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Draft:  4/16/2009

Personal Lines Regulatory Framework


An important and controversial topic facing state legislatures is selection of the most appropriate regulatory framework for personal lines insurance products. Making the selection requires careful consideration of many factors. As such, this paper explores choices that a legislature might make along with factors that will influence these choices. This paper also contains a recommendation to the NAIC Property and Casualty Insurance (C) Committee to address the following charge:

Present a recommendation related to the personal lines regulatory framework to the Property and Casualty Insurance (C) Committee by the 2008 Summer National Meeting so the committee can complete its work on revisions to the NAIC model rating law(s).

To provide a balanced perspective, comments were solicited from parties other than regulators. Comments were received from the American Insurance Association (AIA), the Center for Economic Justice (CEJ), the Consumer Federation of America (CFA), Housing Opportunities Made Equal (HOME), Lawrence Mirel on behalf of State Farm, the National Association of Mutual Insurance Companies (NAMIC), The Property Casualty Insurers Association of America (PCI) and State Farm Insurance Companies.

The paper will concentrate on the two major personal lines insurance products: auto insurance and homeowners insurance. As will be seen, it reflects the opinion of the Personal Lines Market Regulatory Framework (EX) Working Group that the regulatory framework for personal lines insurance products does not need to be uniform in all states.

Historical Perspective

There are three important milestones that add historical perspective to the regulation of insurance products by the states. The first is the United States Supreme Court decision in Paul v. Virginia. In an 1869 decision, the Supreme Court held that insurance was not interstate commerce and, therefore, not subject to control by the federal government under the commerce clause of the Constitution. The second milestone resulted from the 1944 reversal of this decision in the South-Eastern Underwriters case. Following this reversal, insurers, insurer trade associations, insurance producers, rating organizations, state legislators and insurance regulators encouraged Congress to act to avoid drastic changes to insurance regulation. The result was the McCarran-Ferguson Act (Public Law 15-79 of 1945). The third milestone was the reaffirmation of the McCarran-Ferguson Act contained in the 1999 Gramm Leach-Bliley Act.

The McCarran-Ferguson Act provides insurers with a limited exemption from federal anti-trust laws (the Sherman Act, the Clayton Act and the Federal Trade Commission Act) to the extent that insurance is regulated by the states.  Federal law still applies to acts of intimidation, coercion, or boycott or allegations of attempted intimidation, coercion, or boycott. Without this limited anti-trust exemption, insurers would not be able to use advisory organizations to collect and compile historical statistical information for ratemaking purposes.

Following the adoption of the McCarran-Ferguson Act, all states enacted laws regulating rates. At the time, there was a great deal of discussion about the topic of this paper. An All-Industry Committee representing nineteen insurer trade associations was formed to work with insurance regulators on a model law. The result was the two “All-Industry” model laws that were adopted by the NAIC in 1946. Minor amendments were made to them in 1947 and they served as the basis for rate regulation in all states. As is typical for NAIC model laws, lobbying efforts by local insurers and their trade associations, local insurance producers and their trade associations and local consumer interests, led to state enactments that were similar, but not identical, to the All-Industry model laws. There were two distinct models at the time - one for fire and marine insurance and one for casualty and surety. This matched the industry custom at the time of having separate entities writing property insurance and liability insurance.

Early rating laws compelled adherence to rates filed by rating bureaus on behalf of their member insurers. Price competition often came in the form of policyholder dividends that occurred after the policy period was over. Some states allowed insurers to file “deviations” from the rates filed on their behalf. The use of dividends and deviations added elements of price competition to the mix.

In the 1960s, a more significant number of regulators and insurers began to question the rate regulatory framework of earlier times. There was a movement in some states to liberalize rating laws to move toward competitively-oriented laws that

© 2009 National Association of Insurance Commissioners 1

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