Although the first half of the 20th century witnessed the development of insurance regulation at the state level, federal oversight clouds loomed on the horizon.

In the early 1940s, the Department of Justice brought a federal antitrust action against the South-Eastern Underwriters Association, an unincorporated association of 200 stock fire insurance companies, alleging a conspiracy to fix and maintain noncompetitive premium rates and to monopolize trade. In the 1944 landmark case of U.S. v. South-Eastern Underwriters Association, the Supreme Court overturned 75 years of legal precedent commencing with Paul, when it found that insurance could fall within the embrace of congressional power over interstate commerce.

This decision sent shock waves through the insurance industry and the insurance regulatory communities for at least four basic reasons. First, various practices previously deemed immune from the federal antitrust laws were overnight subject to such laws. Regardless of the pros and cons of ultimately applying antitrust to insurance, there was little doubt that immediate application of antitrust would have caused chaos and impeded the ability of the industry, especially property and casualty insurers, to provide personal and commercial coverage to the public. (For example, cooperative collection of data, making rates, drafting policy forms, etc., even though done under regulatory scrutiny, were very likely perceived to be illegal.) Second, the decision raised grave concern over the continued viability of state insurance regulation since its application could very well have been deemed to be a burden on interstate commerce hence invalid under the Supremacy Clause of the United States Constitution. This would have obviated the regulatory safeguards and, since at this time no regulation had developed at the federal level, a regulatory vacuum would have emerged. Furthermore, states were concerned over the potential loss of regulatory turf, and businessmen had come to intensely dislike and fear the new style of federal regulation emerging out of the New Deal in the 1930s and 1940s. Third, numerous federal statutes in many areas had been enacted without thought as to their applicability to insurance. This raised the specter of duplicating and/or conflicting state and federal law as well as the applicability of legislation not considered for and inappropriate to insurance. Fourth, the decision cast doubt on the validity of state laws taxing the insurance business, thereby depriving the states of a significant source of revenue.

As a consequence of this uncertainty, in 1945 Congress enacted the McCarran-Ferguson Act (hereinafter referred to as the McCarran Act). Awareness of the basic elements of this Act is essential to understanding the manner in which insurance regulation functions today. In brief, the Act provides that the business of insurance shall be subject to the laws of the several states which relate to regulation or taxation. No federal legislation shall be construed to invalidate or impair a state law regulating or taxing the business of insurance unless that legislation specifically relates to such business. However, a major proviso, the antitrust laws shall apply to the business of insurance to the extent such business is not regulated by state law.

Basically Congress opted to preserve the state regulatory system as being in the public interest while retaining for Congress a continuing federal oversight role. Furthermore, Congress invited the states to preempt the federal antitrust laws by regulating the business of insurance. Thus the predominant function and impact of the McCarran Act has been to allocate governmental power within the federal system. Other than limited exceptions relating to antitrust, insurance regulatory authority was clearly returned to the states. However, since the allocation of power was achieved by Congressional statute, rather than being predicated on the Constitution, Congress retained the authority to reallocate such power whenever it chooses, though it limited itself to doing so only by specifically relating its legislation to insurance. Since 1945 insurance regulation has evolved within this framework.