The Fatal Flaw of Proposals to Federalize Insurance Regulation

Elizabeth F. Brown, University of St. Thomas

Abstract

While the federal government has had the option of regulating insurance since the decision by the U.S. Supreme Court in the United States v. South-Eastern Underwriters Ass’n, 322 U.S. 533 (1944), the states have retained almost exclusive control over insurance regulation. Within the past seven years, Congress, however, has considered three different methods of federalizing insurance regulation. Some members of the insurance industry see these efforts to federalize insurance regulation as a means of eliminating the problems in the current state system, which they view as costly, cumbersome and confusing.

In the Congressional hearings on federalizing insurance, both opponents and proponents of federalizing insurance have discussed insurance as if was a completely, “unique” financial service. Both sides, however, are mistaken to hold this view of insurance. Insurance is no longer a unique financial service. Today it is part of a continuum of financial services and products that are increasingly fungible with one another. None of the current proposals to federalize insurance recognizes the extent to which the boundaries between insurance products and other financial services products have disappeared. As a result, the current proposals will not adequately address the problems facing regulators in the future.

This article will discuss three alternative structures that would place the regulation of insurance in the context of the evolving financial services industry. Each of these structures offers advantages over both the other proposals to federalize insurance and the current system of state regulation. These structures offer several advantages over the current structure and the proposals to federalize insurance, because, among other things, they would better reflect how the financial services industry operates than the existing structure, would reduce the total number of agencies regulating financial services, and would reduce the problem of agency capture. If the United States is going to federalize insurance, it should adopt a structure that recognizes the current realties of the financial services industry and not one that memorializes how the industry operated decades ago.