A "lite"discussion on property and casualty insurance regulation

Bodily Injury Liability

The insurance industry in the United States is regulated primarily by the individual states. However, the industry (particularly the portion dealing with life and health insurance) is affected by federal law, especially in the areas of tax consequences of its various product protection, savings and investment benefits. In fact, in the area of property and casualty insurance, state laws originally became the dominant source of regulation because of the confusion over whether insurance could be defined as a tangible good. If it were, it would be considered commerce and therefore its regulation would be up to the federal government. It turned out that insurance was defined as an intangible good, so its regulation fell to the individual states. Following are some key events that helped create the regulatory status of the insurance industry.

Paul vs. Virginia

In the 1860s, an agent working for a New York insurer extended his dealings to Virginia. Legal action was filed against the New York agent for failing to comply with Virginia state law. The case was eventually presented to the U.S. Supreme Court. The court needed to address whether individual states maintained the right to regulate the business of insurance. The court’s decision preserved the prevailing assumption that the sale of insurance was not considered to be interstate commerce and should therefore stay under each state’s jurisdiction. For the next 75 years, this decision was upheld.

South-Eastern Underwriters

In 1943, the Department of Justice sued a group of insurers known as the South-Eastern Underwriters Association (SEUA) for violating the Sherman Anti-trust Act. The SEUA members’ agreement to use uniform insurance rates amounted to price fixing, a violation of federal law. The association defended itself by contending that insurance was not considered to be commerce and was therefore not subject to federal regulations. The case was appealed to the U.S. Supreme Court and in June of 1944, the Court reversed itself and ruled that insurance was commerce and, therefore, subject to federal regulation.

McCarran-Ferguson Act – Public Law 15

The brief period following the SEUA decision was characterized by confusion. In 1945, the United States Congress passed the McCarran-Ferguson Act. Through this law, Congress reaffirmed the power of individual states by permitting the states to continue to regulate insurance. However, in order to maintain regulatory control after July 1, 1948, each state had to enact the same type of anti-trust laws that the federal government had on their books.

All of the states eventually passed state-level anti-trust laws and the insurance business is still regulated by the states.

What’s Happening Today

The future of insurance, including regulation, is in an important transition period. For many years, insurance industry experts, executives, insurance commissioners, consumer organizations and non-insurance business groups have debated the need for change. The most commonly discussed options include:

• maintain the status quo by preserving regulation by the individual states.
• devise some level of combination of both federal and state regulation
• shift regulation from the states to the federal government
• decrease insurance industry regulation and let the business be controlled by the insurance marketplace

A very hot topic is the role that banks may play in the insurance industry. The banking industry has been making substantial inroads into the marketing of insurance, seeing the industry as a natural part of the world of financial services. However, the number of proponents for bankers becoming insurers are equaled by those opposing any bank involvement. Banks are ultimately regulated by the federal government through the office of the Comptroller of the Currency. Whatever ecisions are finally made in this arena will have a tremendous impact on how insurance is regulated.