history of regulation Flashcards
Paul vs. Virginia 1869
- Paul applied for license to sell insurance for insurers licensed in NY. VA denied him license since the insurers had not deposited required foreign insurer bond. Paul went ahead and sold insurance in VA anyway and was arrested
- SCOTUS review constitutionality of VA licensure law
- Ruling that insurance was not interstate commerce bc insurance is contract delivered locally and it should be regulated by the states and not the federal government (not subject to laws affecting interstate commerce)
- Impact on regulation of insurance: regulated by states, bureau ratemaking allowed
Pre-SEUA Decision & NCIC effort
- Early to mid-1800s saw fierce competition and many insolvencies -> Insurers formed compacts and associations to control rates
- Two schools of thought about compacts: Deter open and free competition & in public’s best interests if it prevented insolvencies
- Sherman Antitrust Act in 1890: Did not directly apply to insurers because not interstate commerce, but gave states motivation to pass own antitrust laws against controlling rates: prohibited insurer compacts/associations from controlling rates
- did increase some states regulatory authority over insurer’s actions
- 1923 NCIC passed resolution to bring about repeal of state anticompact laws -> regulators supported this movement and reinstatement of compacts and rate bureaus
SEUA Decision 1944
- SEUA formed after states began to repeal their antitrust laws
- SEUA defense = Paul v. VA ruled that insurance was not interstate commerce and therefore it was not subject to federal antitrust laws
- Decision by SCOTUS = overturned ruling by deciding insurance was interstate commerce & Sherman Anti-Trust Act was intended to prevent collusion of pricing to gain monopoly power that SEUA members were exhibiting
- No business that is transacted over state lines, including insurance, should be exempt from federal regulation
- immediate effect of the SEUA decision was that federal legislation now applied to insurance, bureau ratemaking not allowed; federal anti-trust laws apply
2 main questions considered by SCOTUS for SEUA
Did Congress intend the Sherman Act to prohibit insurer’s conduct of restraining/ monopolizing business? Do insurance transactions across state lines constitute “commerce among several states”, which will subject them to Congressional regulation?
SEUA activities that led to criminal indictment
Continuing agreement and concert of action to take control of 90% of the fire & allied lines market, Fixing premium rates and agents’ commissions, Using boycott and other forms of coercion and intimidation to force non-SEUA members to comply, Withdrawing rights of agents to represent SEUA members if they also represented non-SEUA companies, Threatening insurance consumers with boycott and loss of patronage if they didn’t purchase insurance from SEUA members
reasons that led to SEUA decision
- Insurance is not a business that is distinct in each of the states -it is interconnected and interdependent among the states
- Only 18 out of more than 200 SEUA members were domiciled in 1 of the 6 SEUA states
- Intangible products were subject to Congressional regulation
- Other businesses make sales contracts in states where they do not have headquarters, and these are subject to the Commerce Clause
- No business that is transacted over state lines, including insurance, should be exempt from federal regulation
Sherman Act
to prevent collusion and attempts to gain monopoly power; Insurers could no longer form groups to control rates and coverages
2 features = Prohibits actions that create monopoly power & Prohibits boycott, coercion, and intimidation
Clayton Act
prohibited anticompetitive behavior = made illegal activities that lessened competition or created monopoly power; examples include price discrimination, requiring purchase of one product with the purchase of another, and mergers between competitors
Robinson-Patman Act
prohibited price discrimination with the exception of price differentials that could be shown to result from differences in operating costs; Insurers could reduce premiums to drive out competition only if they could prove that the reduction resulted from increased efficiencies in operations
NAIC actions after SEUA decision
- NAIC sought to appeal the decision. When appeal was denied, NAIC sought to continue state regulation resulting in passage of McCarran-Ferguson Act
- NAIC proposed laws passed to allow cooperative rate setting
- NAIC model laws laid out plans for state regulation of insurance. Following SEUA, NAIC tried to pressure Congress into passing law assigning insurance regulation to states.
McCarran-Ferguson Act 1945
- Essentially gave the NAIC and insurance industry what they wanted -Returned regulation of insurance back to states. Justification was that it was “in the public interest”
- Sherman Act still prohibits boycott, coercion, and intimidation
- If states do not regulate an aspect of insurance, then federal anti-trust laws apply
- Federal law that regulates a specific activity of insurance supersedes state laws with respect to that aspect or activity
- Impact: bureau ratemaking was allowed as long as it was regulated by the states. Most states passed prior approval regulation
positives and negatives of mccarron-ferguson
- Positive: insurers could be more free to charge actuarially sound rates, with competition providing incentive to accurately predict costs (and avoid adverse selection)
- Negative: if not careful, competition with insufficient regulation could lead to price wars where in a competitive market some insurers could low-ball prices, greatly expand market share, and then go insolvent, which could lead to other insurers going insolvent (via guaranty association fees). Demand by the public for overly strict regulation may then be implemented
NAIC responses to the McCarran-Ferguson Act
- Development of model laws to prevent/limit the regulation of insurance by the federal government
- Development of model laws to allow rate regulation by the states
- Development of model laws to prohibit certain anti-competitive activities / behavior
- Development of model laws to promote equitable ratemaking and ensure rates were not excessive, not unfairly discriminatory, and were adequate
- Allow cooperation in setting rates, as long as it didn’t hinder competition
