History And Nature Of Regulation

Insurance regulation in the United States has progressed from the period in which only a special legislative charter was required to form a new company through the period during which companies were required to furnish reports relating to financial condition to the era of comprehensive regulation by state insurance departments. 

The development and scope of present day regulation have been influenced profoundly by two cases argued before the United States Supreme Court. The first, Paul v. Virginia, decided in 1869, upheld a Virginia statute requiring the licensing of insurance agents.1 In its decision the court determined that the business of insurance was not commerce under the U.S. Constitution, and thus insurance would not be subject to federal control. This left the control of insurance in the hands of the individual states. It would be incorrect to assume that Paul v. Virginia settled the issue of federal versus state regulation as the period from 1869 to 1944 was replete with cases challenging the validity of Paul v. Virginia and with proposals for federal legislation designed to bring insurance under federal control. In fact, Paul v. Virginia was instigated in a sense by the proponents of federal control. During this same period, there were several investigations of the insurance industry. One of the most influential, especially for life insurers, was the Armstrong Investigation of 1905. The investigation, which centered on the life insurance business, revealed unethical practices and serious abuses of trust. Although the inquiry was made in New York, the impact of the findings led to state laws which affected almost every facet of the entire life insurance industry. The criticisms of state regulation and the activities of some elements of the insurance community eventually led to a second case, United States v. South-Eastern Underwriters Association.2 This case involved a charge by the Department of Justice that the South-Eastern Underwriters Association, an association of stock fire insurers, was conspiring to fix premium rates and insurance agents’ commissions. However, the initial litigation associated with the case focused on the jurisdiction of the federal government over insurance. In ruling on this question, the Supreme Court overturned a lower court and the Paul v. Virginia decision by declaring that insurance was interstate commerce under the Constitution and subject to federal control. 

The immediate result of the decision was confusion and consternation over the validity of existing state insurance laws and the applicability of federal antitrust statutes such as the Sherman and Clayton Acts. However, within a year of the SEUA case
(i.e., on March 9, 1945), Congress enacted the McCarren Act, or Public Law 15. In essence, the Act attempted to accomplish two objectives: first, to establish the right of the states to control the business of insurance irrespective of the fact that the federal government had the ultimate authority and, second, to place pressure on the states to improve their regulatory codes and practices. These objectives were carried out by making federal antitrust laws applicable to insurance to the extent that the insurance business was not regulated by the states. Thus, the states were faced with the choice of losing their authority or improving the quality of their regulatory efforts. 

The response of the states was to enact more comprehensive insurance laws and thus exercise a tighter rein over the business. It is important to note that the specific regulation of the life, health, and accident insurance industry was left relatively undisturbed. This resulted from the fact that the Armstrong Investigation had already led to imposition of many new laws. In addition, rate competition was generally effective in the life, health, and accident fields. 

The McCarren Act has not settled the controversy of state versus federal regulation. Since 1945 there have been several investigations of the insurance business by United States Senate subcommittees. There have been attempts also by various federal agencies, such as the Federal Trade and Securities and Exchange Commissions, to regulate certain aspects of the insurance business. The Securities and Exchange Commission has been successful in controlling the sale of variable annuities. While it is impossible to describe all the pros and cons of state regulation, it is vital to realize that some areas of state regulation need to be strengthened and streamlined. Possibly the most appropriate way to describe the present regulatory situation is that the states are regulating the insurance industry with the approval of the federal government but under its watchful eye.