The history of state insurance departments
Insurance in the U.S. started with a group of firefighters in Philadelphia – one of whom was Benjamin Franklin.
Editor’s note: This column is part of PropertyCasualty360’s Foundations of P&C Insurance series, which aims to bring new insurance professionals up to speed, while keeping industry veterans sharp. On Fridays, PC360 will offer up fresh content covering the nitty-gritty details of P&C insurance, tips for professional development, articles looking at the industry’s more niche concepts, and the history of certain lines and programs.
Where did insurance start in the United States?
In 1752, a group of firefighters — which included Benjamin Franklin — founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. They structured the company after the Amicable Contributorship of London, as a mutual insurance company in which policyholders would share risk.
How the modern insurance framework came to be
In 1799, the first U.S. law considering insurance regulation was passed in Massachusetts, which introduced the concept of state supervision of insurance business.
The New Hampshire Insurance Department became the first insurance regulatory agency in the U.S. when it was founded and appointed its first insurance commissioner in 1851. Over the next two years, seven states followed New Hampshire’s example and established their own insurance departments: Massachusetts, Vermont, Connecticut, California, Indiana, Missouri and New York.
The right of states to determine insurance regulation and taxation was held by the Supreme Court in 1869 when it was ruled in the case of Paul v. Virginia that “issuing a policy of insurance is not a transaction of commerce.”
Beginnings of the NAIC
The first meeting of the National Convention of Insurance Commissioners (NCIC) — which became today’s National Association of Insurance Commissioners (NAIC)— was held in 1871 in New York City.
Those at that first meeting outlined their reason for forming with the following: “First, the delegates decided that there were benefits arising from agreements related to the discretionary powers of the commissioners. Specifically noted in this area were agreements related to terms and nomenclature. The second area was legislation. The convention observed that, while it could not enact laws, that it could influence them.”
Along with the formation of the NCIC came the passage of the Reciprocal General Insurance Act in 1871, which served to, “revise, simplify, and amend the laws of this State in relation to insurance, with due regard to the legislation of other States, so as to secure mutual harmony in the promotion of the public interest, to define the relation of the State to companies and individuals, to insure the stability of companies, to protect the interests of the insured, and to encourage the employment of capital.”
The NAIC is governed by the chief insurance regulators from all 50 states, the District of Columbia and five U.S. territories, who coordinate the regulation of multistate insurers.
Other notable moments in state insurance history from this period include:
*1895: The NAIC recommended the adoption of rules to stop insurers from doing business in states where they had not complied with the state’s laws. *1906: When many fire insurers went into bankruptcy after the 1906 San Francisco earthquake, collective rate setting was established. *1914: The U.S. Supreme Court ruled in German Alliance Insurance Company v. Lewis that states may regulate insurance rates due to their effect on the public interest.
The McCarran-Ferguson Act
The right of states to regulate their own insurance industries was challenged and overturned by a 1944 court case (United States v. South-Eastern Underwriters Association) that determined insurance was commerce, and could therefore be regulated by the federal government according to the U.S. Constitution’s Commerce Clause.
In 1945, Congress passed the McCarran-Ferguson Act in response to the Supreme Court’s decision. The act entrusted states with the regulation and taxation of their own insurance business, without interference from federal regulation, unless specifically provided otherwise by federal law.
NAIC accreditation standards were adopted in 1989, and in 1990 the accreditation certification process began. This accreditation is a certification presented to “a state insurance department once it has demonstrated it has met and continues to meet an assortment of legal, financial and organizational standards as determined by a committee of its peers.”
By 1992, ten states had received accreditation. Currently, all 50 states, the District of Columbia and the U.S. Virgin Islands are accredited. Accredited insurance departments are required to undergo a comprehensive review by an independent team every five years.