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The Independent Institute
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Alternative Frameworks for Insurance Regulation in the United States


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After 150 years of state-run regulation within the U.S. insurance industry, many insurers are now supporting a system that involves greater oversight by the federal government. In a move strongly opposed by the states, insurers are specifically backing the creation of an optional federal charter (OFC), which would allow insurance companies and agents to choose federal regulation, therefore exempting them from state regulation.

In addition to an OFC, Grace and Klein consider proposals such as the State Modernization and Regulatory Transparency Act, a single-state regulatory system, and the delegation of solvency regulation to the federal government and market regulation to the states, evaluating each alternative on its implications for regulatory and market efficiency. Citing the industry’s legacy, the authors suggest that initial changes will be small but may become more substantive as political conditions evolve.

Despite improvements in regulation at the state level, the concept of an OFC continues to gather attention. First introduced to the Senate as the National Insurance Act (2007), the proposed legislation would establish the Office of the National Insurance, for property-casualty insurers, and the ONI would also regulate the solvency and market conduct of these insurers. Price regulations and underwriting standards would remain under the control of the states.

Proponents suggest that an OFC would result in policy reforms and the elimination of rate regulation for participating insurers. Federal regulation could also offer greater structural efficiencies than the state system and produce a uniform set of laws and regulations for the industry nationwide. However, inadequate regulation of national insurers could expose state insurers to large assessments and vice versa. The federal government cannot guarantee the creation of a more reasonable and official set of policies than the states, nor are they immune to excessive regulation or the pressures of interest groups.

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Martin F. Grace is Research Fellow at The Independent Institute. He is the James S. Kemper Professor of Risk Management, associate director, and research associate at the Center for Risk Management and Insurance Research, Georgia State University. Grace is a contributing author to the forthcoming book Insurance Choices, edited by Lawrence S. Powell.


Robert W. Klein is Research Fellow at the Independent Institute. He is an Associate Professor and director at the Center for Risk Management and Insurance Research, Georgia State University. Klein is a contributing author to the forthcoming book Insurance Choices, edited by Lawrence S. Powell.

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