The meltdown of the financial markets has created a new environment for federal reform of insurance regulation. Ever since the passage of the McCarran-Ferguson Act of 1945, Congress has toyed with reforming the regulation of insurance. However, there is now an alignment of interests favorable to changing the way financial services (including insurance) are regulated. The collapse of the credit markets and the devastation of the values of publicly traded companies likely will result in the reorganization of the financial services business, and insurance regulation will be drawn into this process.
The 110th Congress is scheduled to have a “lame duck” session. It is extremely unlikely that any insurance reform legislation will be addressed at that time. This Congress has acted on a variety of insurance regulatory reform proposals, e.g. surplus lines and reinsurance reform (H.R. 1065); national optional federal chartering (S. 40); national registration of insurance agents (H.R. 5611); establishing an office in the Treasury to oversee and gather information about insurance regulation (H.R. 5480); and expansion of the Liability Risk Retention Act (H.R. 5792). Several of these proposals made progress, but none passed.
The 111th Congress will take office in January. It will likely consider those issues referenced above but in the context of overall financial services reform. In other words, Congress will consider much broader and more inclusive issues.
It is charitable to say that the legislative process is imperfect. Because Congress has relatively little experience with the insurance industry, the opportunities for missteps and outright bad legislation is increased. The “law of unintended consequences” should be foremost in every legislator’s mind.
A good example of this is what happened to the legislation to facilitate the multi-state licensing of insurance agents known as “NARAB II” (H.R. 5611). This legislation would have created a non-profit organization that would have been granted limited authority regarding agent licensing. In the 110th Congress, the bill was moving with great speed and momentum. It had been reported out of the relevant House committee and had been sent to the floor of the House to be passed on the “consent calendar.” H.R. 5611 was supported by a coalition of insurance trade associations as well as the NAIC (which had obtained favorable amendments of the original proposal).
During the legislative process, only one group noted that H.R. 5611 had a significant problem; more specifically, it was unconstitutional. The National Association of Professional Insurance Agents (“PIA”) pointed out that the draft legislation would implement an unlawful delegation of authority to the members of the board of NARAB because they would be “politically unaccountable.” This would violate the “Appointments Clause” of the United States Constitution. H.R. 5611 also had problems related to the “Separation of Powers Doctrine,” i.e., Congressional involvement in executive branch functions.
Because the political compromise had been struck, this point of view was particularly unpopular and universally ignored until the Department of Justice (Office of Legislative Affairs) issued an opinion in the form of a letter dated October 1, 2008, articulating why the legislation was unconstitutional. The result, of course, is that H.R. 5611 has been sent back to the shop to be rebuilt so that it can pass constitutional scrutiny.
This is an example of just one of the many pitfalls that must be avoided in any legislative effort to implement insurance regulatory reform. The road to reform will be a bumpy one. Nonetheless, a larger federal role in the regulation of insurance will be high on the agenda of the 111th Congress. Congress generally needs either a consensus or a crisis to act. The 111th Congress may have both.
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.