Federal Government's Role
The regulation of the insurance industry is done principally by the state insurance departments. These departments license agents and insurers, and they supervise agent and company sales practices. As a result of this pervasive state presence, few people give much thought to the role the federal government plays in the regulation of the insurance industry.
Despite this predominance of state regulators, the federal government exerts regulating control over the insurance industry in four principal ways. Federal government influence in the insurance industry is wielded through:
the powers reserved to it under the McCarran-Ferguson Act,
the Internal Revenue Code and its tax provisions applying to insurers and insurance products,
health insurance and pension legislation, and
SEC regulation of insurance products considered securities.
The federal government retains the power to control the insurance industry under the McCarran-Ferguson Act to the extent that the issues involved are deemed to be national in character. Overseeing state regulation of the insurance industry is a power reserved to the federal government. Although the states are specifically charged with the responsibility of regulating matters relating to ethical conduct of insurance agents, the federal government could consider it to be of sufficient national concern to step in. There has been little federal interest up to this point, however, in taking over the job of supervising agent conduct.
The role of the federal taxing authority is very familiar to those practitioners whose career is principally on the life insurance side of the industry. The tax treatment given to products sold by life insurers, particularly the tax-favored cash value growth and income tax-free death benefits, often play an important role in the sale of substantial amounts of life insurance. Furthermore, the Internal Revenue Code also contains specific provisions concerning the taxation of mutual and stock insurance companies. Since taxation can significantly affect any product or industry, it becomes clearer just how important this area of regulatory influence is.
The third area of federal influence concerns its ability to legislate in the areas of health insurance and pensions. In the area of health insurance, the federal government created standards for Medicare supplement policies first and then established criteria for qualified long term care policies. Subsequently, the passage of the Health Insurance Portability and Accountability Act (HIPAA), further defined the health insurance playing field. Recently, the Economic Growth and Tax Relief Reconciliation Act of 2001 made significant changes to pension regulation and contribution limits to qualified plans. Some observers expect that the federal government's move towards standardization will eventually apply to basic health care plans.
The federal government, through the SEC, exerts considerable influence in both licensing and product registration of securities products, and that influence is increasing in the insurance industry due to the many new insurance products that have a dual character as insurance products and investment products. Although the federal government has considerable power to affect the insurance industry through regulation, the major burden of insurance regulation falls to the states.