The Future of Insurance Regulation in the United States

The Future of Insurance Regulation in the United States

MARTIN F. GRACE
ROBERT W. KLEIN
Copyright Date: 2009
Pages: 240
https://www.jstor.org/stable/10.7864/j.ctt1262wz
  • Cite this Item
  • Book Info
    The Future of Insurance Regulation in the United States
    Book Description:

    Important changes have buffeted the insurance industry over the past decade. The 1999 repeal of key provisions of the Glass-Steagall Act unleashed a wave of conglomeration in financial services, as bank holding companies acquired insurance and securities businesses and, to a much lesser degree, insurance companies acquired securities firms and banks. Rivalry within the sector has intensified: insurance companies have developed products that compete directly with the offerings of banks and securities firms and vice versa. In addition, the industry has become increasingly global.

    Against this backdrop, pressure has been building for fundamental changes to the structure of insurance regulation in the United States. Despite several court challenges over the years, insurance continues to be regulated by the states. Many insurance companies view state regulation as an increasing drag on their efficiency and competitiveness and support a federal regulatory system. However, powerful stakeholders, including state officials, state and regional insurance companies, and many insurance agents, oppose federal regulation. As a result, proposals to establish an optional federal charter (OFC) for insurance companies and agents remain mired in fierce debate.

    The Future of Insurance Regulation in the United States gathers some of the country's leading experts on financial regulation to assess the case for an enhanced federal role in the insurance sector. They pay particular attention to the merits of an OFC and how it might be designed. They also consider the principles that should guide insurance regulatory policies, regardless of the institutional framework, and examine the implications of financial convergence and the internationalization of insurance markets for an optimal regulatory structure.

    The debate over insurance regulation has only grown in complexity and intensity since the financial crisis began in the fall of 2008. This book will both inform and help to shape those critical discussions.

    Contributors: John A. Cooke (International Financial Services London), Robert Detlefsen (National Association of Mutual Insurance Companies), Martin F. Grace (Georgia State University), Robert W. Klein (Georgia State University), Robert E. Litan (Ewing Marion Kauffman Foundation and Brookings Institution), Phil O'Connor (PROactive Strategies), Hal S. Scott (Harvard Law School), Harold D. Skipper (Georgia State University), Peter J. Wallison (American Enterprise Institute).

    eISBN: 978-0-8157-0386-0
    Subjects: Business, Political Science

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Preface
    (pp. vii-viii)
  4. 1 The Future of Insurance Regulation: An Introduction
    (pp. 1-12)
    Martin F. Grace and Robert W. Klein

    The question of who should regulate the insurance industry has been debated in the United States since the time of the Civil War. Insurance continues to be regulated by the states despite several challenges to their authority over the years. The states’ authority over insurance was supported in various court decisions until theSoutheastern Underwriterscase in 1944.¹ In that case, the Supreme Court determined that the commerce clause of the Constitution applied to insurance and that insurance companies (and agents) were subject to federal antitrust law. The Court’s ruling caused the states and the industry to push for the...

  5. 2 The Insurance Industry and Its Regulation: An Overview
    (pp. 13-52)
    Robert W. Klein

    Insurance regulation in the United States has been steeped in controversy over its 200-year history. In its early years, industry and regulatory failures prompted reforms and the coalescence of insurance oversight into a state regulatory framework. Beginning in the mid-1800s both the industry and its state regulators have been subject to a series of federal challenges. The states’ regulatory authority was reaffirmed in these challenges, most recently with the passage of the McCarran-Ferguson Act (MFA) in 1945.

    However, as the insurance industry has evolved, its support for state regulation has eroded, and large segments of the industry now support the...

  6. PART ONE Framework for Insurance Regulation

    • 3 An Optional Federal Charter for Insurance: Rationale and Design
      (pp. 55-96)
      Martin F. Grace and Hal S. Scott

      Since the early nineteenth century the states have been the principal authority for the regulation of the U.S. insurance industry. In contrast to other financial services such as securities and banking, Congress has not sought to exercise either concurrent or preemptive authority over insurers on a wide scale.¹ Indeed, the McCarran-Ferguson Act of 1945 explicitly found state regulation of insurance to be in the public interest and provided that no federal law should ”invalidate, impair, or supersede” any state insurance regulation or tax.² Recently, however, and particularly in the wake of the Gramm-Leach-Bliley Act of 1999, many insurers have proposed...

    • 4 Dual Insurance Chartering: Potential Consequences
      (pp. 97-114)
      Robert Detlefsen

      The release in March 2008 of the U.S. Treasury Department’sBlueprint for a Modernized Financial Regulatory Structureadded fuel to a long-simmering debate over the relative merits of state and federal insurance regulation.¹ The blueprint was developed in response to concerns expressed by some policymakers and capital market participants that the current financial services regulatory structure is ill suited to the globalization of capital markets and the increasing complexity of new products. Examining the history and current status of U.S. financial regulation, the blueprint focuses on four sectors: depository institutions, futures, securities, and insurance. The blueprint’s verdict on insurance is...

  7. PART TWO Insurance Regulatory Policies

    • 5 Insurance Regulation: The Need for Policy Reform
      (pp. 117-144)
      Martin F. Grace and Robert W. Klein

      Beyond the push for increasing the federal role in insurance regulation, there is strong pressure for reforming insurance regulatory policies. Indeed, proponents of an optional federal charter (OFC) for insurance envision that federal officials would adopt policies that would significantly diverge from current state regulatory policies in a number of key areas. At the same time, the creation of an OFC would still leave an optional state framework in place, and the states would need to reconsider their regulatory policies in a new environment. Further, the constituency for improving insurance regulation extends beyond OFC proponents to segments of the industry...

    • 6 Consumer Benefits of an Optional Federal Charter: The Case of Auto Insurance
      (pp. 145-164)
      Robert E. Litan and Phil O’Connor

      A key element of most legislative proposals to establish an optional federal charter (OFC) for insurers is that market competition rather than government regulation would set insurance rates. Insurers choosing the federal charter, therefore, would be free to set premiums based on their actuarial calculations of risk and other competitive considerations. The market would discipline insurers and, as in other sectors, would keep premiums in line with claims, other expenses, and a reasonable allowance for profit (taking account of the relative risks involved in underwriting particular kinds of insurance).

      In fact this is how insurance rates are generally set today...

  8. PART THREE Insurance Regulation, Financial Convergence, and International Trade

    • 7 Convergence in Financial Services Markets: Effects on Insurance Regulation
      (pp. 167-188)
      Peter J. Wallison

      Convergence in financial services refers to two quite different developments, each of which is likely to have a different but cumulative effect on regulatory structure. The most obvious form of convergence is conglomeration among banks, securities firms, and insurance companies, an effect that is largely the result of banking organizations—freed to do so by the Gramm-Leach-Bliley Act of 1999 (GLBA)—acquiring insurance and securities affiliates. To a much lesser extent, insurance companies have acquired securities firms, and in even fewer transactions, securities firms and insurance companies have acquired banks. The second form of convergence is in products and services,...

    • 8 U.S. Insurance Regulation in a Competitive World Insurance Market: An Evaluation
      (pp. 189-220)
      John A. Cooke and Harold D. Skipper

      There are long-standing charges that U.S. insurance regulation acts as a barrier to entry and discriminates unfairly against foreign insurers, resulting in a less competitive and robust national insurance market. Simultaneously, many U.S. insurers believe that the U.S. regulatory system hampers them in international competition and that other countries cite it to justify their own trade barriers against them. This chapter addresses these and related issues in the context of the proposal for an optional federal charter (OFC) for insurance companies.

      The OFC proposal needs to be examined in the context of insurance regulation at the national and international levels....

  9. Contributors
    (pp. 221-222)
  10. Index
    (pp. 223-232)