The Beginning of the End of State-Based Insurance Regulation... Or Another Layer of Regulatory Hurdles?

The Hill's Congress Blog explains that the Affordable Care Act is the latest in a series of federal intrusions into the state-based insurance regulation system.

As previously discussed on Insurance Regulatory Law, the Hill's Congress Blog has recently recognized that the Patient Protection and Affordable Care Act, also known as Obamacare, is the latest trench in the ongoing "struggle between the states and Federal government as to who should regulate insurance products, and who is best positioned to protect consumers."[1]

The Hill opinion, written by Matthew S. Brockmeier of the States Alliance for Balanced Insurance Regulation (SABIR), notes that even before the recent decision by the United States Supreme Court upholding the constitutionality of the Affordable Care Act, the insurance industry and insurance regulation has been a subject of heightened public concern.

The issue of insurance has always been one of great economic importance. It is one of the largest segments of our economy. It is a multi-billion dollar industry that provides us with peace of mind and helps get us get back on our feet in times of crisis. It is also a source of solid, stable, career-track jobs: just walk down Main Street in any town in the nation, and you will see insurance offices of all sizes, providing jobs for thousands and thousands of Americans.[2]

Historically, the insurance industry in the United States was regulated almost exclusively by the individual state governments, but federal encroachment on the primacy of the state-based insurance regulation system has become more prevalent in recent decades, as previously outlined by Insurance Regulatory Law.

Federal legislation threatens to fundamentally alter the business of insurance.

Brockmeier highlights the 140-year history of state-based insurance regulation, but warns that the federal "threat to state-based regulation comes from several pieces of legislation that, taken together, threaten to fundamentally alter the business of insurance as we know it."[3]

Essentially, these bills and regulations would confiscate the states’ ability to regulate not just health insurance but virtually any type of insurance. It’s the “Washington Knows Best” attitude that we have seen time and time again, and Americans from all walks of life should be alarmed by this power grab. [4]

The first attempt at federal encroachment on the state-based regulatory scheme can be traced back to the seminal case of Paul v. Virginia in 1869, when a coalition of insurance companies sought to escape an inconsistent web of dissimilar rules and requirements imposed by the state-based insurance regulation system by arguing that insurance regulation was the province of the federal government.[5]

The Supreme Court held that there was no constitutional basis for the federal regulation of insurance.

At that time, there was very little in the way of federal regulatory framework, and thus this coalition was less about promoting federal regulatory primacy and more about avoiding the morass that the state-based system had become. Ultimately, the Supreme Court held that insurance was not commerce, and thus, there was no basis for the federal regulation of insurance under the U.S. Constitution.[6]

The Hill's piece focuses on the modern era, however.

The first bill to threaten state-based regulation was the Dodd-Frank financial reform bill, which turned two in July. Title V of the bill created the Federal Insurance Office. The FIO is the first ever federal body involved with virtually all aspects of insurance. The statute does not technically confer the power to regulate insurance on Federal Insurance Office - yet. But history counsels that it is only a matter of time before the Office begins to expand its scope and reach.

More notoriously, the Patient Protection and Affordable Care Act (PPACA) mandated the insurance exchanges that have been the subject of heated debate. These exchanges, though they would be regulated by the individual states, would have to comply with federal rules and regulations and would be subject to federal fines and penalties for failure to comply. Any claim, then, that the federal government has not effectively usurped the regulation of health insurance, is illusory.[7]

The federal government has "effectively usurped" the regulation of health insurance.

Arguments for and against the federal regulation of insurance abound in both political circles as well as industry concerns. The National Association of Insurance Commissioners, formed in 1871 – in part in reaction to the issues that led up to the Paul v. Virginia case – has been a vital resource that has allowed the various state insurance regulators to coordinate their activities and develop similar models of insurance regulation in order to reduce the inconsistency affecting multi-state insurance companies.[8]

Brockmeier trumpets the state-based insurance regulation system that "has proven its value over and over again..." with state insurance regulators that "have proven that they have the ability to provide sound, competent, and effective regulation of the insurance industry."[9]

State regulation saw the insurance industry through both the Great Depression and the Great Recession relatively unscathed.

Considering that the insurance industry, due in part to careful and consistent regulation by the state-based insurance regulators, survived both the Great Depression in the 1930s and the Great Recession in the late 2000s with significantly less financial destruction in comparison to other financial industries such as banking and securities, Brockmeier and proponents of the state-based system may have a point.[10]

Brockmeier lauds "having 51 sets of eyes on the insurance industry" versus having "one set of eyes – in Washington, D.C. – looking over the industry."[11]

In a similar vein, many have suggested that large, multi-state (even multi-national) businesses and industries would prefer to deal with "a single 800-pound gorilla, rather than 50 monkeys."[12]

A prime example... is insurance regulation. Insurance companies have always been regulated solely by the states, but most now argue that they need a regulatory framework in Washington to compete with banks and other financial service entities that have been given more flexibility by the feds.[13]

The insurance industry is increasingly answerable to both federal and state regulation.

However, proponents of either state or federal insurance regulation should realize that the insurance industry is increasingly answerable to both one 800-pound gorilla and 50 monkeys. That's because the federal insurance regulatory scheme is not so much usurping the state-based system as it is putting another regulatory layer on top of it.

And potentially more troublesome to the insurance industry is another gorilla beating its chest just across the pond: Solvency II and the rising influence of European Union regulation on the U.S. insurance industry.