Insurance Regulation: History, Background, and Recent Congressional Oversight

Congressional research reportFeb 11, 2005

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Order Code RL31982

CRS Report for Congress

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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

CRS-2

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-toentry 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

See Emmett J. Vaughan and Therese M. Vaughan, Fundamentals of Risk and Insurance

(New York: John Wiley & Sons, Inc., 1996), pp. 103-110.

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.

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 online filing and approval systems are providing or can provide regulatory uniformity

and efficiency.7

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.

Vaughan and Vaughan, supra note 2, pp. 140-156.

Further information is available at [http://www.serff.org/] and [http://www.carfra.org/].

These systems incorporate current state requirements.

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 NAICaccredited.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

(...continued)

procedures,” in Best’s Review, vol. 102, Apr. 2002, p. 101.

See NAIC, Model Laws, Regulations, and Guidelines, vols. 1-5, (Kansas City, MO: 2003).

See NAIC, “Accredited States,” updated

[http://www.naic.org/frs/accreditation/map.htm].

June

2004,

available

NAIC News Release, “NAIC Members Approve 2003 Budget,” Dec. 8, 2002, available

at [http://www.naic.org/pressroom/releases/rel02/120802_budget.htm].

Eric C. Nordman, “The Early History of the NAIC,” Journal of Insurance Regulation,

vol. 19, Winter 2000, pp. 164-178.

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

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).

NAIC, Insurance Products and

[http://www.naic.org/insprod/index.htm].

Services

Division,

available

NAIC, “Statement of Financial Position,” in Annual Report 2002, available at

[http://www.naic.org/about/docs/03_annual_report.pdf], p. 24.

Ibid.

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.

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.

(...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.

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.

Meier, supra note 20, p. 51-53.

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.

75 U.S. (8 Wall.) 168 (1868).

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 SouthEastern 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

Randall, supra note 15, pp. 630-631.

Meier, supra note 20, pp. 54-61.

322 U.S. 533 (1944); two justices took no part in the consideration of the case.

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 McCarranFerguson 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

P.L. 79-15, 59 Stat. 33 (codified at 15 U.S.C. §§1011 et seq.).

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.

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).

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.

Ibid., sec. 2(a) (codified at 15 U.S.C. §1012(a)).

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

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.

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 RobinsonPatman Anti-Discrimination Act, shall not apply to the business of insurance or to acts in

the conduct thereof.”).

Sen. Ferguson, remarks in the Senate, Congressional Record, vol. 91, Jan. 25, 1945, p.

479.

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.

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.”).

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))).

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 McCarranFerguson 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

(...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 .... “).

“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.

Ibid., citing Sec. 3(b) of the act.

“[T]here is no attempt here to have Congress throttled in the future in acting upon

insurance legislation.” Ibid., p. 1487.

Ibid., p. 1489.

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

Meier, supra note 20, pp. 74-75.

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.

Randall, supra note 15, p. 634.

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.

Kimball and Heaney, supra note 19, pp. 62-62, 84.

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

Kimball and Heaney, supra note 19, pp. 63-78.

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.”)

Harrington, supra note 51, pp. 26-27.

See the appendix to this report for a review of the major historical cases.

P.L. 89-97, 79 Stat. 290.

P.L. 89-97, 79 Stat. 343.

P.L. 93-406, 88 Stat. 829.

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

P.L. 96-265, 94 Stat. 476.

P.L. 99-272, 100 Stat. 222.

P.L. 104-191, 110 Stat. 1936.

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.

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).

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.

P.L. 99-563, 100 Stat. 3170.

Statistics from The Risk Retention

[http://www.rrr.com/education/growth.cfm].

Reporter,

a va i l a b l e

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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 ratemaking. 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

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.

Harrington, supra note 51, pp. 21-22 and pp. 36-37; Randall, supra note 15, p. 640.

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).

S.Rept. 1834, p. 2.

S.Rept. 831, p. 7.

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

Sen. Thomas J. Dodd, remarks in the Senate, Congressional Record, vol. 112, Feb. 17,

1966, pp. 3373-3374.

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.

Harrington, supra note 51, p. 28.

McKinsey & Co., Inc., Final Report on Strengthening the Surveillance System, (New

York: McKinsey & Co., 1974). Also printed in 1974 NAIC Proceedings, vol. II, pp. 225346.

Harrington, supra note 51, p. 28. Senator Brooke introduced S. 3884, Federal Insurance

Act, in the 94th Congress (1975-76).

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).

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).

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 ...

(...continued)

Commission, July 1979 (Washington: GPO, 1979).

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.

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).

Meier, supra note 20, pp. 90-93, details the causes, which included an explosion of

asbestos litigation and a contraction in the reinsurance market.

Harrington, supra note 51, p. 30.

Meier, supra note 20, pp. 98-99.

Ibid., p. 101. Sen. Simon introduced S. 2458, Insurance Competition Act of 1986, in the

99th Congress.

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).

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.

Ibid., p. III (letter of transmittal).

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.

Ibid.

Ibid., p. 4.

Ibid., p. 5.

Ibid., pp. 75-76.

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-9110 (Washington: Feb. 27, 1991)

See 1989 NAIC Proceedings, vol. II, June 4-8, 1989, pp. 33-37.

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].

1992 NAIC Proceedings, vol. I, Dec. 9-12, 1991, at 6 (remarks of Commissioner Harold

Duryee).

CRS-18

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.

CRS-19

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

111

P.L. 106-102, 113 Stat. 1338.

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

128

For additional information about the compact, see [http://www.naic.org/compact/].

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 statelicensed 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 NARABlike 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 McCarranFerguson.132

What Is “Insurance”

SEC v. VALIC133 established that the definition of “insurance” under McCarranFerguson 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. 001471)(Apr. 2. 2003), available at [http://www.supremecourtus.gov/opinions/02pdf/001471.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

134

SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65(1959).

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 McCarranFerguson 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).

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.