Actuarial Notes

State and Federal Insurance Regulation

Study guides: Exam 6U, Exam GH-201U, Exam GI-302

State and Federal Insurance Regulation is the dual structure of U.S. insurance oversight: the states license, examine, review the rates and forms of, and if necessary liquidate insurers, while the federal government overrides state insurance law only through statutes that specifically relate to insurance, monitors the sector through the Federal Insurance Office, and runs a few insurance programs of its own. The NAIC coordinates the states but does not govern them.

\begin{gathered}\text{Federal act supersedes a state insurance law} \\ \Downarrow \\ \text{the act specifically relates to the business of insurance}\end{gathered}

  • The rule above is McCarran-Ferguson's "reverse preemption" (1945; see History of Insurance Regulation). A federal statute of general application cannot displace a state law regulating the business of insurance; only one written about insurance can. Federal antitrust law has its own carve-out, covered in Antitrust Law.
  • What the states do. Each state licenses insurers and producers, regulates rates, forms and market conduct for business written there, and collects premium tax. The domiciliary state carries the solvency load — financial examinations, Risk-Based Capital, holding-company filings, receivership — and other states rely on its work, which is what the NAIC accreditation program exists to make safe (Solvency Monitoring).
  • What the NAIC is. The standard-setting and support organisation of the chief insurance regulators of the 50 states, D.C. and five territories. It drafts model laws (binding on no one until a legislature enacts them), maintains the annual statement and statutory accounting manual, runs the financial databases and analysis tools, and accredits state departments. It has no enforcement power of its own.
  • Where Washington is present:
    • Monitoring and international affairs — the Federal Insurance Office and FSOC, created by Dodd-Frank. FIO negotiates covered agreements (U.S.–EU 2017, U.S.–UK 2018) that can preempt state measures inconsistent with them.
    • Statutes that specifically relate to insurance — the Liability Risk Retention Act (Risk Retention Groups), the Nonadmitted and Reinsurance Reform Act (Excess and Surplus Lines), Gramm-Leach-Bliley (bank–insurer affiliation, privacy, functional regulation).
    • General laws that still bite — securities law and Sarbanes-Oxley for public insurers; the Fair Credit Reporting Act for insurance scores; ERISA, which takes self-funded employer plans out of state reach.
    • Federal programs — the National Flood Insurance Program, federal crop insurance, and the terrorism backstop under TRIA.
  • The standing debate. Critics point to fifty-plus filing regimes and slow product approval; defenders point to local responsiveness and the sector's record in 2008. Optional federal charter bills have recurred since the 2000s; none has passed.

Mapping a Group to Its Regulators A NYSE-listed holding company owns (a) an Ohio-domiciled P&C insurer writing personal auto in 25 states, which cedes a quota share to a UK reinsurer; (b) a Delaware-domiciled surplus lines insurer; and (c) a federal savings association. Who regulates what?

Answer

  • Ohio — solvency of the auto insurer: examinations, RBC, dividends and affiliate transactions, holding-company filings. It also decides the credit for reinsurance on the UK cession; under the U.S.–UK covered agreement a qualifying UK reinsurer cannot be required to post collateral.
  • Each of the 25 states — the auto insurer's licence, rate and form filings, market conduct, premium tax and guaranty-association membership.
  • Delaware — solvency of the surplus lines insurer. Its individual placements are regulated and taxed only by each insured's home state, through licensed surplus lines brokers, with no rate or form approval.
  • Federal banking regulators — the savings association itself; its presence makes the parent a savings and loan holding company supervised by the Federal Reserve.
  • SEC — the parent's public reporting, including SOX certifications and internal-control reporting.

At least six regulators, and none sees the whole group — the gap that lead-state coordination, supervisory colleges and the holding-company Form F risk report are meant to close.

A Federal Statute Meets a State Insurance Code A state's insurance code voids arbitration clauses in insurance policies. An insurer argues that the Federal Arbitration Act, which makes arbitration agreements enforceable, overrides the state rule. Who wins?

Answer Generally the state. The Federal Arbitration Act is a statute of general application — it does not specifically relate to the business of insurance. The state rule governs the terms of the insurance contract between insurer and policyholder, so it regulates the business of insurance. McCarran-Ferguson therefore protects it from displacement, and the clause is unenforceable in that state.

The result can differ where the arbitration clause rests on an international treaty rather than the domestic act — an area where federal courts have split — which is a reminder that reverse preemption is a rule about Acts of Congress.