For more than three decades, federal law has relegated the regulation of the vast insurance industry to the states. But the increasing dissatisfaction with state regulation, both in Washington and among a small segment of the industry, points to an inevitable showdown between federal and state agencies for jurisdiction over insurers.
Symbolic of that coming clash are two events occurring simultaneously today in Minneapolis.
State insurance commissioners are gathering in that city for the annual convention of the National Association of Insurance Commissioners.
Traditionally, the event is simply an excuse for the regulated to wine and dine the regulators, with little substantive work or discussions taking place.
Also in Minneapolis today, Jeremiah S. Buckley, minority staff director of the Senate Banking Committee, will brief members of the American Bar Association on a federal regulatory proposal. The bill's sponsor, Sen. Edward W. Brooke (R-Mass.), is expected to introduce the legislation next week.
One section of the Brooke bill would create a federal guarranty fund for property and casualty insurance companies. similar to the Federal Deposit Insurance Corp, for banks.
"It is generally conceded," Buckley says in the text of the speech he will deliver "that the present state guaranty funds would not be able to cope with a large company insolvencies."
Some 47 states have guaranty funds for property and casualty companies. About eight states also have guaranty funds for life, health and accident companies.
The state plans call for surviving companies to pick up the claims and policies of the insolvent company.
The Brooke bill calls instead for an annual assessment of companies to build upa pool of funds to cover an insolvency.
The weakness of the state guaranty system can be seen by what might have happened if Government Employees Insurance Co. (Geico) had been allowed to slip into inslovency last year.
"The problem with state guaranty plans is that when a big company is in trouble, the whole industry is unually in the same shape," one industry observer said.
In the Geico case, he said, if insurance companies had been assessed retroactively to cover Geico policyholder claims and other expenses, "a number of companies could have been pulled down with Geico."
The industry debate over the Brooke bill shows how divided insurers are over the whole question of federal insurance regulation.
For example, the American Insurance Association (AIA) has been working with Brook's people drafting the bankruptcy guaranty portion of the legislation.
The AIA, whose members include the big, pulicly owned insurers such - as Insurance Company of North America, The Hartford, adn The Travelers, have spported federal guaranty funds since 1969, when such a proposal was made by Sen. Warren Magnuson (D-Wash.).
"The only problem," an AIA spokesman said, "is what is the guid pro quo for our backing the guaranty portion of the bill. How much federal regulatory authority will be allowed."
Most other Washington representatives of linsurance interests are opposed to the Brooke bill because they see it as a fearful step toward overall federal regulation of the industry.
The very foundation of state regulation - the 1945 McCarran-Ferguson Act - was shaken last January by a Justice Department report.
Essentially, the McCarran-Ferguson Act said the states had power to regulate insurance, barring federal legislation to the contrary. It also provided insurance companies with an antitrust exemption for rate setting and made such rates subject only to state regulation.
But last January, a Justice Department Task Group on Antitrust Immunities concluded generally that the special treatment of insurance companies under McCarran-Ferguson was unwarranted.
These broader questions of federal regualtion are what make insurance executives nervous. The Brooke Bill, for example, provides for companies to choose between federal and state charters. Both federal and state Chartered companies would be able to take part in the guaranty program.
But the effect of federal charters could be to undermine the state insurance rate-setting mechanisms. While a number of big companies that do business in most states are unhappy with the crazy quilt of rates and regulations, they are not ready to jump into the federal lap for fear of what might follow.
For example, most insurers are unhappy with yet another section of the Brooke bill that would take the Federal Insurance Administration FIA) office out from under the Department of Housing and Urban Development.
Currently, the FIA manages federally subsidized insurance programs - against flood, riot, and crime. The Brooke bill would convert the FIA into a 3-person Federal Insurance Commission with a chairman appointed by the President.
But the industry has always looked at the Federal Insurance Administrator with some suspicion. Indeed, the industry has compaigned vigorously to oust the present acting administrator, Robert Hunter.
Hunter has occasionally criticized what he sees as questionable ration practices by the industry and its refusal to provide normal coverage to minorities and to the poor.
No one is betting on the Brooke bill passing. For one thing, there is too much ignorance on the Hill about the industry and about the uneven quality of state regulation. Senators and Congressmen are duck soup for the army of high-paid, will-informed insurance lobbyists who wander Washington.
Few legislators know that many states attempt to regulate computerized insurance companies with adding machines. Or that many state insurance commissions try to regulate life insurance companies without having actuaries on their staffs. Or that some states, lsuch as Georgia, Mississippi, Idaho and Oklahoma, do not even have their own inssurance examiners to review insurance company books.