The Relevance of the McCarran-Ferguson Act
August 2017, CIPR Newsletter
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Last Updated 1/7/19
Issue: A Supreme Court decision in 1869 (Paul v. Virginia) opined that insurance was not interstate commerce subject to the Commerce Clause in the U.S. Constitution. As a result the regulation of insurance was left to the states until 1944. A subsequent Supreme Court decision (United States v. South‐Eastern Underwriters Association) overturned the earlier ruling concluding insurance was indeed interstate commerce.
To remove any uncertainty over states’ regulatory authority over insurance created by that decision, the NAIC proposed a bill sponsored by U.S. Senators Pat McCarran (D-NV) and Homer Ferguson (R-MI) that would keep insurance regulation in the hands of the states. Versions of the bill passed both the House and the Senate and it was signed into law by President Franklin D. Roosevelt in 1945.
The McCarran‐Ferguson Act is as relevant today as it was when it was adopted. It contains the basic delegation of authority from Congress to the states with respect to the regulation and taxation of the business of insurance. It has been affirmed as the law of the land in the Gramm‐Leach‐Bliley Act and in the Dodd‐Frank Act.
Overview: The McCarran-Ferguson Act declared “that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several states.” It affirmed that from then on “no Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any state for the purpose of regulating the business of insurance.”
The Act also limited the application of the antitrust laws to the business of insurance as long as and to the extent state law regulated the business of insurance. However, if states would not regulate insurance, the Sherman and Clayton Acts, as well the Federal Trade Commission Act still applied.
Following the passage of the McCarran-Ferguson Act, state insurance regulators, working through the NAIC, began work to create the legal framework needed to strengthen state regulation and to limit any future intervention by the federal government. Through their coordinated national effort, state regulators were able to impose stronger price regulations than what the industry would have otherwise had accepted.
The model laws enacted in that period introduced the frameworks for the rating laws in place today. They included several concepts including the formation, licensing and regulation of rating organizations; the rate standards that rates should not be excessive, inadequate or unfairly discriminatory; and the requirements for filing and approval of rates and rating systems. Also included was a prohibition against giving rebates.
In today’s world, there is much discussion of deregulation and making things easier for businesses. Designing the appropriate and prudent regulation of the business of insurance to ensure solvency, promote competitive markets and ensure sound consumer protection can be challenging. It is important for the insurance industry, consumers, insurance producers and regulators to remember deregulation of the business of insurance is unlike deregulation of any other sector of the economy. The congressional delegation of authority to the states is a contingent delegation of authority. There are two contingencies affecting the delegation of authority. First, Congress can enact legislation applicable to the business of insurance by mentioning it in a bill and affirmatively stating that the legislation applies to the business of insurance. Second, when the states do not enact or maintain laws to regulate the business of insurance, such regulation is left to Congress under the Sherman Act, the Clayton Act and the Federal Trade Commission Act.
Thus, deregulation of aspects of the business of insurance may be accompanied by some unanticipated outcomes with respect to antitrust laws. For example, sharing loss data among competitors as is done through advisory organizations would be considered an antitrust violation. Organizations such as Insurance Services Office and the National Council on Compensation Insurance can only exist under active state regulation of the products they produce and the information they collect. In addition, if state insurance regulators do fail to regulate, the insurance industry does not become deregulated but the regulatory authority passes to the Federal Trade Commission.
Status: The Government Relations (EX) Leadership Council coordinates the NAIC's ongoing work with the federal government and state government officials on legislative and regulatory policy. Among its 2018 charges is to advocate for NAIC objectives and the benefits and efficiencies of state-based insurance regulation.