Peter Henning, Wayne State University School:

"The Subcommittee on Financial Management, the Budget, and International Security of the Senate Governmental Affairs Committee will be holding a hearing today (Nov. 16) on the state of the insurance industry in light of the various investigations of industry practices that have been the subject of two lawsuits filed by New York Attorney General Eliot Spitzer….

Congressional hearings of this type are usually a forum for grandstanding, by both witnesses and elected officials, rather than a substantive consideration of the issues.  The interesting question about the insurance industry is whether there will be an effort in the next Congress to increase federal regulation in the area, perhaps through the creation of a new agency charged with oversight of large insurance companies.  Yesterday (Nov. 15), Ace Ltd., a large reinsurer, disclosed that it had received a subpoena from the SEC regarding its "finite insurance" contracts, which are designed to help companies limit risk and, in some instances, smooth out their financial results.  This is part of a continuing investigation by the Commission of the reinsurance field and how its financial products have been used–or misused–by companies in their financial reporting.

While the SEC can investigate the financial practices of insurance companies to the extent their conduct affects financial reporting, the Commission cannot directly regulate insurers. Indeed, there is no federal regulation of insurance companies because of the McCarren-Feguson Act, which reserves to the states the power to regulate insurance.  The key provision of the Act is 15 U.S.C. § 1012, which provides:

State regulation

The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.

Federal regulation

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, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance: Provided, That after June 30, 1948, the Act of July 2, 1890, as amended, known as the Sherman Act, and the Act of October 15, 1914, as amended, known as the Clayton Act, and the Act of September 26, 1914, known as the Federal Trade Commission Act, * * * shall be applicable to the business of insurance to the extent that such business is not regulated by State Law.

The Act means that large insurance companies potentially are subject to 51 state regulators (including the District of Columbia), and that kind of fragmentation makes it difficult for coordinated oversight.  At the same time, any push for federal regulation will run into issues regarding the budget and federalism, not to mention the usual in-fighting on Capitol Hill regarding which Committee would have oversight responsibility for the overseers.  As the investigations of the insurance industry blossom, watch for calls for increased regulation, and notice how the insurance industry divides on the issue." [November 16, 2004; White Collar Crime Prof Blog has the original post]