LETTER FROM WASHINGTON
Why Congress will have a Hard Time with Insurance Reform Legislation
By Robert H. Myers, Jr.
Discussed previously in this column (and by other writers) is the need for insurance regulatory reform legislation. While Congress has been overwhelmed by the state of the economy and the demands of the new Administration, it has found time to hold several hearings on insurance regulatory reform. Needless to say, many Congresses in the past have held hearings on the topic, and numerous “think tanks” and the Government Accountability Office have done studies and issued papers about various aspects of the system.
The McCarran Ferguson Act has been in effect since 1945. Since that date, Congress has scored only a few dents in the armor of state insurance regulation. They can be counted on one hand. For example, the federal securities law intrudes upon the business of insurance to the extent that insurance contracts are “investment” vehicles. 15 U.S.C. §§ 80a-1 et seq.; 15 U.S.C. §§ 77a et seq. ERISA preempts state law regarding employee benefits but, for the most part, leaves the insurance aspects in the hands of state regulators. 18 U.S.C. §§ 1001 et seq. The Liability Risk Retention Act (“LRRA”) preempts non-domiciliary state regulatory authority over a risk retention group, but the authority of the state of domicile is in no way preempted. 15 U.S.C. §§ 3901 et seq. The Terrorism Risk Insurance Act (“TRIA”) authorized the U.S. Treasury to oversee the TRIA program, which involves preemption of a limited amount of state law. 15 U.S.C. § 6701 note; 116 Stat. 2326.
Why have there been so few successful efforts to remove insurance regulation from the grip of the states? It certainly has not been for lack of trying. There has been a serious effort to authorize federal chartering of life insurance companies for at least a decade. Several years ago the House Energy and Commerce Committee explored mechanisms to mandate state uniformity through the so called “SMART” Act. In the more distant past (the late ‘80s and early ‘90s), the so called “Dingell Hearings” lambasted state regulation for its perceived shortcomings.
While there are numerous reasons that reform efforts have not succeeded at the federal level, the foremost among them is that state insurance regulation is not only complicated, but is firmly entrenched within the fabric of state government. Insurance regulation has created a body of state law, both statutory and case law, reaching back over 100 years. Moreover, state insurance commissions (state agencies) have been issuing regulations and bulletins interpreting that body of law for a comparable period of time.
Just as importantly, the premium tax is a major source of revenue for many states. Any federal takeover of insurance regulation would necessarily undermine this continuing stream of state revenue.
As a result, just trying to draft legislation that would preempt state law and deliver insurance regulation into the hands of the federal government is extremely difficult. The efforts to draft federal chartering legislation reflect this problem.
Insurance regulation involves not only the complicated business of solvency oversight, but also market conduct regulation. Does the federal government really want to takeover both of those complicated functions, which result in so much intimate contact with not only the regulated companies, but with individual consumers?
Implementation of federal preemption (e.g. LRRA, ERISA and TRIA) has been difficult at best. The state regulatory system has been built up over decades. These legislative efforts have shown that it is difficult to surgically remove any aspect of the insurance business from state oversight, no matter how sharp the scalpel.
The most recent example of botched surgery occurred in the last Congress (the 110th) with H.R. 5611, also known as “the National Association of Registered Agents and Brokers Reform Act of 2009” or “NARAB II.” NARAB II would have established an association for the purpose of facilitating national licensing of agents and brokers in the form of a not-for-profit corporation. The members of the board of the corporation would be allocated among regulators and designated industry representatives.
NARAB II seemed to be well on its way to passage until the Office of Legislative Affairs of the Department of Justice issued a letter in October 2008 pointing out that H.R. 5611 was unconstitutional. It not only violated the Appointments Clause of the U.S. Constitution by unlawfully delegating authority to non-politically responsive private officials, but it also violated the separation of powers among the Executive and Legislative branches by mandating that an entity (NARAB) created by legislation, but under the supervision of the Chief Executive (the President), was also subject to the supervision of the Congress.
NARAB II is just one example of how difficult it is to maintain any state-based control of insurance regulation when faced with federal preemption.1 It is very hard to avoid dual regulation, as the history of ERISA and the LRRA amply demonstrate.
Accordingly, Congress is caught in a trap. It does not want to have the federal government take on the full regulation of the business of insurance but, on the other hand, finds it difficult to carve out pieces of the business to regulate without becoming ensnared in the complications of state regulation.
State regulation may not be efficient, but it does work. Federal regulation might be efficient, but one has to question how well it would work, given the experience with the savings and loan crisis of the ‘80s and the current crisis in the financial markets.
That’s the conundrum.
Robert “Skip” Myers is Co-Chairman of the firm’s Insurance and Reinsurance Practice and focuses in the areas of insurance regulation, antitrust, and trade association law. Skip received his bachelor’s degree from Princeton University and his law degree from the University of Virginia.
1As of this writing, a revised version of NARAB II has been drafted with the express purpose of avoiding the Constitutional problems of its predecessor. It was introduced into the 111th Congress as H.R. 2554 on May 21, 2009.
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