Lately we have been having discussions with lots of new carriers, insuretech vendors, and existing carriers in which the word Byzantine comes up. The context is usually regulation and the comments go something like this:
“The way the U.S regulates insurance today is absolutely Byzantine. You have fifty states plus D.C plus the Feds. The patchwork of rules and regulations is confusing. My systems can’t handle it. Hopefully the feds will come in and regulate this stuﬀ and rationalize the stack.”
I hadn’t thought about insurance regulation in any meaningful way, because Instec has configuration tools that allow users to easily configure rates, rules, and forms by state. But as I kept hearing these comments, I wondered what the odds were that the federal government would step in and overhaul the insurance regulatory world.
Historically, insurance has been regulated at the state level. In 1851, the first state commissioner of insurance was appointed in New Hampshire. At a time of states’ rights, it seemed only logical that states would regulate the market. Also in the states’ favor was the fact that insurance was a contract between two parties which, unless it crossed state boundaries, was under state jurisdiction. Moreover, many risks are geographically dependent, and best regulated at the state level. (i.e., You don’t get hurricanes in Illinois. Snow storms, yes). This view was confirmed by the U.S. Supreme Court in 1869 with the Paul vs Virginia decision, which ruled that Congress has no power to regulate insurance under the Constitution’s commerce clause.
All was well until 1944 when the same Supreme Court upset the apple cart by ruling that insurance was subject to certain federal legislation, in the case of United States vs. South-Eastern Underwriters Association. That prompted Congress to pass the McCarran-Ferguson Act which reaﬃrmed that insurance was to be regulated at the state level. Since then, with few exceptions, such as TRIA, insurance regulation has been handled by the states, with each state having its own insurance commissioner, and each commissioner a member of the National Associate of Insurance Commissioners (NAIC).
So, what’s the problem? It seems that while the states have made progress toward standardizing some portions of regulation, there still exists a wide latitude between states, particularly in rate regulation. Some states are quite strict, while others are loose. The solution to this problem would be to have the federal government regulate insurance via the Optional Federal Charter (OFC). However, even if the feds regulate insurance, they would still need to vary rates by state (because of the geography of risks problem) and given their regulation of the banking environment, I’m not sure the states would trust them with insurance.
So, at this point, I do not see the federal government stepping in any time soon. I’m left with the opinion that the best that will occur will be a hybrid regulatory scheme (dual charter) where the states still regulate most rates, rules, and forms and the federal government addresses national risks such as terrorism. For Instec that means continuing to improve our best-in-class configuration tools to continue to enable users to easily configure rates, rules, and forms at the state level.