Printer Friendly

Trends in insurance regulation.

This paper provides an overview of the trends in insurance regulation over 200 years with emphasis on the most recent risk and insurance events and regulatory changes. Most recent trends indicate that there is an increasing involvement of the federal government in insurance issues in the following: 1) providing actual coverages such as terrorism and flood coverages: 2) implementing Terrorism Risk Insurance, 2002: 3) forcing the states to create reciprocation laws for agents under the Gramm-Leach-Bliley Financial Modernization Act of 1999; 4) providing social insurance such as Social Security, Medicare and unemployment compensation (administered by the states); and 5) overseeing the actions of the states as was the charge of the House Financial Services Committee during the 108th Congress.


The pressures on global insurance markets generated by the September 11 terrorist attacks have set in motion some insurance regulatory actions whose end is not yet in sight. The implementation of the Terrorism Risk Insurance Act of 2002 (TRIA), (1) in combination with the Gramm-Leach-Bliley Financial Modernization Act of 1999 (GLBA), (2) has rekindled a long-smoldering debate between proponents of federal insurance regulation and the advocates of the status quo, state insurance regulation. Circumstances are now leading to debate among three choices: 1) modest changes to the current system of only states regulating insurance; 2) transfer of insurance regulation to the federal government; and 3) dual regulation by both the federal and state governments.

Alone among financial services in the U.S., insurance has remained the exclusive domain of state regulators. Two hundred years ago, the primary role of the states was to issue charters to insurers. As the industry grew, along with the nation's economy, the states developed taxation, rate, and solvency regulations. As it stands today, insurance regulation has become increasingly complex, involving an ever-expanding array of local, regional, and global issues, including financial solvency, securitization, risk-based capital, statutory accounting principles, technology, privacy, long-term care insurance, managed care, life and annuity issues, availability and affordability of various property/casualty lines, consumer information, credit scores as an underwriting and rating tool, international trade agreements, and agency issues. (3) The passage of GLBA added a new layer of complexity. The sudden apparition of catastrophic terrorism changed the perception of risk dramatically, and with it, insurance as we knew it.

The insurance regulation debate has a long history. In Paul v. Virginia (1868), the Supreme Court placed insurance regulation in the hands of the states. Despite a reversal in US. v. South-Eastern Underwriters Association (1944), the states retained their regulatory authority through the passage of the McCarran-Ferguson Act of 1945. Lack of uniformity in regulating an interstate and international industry challenges regulators and firms alike. Recognizing these difficulties early on, the states formed the National Association of Insurance Commissioners (NAIC) in 1871 to serve as their functional and symbolic "arm," sustaining state regulation by promoting uniformity and efficiency.

The continued viability of state regulation has reemerged as a question of immediate urgency. Reformers claim that the implementation of new federal laws, specifically GLBA and TRIA, have opened the door to federal regulation and to more urgent debate about Optional Federal Chartering of large and national/global insurers. Those in favor of some form of federal regulation appear to be gaining the support of insurance executives who, during the Congressional debate leading to the passage of TRIA, felt that neither the NAIC nor individual states regulators could adequately represent their interests. (4) The most recent survey of insurers reveals growing interest in federal regulation rather than state regulation alone. The majority, however, still are in favor of the status quo. (5)

In this paper we conduct a study of the two-century-long development of insurance regulation in the U.S, which we present in Exhibit 1, divided into four sections: (A) pre-1870, (B) 1870-1920, (C) 1920-1998, and (D) 1999-2003. The final section is intended to emphasize the importance of GLBA and September 11th and its subsequent legislation, TRIA. For each period, we look at the insurance markets, major events that affected the insurance markets and industry, the industry's reaction, and subsequent regulatory actions. As the industry matured and new lines of insurance were introduced, events and regulatory actions became more focused on specific lines. Therefore, Exhibit 1, sections A-D are divided into lines as appropriate to the period. For example, health insurance and social insurance were only developed in the second quarter of the 1900s, while fire, marine and life products are centuries-old.

A review of Exhibit 1, sections A-D leads to four main observations: 1) insurance is regulated by a multitude of non-uniform state systems; 2) local state insurance issues do exist and may require local solutions; 3) most insurance markets are national or global in scope and may demand a unified regulatory system; and 4) insurance regulatory change typically comes in the wake of one or more catastrophic events or crises of availability and affordability in insurance markets.

Each of these four conclusions tends to support the case for one of the three regulatory choices outlined above. Proponents of maintaining the state insurance regulatory system contend that the system is not broken, but requires realignment for better functionality and efficiency. In testimony given by the NAIC Secretary-Treasurer Joel Ario before the House Subcommittee on Over sight and Investigations/Committee on Financial Services of the 108th Congress, the position of the NAIC for preservation of state regulation was clear. (6) He pointed out that "market regulation is more difficult to harmonize than financial regulation where financial records do not change from state to state." However, in market regulation, "The market behaviors of insurers can be quite different from one state to another because the laws may be different and insurer compliance with the laws may vary by state. Market regulation is definitely not an area where 'one size fits all' across the country."

Proponents of the dual regulation proposed by the advocates of Optional Federal Chartering regard the need for federal regulation for some lines of insurance, for certain insurers and for financial issues as an important addition to supplement state regulation, as is the case in banking regulation. This proposal is an outcome of GLBA. Pointing out that the nature of their business is not regional, large insurers argue in favor of the option of choosing a federal charter, just as banks can do now with the Office of Comptroller of the Currency. A draft bill proposing Optional Federal Chartering was released in December 2001 by Sen. Charles Schumer (D-NY), and another was introduced in the House of Representatives in February 2002 by Rep. John LaFalce (D-NY). These bills merely opened the debate. A series of three hearings in June 2002 began "to explore the concept of federal insurance regulation and the potential to improve state supervision to offset the need for a federal regulatory agency." (7)

The proponents of exclusive federal regulation are in favor of uniformity and ending the "barrier to entry" that is created by the multitude of states insurance regulatory systems. While there is no proposal for exclusive federal insurance regulation at the present time, there has been an increased level of Congressional oversight over the NAIC and the insurance activities of the states. During the 108th Congressional session, insurance issues were a significant part of the agenda of the House Financial Services Committee. (8) While insurance regulation is the domain of the states, the committee has acted in an oversight capacity over the states with its decision to continue to examine the insurance solvency regulation program, including solvency accreditation of the NAIC (which began in the 1990s after a series of GAO reports about insurance insolvencies). The committee's agenda also included market conduct regulation, agent licensing reform as required under GBLA, insurance product approval, national insurance uniformity, terrorism insurance, workers' compensation, insurance marketing, insurance fraud, insurance consumer protection and seniors' retirement needs, risk retention acts, professional liability insurance and reforms aimed at resolving the crisis of availability and affordability in this line of coverage, insurance litigation reform to circumvent future insurance crises, holocaust claims, mold, natural disaster insurance, homeowner's insurance--price controls, underwriting criteria and availability, and corporate-owned life insurance. Standing out in this agenda is the "preemption of state insurance law" which reaffirms state regulation of insurance. The committee is charged to "review efforts by Federal agencies to preempt state laws governing insurance activities and will examine any controversial state insurance laws to ensure that they do not significantly interfere with federally authorized powers of financial institutions." (9)

While Congress exerts oversight, the states continue the business of insurance regulation including efforts to resolve major local problems of availability, affordability and insolvencies. An example is the resolution of file mold crisis in Texas and its impact on the homeowners' insurance market. In 2002, local regulators created the "Fair" plan giving homeowners access to insurance when the voluntary market failed to provide such coverage. (10) In June 2003 the Texas governor signed a bill to relieve the pressure on the homeowners' insurance market in Texas. As a result, the majority of homeowners' insurance in Texas is now subject to rate regulation. (11) In addition, mold remediation companies were brought under stringent regulation.

The medical malpractice insurance crisis provides another example of how states resolve local issues. (12) While Congress attempts to pass laws limiting awards in litigation, many state legislatures are also working on passing similar laws to relieve the pressure on medical malpractice insurance. Most recently, Pennsylvania Gov. Edward Rendell proposed that "the state would pay for three years the premiums of certain high-risk categories of physicians to the state's Medical Care Availability and Reduction of Error program." (13)

This article is structured as follows: Using the Exhibit format described above, we move through the 200-year history of insurance regulation in the U.S., including historical overviews of the most significant events in insurance regulation until 1998. Then we overview the current trends in insurance regulation, with emphasis mostly on GLBA and TRIA and their impact. The paper concludes with a summary.

Trends in Insurance Regulation Pre-1870

While already popular in Britain, insurance hardly existed in the United States prior to the 1790s. Marine insurance was the most developed fine, with fire insurance a distant second, mostly consisting of local mutual insurers, while life insurance was yet to emerge. As the nation grew and the economy developed, the insurance industry grew, making regulation necessary. Initially, insurance regulation only involved chartering and taxation. The New York Fire of 1835 led fire insurers to diversify into larger territories to mitigate their risk. To sell insurance on a regional or national scale, insurers developed the independent agency system.

Life insurance was affected by the financial panic of 1837, which reduced access to capital and made the mutual form popular. The Civil War further helped the growth of the life insurance industry.

By the 1870s, a number of states had separate insurance departments. Most followed the New York model and enacted separate statutes for fire and marine and life insurance. Minimum capitalization requirements were enacted, and forfeiture laws for life products were adopted.

The seminal legal case of Paul v. Virginia (1868) affirmed the power of the states over insurance regulation. Prior to the ruling, the insurance industry had campaigned for federal regulation. For both life and fire insurance firms, the variability of regulations in different states made doing business on a national scale increasingly complex. In its ruling, the Supreme Court declared insurance not to be interstate commerce, and thus not eligible for regulation by the federal government. As a result of Paul v. Virginia, insurance would not be subject to any federal regulations over the coming decades. (14)

Trends in Insurance Regulation 1870-1920

As noted in the introductory discussion, catastrophes act as catalysts to change insurance regulation. This was the case numerous times throughout history up to the September 11, 2001 catastrophic terrorist attack. During the 1870-1920 period, two of the most influential events were the Chicago and Boston fires of 1871 and 1872. The major insolvencies caused by these disasters brought the fire and marine industry into the realm of collective rate setting, first with the companies setting their rates cooperatively, and eventually with state regulators setting rates in conjunction with the insurance industry through its rating bureaus (progression in Exhibit 1. B).

In the field of life insurance, a few large insurers dominated a market characterized by fierce competition that led to rebating, twisting and other shady practices. Only after New York's Armstrong Committee investigation into the life insurance industry (1905-6) brought these practices and other misconduct to light did regulators begin to crack down on life insurers. In 1907 New York passed laws outlawing rebating and twisting and otherwise reforming the industry. Because of the so-called Appleton rule, requiring any insurer doing business in New York to follow that state's laws wherever they conducted business, New York's insurance laws became de facto national law.

Prior to 1920, other lines, beyond fire, marine and life, were just starting to emerge. The invention of the automobile spurred the growth of the casualty industry, with separate companies developing to handle this new line. During the 1910s, most states enacted workers' compensation laws to protect employees. Health insurance had yet to develop, however, as the industry. Private insurers, fearing adverse selection and moral hazard, did not perceive health coverage an appropriate exposure.

By 1920 life and property/casualty insurance regulation was essentially in its current form.

Trends in Insurance Regulation 1920-1998

Shortly after the Supreme Court's ruling in U.S v. Southeastern Uuderwriters Association (1944) overturning Paul v. Virginia and giving the federal government the power to regulate insurance, Congress reaffirmed state insurance regulation with the passage of the McCarran-Ferguson Act (1945). McCarran-Ferguson is the foundation of all current state insurance regulation.

State Regulation--General. The form and process of state insurance regulation is summarized in Exhibit 2. Today, most insurance departments have relatively few staff employees, with the exception of Texas, California, Illinois, Florida, and New York. (15) Despite the efforts of the NAIC to provide model laws for adoption by the states, the laws that are finally adopted may not be uniform across the states because of differing local interests. The resulting maze of regulations is considered a barrier to the entry of new insurers.

The state legislatures pass insurance laws that form the basis for
insurance regulation.

* To ensure the smooth operation of insurance markets and the solvency
 of Insurers, insurance laws are concerned with:

* Licensing requirements for insurers, agents, brokers, and claim

* Rates and policy forms and consumer protection.

* Methods of establishing reserves and the types of investments

* Provisions for the liquidation or rehabilitation of any insurance
 company in severe financial difficulty.

* Trade practices, including marketing and claims adjustment processes.

* Availability of insurance and affordability during hard markets.

Every slate has an insurance department to administer insurance laws.
The state insurance commissioner is empowered to:

* Grant, deny, or suspend licenses of both insurer and insurance

* Require an annual report from insurers (financial statements).

* Examine insurers' business operations.

* Act as a liquidator or rehabilitator of insolvent insurers.

* Investigate complaints.

* Originate investigations.

* Decide whether to grant all, part, or none of an insurer's request
 for higher rates.

* Propose new legislation to the legislature.

* Approve or reject an insurer's proposed new or amended insurance

* Promulgate regulations that interpret insurance laws.

Licensing Requirements

* An insurer must tiara a license from each state in which it conducts

* Holding a license implies that the insurer meets specified regulatory
 requirements designed to protect the consumer. It also implies that
 the insurer has greater business opportunities than nonlicensed
 insurers do.

* A foreign insurer can conduct business by direct mail in a state
 without a license Item that state. The insurer is considered
 nonadmitted and is not subject to regulation. Nonadmitted or
 nonlicensed insurers are also called surplus lines or excess

Financial Requirements

* Risk hosed capital

* Reserve requirements

* Guaranty Funds Associations

Policy and Rate Regulation

Rates are regulated for auto, property and liability coverages. Methods

* Promulgated rates

* Prior approval

* File-and-use

* Open competition

* Minimum rates for individual life insurance and annuity contracts are
 regulated indirectly retouch limits imposed on assumptions used in
 establishing reserves.

Control of Agents' Activities

* Insurance laws also prohibit certain activities on the part of agents
 and brokers, such as twisting, rebating, unfair practices, and
 misappropriation of funds belonging to insurers or insureds.

* Unfair Practices is a catch-all term that can be applied to many
 undesirable activities of agents, claim adjusters, and insurers
 (including misleading advertisements).

* Unfair practices may lead to fines, removal of licenses, and, in
 extreme cases, to punitive damage awards by the courts.

Control of Claims Adjusting

* Insurance commissioner's control claims adjusting practices
 primarily through policyholder complaints.

* The commissioner's office investigates complaints.

Control of Underwriting Practices

* Over the years, insurers have used a variety of factors in their
 underwriting decisions.

* A number Of these have become taboo from a public policy standpoint.
 Their use may be considered unfair discrimination.

* Credit rating issues and privacy issues are under review and

Providing Markets

* Residual Markets for lines of business with availability issues to
high risk insureds

* Catastrophic pools for windstorm and earthquake risks

Source: Baranoff, Etti. Risk Management and Insurance. John Wiley +
Sons. 2003.

Major Issues in P/C Insurance Regulation 1920-1998. As noted in the introductory discussion and as shown in Exhibit 1. C, the underlying causes for actions by insurance regulators in the P/C markets are insolvencies, catastrophes and crises of availability and affordability. During the 1980s and 90s, crises and fraud led to many insolvencies, prompting regulators to strengthen their financial and market conduct regulation. Even before these waves of insolvencies, states had set up guaranty funds to protect insureds in cases of insolvency. (16) To ensure viable markets for all potential insureds, assigned risk pools were created for high-risk customers and catastrophe pools were developed for disaster prone areas.

The states continued the rate regulation system created prior to 1920 and used the advisory rates provided by the Insurance Services Office (ISO), which also filed policy form changes on behalf of member insurers with state regulators. Until the 1980s, when anti-trust fears led to its reorganization, ISO exerted great power as the industry's main advisory organization.

Major Issues in Health Insurance Regulation 1920-1998. Health insurance took off during the 1930s with the birth of the Blues-Blue Cross for hospitals and Blue Shield for doctors. While commercial insurers initially regarded health risk as uninsurable because of moral hazard and adverse selection, the success of the tax-exempt Blues led to interest by the commercial carriers. The Blues were required to use community rating by regulators, while the commercial writers could use experience rating. As a result, commercial insurers' share of the market grew. (17) HMOs, another prepaid health care system, had appeared earlier, hut it was only after the passage of the Health Maintenance Organization Act of 1973 requiring employers to offer HMOs to their employees that the HMOs' market share grew dramatically. (18)

With health insurance costs escalating due to aging population, third party payer and medical technology, modern managed care emerged in file late 1970s and early 1980s. As in HMOs, Preferred Provider Organization (PPOs) and other new health care plans limited access to providers. The limiting effects of managed care prompted passage of major healthcare legislation in various states to improve patients' rights. On the national level, various versions of "patient bill of rights" legislation failed to pass. However, various benefits became mandated by states and the federal government, such as a 48-hour stay in a hospital after delivery of a baby. (19)

Major federal legislation ensuring portability of health insurance when changing jobs was signed by President Clinton in 1996. The Health Insurance Portability and Accountability Act (HIPAA) also provided additional requirements including privacy laws.

Major Issues in Life Insurance and Pensions Regulation 1920-1998. As noted in Exhibit 1. C, life insurers were regulated for their solvency and reserves, but not rate regulated. Selling activities were also closely regulated. As new products emerged during the periods of high interest rates and interest in the stock market, such as universal life (1970s) and variable life (1980s), regulators on both the state and federal level (via the Securities and Exchange Commission) became more involved in regulating life insurance products.

The need for market conduct regulation became apparent during the 1980s when agents misrepresented the new interest-sensitive products as "vanishing premium" products, claiming they would be paid up after only a few years due to high interest rates and also could provide substantial retirement income. These misrepresentations cost many life insurers dearly in fines and led to the institution of market conduct examination and the creation of the new ethics officer position in many large life insurance companies.

In pensions, an area that has not been regulated by the states, ERISA passed in 1974 to protect the workers' retirement funds. As many insurers sell investment products such as annuity and life products to pension plans, life insurers regularly deal with this regulation.

As in the P/C area, guaranty funds were established for both life and health insurance in most states in the 1970s and early 1980s.

Social Insurance 1920-1998. The social insurance programs of the 1930s and 1960s represented a major step in federal government involvement in insurance. The risks covered under Social Security and Unemployment Compensation were considered too fundamental to be privately insured. Thus, the government provided a base floor of coverages for old age security, survivors, disability and medical coverage in the form of Medicare A and Medicare B.

Workers' Compensation is considered a social insurance program despite being provided in many states by the insurance industry. There are 25 states that operate state WC funds. Crises in availability during the 20th century led major reforms in the states' regulation of WC. (20)

Trends in Insurance Regulation 1999-2003

Around the beginning of the new millennium, two very different major events affected insurance regulation. After decades of debate, Congress passed the Gramm-Leach-Bliley Financial Services Modernization Act (GLBA) in 1999. Then, on September 11, 2001, America was attacked by terrorists. The horrific attacks on the World Trade Center wad the Pentagon led to the passage of the Terrorism Risk Insurance Act (TRIA) of 2002. The impact of both events on insurance regulation was discussed in the introductory comments. Here, we elaborate on more details.

The Gramm-Leach-Bliley Financial Services Modernization Act (GLBA) of 1999. Since the passage of GLBA on November 12, 1999, insurance regulators have been working to maintain state regulation (as opposed to moving insurance regulation under the federal umbrella) while complying with the new requirements under the Act as featured in Exhibit 3. State insurance regulators point out that they are committed to modernizing insurance regulations to meet the realities of an increasingly dynamic and internationally competitive financial services marketplace. NAIC's and the states' regulators' commitments to change are listed in Exhibit 4.
January 2002

* The Financial Services Modernization Act of 1999, known as the
 Gramm-Leach-Bliley Act or GLBA, became federal law November 12, 1999.

* GLBA breaks down herders among the banking, insurance, and securities
 industries and establishes a framework to cover the responsibilities
 of federal and state regulators.

* Traditional insurance providers will generally use the Act to offer
 their products through banks and other financial institutions and/or
 to become affiliated with a bank or other financial institution.

* State insurance departments will be the functional regulators of the
 insurance business activities of all financial firms engaged in the
 business of insurance, including banks.

* State licensing requirements for all insurers and agents remain in

* The Federal Reserve Board will supervise financial holding companies
 established under the Act, but generally must rely upon the
 examinations, reports, and decisions of the functional regulators.

Source: California Department of insurance:


* Amending state laws to include anti-affiliation statutes, licensure
 laws, demutualization statutes, and various essential consumer
 protections, including sales and privacy provisions.

* Building on initiatives already underway concerning national
 companies, such as review of financial reporting, financial analysis
 and examination, and refining the risk-based approach to examining
 the insurance operations of financial holding companies.

* Implementing functional regulation.

* Speed to market concept of expediting the introduction of new
 insurance products into the marketplace.

* Regulatory re-engineering, which promotes uniformity, and market
 conduct reform.

* Streamlining and standardizing the licensing procedure for producers.
 As of February 2003, 48 states and Guam have passed the Producer
 Licensing Model Act (PLMA) or other licensing laws with the intent of
 satisfying the reciprocity licensing mandates of GLBA, 3 more
 legislatures are expected to consider PLMA in 2003. (32)

Source: Baranoff, Etti. Risk Management and Insurance. John Wiley &
Sons, 2003.

Terrorism Risk Insurance Act (TRIA) of 2002. The horrific attacks of September 11, 2001 affected the insurance industry and its regulation more fundamentally than any previous catastrophe. This was a man-made catastrophe. Neither the industry, nor state and federal regulators can foresee any possibility of truly predicting such future events. Underwriting, as the industry and regulators knew it before, changed its parameters. Initially, many states approved the terrorism exclusion endorsement proposed by ISO on behalf of the industry. However, fears that lack of coverage would curtail economic growth led to the signing of the Terrorism Risk Insurance Act by President Bush on November 26, 2002. The main features of the Act are contained in Exhibit 5.

* An event has to cause $5 million to be certified as an act of

* Each participating insurance company will be responsible for paying
 out a certain amount in claims--a deductible--before federal
 assistance becomes available This deductible is based on a percentage
 of direct earned premiums from calendar year 2002. The deductible is
 as follows:

() 2002--1 percent (from enactment through the end of the year)

() 2003--7 percent

() 2004--10 percent

() 2005--15 percent

* For losses above a company's deductible, the federal government will
 cover 90%, while the company contributes 10%.

* If the federal government pays for insured losses during the course
 of a year, the Treasury Secretary will be required to recoup the
 difference between total industry costs (individual insurers' losses
 up to their deductibles, plus the industry's 10 percent cast share
 above the deductibles) and the following fixed dollar amounts per

() $10 billion for 2002 and 2003

() $12.5 billion for 2004

() $15 billion for 2005

* Even with federal support, the insurance industry's share of the risk
 substantial. For example, assuming that the baseline for the program
 is $125 billion in commercial insurance (direct premium written) and
 that the next terrorist attack amounts to $30 billion in commercial
 property and workers compensation loss, the total industry loss would
 be approximately:

() $11 billion for the remainder of 2002 and 2003

() $14 billion in 2004

() $20 billion in 2005

* The recoupment will be accomplished through a surcharge on all
 policyholders. The surcharge cannot be more than 3% of the premium
 paid for a policy in a given year.

* Losses covered by the program will he capped at $100 billion; above
 this amount, Congress is to determine the procedures for and the
 source of any payments.

* The Insurance Information Institute estimates the total insured loss
 for the World Trade Center, Pentagon and Pennsylvania events is
 $40.2 billion.

Source: Insurance Information Institute (III)

As noted in the introductory discussion, both GLBA and TRIA open a wide door for federal insurance regulation. The implementation of TRIA is expected to give Treasury Department personnel expertise in insurance regulation. To date this expertise has been exclusively in file hands of the states' insurance regulators and the NAIC.

Additional Trends 1999-2003. Exhibit 1. D also features some less monumental regulatory changes. EGTRRA, 2001 and the new tax-favored Health Reimbursement Accounts are important steps to resolve the current issues of aging population, longer longevity and escalating health care cost. The major benefits of EGTRRA are increases in the tax-favored limits, increased flexibility and administrative simplification. EGTRRA is known to resolve some of ERISA's shortfalls. It is important to note that the changes in regulation described here are not part of state-based insurance regulation, but, are imperative for inclusion since they influence insurance products and innovation in insurance markets.

Summary and Conclusion

This paper's overview of the trends in insurance regulation over 200 years demonstrates that as risk changes, markets grow, and as the world becomes smaller, insurance regulation is no longer the sole domain of the states. Despite McCarran-Ferguson and the repeated affirmation that insurance regulation is under the domain of the states, as in GLBA 1999, we see the increasing involvement of the federal government in insurance issues. Risk, especially after September 11, has become central to every business. It is on the minds of executives and all types of regulators--state and federal alike. Thus, despite the affirmation of the power of the states in this unique financial arena, the federal government is deeply involved in insurance regulation. This involvement is in: 1) providing actual coverages such as the terrorism and flood coverages; 2) implementing of TRIA 2002; 3) forcing the states to create reciprocation laws for agents under GLBA; 4) providing social insurance such as Social Security, Medicare and unemployment compensation (administered

by the states); and 5) overseeing the actions of the states, as was the charge of the House Financial Services Committee during the 108th Congress.

 Line Insurance Markets Key Insurance Events

Prior to Fire/ Local markets- Birth of a new
1830 Marine developing economy nation--need for
 economic growth

 Increased maritime ask.
 Napoleonic Wars, War
 of 1812, Embargo Act
 (18 month stoppage of
 marine business)

 Life Charity base

1830-1870 Fire/ Regional [??] national. 1835--A fire destroys
 Marine Competition in many New York's business
 markets and high district. Losses are
 failure rate. $15-$26 million,
 resulting in bankruptcy
 for 23 of the 26 local
 fire insurance

 Life National Markets Panic of 1837--
 financial crisis made
 Competition and high raising capital
 failure rate difficult.

 Civil war [??] growth
 in sales of life

 Both Paul v. Virginia in
 1868 keeps insurance
 under the jurisdiction
 of then states, not the
 federal government

 Line Industry's Reaction Highlight/Reaction

Prior to Fire/ Mutual fire insurers State legislatures
1830 Marine already in most cities, granted chairs to
 After 1790, joint-stock insurers.
 insurers begin to form.
 Fire insurers are State taxation of
 mostly limited to out-of-state insurers
 single markets. (encouragement of
 domestic business.)
 Marine insurers
 diversified into fire

 Life Churches and charitable State legislatures
 organizations granted charters to

1830-1870 Fire/ Diversification into After 1835 states drop
 Marine other regional and discriminatory taxes of
 national markets. out-of-state companies.
 Development of
 independent agency By mid-century general
 system. incorporation laws make
 it easier in farm
 insurance companies.

 Life 1840s--most new life Incorporation and
 insurers take mutual taxation are main
 form. functions of
 Aggressive marketing
 1850s, 60s--states
 Intense competition begin to establish
 separate insurance
 Variety of products. departments.
 Deferred dividend
 policies (tontines) Most states follow
 introduced in 1867. Massachusetts or
 New York regulatory

 Separate statutes
 enacted for life and
 fire & marine

 New York law (1849)
 requires life insurance
 companies to have
 minimum capital stock
 of $100,000 for
 consumer protection.

 Both MA (1861)--non-
 forfeiture law in
 life insurance


Line Insurance Markets Key Insurance Events

Fire/Marine Natural Markets 1871: The Chicago Fire,
 1872: the Boston Fire.
 About 100 companies

 1906: San Francisco
 earthquake (direct quake
 losses of about $24
 million and fire losses
 of about $500 million,
 according to the National
 Geophysical Data Center.
 That would be almost $10
 billion in 2000 dollars.)

 Populist movement leads
 to anti-compact movement,
 primarily in Midwestern

 1911: The NY Merritt
 Committee: cooperation
 among insurers is in the
 public interest, Insurance
 boards should set rates.
 Requirement to submit
 uniform statistics on
 premiums and losses for
 the first time [??]
 national implications.

 1914: German Alliance
 Insurance Co. v. Ike
 Lewis, Superintendent of
 Insurance. The Supreme
 Court declared insurance
 to be a public good, and
 thus subject to rate

Casualty Casualty Industry develops New product--national [??]
 automobile insurance

 Labor movement and
 progressive reformers
 demand protection of

Life Few large firms dominate Economic downturn
 the industry. following Panic of 1873

 Variety of new products. Competition leads to:
 rebating, twisting, and
 Growth of assessment and exaggerated claims of
 fraternal benefit future payments on
 societies tontine policies.

 Development of industrial 1905--Armstrong Committee
 life insurance, group Investigation reveals
 insurance misconduct by insurers
 including political
 Global market emerges kickbacks, nepotism,
 extremely high salaries
 No health insurance for top officials, and
 industry misuse of funds.

 "Commercial insurance
 companies did not believe
 that health was an
 insurable commodity
 because of the high
 potential for adverse
 selection and moral
 hazard. They felt that
 they lacked the
 information to accurately
 calculated risks and write
 premiums accordingly."

 Regulatory Highlight/
Line Industry's Reaction Reaction

Fire/Marine Collective rates: By Insurance departments in
 1880s, rates are set by almost all states.
 boards of local agents.
 Regional organizations set NAIC National Association
 rates for smaller of Insurance
 communities. Commissioners) formed in
 1871 (originally called
 Reacting to anti-compact the National Convention
 movement, rating bureaus of Insurance
 begin setting "advisory" Commissioners). Goal: more
 rates. uniformity among states.

 1910s: Insurers fight Anti-compact laws passed
 state rate-regulation. in 20 states by 1908.

 After German Alliance 1910s: Anti-compact and
 decision, industry begins industry-based rate
 to cooperate with regulation replaced by
 regulators to set rates. state rate regulation
 and/or supervision.
 1914: creation of an
 Actuarial Bureau within
 the National Board of Fire
 Underwriters establishes
 uniform classification

Casualty By 1910, 23 companies Regulators split
 sell liability policies. automobile insurance
 between fire & marine
 companies (property
 damage) and casualty
 companies (liability).

 1910s: Workers'
 Compensation laws in
 most states.

Life Many companies fail, The Armstrong Committee
 leaving industry dominated investigations leads to
 by few large finds. strict regulation of life
 Through the National
 Association of Life 1907--New York outlaws
 Underwriters (NALU), deferred-dividend
 formed in 1890, the life policies, rebating, and
 insurance industry twisting. New law also
 attempts to reform curtails lobbying
 itself. But unlike the activities, eliminates
 fire insurance industry. proxy voting, and mandates
 life underwriters standardized policy forms.
 did not succeed at
 self-regulation. New York Statute creates
 national standards because
 any company doing business
 in New York is required to
 follow its rules in all
 other states (Appleton


Line Insurance Markets Key Insurance Events

P/C Multiple Lines US. v. South-Eastern
 Underwriters Association
 Global industry and issues (1944)--U.S. Supreme Court
 overturns Paul v. Virginia,
 Electronic: age determines that federal
 government can regulate

 Catastrophe losses--natural
 disasters: Hurricane
 Andrews (largest)--August,
 1992 with $15.5 billion in
 insured losses, Northridge
 earthquake, 1-17-1994, most
 costly quake in U.S.
 history, causing an
 estimated $20 billion in
 total property damage
 including $12.5 billion in
 insured losses.) (23)

 1970s--asbestos and
 pollution losses leading
 to liability crisis.

 Underwriting cycles leading
 to availability and
 affordability crises

 Since 1980--increase in
 number of insurers'
 insolvencies. (24)

 Since late 1980s--Redlining
 and credit scoring
 underwriting criteria

 Major Financial
 Institutions mergers--
 Citicorp and Travelers

 Stock market bubble from
 mid 1990s to early 2000

Health Growth of the health 1930-1940--The birth of
 insurance industry. Blue Cross and Blue Shield

 Aging population, longer HMOs vs. commercial health
 longevity of the baby insurers in an era of
 boom generation and spiraling health care
 medical technology costs.
 Portability and privacy
 issue for health insurance

Life/ New financial products High interest rates in
Pensions 1970s and 1980s and the
 Global Industry stock market bubble in the
 late 1990s
 Global issues of financial
 markets Corruption in pensions

 People live longer Ethical Issues--vanishing
 premiums in life insurance

Social The Federal government Depression era
Insurance enters the insurance area
 --Social Security and World War II
 Compensation Acts. Worker s Compensation
 Creep in late 1980s and
 States are heavily involved 1990s.
 in WC insurance.
 Social Security deficits.
 Aging poli longer
 longevity of the baby Medicare deficits.
 boom generation and
 medical technology

Line Industry's Reaction Highlight/Reaction

P/C P/C rating by rating McCarran-Ferguson Act
 bureaus. Industry seeks to (1945)--Congress allows
 protect the bureau system. states to continue
 Insurance Services Office regulating insurance as
 (ISO) provides advisory long as they meet certain
 policy forms and rates for federal requirements.
 adoption by the states. Industry granted limited
 exemption from anti-trust
 During periods of high laws. Law primarily affects
 returns on investment property/casualty insurers.
 income, the industry adopts
 "Cash flow" underwriting. Various types of rate
 regulation becoming
 Flood insurance is too predominant in the states:
 catastrophic for private Promulgated rates, file
 insurers and use, use and file and
 benchmark rates with
 When litigation resulted deviation.
 in high losses. ISO files
 policy forms with 1980s brought a governance
 exclusions with the state change in ISO to ensure "no
 regulators. Example: collusion" among insurers
 Pollution exclusion. in rate setting, Investment
 income is being considered
 in rate making by the

 The states adopt modified
 policy forms proposed by
 the industry via ISO.

 Example homeowners,
 automobile and commercial
 property and liability
 policy forms.

 Response to natural
 catastrophic events:

 1. Hurricanes and weather
 related catastrophes
 led to Special
 Catastrophe Programs
 known as Beach and
 Windstorm Plans (i.e.
 Florida Hurricane
 Catastrophe Fund) that
 are designed to ensure
 the availability of
 windstorm insurance
 for properties close
 to the ocean. These
 pools are operated by
 property insurers
 doing business in
 those states with
 exposure. (25)
 2. Earthquakes in
 California led to
 the creation of the
 California Earthquake
 Authority (CEA) in
 1996. The CEA is a
 privately funded,
 publicly managed
 organization. Insurers
 can, participate in
 the CEA and offer CEA
 policies to their

 To provide insurance
 markets during availability
 and affordability crises,
 each state adopts some form
 of involuntary market such
 as assigned risk pools or
 joint underwriting
 associations. All insurers
 are required to belong to
 these residual markets.

 1970s--Each state creates
 P/C guaranty fund to
 protect insureds when
 insurers become insolvent.

 Congress passes the
 National Flood Insurance
 Act of 1968 & Flood
 Disaster Protection Act
 of 1973 (28) to protect
 residents of flood prone

 NAIC creating an
 International Panel,
 Federal government shadows
 over NAIC (GAO).

 The NAIC efforts to bring
 uniformity among the states
 via model laws do not bring
 uniformity. NAIC creating
 data bases and developing
 model laws to handle market
 conduct and underwriting
 criteria issues. P/C
 Risk-Based capital laws are
 enacted in 1994. Issues on
 the agenda of the NAIC and
 the states grow in scope
 and complexity.

 Federal vs. state insurance
 regulation debate emerges

Health Development of the health Tax incentive for group
 insurance industry which health insurance codified
 staves off government Under are 1954 Internal
 intervention of Revenue Code (IRC). Under
 nationalized health the code employer
 insurance. Community contributions to employee
 rating for the Blues and health plans were exempt
 experience rating by from employee taxable
 commercial insurers in income. Cafeteria plans
 early years. under Section 125 of the
 Internal Revenue
 Spiraling health care costs Code--expends tax
 lead to managed care incentives.
 solution and the creation
 of PPOs, POS, and other The 1973 Health Maintenance
 health plans. Blues, Organization Act
 commercial insurers
 and HMOs are more aligned Each states creates a
 in response to consumer life/health insurance
 needs. New Medical Saving guaranty fund to protect
 Accounts (MSAs) and Health insureds when insurers
 Reimbursement Accounts become insolvent.
 (HRAS) emerge.
 The states adopting
 Long-Term Care products "patients bill of rights"
 to protect health
 consumers. Congress too
 debates me issues. States
 also adopt mandate benefits
 requirements for health
 insurers and special
 programs to help small

 The NAIC efforts to bring
 uniformity among the states
 via model laws do not
 bring uniformity. The NAIC
 and states are handling a
 wide and complex array of
 health insurance issues.

 1996--Health Insurance
 Portability and
 Accountability Act (HIPAA)
 signed by president

Life/ Life insurance remained a Life insurance regulation
Pensions competitive market. primarily concerned with
 solvency, adequate reserves
 Development of Universal and consumer protection
 Life Insurance products
 and other innovative life Each state creates a
 and annuity products life/heallh insurance
 incorporating investment guaranty fund to protect
 in the stock market. The insureds when insurers
 life industry is part of become insolvent.
 financial intermediation
 industry and competes Market conduct examinations
 accordingly. developed by the states to
 exert greater scrutiny over
 the conduct of agents and
 companies advertisements.

 Retirement Income Security
 Act--Federal protection of
 employee benefits and
 pensions. Creation of the
 Pension Benefits Guarantee
 Corporation (PBGC).
 TRA86--the tax reform of
 1986 brought about more
 changes to pensions
 regulation by the
 Department of Labor and

 Insurers create new market The NAIC efforts to bring
 conduct departments and uniformity among the states
 the position of Ethics via model laws do not bring
 Officer in the 1980s and uniformity. The NAIC and
 1990s. states are handling a wide
 and complex array of life
 insurance issues.

Social Wage freeze during WW II 1930s-60s--creation of
Insurance period leads to increase social insurance programs
 in employee benefits. including Social Security
 (1935, 39, 54).
 In states where WC Is sold Unemployment Compensation,
 by insurers, insurers fight Medicare and Medicaid.
 litigation and high medical
 cost to streamline rate States pass laws to help
 levels. mitigate the high cost of
 WC by reducing litigation.
 Most states regulate WC

 WC residual markets are
 available in each state
 for high risk employers.
 25 states run their own WC
 Funds. Some are exclusive
 and others are in
 competition with the
 industry. (29)


Line Insurance Markets Key Insurance Events

P/C Global The Gramm-Leech-13 Billey
 Hard markets Financial Services
 Modernization Act (GLBA)
 of 1999

 September 11, 2001
 terrorist attacks

 Mold crisis

 Availability and
 affordability issues of
 medical malpractice, (30)
 accounting scandals and
 tightness in D&O coverage

Life/ Global markets and issue GLBA, 1999
 Continued issues of the
 late 1990s. A drop in the
 Mock market and economic

Health Tight markets Continued issues of the
 late 1990s. Medical

Social Needs of reforms Social Security deficits.
 Medicare deficits

 Large September 11, 2001
 WC Losses

Line Industry's Reaction Highlight/Reaction

P/C No major mergers as a NAIC end states reacted to
 result of GLBA, 1999. ensure continuation of
 state Insurance regulation
 The horrific terrorist
 attacks caused tightness Terrorism Risk Insurance
 in the markets. Major Act (TRIA) of 2002, Federal
 changes in underwriting oversight intensifies
 and coverage. Terrorism while the NAIC develops
 exclusions until passage directives to implement
 of TRIA. the Act. The Treasury
 department also issues
 The mold issue in Texas directives for comments.
 leads to mold exclusion and
 reduction in homeowners Texas Department of
 coverage. Insurers try to Insurance creates a FAIR
 leave the Texas market and plan for homeowners
 do not write new business. insurance and the governor
 signs a bill to bring Texas
 Lloyds into the regulatory

 Many States and Congress are
 working on legislation to
 lower limits of malpractice

Life/ New innovative life 2001--Economic Growth
Pensions insurance products Tax Reduction and
 Reconciliation Act
 favorable tax treatment
 in qualified retirement
 plans and changes in
 pensions regulation.

Health Insurers continue to 2002-Health Care
 tighten managed care and Reimbursement Accounts
 increase cost. Employers receive favorable tax
 shift cost to employees treatment.
 and look to creative
 products such as defined
 contribution health plans.

Social Congressional discussion on No change yet--under debate
Insurance various solutions in Social to provide prescription
 Security and Medicare drugs to Medicare
 The Sep. 11 Losses led to
 closer lock into terrorism
 exposure. Tightness in
 reinsurance market for
 WC (31)


(1.) An overview and the steps for implementation are at: http://www.ustreas. gov/offices/domestic-finance/ financial-institution/terrorism-insurance/. The Terrorism Risk Insurance Act of 2002 requires that the Treasury Department monitor the availability and affordability of terrorism insurance, thus placing a federal agency in a rate-monitoring capacity. See also Friedman, S. "Could Terror Law Spur Federal Charter?" National Underwriter Property & Casualty/Risk & Benefits, Management Edition. January 20, 2003.

(2.) See explanation in Section V of tiffs paper. Summary of Provisions of the Act are also at: conf/grmleach.htm

(3.) "ISSUES 2003," National Association of Insurance Commissioners].

(4.) Friedman, S. "Could Terror Law Spur Federal Charter?" National Underwriter Property & Casualty/Risk & Benefits, Management Edition. January 20, 2003.

(5.) Hays, D. "More Insurers Favor Fed Regulation, Survey Finds." NU Online News Service, May 10, 2003. The concept of federal regulation for the insurance marketplace appears to be making some inroads judging by an instant poll taken ... at an industry conference here. The survey was done at the National Council on Compensation Insurance annual meeting, where participants were asked "Which do you favor--state regulation of insurance, federal regulation of insurance or some combination?"

(6.) "The NAIC Testifies on State Market Regulation and Consumer Protection Says Effective Consumer Protection Focused on Local Needs is Hallmark of State Regulation," Kansas City, Mo., May 6, 2003, at

(7.) Brostoff, S., Washington Editor. "Sen. Schumer Plugs U.S. Chartering." NU Online News Service, March 13; and "Issues 2003," Optional Federal Charter, NAIC, page 83.

(8.) Brostoff, S. "Insurance Weighs Heavily on Agenda of House Financial Services Panel." National Underwriter Edition, February 10, 2003.

(9.) See Oversight Plan of the Committee on Financial Services for the 108th Congress at: http://financialservices.

(10.) January 8, 2003, Texas launches residual market for homeowners insurance, Texas FAIR Plan Association officially begins enrolling consumers at: http: // nr01083a.html

(11.) Harmon, D. "Gov. Rick Perry signed three insurance bills into law Tuesday." Austin American-Statesman. Wednesday, June 11, 2003:

Insurance regulation: Senate Bill 14 puts all insurance companies operating in Texas under state regulation, giving the insurance commissioner the power to review and reject homeowners rates. All auto policies are now under state regulation. The law takes effect immediately.

Mold remediation: House Bill 329 requires mold assessors and remediators to be licensed by the state, imposing minimum standards on a previously unregulated industry. It takes effect Sept. 1.

Water damage claims: Senate Bill 127 requires insurance companies to respond more quickly to certain water damage claims--an effort to get water damage cleaned up before mold can form.

(12.) Ackerman, T. D. and Ayenew, T. "Beyond Tort Reform: Fixing The Economies Of Med Mal Litigation." National Underwriter Edition. April 28, 2003.

(13.) Prince, M. "Pennsylvania governor pro poses med mal changes." Business Insurance. Posted on June 11, 2003

(14.) Baranoff, D. "Shaped By Risk: Fire Insurance in America 1790-1920." Ph.D. dissertation. The Johns Hopkins University, 2003; Baranoff, D. "Insurance," in Northrup, C., ed. The History of U.S. Economic Policy, 1600s-2000. Santa Barbara, CA: ABC-Clio, 2003.

(15.) 2001 Insurance Department Resource Report, NAIC

(16.) Insurance Information Institute (III) "Insolvencies/Guaranty Funds" Hot Topic, April 2003 at: http://www.

(17.) See footnote 16.

(18.) History of HMOs, Health Alliance Plan at: history_hmo.php

(19.) "Clinton signs 48-hour hospital stay bill for new moms," September 26, 1996, CNN Web posted at: http://www.

(20.) Insurance Information Institute (III) "Workers Compensation" Hot Topic, May 2003 at: hottopics/insurance/workerscomp/

(21.) Insurance Information Institute (III) Earthquakes: Risk and Insurance Issues, Hot Topic, May 2002 at:

(22.) Thomasson, M. "Health Insurance in the United States." EH.Net Encyclopedia, Whaples, R., ed., April 18 2003 URL

(23.) See footnote 15.

(24.) See Insurance Information Institute (III), Hot Topics and Insurance Issues, Insolvencies/Guaranty Funds. April 2003 at: topics/insurance/insolvencies/, Baranoff, E. G. "Causes of Insolvencies of Texas Insurers during the 1980s and 1990." ARIA meeting, Orlando, FL, 1990; and Baranoff, E. G., and Williams, N. "Texas' Early Warning System," ARIA meeting in Denver, CO, 1989 (unpublished).

(25.) Insurance Information Institute (III), Hot Topics and Insurance Issues, Catastrophic Insurance Issues, June 2003, at: urance/xxx/

(26.) Insurance Information Institute (III) "Residual Markets" Hot Topic, April 2003 at: topics/insurance/residual/The first of the residual market mechanisms for automobile coverage was established in New Hampshire in 1938.

(27.) History of Guaranty Funds Management Services at: and the National Conference of Insurance Guaranty Funds at:

(28.) The Federal Emergency Management Agency (FEMA) at: http://www.fema. gov/pdf/nfip/floodact.pdf

(29.) Insurance Information Institute (III) "Workers Compensation" Hot Topic, May 2003 at: media/hottopics/insurance/workerscomp/

(30.) Prince, M. "Cheney calls for medical malpractice reform." Business Insurance, June 13, 2003. WASHINGTON--Vice President Dick Cheney urged Congress to quickly pass medical malpractice liability reform. "The current medical liability system is "broken" and has driven up malpractice insurance rates, forcing some physicians to stop practicing medicine," Mr. Cheney said.

(31.) Insurance Information Institute (III) "Workers Compensation" Hot Topic, May 2003 at: media/hottopics/insurance/workerscomp/

(32.) Source: NAIC at: GLBA/narab.htm


1. Baranoff, D. "Shaped By Risk: Fire Insurance in America 1790-1920." Ph.D. dissertation, The Johns Hopkins University, 2003.

2. Baranoff, D. "Insurance," in Cynthia Northrup, ed. The History of U.S. Economic Policy, 1600s-2000. Santa Barbara, CA.: ABC-Clio, 2003.

3. Baranoff, E. Risk Management and Insurance. New York: John Wiley & Sons, Inc., 2003.

4. Baranoff, E.G., D. Baranoff and T. Sager. "Nonuniform Regulatory Treatment of Broker Distribution Systems: An Impact Analysis for Life Insurers," Journal of Insurance Regulations. September, 2000

5. Baranoff, E.G. and D. Gattis, "Shaping a Positive Insurance Regulatory Environment in the New Knowledge Millennium," Seminar, Proceedings of the International Insurance Society, Inc. Vol. 2000, July, 2000.

6. Baranoff, E.G. and D. Gattis. "Measuring Attitudes Toward Regulation," Best's Review, P/C and L/H Issues, September 1998.

7. Hartwig, R.P. "September 11, 2001: The First Year, One Hundred Minutes of Terror that Changed the Global Insurance Industry Forever." Insurance Information Institute at: hottopics/insurance/sept11/sept11paper/

8. Klein, R.W. "The Regulation of Catastrophe Insurance: An Initial Overview." Prepared for The Wharton Catastrophe Risk Project, December 7, 1998.

9. Thomasson, M. "Health Insurance in the United States." EH.Net Encyclopedia, edited by Robert Whaples, April 18, 2003 URL contents/ .us.php

Etti G. Baranoff, Virginia Commonwealth University

Dalit Baranoff, The Johns Hopkins University
COPYRIGHT 2003 St. John's University, College of Business Administration
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2003 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Baranoff, Etti G.; Baranoff, Dalit
Publication:Review of Business
Geographic Code:1USA
Date:Sep 22, 2003
Previous Article:Emerging trends in risk management: from the corporate consumer's perspective: an interview with John J. Hampton, executive director of the Risk...
Next Article:Auditing, risk management and a post Sarbanes-Oxley world.

Related Articles
Repairing insurance markets: despite some setbacks, insurance markets have become more competitive. (Insurance).
30-year level premiums resurface in term life. (Life/Health: Marketplace).
Insuring the future: facing issues from privacy to toxic mold. (Businesstrends Insurance).
Federal Deposit Insurance Corporation: Results of 2003 and 2002 Financial Audits.
Insurance regulators struggle with change all over the world.
Protect the core of your business; DATA COMPLIANCE REVIEW.

Terms of use | Privacy policy | Copyright © 2022 Farlex, Inc. | Feedback | For webmasters |