Right to regulate: amid claims the federal government should oversee insurance companies, state lawmakers say consumers are better off with them in charge.

• Author: Morton, Heather

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The near-collapse and rescue of insurance giant AIG last year has renewed a long-simmering effort to switch authority for regulating the insurance industry from states to the federal government.

Proponents argue that insurance regulation is too complex for individual states to handle, and allowing the companies an option to be regulated by the federal government would streamline regulation and be good for consumers.

Opponents maintain state regulation has been effective, that the federal government could not cope with the workload, and that consumers are better off with state oversight. In fact, state regulation prevented even larger problems last year, says Maryland Senator Delores Kelley.

"During the recent financial meltdown, no state-regulated insurer was found lacking in sufficient reserves or was in need of a federal bailout," she says, "including companies that are subsidiaries of AIG."

A parallel effort, supported by the Obama administration and opposed by many state lawmakers, would create a national office of insurance information that would provide a central clearinghouse for data and policy.

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The move toward federal legislation is "a continuation of a long-term effort to move insurance regulation to the federal government," says Tom Baker, a professor of Law and Health Sciences at the University of Pennsylvania Law School. "What is more important is how we regulate insurance rather than where we regulate insurance."

HISTORY OF STATE REGULATION

State regulation of insurance was unquestioned until 1944 when the Supreme Court decided insurance, when conducted across state lines, was interstate commerce and subject to federal regulation. Following the decision, Congress in 1945 enacted the McCarran-Ferguson Act, which reinstated state regulation of insurance. It clarified the states' power to tax insurance and limited the application of federal antitrust laws to the insurance business. The act operates as a reverse preemption; a federal law must specifically relate to insurance in order to preempt a state law.

FEDERAL CHARTER

The move toward bigger changes began with legislation in 2002 to create an optional federal charter for insurers. Legislation also has been introduced that would create a National Insurance Office within the Department of Treasury.

The optional federal charter would create a dual state and federal insurance regulatory system, similar to the system for banks and credit unions. Just as those institutions can choose to be chartered by a state or the federal government, insurance companies would make the same choice.

Numerous banking and insurance associations favor a dual system. They believe it would be good for consumers, help the United States in its global competitiveness and improve the effectiveness of the regulatory system.

The federal charter...