Property Casualty Insurance: A Case Study in Federalism

The trend in recent years has been to nationalize every issue and cede control of state or private matters to a federal bureaucracy in Washington.

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David Sampson is the president and CEO of the Property Casualty Insurers Association of America. He served in the George W. Bush Administration as the deputy secretary of the U.S. Department of Commerce and as assistant secretary of Commerce for Economic Development.

Recently, the Supreme Court heard arguments on the constitutionality of the Patient Protection and Affordable Care Act. While the focus was primarily on the individual mandate and the application of the Commerce Clause, the fundamental debate surrounding the healthcare law is really about the proper size and scope of the federal government.

Since 2009, Americans have seen an unprecedented expansion of the power of the federal government; the stimulus, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the aforementioned Affordable Care Act are just a few high-profile examples. The trend in recent years—and especially since the economic crisis—has been to nationalize every issue and cede control of state or private matters to a federal bureaucracy in Washington.

[See a collection of political cartoons on healthcare.]

However, many industries operate effectively with minimal federal supervision. The property casualty insurance industry—home, auto, and business insurance—is one such example.

For more than 150 years, the property casualty insurance industry has been primarily regulated at the state level by insurance commissioners in every state. These commissioners regulate insurance companies for market conduct and solvency, and it is important to note that no major insurer insolvencies occurred during the financial crisis.

Property casualty insurers are not highly leveraged, nor interconnected, and we do not securitize our risk. Underwriting risk is our core competency. And we pay for our own risk of insolvency through state guaranty funds, which protect consumers in the rare chance of a company’s failure—at levels even higher than those of the Federal Deposit Insurance Corporation.

[See a collection of political cartoons on the economy.]

From threats of earthquakes in California to hurricanes in the Gulf Coast, there are 50 very different insurance markets across the country. A duplicative federal regulatory system would be both inefficient and detrimental to insurance policyholders. Under the current state-based system, consumers can choose the right type of coverage for their property, their business, and their families.

The McCarran-Ferguson Act of 1945 explicitly delegated insurance regulation and enforcement of antitrust laws to the states. Every state has a comprehensive insurance code that governs the insurance industry, including subjecting the industry to strict antitrust enforcement. But this has not stopped the federal government from attempting to encroach upon the state-regulated system.

The most significant push for federal regulation of insurance came during debate on the Dodd-Frank Act. The insurance industry spent a significant amount of time helping policymakers understand that property casualty insurance remained strong and stable throughout the recent economic crisis, precisely because of the strong state regulatory system already in place.

[Read the U.S. News debate: Should the Dodd-Frank Act Be Repealed?]

Property casualty insurers have an extremely low rate of return on equity because our investments have to be so conservative and highly liquid to pay claims whenever a major natural catastrophe hits. Insurers have a fundamentally different business model than banks, and so the regulatory treatment needs to be different. The 111th Congress agreed, and traditional property casualty insurance was largely excluded from the Dodd-Frank Act as our industry is not systemically risky.

Elected leaders need to resist thinking that every problem can be solved with more regulation and more federal government control. The 10th Amendment to the U.S. Constitution specifically limited the power of the federal government by allocating all powers not explicitly given to the federal government to the states or to the people. This was an intentional act by the Framers, who had every reason to be fearful of an encroaching, centralized government.

As The National Review’s Jonah Goldberg recently wrote, "A one-size-fits-all policy imposed at the national level has the potential to make very large numbers of citizens unhappy, even if it was arrived at democratically." Instead, the Founding Fathers empowered states to make the best decisions for their citizens. Property casualty insurance is a case study in how federalism works for a vital industry that millions of people across the country rely on to insure their part of the American dream.

Corrected 04/18/2012: A previous version of this article misidentified David Sampson’s organization. He is president and CEO of the Property Casualty Insurers Association.