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Inherent Advantages of State Insurance Regulation
In an earlier work, this author considered some of the inherent advantages of state insurance regulation. Included among such advantages are (1) federalism, (2) existence of state insurance regulation, (3) pluralism, experimentation and vitality, (4) accountability, (5) regulation closer to the people and (6) limitations on omnipotence.
In enacting the McCarran Act, Congress sought to resolve the basic issue of the allocation of governmental power over the business of insurance between the federal and state governments. At that time Congress concluded that the public would be better served if regulatory authority were left with the states. This decision was consistent with the fundamental principle of federalism, which holds that the dispersion of political and economic authority and power between state and federal governments serves the public interest.
[T]here is importance to our whole society, altogether transcending and overriding industry interests, of some fundamental political values urging state level regulation. The very basis of our federal system is at issue. Decentralization and dispersion of political power is in itself an important value in a democratic society. Concentrations of power are bad per se, and it is irrelevant whether the concentrations are in government, in labor or in business. In any case they are in people. For present purposes, however, I am only concerned with powerful government. Undue concentration of power in Washington is unwise from any point of view. Any problems that can be dealt with adequately at the state level should be handled there in preference to Washington.
And
[h]istory of both federal and state governments has demonstrated that government cannot always be relied upon to perform in the public interest. An important guardian of such interest is the dispersion of power between the state and federal government enabling each to exercise a discipline over the other. . . . Undisciplined power tends to become unresponsive at best and corrupt at worst. Effective implementation of the concept of federalism is fundamental to the exercise of such discipline. This concept requires a dispersion in ultimate decision-making power and responsibility and not merely superimposing a federal government regulatory agency on top of that of the states.
The inevitable shifting in regulatory locus arising from a significant modification or repeal of the McCarran Act or from direct vesting of substantial additional regulatory authority over the insurance business in the federal government would directly contradict this fundamental concept of federalism.
Existence of State Insurance Regulation
State insurance regulation not only exists currently, but it has also been in place for well over a century.
As a general proposition, it is more effective and less expensive to improve upon and add to existing institutions than to start new ones, especially with respect to institutions, such as the state insurance regulatory mechanisms, which have demonstrated a willingness and facility to evolve to meet changing conditions and public demands. Assumptions of regulatory power by the federal government could sweep away much of the experience and expertise existing in state insurance departments. Such a shift would cast doubt for years as to many of the rules under which the business has been accustomed to function. From the customers’ perspective, the known local points for applying citizen pressure would be removed, dispersed or obscured.
Furthermore, there is no assurance that the resulting quality of federal regulation will justify the dislocations incident to the change in locus of regulatory authority. The history of many federal agencies does not give rise to overconfidence. Few things are so unsure as predicting the full range of consequences of a major change in a complex system. Consequently, the fact that state insurance regulatory mechanism already exists, in itself, is a powerful argument for its continuance.
Pluralism, Experimentation and Vitality
Although there is substantial commonality in the conditions and regulatory problems among the states, they can and often do vary significantly from state to state. For example, industry structure, the degree of market availability of certain lines of coverage, pricing problems, urban and rural situations, etc. may be very different. States possess the unique ability to target specific market needs and localize remedies to improve the insurance environment for both the consumer and the insurance industry. A state regulator is better positioned to be more responsive to react to local conditions and needs than a federal regulator bound to one set of rules applicable to all states.
Furthermore, the pluralism of a state regulatory system
involves regulatory agencies of limited size. It seems clear that the economies of scale taper off as size increases beyond some point while problems of bureaucracy become proportionately worse.
The field of government regulation is imperfectly understood. This lends support to utilizing a number of agencies rather than just one. Such a system is conducive to experimentation and will confine the impact of an experiment until it has been tested. The dispersion of decisional responsibility and power tends to restrict the gravity of the impact of mistakes or miscalculation to a limited area and segment of the population. On the other hand, a dramatic and effective innovation by a particular state is apt to be adopted elsewhere after a period of time and testing.
In contrast, inherent in a shift to a new massive federal regulatory regime is major uncertainty as to how it will evolve. Insurers, agents and the public will not know the impact of such a fundamental shift until it is too late to do much about it. Even after a federal regulatory system is in place, by its very nature, federal regulation is circumscribed from this type of experimentation except at the risk of bad regulation causing nationwide adverse consequences. In contrast, under the state regulatory system, effects of ill advised legislation or regulation can be localized and more readily reversed. Thus, states can well serve as laboratories for testing different types and degrees of regulatory controls. Through one or a few states trying out new and creative approaches to regulatory problems, the state system is better able to experiment without affecting the insurance business nationwide.
Furthermore,
[p]luralism also affords a more fertile environment for greater vitality than does a single national agency. The scope for top creative leadership is greater in a system having several tops. The work of one or more vigorous agencies is contagious. It tends to be imitated, competed with and used as a standard in other states. The problem of keeping regulatory agencies, whether state or federal, imbued with the sense of vitality, capable of self-renewal and change is now and, certainly in the future, a graver public concern than an occasional awkwardness of a multistate regulatory system.
A unique, very important and frequently overlooked advantage of state insurance regulation, under the continuing discipline of congressional oversight of the McCarran Act, is the ongoing threat of a national alternative which hangs over state regulation. State insurance regulatory authorities are subject to seemingly constant review, investigation and embarrassment by Congress, which possesses the power to abolish or modify the system if it so chooses. Such federal oversight stimulates the states to better performance.
On the other hand, if a national regulatory agency becomes involved, it is unlikely that it would be as skeptically watched or credibly menaced. Congressional oversight of federal regulatory agencies has not been demonstratively better than state legislative oversight of state agencies. In other words, Congressional oversight of federal agencies has yielded fewer public benefits and more adverse side effects than Congressional oversight of state insurance regulation.
Thus, the McCarran Act has imposed a unique and rather effective system of accountability over state insurance regulatory agencies. Such accountability can be retained only as long as federal assumption of insurance regulatory authority remains a threat rather than becoming a reality.
Regulation Closer to the People
While perhaps a cliché, state government tends to be closer and more accessible to the insurance consuming public which it seeks to serve than a federal counterpart would be. An individual possesses more readily available means to seek redress, obtain answers and apply pressure at the state level. An insurance commissioner and his or her higher level staff are more accessible than comparable members of the President’s cabinet or chairperson (or members) of federal independent agencies such as the FTC. Furthermore, there are more than 50 state insurance commissioners in contrast to one federal cabinet secretary or agency chairperson to whom resort can be had. When ultimate responsibility is vested in far-off Washington, response to public members tends to be slower and less attuned to their needs and demands.
A federal agency possessing comprehensive authority to regulate the insurance business would wield substantial influence and control over the nation’s economy, especially given Congressional tendency to establish broad standards to be enforced through the delegation of wide discretionary authority to federal agencies. Other than occasional oversight checks, the exercise of regulatory power by federal agencies within broad parameters tends to be quite extensive. At least as a general proposition, under the state regulatory system, an insurer can opt out of doing business in a state, whereas it is rather difficult to opt out of the entire nation under a system of comprehensive and pervasive federal controls.
In addition, if the federal insurance regulatory function is vested in an agency which is also responsible for providing federal insurance and reinsurance programs, the potential power of the agency becomes awesome. If such an agency were to seek the expansion of its insurance operations, it could either intentionally or inadvertently regulate the insurance industry into ineffective performance to create the legislative climate for such expansion. Or the mere potential of doing so would afford the federal regulator awesome regulatory leverage.
In short, a federal agency possessing either sole or predominant control over the insurance industry could very well become a virtually omnipotent overseer, especially if it also has the authority and capability to provide insurance coverage itself. Such a concentration of economic and political power would appear to run contrary to the emerging consensus as to the reduction of, or at least a limitation on, the federal regulatory role in our society.
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