Recent Changes in Insurance Regulation

The last half of the 20th century witnessed rapid changes in the insurance industry. Life insurance companies developed variable annuities as retirement vehicles. Health maintenance organizations (HMOs) evolved from private employers’ in-house clinics into giant for-profit providers of managed health care. As the century ended, the long-standing separation of the banking, security brokerage and insurance industries was repealed.

The Financial Services Modernization Act of 1999, also called Gramm-Leach-Bliley, overturned the Glass-Steagall Act. Glass-Steagall was passed as a response to the collapse of the financial structure during the Great Depression. That Act prohibited banks from owning insurance companies and required separation of merchant banking from commercial banking activities.

Due to mergers between various financial institutions — spurred particularly by the merger of Citigroup and Traveler’s Insurance — Congress repealed Glass-Steagall’s restrictions, opening up multi-faceted financial services firms offering integrated banking, brokerage and insurance products to their customers.

The federal government retained primary jurisdiction over banking and security activities and the states were left in control of insurance. The new law requires the states to act more uniformly, in particular the licensing of agents. If a majority of the states did not provide for reciprocity of non-resident agent licenses by 2002, the federal law threatened to impose a nationwide system of agent licensing.

As a result of these changes, the debate of state versus federal regulation continues. “States’ rights” advocates argue for continued state jurisdiction; those who view insurance as interstate commerce argue for repeal of McCarran-Ferguson and for uniform, enforceable nationwide regulation. Almost every Congress since 1977 has introduced a bill to repeal McCarran-Ferguson.

This debate continues amid political considerations: the desire of states to retain their jurisdiction, the federal government’s argument for more uniform centralized regulation, and the insurance industry’s preference for less-intrusive governmental regulation. The NAIC balances on the tightwire: trying to preserve state regulation by increasingly centralizing insurance regulations into a nationwide system.

In summary, under the McCarran-Ferguson Act, insurance regulation in the United States is, in reality, a patchwork quilt of state-by-state laws — coordinated to some extent by the National Association of Insurance Commissioners (NAIC). In addition, some aspects of insurance regulation are subject to federal mandates that supersede those state laws.