17.1 State Regulation, Licensing, and the McCarran-Ferguson Act

Who Regulates Insurance

Insurance in the United States is regulated almost entirely at the state level. The cornerstone is the McCarran-Ferguson Act of 1945 (Public Law 79-15), which Congress passed after the Supreme Court ruled in United States v. South-Eastern Underwriters Association (1944) that insurance was interstate commerce and therefore subject to federal antitrust law. McCarran-Ferguson reversed the practical effect of that ruling: it declared that state regulation and taxation of insurance is in the public interest and that federal law applies to insurance only to the extent state law does not regulate the activity.

Three exam points flow from this statute:

• Insurance is regulated by the states, not primarily by the federal government.
• Federal antitrust laws (Sherman, Clayton, FTC Acts) apply to insurance only where state law leaves a gap, and never to boycott, coercion, or intimidation, which remain federally actionable.
• The act gives a limited antitrust exemption allowing insurers to pool loss data and develop shared rates and forms through advisory organizations such as ISO (Insurance Services Office).

The NAIC and Model Laws

The National Association of Insurance Commissioners (NAIC) is not a regulator and has no direct enforcement power. It is a coordinating body of the chief insurance officials from all 50 states, the District of Columbia, and the territories. The NAIC drafts model laws and regulations (for example, the Unfair Trade Practices Act and the Producer Licensing Model Act) that individual states may adopt, modify, or ignore. Uniformity is voluntary, but most states adopt large portions to ease multi-state operation and to keep NAIC accreditation.

Exam Key: The NAIC creates MODEL laws and accredits states; it does NOT license producers, approve rates, or fine insurers. The state insurance commissioner (sometimes titled director or superintendent) does all of that.

The Commissioner and the Department of Insurance

Each state's Department of Insurance is headed by a commissioner, who is elected in some states and appointed by the governor in most. The commissioner's powers include:

A party aggrieved by a commissioner's order generally requests a hearing (notice is usually required at least 10 days in advance) and may then appeal the result to the courts. The commissioner cannot jail anyone; criminal matters are referred to prosecutors.

Admitted vs. Non-Admitted Insurers

An admitted (authorized) insurer holds a Certificate of Authority from the state and is subject to its solvency, rate, and form rules; its policyholders are protected by the state guaranty association. A non-admitted (unauthorized/surplus-lines) insurer is not licensed in the state and is not guaranty-fund protected. Surplus-lines business may be placed only by a specially licensed surplus-lines broker and only after the risk has been declined by a required number of admitted insurers (commonly three).

Insurers are also classified by home location:

• Domestic — formed under the laws of THIS state.
• Foreign — formed in ANOTHER U.S. state.
• Alien — formed in ANOTHER country.

Producer Licensing

A producer (the modern statutory term for agent or broker) must hold a valid license in every state where solicitation, negotiation, or sale occurs. The licensing pathway:

A producer first obtains a resident license in the state of principal residence or business. Under the producer-licensing reciprocity provisions of the Gramm-Leach-Bliley Act (1999) and NAIC uniform standards, non-resident licenses in other states are usually issued without a second exam, provided the home-state license is in good standing.

Federal law adds a hard backstop. Under 18 U.S.C. 1033-1034, anyone convicted of a felony involving dishonesty or breach of trust is prohibited from working in insurance unless they first obtain a written 1033 waiver from the commissioner. A felony-fraud conviction is therefore not just a renewal problem—it is a federal bar absent a waiver.

Continuing education is commonly 24 hours every 2 years, including roughly 3 hours of ethics. Missing CE causes a lapse (administrative non-renewal), which is different from a disciplinary suspension or revocation. Temporary licenses (90-180 days) let a survivor or designee service existing business after a producer dies, is disabled, or is called to active duty, but they may not write new business.

McCarran-Ferguson and the Federal-State Balance

The legal foundation for state insurance regulation is the McCarran-Ferguson Act of 1945, passed after the Supreme Court's South-Eastern Underwriters decision held insurance was interstate commerce subject to federal law. McCarran-Ferguson returned primary regulatory authority to the states, declaring that federal antitrust and commerce laws apply to insurance only to the extent the business is not regulated by state law.

The exam tests that insurance is primarily state-regulated, with federal law stepping in mainly where states do not act (and through later overlays like Gramm-Leach-Bliley privacy, Dodd-Frank/FIO, and terrorism (TRIA) backstops).

The NAIC and Model Laws

The National Association of Insurance Commissioners (NAIC) is not a regulator — it is an association of state commissioners that drafts model laws and regulations for states to adopt, promotes uniformity, maintains financial databases, and runs accreditation of state solvency regulation. A state adopts a model only when its legislature enacts it; until then the model has no force in that state. A stem implying the NAIC directly licenses producers or directly regulates rates is wrong — that power belongs to each state's department.

The Commissioner and Departmental Powers

Each state's Commissioner (Director/Superintendent) of Insurance — appointed or elected — administers the insurance code: licensing producers and insurers, examining companies' finances and market conduct, approving rates and forms where required, holding hearings, issuing cease-and-desist orders, levying fines, and suspending or revoking licenses. The Commissioner may also place an insolvent insurer into rehabilitation or liquidation as receiver.

Admitted vs. Non-Admitted (Surplus Lines)

An admitted (authorized) insurer holds a certificate of authority and is fully subject to state rate/form regulation and the guaranty fund. A non-admitted (unauthorized) insurer is not licensed in the state; coverage is placed through surplus lines brokers only when admitted markets decline the risk, and such policies are not protected by the guaranty association. The exam tests that surplus-lines/non-admitted coverage is a last resort for hard-to-place risks and lacks guaranty-fund backing.

Producer Licensing Basics

Producers must be licensed by line (property, casualty, life, health), meet pre-licensing/exam and continuing-education requirements, and be appointed by an insurer to represent it. Acting without a license, or transacting a line not on the license, is a violation subject to penalties.