August 3rd, 2009

Modernizing the U.S. Insurance Regulatory Structure, Part I: State of Regulation

Posted at 8:00 AM ET

Financial Intelligence Team

Though Benjamin Franklin created the first insurance “company” in the mid-eighteenth century, it took another 100 years for insurance regulation to develop formally. New Hampshire established its state regulator in 1851 … and the U.S. state insurance regulatory system had been born.

Just short of a century later, the U.S. federal government solidified the states’ role in managing insurance business within their borders. The 1945 McCarran-Ferguson Act declared that states should remain the central regulators of the insurance industry. State legislatures were officially granted responsibility for setting broad policy and managing oversight of insurers. Any coordination among states would be conducted through the advisory body of the National Association of Insurance Commissioners (NAIC), which had been established in 1871.

The system worked reasonably well for many years, even though insurers struggled with the administrative burden of complying with the requirements of more than 50 jurisdictions and the resulting patchwork approach to regulation. Eventually, however, as the global financial services industry evolved, regulation needed to change as well. The Financial Modernization Act of 1999 (also known as Gramm-Leach-Bliley) set out to reform the financial services industry by expanding the types of business different institutions could conduct. For example, commercial banks, investment banks, securities firms, and insurance companies were permitted to consolidate. The act also called on state regulators to reform policy so that insurance companies could better compete in the newly integrated financial services marketplace. Although this act left untouched state-level insurance regulation, the federal toe had inched its way under the state regulatory tent.

Over the years, the argument for insurance regulation reform has grown louder and more difficult to ignore. In 2008, then U.S. Treasury Secretary Henry Paulson called for an optional federal charter citing a “clear need for regulatory modernization.” Gradually, movement was being made toward productive federal-level adjustments to the regulatory system to reflect the increased sophistication, worldwide reach, and integration of the insurance marketplace.

But it was not until this year that true change to the traditional U.S. state-based insurance regulatory system seemed imminent. Although the recent White House proposal does not dictate a switch to an optional federal charter, it leaves the option open to Congressional action. The extent of change to the insurance regulatory system remains undetermined, but there seems little doubt that a transformation is in the works and that this year is likely to usher in a new regulatory foundation.

Tomorrow, we’ll take a closer look at the White House proposal and the Congressional considerations that could shape the variation that is likely to be voted on later this year.

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Statements concerning, tax, accounting, legal or regulatory matters should be understood to be general observations based solely on our experience as reinsurance brokers and risk consultants, and may not be relied upon as tax, accounting, legal or regulatory advice which we are not authorized to provide. To the extent that you discuss such statements with your clients, be sure to advise your clients that all such matters should be reviewed with their own qualified advisors in these areas.

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