insurance” is a federal question — and that neither
insurers nor state regulators can use McCarran-Ferguson’s reverse preemption to
exclude federal regulation.
What Is the “Business of Insurance”
National Securities138 established that McCarran-Ferguson’s reverse preemption
of federal law did not extend beyond regulation to protect policyholders.139 It did not
extend to all insurers’ activities regulated by state insurance commissioners under
state laws.140 In this case, the Securities and Exchange Commission wanted to
unwind a merger between insurance companies that had been approved by the
domestic insurance commissioner pursuant to state law, as the SEC thought that the
insurers’ shareholders had not been given correct or appropriate information about
the terms of the merger. The insurers had objected to the SEC’s assertion of
jurisdiction, arguing successfully in the lower courts that McCarran-Ferguson barred
it. The Supreme Court disagreed with the lower courts and with the insurers,
holding “that a state statute aimed at protecting the interests of those who own stock
in insurance companies [did not come] within the sweep of the McCarran-Ferguson
Act [since it] is not a state attempt to regulate the “business of insurance ....”141 The
Court went on to say that “the McCarran-Ferguson Act furnishes no reason for
refusing the remedies the [SEC] is seeking.”142 This meant the scope of the reverse
preemption was much narrower than its supporters had hoped.143
135 NationsBank of N.C. v. Variable Annuity Life Ins. Co., 513 U.S. 251 (1995).
136 Ibid. at 260.
137 Ibid. at 262.
138 SEC v. National Sec., 393 U.S. 453 (1969). At issue was the scope of the exemption
granted by Section 2(b) of the act; see note 42 supra.
139 Ibid. at 463 (“The paramount federal interest in protecting shareholders is in this situation
perfectly compatible with the paramount state interest of protecting policyholders.”).
140 Ibid. at 459 (“The McCarran-Ferguson Act was an attempt to turn back the clock, to
assure that the activities of insurance companies in dealing with their policyholders would
remain subject to state regulation.”).
141 Ibid. at 457.
142 Ibid. at 461-463.
143 Kimball and Heaney, supra note 19, at 104-105.

CRS-27
Royal Drug144 established that insurers’ exemption from antitrust laws under
McCarran-Ferguson likewise did not extend to all their business activities.145 It
extended instead only to those practices that spread or transfer a policyholder’s risk,
are integral to the relationship between the insurer and the insured, and are limited
to entities within the insurance industry.146 In this case, pharmacies that had declined
to contract with Blue Shield to limit drug costs for its policyholders brought an
antitrust action against Blue Shield, alleging an unlawful boycott. After analyzing
in detail McCarran-Ferguson and its legislative history, the Court concluded that the
contracts between Blue Shield and the pharmacies could not be considered the
business of insurance since they did not transfer risk but merely arranged for
purchase of goods and services,147 since they did not directly affect the contract
between the insured and the insured,148 and since Congress had intended to exempt
only collective rate-making from the antitrust laws.149 This meant that most insurers’
business practices — other than collective rate-making — were subject to the federal
antitrust laws.
U.S. v. Fabe150 established that states’ laws for liquidating insurers do constitute
the “business of insurance” — and therefore preempt a conflicting federal statute —
but only to the extent necessary to protect the insolvent’s policyholders.151 In this
case the United States had claims on the assets of an insolvent insurer, which it
asserted had priority under federal bankruptcy law over all other claimants, including
policyholders. The state insurance commissioner administering the insolvency
objected, asserting that the state’s priority scheme — under which all government
claims ranked last — preempted the federal law.152 The Court analyzed Section 2 of
the McCarran-Ferguson Act and its legislative history closely. It concluded that
“federal law must yield to the extent the [state liquidation] statute furthers the
interests of policyholders.”153 The federal law need not yield, said the Court, “to the
extent that [the state liquidation statute] is designed to further interests of other
creditors ....”154 This meant that McCarran-Ferguson could subordinate the federal
144 Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205 (1979).
145 Ibid. at 211 (“The exemption is for the ‘business of insurance,’ not the ‘business of
insurers.’”).
146 Ibid. at 211, 215-216, 226-230.
147 Ibid. at 211-215.
148 Ibid. at 215-217 (citing National Securities).
149 Ibid. at 217-27.
150 United States Dep’t of Treasury v. Fabe, 508 U.S. 491 (1993).
151 Ibid. at 493-494, 508.
152 Ibid. at 494-497.
153 Ibid. at 502 (citing National Securities).
154 Ibid. at 508. Four justices dissented, arguing that the majority’s decision was not a
logical extension of the National Securities decision and erroneously confined the Royal
Drug indices to antitrust issues. Ibid. at 512-518.

CRS-28
government as a creditor only with respect to policyholders but not with respect to
general creditors.155
Must State Regulation Be Effective to Preempt Federal Law?
FTC v. National Casualty156 established that McCarran-Ferguson’s reverse
preemption did not depend on the quality of state regulation.157 In this case the
Federal Trade Commission ordered two multistate insurers to stop using advertising
that it found violated the Federal Trade Commission Act as false, deceptive, and
misleading.158 The Court agreed that the McCarran-Ferguson Act “withdrew from
the [FTC] the authority to regulate [the defendant insurers’] advertising practices in
those States which are regulating those practices under their own laws.”159 The Court
expressly declined to examine whether the states’ laws had been effectively
applied.160
What Is “Boycott, Coercion, or Intimidation”?
St. Paul v. Barry161 established that federal antitrust laws may be applied to
certain disputes between insurers and their policyholders.162 In this case only four
insurers offered medical malpractice insurance in a state. One of them — St. Paul
— stopped selling it with terms most favorable to the insureds, offering only
coverage with less favorable terms. The three other insurers in the market also
refused to sell the more favorable coverage to any of St. Paul’s policyholders. Those
policyholders sued, alleging that the insurers had engaged in an unlawful boycott.
The insurers asked for the case to be dismissed as barred by McCarran-Ferguson.
The U.S. Supreme Court held that the suit should not be dismissed, since the
insurers’ alleged concerted refusal-to-deal came within the statutory exception in the
McCarran-Ferguson Act.163 It did not matter, said the Court, that the floor debates
155 Kimball and Heaney, supra note 19, at 128.
156 FTC v. Nat’l Cas. Co., 357 U.S. 560 (1958).
157 Ibid. at 564. See also Kimball and Heaney, supra note 19, at 84.
158 FTC v. Nat’l Cas. Co., supra note 178, pp. 561-562.
159 Ibid. at 563 (footnote omitted).
160 Ibid. at 564. The scope of federal antitrust preemption of a federal statute under the
“state action” doctrine established in Parker v. Brown, 317 U.S. 341 (1943), is beyond the
scope of this Report. See Kimball and Heaney, supra note 19, at 87-88.
161 St. Paul Fire & Marine Ins. Co. v. Barry, 438 U.S. 531 (1978).
162 Ibid. at 552-555.
163 The Section 2(b) antitrust exemption, codified at 15 U.S.C. §1012(b), is: “No Act of
Congress shall be construed to invalidate, impair, or supercede any law enacted by any State
for the purpose of regulating the business of insurance, unless such Act specifically relates
to the business of insurance .... “ The statutory exception to that exemption is Section 3(b)
(codified at 15 U.S.C. §1013(b)): “Nothing contained in this [Act] shall render the said
Sherman Act inapplicable to any agreement to boycott, coerce, or intimidation, or act of
(continued...)

CRS-29
during the act’s passage expressed intent to proscribe concerted activity by insurers
against other insurers or against agents. The Court reasoned that Congress could not
have meant to offer the shelter of the antitrust laws only to competitors and agents
and not to consumers as well.164 This case meant that mere regulation by the states
could not shield insurers from all attempts to apply federal antitrust law.165
Hartford Fire v. California166 established that refusal to sell contracts with
certain terms did not constitute a boycott, absent proof that the insurers also refused
to deal on collateral or unrelated matters.167 In this case, nineteen states had sued
U.S. and foreign insurers, alleging they had violated the antitrust laws by acting to
force other insurers to sell only policies with terms similar to those in the defendants’
policies. A bare majority of the Court defined a boycott as a collective use of
unrelated commercial transactions as leverage to achieve the desired terms.168 The
majority distinguished between concerted refusals to deal on unrelated matters, on
the one hand, and concerted refusals to deal on particular transactions until the terms
of those transactions are satisfactory, on the other. A concerted refusal to deal on
certain contract terms was not a boycott within the meaning of McCarran-Ferguson,
said the majority, because the terms were central to the insurance contract.169 This
decision had the effect of narrowing the boycott exception to McCarran-Ferguson’s
antitrust immunity.170
163 (...continued)
boycott, coercion, or intimidation.” The insurers were arguing that the act’s Section 2(b)
exemption trumped the Section 3(b) exception to the exemption.
164 St. Paul v. Barry, supra note 183, at 551-552 (note 24). See also ibid. at 547 (“The
debates make clear that the ‘boycott’ exception was viewed by the act’s proponents as an
important safeguard against the danger that insurance companies might take advantage of
purely permissive state regulation to establish monopolies and enter into restrictive
agreements falling outside of the realm of state-supervised cooperative action.”).
165 The case came before the Supreme Court on a motion to dismiss, so the Court’s decision
meant that McCarran-Ferguson provided no shield against the mere allegation of a boycott.
Ibid. at 533-534. See also Kimball v. Heaney, supra note 19, at 157.
166 Hartford Fire Ins. Co. v. California, 509 U.S. 763 (1993).
167 Ibid. at 800-811.
168 Ibid. at 803.
169 Ibid. at 805-809. “Of course as far as the Sherman Act (outside the exempted insurance
field) is concerned, concerted agreements on contract terms are unlawful .... The McCarran-
Ferguson Act, however, makes that conspiracy lawful .... unless the refusal to deal is a
‘boycott.’” Ibid. at 803 and 810-811.
170 Courts have since held that defendant insurers concertedly refusing to deal on terms
satisfactory to plaintiffs have not engaged in illegal boycotts within the meaning of Section
3(b) of McCarran-Ferguson. See Slagle v. ITT Hartford, 102 F.3d 494 (11th Cir. 1996); N.
J. Auto. Ins. Plan v. Sciarra, 103 F.Supp. 2d 388 (D.N.J. 1998).