It's June 1944. General Dwight D. Eisenhower is in the final planning stages of launching the largest sea-borne invasion in the history of the world. As he confers with his staff and the staff of the Allied forces, and the men prepare for battle on the beaches of Normandy — the United States Supreme Court is in the act of determining policy that will shape the insurance industry for generations.

McCarran-Ferguson Act

On that June day, the Supreme Court handed down its decision on United States v. South-Eastern Underwriters Association. The Supreme Court ruling put into motion the regulation of insurance, holding that insurance companies were subject to the Sherman Anti-Trust Act. On March 9, 1945, Congress passed the McCarran-Ferguson Act, thus creating the regulatory framework that has been guiding the insurance industry since.

The McCarran-Ferguson Act created these main areas of regulation:

• A partial exemption for insurance companies from the federal antitrust legislation that applies to most businesses.
• Provision for states to regulate insurance.
• Provision for states to establish mandatory licensing requirements.
• Preservation of certain state laws on insurance.

To fully understand the reasons for McCarran-Ferguson, one has only to read about the business practices employed by Southeastern Underwriters, and compare them with what we take for granted today.

In the 1930s, very little regulation existed, resulting in suspect business practices, charlatans engaged in underwriting and claims, and there were woeful financial controls. With each state overseeing its own regulation, there was little uniformity or oversight, and insurance companies grew to control the markets. The main theme of the Supreme Court ruling was that the Sherman Antitrust Act did apply to the insurance industry. The South-Eastern case illustrates not only the egregious business practices in place at that time, but also how far the insurance industry has come.

Monopoly, mafia tactics

The picture this paints is nothing short of monopoly, with some mafia tactics thrown in for good measure. The Court noted that, at a very basic level, the business practices of Southeastern Underwriters were in massive violation of the Sherman Antitrust Act. In its decision, the Court meted out remedies that, to this day, form the foundation of the McCarran-Ferguson Act and the regulatory framework of modern insurance.