Insurance Regulation: Background and Issues

Publication Date: September 2003

Publisher: Library of Congress. Congressional Research Service


Research Area: Banking and finance



Insurance companies make up a major segment of the U.S. financial services industry. However, unlike banks and other financial institutions that are regulated primarily at the federal level, insurance companies are regulated by the states. As financial services have converged in response to globalization and other market factors, the seemingly arbitrary distinctions separating various financial products and services, as well as their providers, have broken down.

In 1999 Congress passed the Gramm-Leach-Bliley Act (GLBA) to reflect marketplace changes and to overhaul the laws governing financial institutions. Rather than changing the regulatory structures for the various financial institutions, GLBA embraced the concept of “functional” regulation. It specifically reaffirmed the regulation of insurance by the states as granted by the 1945 McCarran-Ferguson Act. Since 1945 Congress has reviewed the jurisdictional stewardship entrusted to the states under McCarran-Ferguson on various occasions. Until recently, however, efforts to transfer insurance regulatory authority back to the federal government were opposed by both the states and a united insurance industry.

Some insurers now claim that in view of the growing convergence of financial services and products, they find themselves at a competitive disadvantage because of the inefficiencies associated with being regulated by the states. For example, life insurers selling products aimed at retirement and asset accumulation must now compete with similar bank products. While banks can roll out their new products nationwide in a matter of weeks, it sometimes takes 2 years or more for an insurer to obtain the necessary state approvals for a national launch of a similar product. As a result, many insurers selling such products are calling upon Congress to pass legislation reinstating the federal government’s insurance regulatory role.

Legislation presented in the 107th Congress was modeled on the dual state/federal regulation that now exists for the banking industry. The 107th Congress did not address either measure, but it is anticipated that proposals for increased federal involvement in insurance will garner some consideration in the 108th Congress. The only such proposal introduced in the 108th Congress to this date is a bill by Senator Hollings, S.1373, which calls for mandatory federal regulation of interstate insurance rather than the optional charter envisioned in the 107th Congress bills.

Finally, the sunset of the Fair Credit Reporting Act’s (FCRA) preemption of state laws has sparked a debate over who should regulate insurers’ use of medical and financial information. Insurers’ use of credit scoring in underwriting homeowners and automobile insurance has been particularly addressed through committee amendments to H.R.2622, a bill amending and extending portions of the FCRA.