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security brokerage and insurance industries, which resulted from financial collapses during the Great Depression, was repealed.   In 1956, the Securities and Exchange Commission argued successfully for joint state-federal regulation of variable annuity contracts.   In 1974, Congress enacted the Employee Retirement Income Security Act (ERISA) to govern private-sector pension plans and employee benefit programs such as HMOs. [ERISA is discussed in greater detail later in this chapter.] The  Financial Services Modernization Act of 1999 imposed increased uniformity on state regulation of insurance, but by and large left insurance in the hands of state regulators.  While recent Supreme Court decisions have overturned state prohibitions against banks selling insurance products.


 The  Financial Services Modernization Act of 1999, also called Gramm-Leach-Bliley, overturned the Glass-Stegel Act.  Glass-Stegel was passed as a response to the collapse of the financial structure during the Great Depression.  This Act prohibited banks from owning insurance companies and required separation of merchant banking (securities underwriting) from commercial banking activities -- as these were believed to have accelerated the collapse.  Due to mergers between various financial institutions, and spurred particularly by the merger of Citigroup and Traveler’s Insurance, Congress repealed Glass-Stegel’s restrictions, opening up multi-faceted financial services firms offering integrated banking, brokerage and insurance products to their customers.  This legislation attempts to increase uniformity in the regulation of related financial institutions.  As part of the reformed regulatory regime, the federal government retained primary jurisdiction over banking and security activities and the states were left in control of insurance.  The new law does require 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. Florida enacted reciprocity reforms in 2002, as did a majority of the states.  The net effect of this law is that the states retained jurisdiction, subject to a federally mandated uniformity clause.    Specifically, Florida now accepts the NAIC’s “Uniform Application” for licensure of nonresident agents and allows for transfer of an agent's license from another state if the agent becomes a resident of Florida.

 Two United States Supreme Court rulings, prior to 1999’s passage of The  Financial Services Modernization Act, opened the insurance and annuity markets to banks and other financial institutions.  One of those cases, Barnett Bank v. Nelson, directly overturned a Florida law that prohibited the sale of insurance products by banks.  The other case, NationsBank v. Variable Annuity Life Insurance Company (VALIC), allowed national banks (operating under a federal charter and subject to the federal Comptroller of the Currency's jurisdiction) to avoid state regulation of the sale of variable annuities.  These cases added to the growing calls for  reform of financial industry regulations, leading to The  Financial Services Modernization Act of 1999.


Regulation Today

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.  These efforts have failed, in part, due to the efforts of the NAIC (National Association of Insurance Commissioners) to “impose” some level of uniformity on the states.  As reported in the Wall Street Journal:  “many insurers believed that national regulation was creeping up on them in the unlikely form of the National Association of Insurance Commissioners...[which was] armed with its own computer resources and a talented staff that was increasingly tackling consumer-oriented issues.”

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 (and a natural desire to be regulated by whoever is perceived as the weaker regulator -- prior to World War II that was the federal government, since then the states have been seen as less-stringent regulators).    The NAIC balances on the  tightwire: trying to preserve state regulation by increasingly centralizing insurance regulations into a nationwide system.

In summary, under 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.  It has been relatively easy for unscrupulous operators to exploit the seams within this confusing patchwork of rules and laws -- and bilk thousands of unsuspecting consumers out of millions of dollars by selling “phony” insurance plans.  In 2002, as a response to this trend, the Florida legislature increased the penalties for companies and agents who sell “phony” insurance.