Regulating the Business of Insurance in a Federal System

Joseph F. Zimmerman

Description

In Regulating the Business of Insurance in a Federal System, Joseph F. Zimmerman provides an up-to-date historical description and analysis of the regulation of the business of insurance in the United States. He focuses on the controversial issue of whether Congress should authorize optional federal charters for insurance companies, thereby establishing a dual charter system superficially similar to the dual banking system. Reviewing the evidence between federal and state level regulation of the financial securities industry, Zimmerman finds that federal regulation falls woefully short of its state counterpart. He concludes that the current system, rather than the proposed dual insurance regulatory system, is the most efficient and effective.
Preface
Acknowledgments

1. The Business of Insurance

2. State Regulation of the Business of Insurance

3. Criticisms of State Insurance Regulation

4. State Uniformity Efforts

5. A Dual Insurance Regulatory System

6. Regulating the Business of Insurance

Notes
Bibliography
Index

Sujets

• USA
• United States of America
• Central government
• Region
• Political economy
• Regional
• Central
• États-Unis
• National

Informations

• Publié par: State University of New York Press
• Date de parution: 09 décembre 2010
• Nombre de lectures: 0
• EAN13: 9781438433592
• Langue: English

Extrait

Regulating the Business of Insurance in a Federal System
Joseph F. Zimmerman

Published by State University of New York Press, Albany
© 2010 State University of New York
All rights reserved
Printed in the United States of America
No part of this book may be used or reproduced in any manner whatsoever without written permission. No part of this book may be stored in a retrieval system or transmitted in any form or by any means including electronic, electrostatic, magnetic tape, mechanical, photocopying, recording, or otherwise without the prior permission in writing of the publisher.
For information, contact State University of New York Press, Albany, NY www.sunypress.edu
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Library of Congress Cataloging-in-Publication Data
Zimmerman, Joseph Francis, 1928–
    Regulating the business of insurance in a federal system / Joseph F. Zimmerman.
          p. cm.
    Includes bibliographical references and index.
    ISBN 978-1-4384-3357-8 (hbk. : alk. paper)
    1. Insurance law—United States—States. 2. Insurance—United States—States—State supervision. 3. Insurance law—United States. 4. Insurance—United States—State supervision. I. Title.
    KF1164.Z56 2010
    346.73'086—dc22                                                                                                                                   20100181541
10 9 8 7 6 5 4 3 2 1

To Peggy with Love for Her Support
Preface
The business of insurance in the United States is a multitrillion dollar industry that is essential for the functioning of the economy and protection of business firms and individual policyholders. Historically, states regulated insurance firms and such authority to regulate was confirmed by the U.S. Supreme Court in 1869 when it opined the business of insurance was not interstate commerce. Although the court reversed this decision in 1944, Congress enacted the McCarran-Ferguson Act of 1945 devolving power to the states to regulate the business of insurance. Currently, all insurance companies are state-chartered and regulated.
Congress may remove regulatory powers from state and local governments by means of preemption statutes and has enacted six statutes removing insurance regulatory powers from the states commencing in 1974. The most important insurance preemption act is the Gramm-Leach-Bliley Financial Modernization Act of 1999 forbidding states to impose regulatory standards more burdensome than thirteen specified ones in the act. The act also contains a contingent preemption provision threatening to establish a federal system of licensing insurance agents if states failed to harmonize their licensing laws by a specified date. The act encouraged the National Association of Insurance Commissioners to initiate actions to harmonize state regulation of the business of insurance, including licensing of agents and to draft the Interstate Insurance Product Regulation Compact, which accelerates state approval of new insurance products.
Numerous large insurance firms, particularly international ones, continue to complain about nonharmonious state insurance regulation and support congressional enactment of a statute authorizing the issuance of an optional federal charter for insurance companies, thereby establishing a dual system of insurance regulation superficially similar to the dual banking system. The specific foci of this analytical work are two congressional bills authorizing issuance of an optional federal charter for insurance companies. This first book on the subject also presents five alternatives that Congress should consider when initiating action to harmonize state insurance regulation.
Acknowledgment
I express a special debt of gratitude to Addie Napolitano for her expert and prompt preparation of the manuscript for publication. In addition, I thank copy editor Therese Myers for improving the manuscript. Any errors of fact or misinterpretation are my sole responsibility.
1
The Business of Insurance
Insurance involves the spreading of risks and is traceable to the insurance of slaves by Antigenes of Rhodes during the reign of Alexander the Great and the contracts made for supplies provided to the Roman government at the time of Livy. 1 Marine insurance, which originated in Italian commercial cities in the fourteenth century, is the oldest type of insurance available today.
The Philadelphia Contributionship for Insurance of Houses from Loss by Fire, the first mutual insurance company in the United States, was established in 1752 by Benjamin Franklin and other prominent Philadelphia citizens who banded together to insure their properties. Property and casualty insurance companies in the nineteenth century sold primarily fire insurance. Subsequently, life insurance became a major part of the industry, and companies today issue a wide variety of policies including health, life, property and casualty, and retirement insurance. 2
Today, insurance products fall into two classes. Personal lines are the first class and include annuities, automobile insurance, health insurance, homeowner's liability, and life insurance. The latter differs in one major aspect from other types of insurance, that is, the risk increases with the life of the contract. Commercial lines are the second class and are primarily property and casualty insurance.
The business of insurance in recent years has undergone a fundamental transformation with the development of new communication and information technologies, new products, and increased competition. Today, the U.S. business of insurance is a $6 trillion worldwide industry that is essential for businesses and individuals, and is an important source of state revenue with approximately $12 billion in premium taxes and fees paid annually by insurance companies. In contrast, assets held by the banking industry total $12 trillion and assets held by the securities sector total $11 trillion prior to the worldwide financial crisis that emerged in 2008.
Chief executive Therese M. Vaughan of the National Association of Insurance Commissioners (NAIC) testified in 2009 before a subcommittee of the U.S. House of Representatives investigating the financial crisis and explained: “The nature of the insurance market and its regulatory structure make the possibility of systemic risk originating in the industry less than in other financial industries. In general, the insurance industry is more likely to be the recipient of systemic risk from other economic agents rather than the driving force that creates systemic risk.” 3
The industry continuously is undergoing rapid changes with increasing globalization of financial markets and the removal of the last of the legal barriers between banks and insurance companies by the Gramm-Leach-Bliley Financial Modernization Act of 1999 , which also authorizes a new type of financial institution: the financial holding company. 4 Approximately one-quarter of the approximately 700 financial holding companies are engaged in insurance agency activities and 5 percent are engaged in insurance underwriting.
The industry has premium revenues of more than $735 billion annually and provides policies for business firms, consumers, and governments in each state. 5 Life insurance coverage alone, for example, involves approximately 400 million policies with protection totaling $26 trillion 2009. In addition, citizens have retirement saving in excess of $2 trillion in the form of insurance companies' annuity products. Life insurance companies are one of the largest holders of long-term, fixed-rate commercial mortgages. The average life insurer in the mid-1970s received close to 87 percent of its premiums from the sale of life insurance compared to 13 percent from the sale of annuities. By 2004 the source of premiums changed to 70 percent coming from annuities and 30 percent from insurance. Life insurance companies currently administer approximately $2 trillion in retirement plan assets or more than one-quarter of the private retirement plan assets managed in the United States.
The number of licensed insurers in the 50 states exceeds 7,000, and the number of licensed domestic insurers and the number of licensed foreign insurers vary among states with the latter type of insurer constituting the bulk of the insurers. The number of insurance companies licensed to sell insurance in a particular state ranges from 900 to 2,000. Approximately 3.5 million persons are licensed by states to sell insurance, including independent agents who offer policies for two or more insurance companies, agents who sell policies only for specific companies, and brokers representing buyers who obtain the lowest premium prices for a given policy for their clients.
Numerous large insurance and other corporations established offshore global tax havens in small nation