Federal Government's Role
While states play the primary role in regulating the insurance industry, the federal government exerts control over the insurance market -- directly and indirectly -- in four areas:
the Internal Revenue Code and its special tax treatment of insurance products,
health insurance and pension legislation (most notably HIPAA and ERISA),
regulation of insurance products considered securities by the Securities Exchange Commission, and
the powers reserved to it under the McCarran-Ferguson Act,.
The tax code provides insurance products special tax treatment: such as tax-deferred growth of cash values within life insurance and annuities, income tax-free death benefits, and deductions for employers who provide group health insurance. These often play an important role in the sale of insurance. Furthermore, the Internal Revenue Code also exerts control over taxation of mutual and stock insurance companies. Taxes provide incentives and disincentives, and changes in tax policy can significantly affect how the insurance market evolves.
A second area of federal influence relates to the areas of health insurance and pensions. The federal government enacted Medicare and Medicaid -- a basic health care framework for the elderly and poor. The insurance industry responded with products that work in concert with that federally-created and administered framework, such as Medicare supplement policies and qualified long term care policies. Subsequently, the passage of the Health Insurance Portability and Accountability Act (HIPAA), further defined the health insurance playing field. ERISA (The Employee Retirement Income Security Act) applies to employer provided benefit programs such as pensions and health care plans offered by HMOs. 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.
Lastly, the federal government retains the power to control the insurance industry under the McCarran-Ferguson Act. This law was passed in response to a Supreme Court decision in 1945 that declared insurance to be "interstate commerce" subject to federal jurisdiction. The McCarran-Ferguson Act effectively overturned that decision, leaving most insurance regulation to the states, but retaining federal jurisdiction to the extent that the issues involved are deemed to be national in character. So, ultimately, oversight of state insurance regulations 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 -- as is the case of the Gramm-Leach-Blily Act (or Financial Services Modernization Act), which provides for standardized nationwide licensing requirements of insurance agents and privacy of customer information
If these federal and state regulations were the only rules that applied to agent and insurer marketing practices and conduct, they would be sufficient to hold both agents and their companies liable for errors and omissions. Insurers, however, have liability for agent conduct that predates these laws. That liability derives from the common law and its concept of agency.