#16
Federalism in an Era of International Free Trade:
The General Agreement on Trade in Services
And the Regulation of Insurance in the United States
Table of Contents
Introduction
2
3
I.
The Domestic Regulation of Insurance: A Division of Authority Between the State and
Federal Governments
6
A.
The McCarron-Ferguson Act and the Constitutional Underpinnings of Insurance
Regulation
7
B.
The Traditional Role of State Insurance Regulators
C.
Pressure for Change
10
D.
Movement Towards a Larger Federal Role
14
II.
The General Agreement on Trade in Services and Its Restrictions on Insurance
Regulation
A.
9
16
Current GATS Commitments Affecting Insurance Regulation
18
a.
Most-Favored-Nation Treatment
18
b.
Market Access
18
c.
National Treatment
19
B.
Future GATS Commitments Affecting Insurance Regulation
19
C.
The Dispute Settlement Process for GATS Violations
21
III.
Limited Avenues for State Input in WTO Negotiations and Dispute Settlement
22
IV.
Hypothetical Insurance Violations and Dispute Settlement
25
V.
Recommendations for Preserving a Dual System of Insurance Regulation
29
Introduction
3
The regulation of insurance within the United States has traditionally been the
responsibility of the states. 1 Following the McCarran-Ferguson Act of 1945, in which Congress
declared that “the continued regulation and taxation by the several States of the business of
insurance is in the public interest,” the federal government maintained only a limited role in the
governance of the insurance industry. 2 Congress may choose to enter the field at any time; it
has, for instance, enacted substantial legislation in the areas of antitrust, employee benefits,
health insurance, and securities regulation that affect the business of insurance. 3 But the federal
government has left the direct regulation of insurance, including the management of insurer
solvency and the maintenance of important consumer protections, to the states. State insurance
regulators conduct regular reviews of insurance rates, receive and process consumer complaints,
provide for guaranty funds in case of insurer insolvency, and license insurance companies,
agents, brokers, and the products they wish to sell. 4
Recent developments have prompted a reconsideration of the appropriate division of
regulatory authority over insurance between the federal government and the states. For many,
the 2008 financial crisis demonstrated the inadequacy of state insurance agencies in dealing with
the systemic risks created by financial entities engaged concurrently in nationwide banking,
1
See Susan Randall, Insurance Regulation in the United States: Regulatory Federalism and the National
Association of Insurance Commissioners, 26 FLA. ST. U. L. REV. 625, 626 (1999). To avoid confusion, this paper
will use the word “state” or “states” to refer to one or more of the fifty states within the United States, and the word
“country” or “countries” to refer to nations outside of the United States.
2
See 15 U.S.C. § 1011 (2012).
3
See, e.g., JOHN F. DOBBYN, INSURANCE LAW 291-92 (2d ed. 1989); IRWIN M. TAYLOR, THE LAW OF INSURANCE 4
(2d ed. 1968).
4
See generally NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS, STATE INSURANCE REGULATION (2011),
available at http://www.naic.org/documents/topics_white_paper_hist_ins_reg.pdf. In 2010, state insurance agencies
employed approximately 11,600 regulatory personnel and collected about $18.6 billion in revenues from insurance
regulation and licensing. Id. at 2.
securities, and insurance activities. 5 Furthermore, international efforts to liberalize the global
4
insurance industry under the auspices of the World Trade Organization (“WTO”) have
highlighted the federal government’s inability to enter into international agreements without
impeding on the state regulations already in place. 6 Although substantial disagreement remains
over the appropriate regulatory—or deregulatory—goals that a new federal insurance presence
should aim to further, the movement towards a larger federal role has nevertheless gained
substantial traction in the last several years. A moderate step in this regard was the 2010
establishment of the Federal Insurance Office (“FIO”) within the U.S. Department of the
Treasury. 7 The FIO has important market-monitoring and information-sharing responsibilities,
and it can preempt certain state regulations that are inconsistent with international agreements. 8
Other recent legislative proposals have ranged from stronger coordination among state insurance
regulators to an entirely new system of federal oversight, licensing, and regulation that would
preempt all state action in these areas. 9
The United States’ international commitments under the General Agreement on Trade in
Services (“GATS”) may also accelerate the movement toward a more limited insurance
regulatory role for the states. 10 In general terms, GATS prohibits WTO members from enacting
5
See, e.g., U.S. DEPARTMENT OF THE TREASURY, FINANCIAL REGULATORY REFORM—A NEW FOUNDATION:
REBUILDING FINANCIAL SUPERVISION AND REGULATION 2 (2009), available at
http://www.treasury.gov/initiatives/Documents/FinalReport_web.pdf; BAIRD WEBEL, CONGRESSIONAL RESEARCH
SERVICE, THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT: INSURANCE PROVISIONS 1
(2010), available at http://www.llsdc.org/assets/DoddFrankdocs/crs-r41372.pdf.
6
See Elizabeth F. Brown, Will the Federal Insurance Office Improve Insurance Regulation?, 81 U. CIN. L. REV.
551, 566 (2013).
7
See 31 U.S.C. § 313 (2012).
8
See id.
9
See, e.g., National Insurance Consumer Protection Act, H.R. 1880, 111th Cong. (2009); Insurance Industry
Competition Act of 2009, H.R. 1583, 111th Cong. (2009); Insurance Information Act of 2008, H.R. 5840, 110th
Cong. (2008); see also infra notes 55–57 and accompanying text.
10
See Agreement Establishing the World Trade Organization, Annex IB: General Agreement on Trade in Services,
Apr. 15, 1994 [hereinafter GATS].
trade measures that harm foreign service providers. 11 Not only does GATS limit the range of
5
policy choices available to state insurance regulators, it effectively forces the federal government
to preempt any state statute or regulation that the WTO’s Dispute Settlement Body (“DSB”)
finds to be in violation of GATS. 12 The United States’ GATS insurance commitments constrain
states’ abilities to regulate the business of insurance. If the federal government agrees to
additional insurance commitments during the ongoing Doha Round, the states will become even
more restricted in the regulations they can adopt. 13
As this paper will demonstrate, GATS threatens the values underlying the traditional
allocation of regulatory authority between the states and the federal government. The debate
over the appropriate state and federal roles in the area of insurance has historically been framed
by the principles underlying our federal system of governance generally, especially as those
principles relate to the efficacy of the consumer protections available at the state and federal
levels. 14 In the global forum, however, these foundational principles are sometimes trumped by
other political and economic considerations. The federal government may prioritize the
maintenance of its relations with other countries over the protection of state sovereignty,
providing states with little to no role in international negotiations and acceding to other
countries’ demands for strong liberalizing agreements. 15 Perhaps even more significantly, under
current GATS commitments, other countries can influence domestic insurance policy by
11
The relevant text of GATS is examined in detail in Part II infra.
See Agreement Establishing the World Trade Organization, Annex 2: Understanding on Rules and Procedures
Governing the Settlement of Disputes, Apr. 15, 1994, at art. 22 [hereinafter DSU] (authorizing trade sanctions for
noncompliance with GATs and other covered agreements).
13
The Doha Round, also known as the Doha Development Agenda, is the current round of trade negotiations among
WTO members. See The Doha Round, WORLD TRADE ORGANIZATION,
http://www.wto.org/english/tratop_e/dda_e/dda_e.htm (last visited Jan. 8, 2013).
14
See infra Part I.C.
15
GATS negotiations typically proceed through a series of “requests,” in which WTO members formally ask other
members to make specified commitments, and “offers,” in which members respond with a draft of proposed
commitments. See WORLD TRADE ORGANIZATION, TECHNICAL ASPECTS OF REQUESTS AND OFFERS 1–3 (2002),
available at www.wto.org/english/tratop_e/serv_e/requests_offers_approach_e.doc. Under this system, the United
States may face pressure to agree to other countries’ requests in order to achieve its own trade objectives.
12
deciding whether or when to bring a complaint to the DSB and, ultimately, whether or when to
6
impose trade sanctions for GATS noncompliance. 16 The federal government and foreign
countries have interests at stake other than, or in addition to, the protection of United States
consumers, and GATS serves as a medium by which those interests can significantly impact the
federal-state balance of insurance regulatory authority.
This paper argues that the United States’ insurance-related GATS obligations, and the
procedures under which those obligations are negotiated and enforced, must be designed to
protect the values of federalism that have traditionally shaped the division of insurance
regulation within the United States. Part I examines the domestic regulation of insurance,
including both the historical balance of power between the states and the federal government and
the recent movement toward greater federal oversight. Part II explores GATS and discusses its
major provisions that affect insurance regulation. Part III considers the narrow role that states
play in negotiating international agreements and defending state statutes in WTO tribunals. Part
IV discusses several actual and hypothetical disputes that illustrate the threat GATS poses to
state sovereignty. Lastly, Part V proposes several measures aimed at preserving a dual system of
insurance regulation in the face of mounting international pressure for increasing deregulation.
I.
The Domestic Regulation of Insurance: Dividing Authority Between the State
and Federal Governments
The regulation of insurance within the United States has traditionally been undertaken by
the states. The federal government has assumed a more limited role in the field, although it
retains the constitutional authority to preempt any state insurance regulation. Recent domestic
and international developments threaten to upend this equilibrium.
16
See infra Part II.C.
A. The McCarron-Ferguson Act and the Constitutional Underpinnings of
Insurance Regulation
7
The federal government originally held no constitutional authority to regulate
insurance. 17 In 1868, soon after the development of the first state insurance regulations, 18 the
question of the constitutionality of federal insurance regulation reached the Supreme Court in
Paul v. Virginia. 19 The Court held in that case that the issuance of an insurance policy did not
constitute interstate commerce and that the regulation of insurance was therefore the province of
the states, not the federal government. 20 Paul’s holding stood for over seventy-five years. 21
In 1944, relying on a series of Commerce Clause cases decided in the intervening years,
the Court in United States v. South-Eastern Underwriters Association overturned Paul, holding
that the business of insurance was interstate commerce that could be regulated by Congress. 22 In
that case, an association of nearly two hundred fire insurance companies had been indicted for
allegedly engaging in price-fixing and monopolization in violation of the Sherman Antitrust
Act. 23 The Court held that the association was subject to the provisions of the Sherman Act, and,
in doing so, opened the door for further congressional regulation of the industry. 24
South-Eastern, however, was an unpopular decision. Thirty-five states had filed amicus
briefs in that case, urging the Court to reaffirm the principles articulated in Paul. 25 The
insurance industry also favored the certainty of the state system of regulation to the uncertainty
of new federal regulation. Following South-Eastern, the industry lobbied heavily for legislative
17
See Randall, supra note 1, at 630.
The New Hampshire Board of Insurance Commissioners, the first state agency with regulatory authority over
insurance, was created in 1851. See id. at n.18.
19
Paul v. Virginia, 75 U.S. 168 (1868).
20
See id. at 183; see also DOBBYN, supra note 3, at 284–85.
21
See Randall, supra note 1, at 632.
22
See United States v. South-Eastern Underwriters Ass’n, 322 U.S. 533, 551–53 (1944).
23
Id. at 534–35.
24
See id. at 539.
25
See id. at 595 n.18 (Jackson, J., dissenting).
18
8
action that would solidify the traditional regulatory responsibilities of states in light of the federal
government’s new constitutional power. 26 To address the concerns articulated by the states and
the insurance industry, Congress passed the McCarran-Ferguson Act in 1945, affirming that the
states would hold primary responsibility for the regulation of insurance. 27 The Act explicitly
declared “that the continued regulation and taxation by the several States of the business of
insurance is in the public interest, and that silence on the part of the Congress shall not be
construed to impose any barrier to the regulation or taxation of such business by the several
States.” 28 It also provided that “[n]o Act of Congress shall be construed to invalidate, impair, or
supersede any law enacted by any State for the purpose of regulating the business of insurance,
or which imposes a fee or tax upon such business, unless such Act specifically relates to the
business of insurance.” 29
The McCarran-Ferguson Act did not foreclose any federal role in the regulation of
insurance. In fact, Congress has enacted a number of statutes that substantially affect the
business of insurance. The Employee Retirement Income Security Act, the Health Insurance
Portability and Accountability Act, and the Affordable Care Act govern various aspects of the
health insurance market. The Securities and Exchange Commission retains the authority to
mandate certain reporting requirements with respect to shareholder-owned insurance companies.
Federal tax and labor laws still apply to insurance companies of all types. 30 In addition, the
McCarran-Ferguson Act provided by its own terms that certain statutes, such as the Sherman
Act, Clayton Act, and Federal Trade Commission Act, would govern the business of insurance
26
DOBBYN, supra note 3, at 285.
See McCarron-Ferguson Act of 1945, Pub. L. No. 79-15, §§ 1–6, 59 Stat. 33, 33–34 (codified as amended in 15
U.S.C. §§ 1011–15).
28
See 15 U.S.C. § 1011 (2012).
29
See id. § 1012.
30
See DOBBYN, supra note 3, at 291–92; TAYLOR, supra note 3, at 4.
27
“to the extent that such business is not regulated by State law.” 31 The McCarran-Ferguson Act,
9
however, remained a strong message to the states that the interests of policyholders were best
served if the states took the lead in insurance regulation.
B. The Traditional Role of State Insurance Regulators
States exercise their insurance regulatory authority primarily through legislation and the
actions of their state insurance agencies, which are often headed by a Commissioner of
Insurance. 32 These agencies perform a number of functions to protect consumers. Perhaps most
significantly, state agencies license insurers, as well as insurance brokers and agents, to sell
insurance and to offer particular insurance products in the state. Insurers who do business in
multiple states therefore must undergo multiple states’ licensing procedures. 33
State insurance agencies also monitor the financial condition of insurers and the
reasonableness of the premiums they charge policyholders. Many types of insurers must file in
advance their proposed insurance prices with the state agency, which may then approve or
disapprove the rates. All insurers are required to submit regular financial statements to the state
regulator; if the agency determines that an insurer is financially insecure, the agency may take
control of the insurer. In case of insurer insolvency, the states provide guaranty funds to ensure
that policyholders can collect the compensation due to them under their policies. 34
31
15 U.S.C. § 1012(b).
See DOBBYN, supra note 3, at 288. In 29 states, the state insurance commissioner is appointed by the governor.
See JOSEPH F. ZIMMERMAN, REGULATING THE BUSINESS OF INSURANCE IN A FEDERAL SYSTEM 42 (2010). Other
state government officials, including state attorneys general, exercise some oversight over the insurance industry.
See id. at 41–43; see also The Insurance and Financial Services Division, OFFICE OF ATTORNEY GENERAL MARTHA
COAKLEY, http://www.mass.gov/ago/bureaus/public-protection-and-advocacy/the-insurance-and-financial-servicesdivision/ (last visited January 8, 2014).
33
See NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS, supra note 4, at 2–5.
34
See id.
32
State insurance agencies take a variety of other actions to ensure that policyholders are
10
treated fairly. 35 Regulators receive consumer complaints on insurance companies, often through
toll-free hot lines or websites. 36 They may also publish consumer education materials or hold
classes to educate consumers about the insurance market. The agency may specify that certain
language, called standard form requirements, be included in particular types of policies. When an
insurance company unreasonably delays in making payments or otherwise operates outside the
law, the regulator can impose monetary penalties or suspend or revoke the insurer’s license. 37
C. Pressure for Change
Almost seventy years after the McCarron-Ferguson Act, the debate continues over the
proper division of insurance regulatory authority between the federal government and the states.
Foreign and large domestic insurers tend to favor a federal system of regulation, while smaller
companies, brokers, and individual agents tend to prefer the current system of state-level
regulation. 38 Those who advocate for the maintenance of the current system have found support
in the broad values underlying a dual system of governance generally: state governance allows
citizens to have greater access to government officials, encouraging higher governmental
accountability; state government officials are more likely to understand and more able to respond
to the unique needs of each state; a strong regulatory role for states provides an opportunity for
policy experimentation; and a dual federal-state system provides a check on the expansion of the
35
See id. at 5.
According to the NAIC, state insurance regulators received more than 2.1 million consumer inquiries and over
300,000 formal complaints in 2010. Id.
37
See DOBBYN, supra note 3, at 296–99.
38
See PATRICIA ARNOLD, THE GENERAL AGREEMENT ON TRADE IN SERVICES (GATS): IMPLICATIONS FOR
REGULATION OF FINANCIAL SERVICES IN THE UNITED STATES 7 (2002), available at
http://tacd.org/index2.php?option=com_docman&task=doc_view&gid=191&Itemid=; MCKINSEY AND COMPANY &
NEW YORK CITY ECONOMIC DEVELOPMENT CORPORATION, SUSTAINING NEW YORK’S AND THE U.S.’S GLOBAL
FINANCIAL SERVICES LEADERSHIP 117–18 (2007), available at
http://www.nyc.gov/html/om/pdf/ny_report_final.pdf; ZIMMERMAN, supra note 32, at 107.
36
11
federal government’s power. 39 Yet new domestic and international developments have expanded
the scope of the debate, placing greater pressure on the federal government to increase its
regulatory role.
Proponents of the current state-based system of regulation often argue that state insurance
regulators better understand the unique needs of their states, are more accountable to the people
of their states, and possess greater flexibility to experiment and to adapt laws to local conditions
than federal officials. 40 Consumer protections, proponents would argue, are therefore more
extensive at the state level than they would be at the federal level. 41 Moreover, the costs of a
new federal system of regulation would be high. A shift to a federal system would likely lower
barriers to expansion for large insurers who already do business in multiple states, possibly
decreasing the competitiveness of the market by driving out smaller, local insurers. And
although state insurance legislation is often accompanied by decades of judicial opinions, any
issues surrounded newly enacted federal statutes might remain unresolved by the courts for
years. Alternatively, if the federal government expanded its role without preempting all state
insurance laws, the resulting dual system of regulation could be complex, raising administrative
costs for insurance companies of all sizes. Where uniformity is important, proponents of the
39
See Erwin Chemerinsky, The Values of Federalism, 47 FLA. L. REV. 499, 525 (1995); Randall, supra note 1, at
664–65.
40
Voters elect the heads of the insurance agencies in California, Delaware, Florida, Georgia, Kansas, Louisiana,
Mississippi, Montana, North Carolina, North Dakota, and Washington. See ZIMMERMAN, supra note 32, at 42.
Even where not chosen by popular vote, however, state insurance officials are often accountable to other elected
officials.
41
See COUNCIL OF STATE GOVERNMENTS, RESOLUTION OPPOSING FEDERAL INSURANCE CHARTERING (2007),
available at http://www.csg.org/knowledgecenter/docs/Insurance%20Preemption%20Resolution-final.pdf (noting
that “state insurance protection safeguards individual and commercial policyholders, and thereby galvanizes the
strength of the U.S. insurance markets through . . . addressing unique local concerns,” whereas option federal
insurance chartering “would disrupt insurance markets and harm consumers”).
state system would argue, the answer lies in the model laws promulgated by the National
12
Association of Insurance Commissioners (“NAIC”), not in federal regulation. 42
On the other hand, proponents of a federal system of insurance regulation point out that
compliance with each state’s individual licensing and regulatory requirements can be difficult
and time-consuming, especially for large insurers doing business in multiple states. In addition,
state insurance commissioners may be more likely to be “captured” by the insurance industry.
Insurers can choose the jurisdiction in which to operate, which might lead to a “race to the
bottom.” For these reasons, a federal insurance agency might be better able to protect
consumers. 43
The current system of state regulation may also be incapable of addressing existing
regulatory gaps. Today’s financial institutions are often involved in a combination of banking,
securities, and insurance activities. 44 As the lines between these activities blur, state insurance
agencies may find it difficult to determine which financial activities fall under their purview. A
federal system of regulation, encompassing all of these activities within its oversight, might be
more capable of managing the systemic risks posed by large financial institutions. If so,
consumer protections would increase on the federal level when compared to the state level. 45
42
See DOBBYN, supra note 3, at 294–95; ZIMMERMAN, supra note 32, at 101–06. The NAIC is composed of the
head insurance regulators of each U.S. state and territory. It promulgates model laws and regulations and distributes
information on best practices to the states. See NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS, supra note
4, at 2.
43
See DOBBYN, supra note 3, at 292–94; FEDERAL INSURANCE OFFICE, U.S. DEPARTMENT OF THE TREASURY, HOW
TO MODERNIZE AND IMPROVE THE SYSTEM OF INSURANCE REGULATION IN THE UNITED STATES 1 (2013), available
at http://www.treasury.gov/initiatives/fio/reports-andnotices/Documents/How%20to%20Modernize%20and%20Improve%20the%20System%20of%20Insurance%20Re
gulation%20in%20the%20United%20States.pdf; Brown, supra note 6, at 560–66.
44
The Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act, permitted
institutions offering different types of financial services to combine to form financial conglomerates. See Financial
Services Modernization Act of 1999, Pub. L. No. 106-102, §§ 1–740, 113 Stat. 1338, 1338–1481 (1999) (codified as
amended in scattered sections of 12 & 15 U.S.C.); see also Brown, supra note 6, at 557.
45
See FEDERAL INSURANCE OFFICE, supra note 43, at 1; ZIMMERMAN 98–101.
13
The need for greater management of systemic risk, some would argue, can be seen most
acutely in the regulatory failures of the recent financial crisis, especially in the near-collapse of
insurance giant American International Group (“AIG”). 46 AIG was at one time the world’s
largest insurance firm. AIG’s insurance activities were regulated by the individual states in
which it conducted its insurance business; its other activities were overseen by the federal Office
of Thrift Supervision. None of AIG’s regulators supervised the company as a whole, nor did the
individual insurance regulators coordinate their oversight of AIG effectively. The firm
eventually received a $182 billion bailout from the federal government. Had it been regulated by
a single agency that understood the risks such complex insurers posed, much of the financial
damage might have been averted. 47
Many proponents of a federal system of regulation also point to the growing international
pressure for further deregulatory commitments in the area of insurance. Financial services
markets are increasingly interconnected, and technology has made the cross-border sale of
insurance easier than ever before. 48 Countries with insurers that wish to take advantage of
foreign insurance markets are increasingly pushing for further liberalization of the global trade in
insurance services. The states have no formal role within the WTO, and the federal government
is hampered in WTO negotiations by its inability to bind the states to insurance reforms. 49 A
stronger federal system of insurance regulation would provide the federal government with
greater negotiating power on issues of insurance deregulation.
46
See U.S. DEPARTMENT OF THE TREASURY, supra note 5, at 39 (“The current crisis highlighted the lack of expertise
within the federal government regarding the insurance industry.”); WEBEL, supra note 5 (“The financial crisis,
particularly the role of insurance giant American International Group (AIG) and the smaller bond insurers, changed
the tenor of the existing debate around insurance regulation, with increased emphasis on the systemic importance of
some insurance companies.”).
47
See FEDERAL INSURANCE OFFICE, supra note 43, at 2; Brown, supra note 6, at 552.
48
See FEDERAL INSURANCE OFFICE, supra note 43, at 5 (noting the “increasingly international dimension of the
insurance marketplace”); Randall, supra note 1, at 627.
49
See Brown, supra note 6, at 556.
D. Movement Towards a Larger Federal Role
14
These recent developments have prompted the President and Congress to make a renewed
push for a stronger federal insurance presence. Insurance regulatory reform has long been an
important issue for the Obama administration. On June 17, 2009, the U.S. Department of the
Treasury released a policy paper entitled "Financial Regulatory Reform – A New Foundation:
Rebuilding Financial Supervision and Regulation." 50 The paper stated that “[f]or over 135 years,
insurance has primarily been regulated by the states, which has led to a lack of uniformity and
reduced competition across state and international boundaries, resulting in inefficiency, reduced
product innovation, and higher costs to consumers. . . . Given the importance of a healthy
insurance industry to the well functioning of our economy, it is important that we establish a
federal Office of National Insurance (ONI) within Treasury, and that we develop a modern
regulatory framework for insurance.” 51 It also noted that “[i]n the international context, the lack
of a federal entity with responsibility and expertise for insurance has hampered our nation’s
effectiveness in engaging internationally with other nations on issues related to insurance.” 52 To
address these concerns, the Department of the Treasury proposed the creation of an Office of
National Insurance within the Department “to gather information, develop expertise, negotiate
international agreements, and coordinate policy in the insurance sector.” 53 In particular, the
Department suggested that consumers would benefit from national uniformity in capital
standards and consumer protections. 54
In recent years, legislators introduced several bills in Congress that would have increased
the federal government’s regulation of the insurance industry. The proposed Insurance
50
See U.S. DEPARTMENT OF THE TREASURY, supra note 5.
Id. at 39.
52
Id. at 39–40.
53
Id. at 39.
54
See id. at 40–41.
51
Information Act of 2008 would have created an Office of Insurance Information within the
15
Department of the Treasury to monitor the insurance industry and establish federal policy on
international insurance matters. 55 The Insurance Industry Competition Act of 2009 would have
applied federal antitrust laws to all insurers by repealing the McCarron-Ferguson Act’s partial
antitrust waiver. 56 Most significantly, the National Insurance Consumer Protection Act of 2009
would have created an Office of National Insurance within the Department of the Treasury with
the authority to license insurers and promulgate regulations for the insurance industry. Under this
proposed scheme, insurers could elect to follow either federal or state regulations. 57
Some measure of insurance reform was eventually achieved with the Dodd–Frank Wall
Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”). 58 Dodd-Frank created the
Federal Insurance Office (“FIO”) within the Department of the Treasury. 59 The FIO cannot
promulgate regulations, but it does have several important functions. First, the FIO can collect
data from insurance companies and “monitor all aspects of the insurance industry.” 60 This
information-gathering role extends in particular to the identification of “issues or gaps in the
regulation of insurers that could contribute to a systemic crisis in the insurance industry or the
United States financial system.” 61 Second, the FIO represents the United States internationally
by “coordinat[ing] Federal efforts and develop[ing] Federal policy on prudential aspects of
international insurance matters, including representing the United States, as appropriate, in the
International Association of Insurance Supervisors (or a successor entity) and assisting the
55
Insurance Information Act of 2008, H.R. 5840, 110th Cong. (2008).
Insurance Industry Competition Act of 2009, H.R. 1583, 111th Cong. (2009).
57
National Insurance Consumer Protection Act, H.R. 1880, 111th Cong. (2009).
58
See Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. No. 111-203, § 1–1601, 124
Stat. 1376, 1376–2223 (2010).
59
See 31 U.S.C. § 313 (2012).
60
Id. §§ 313(c)(1)(A), 313(e). The FIO does not monitor health insurance, long-term care insurance, or crop
insurance. See id. § 313(d).
61
Id. § 313(c)(1)(A).
56
Secretary in negotiating covered agreements.” 62 Third, the FIO can “consult with the States
16
(including State insurance regulators) regarding insurance matters of national importance and
prudential insurance matters of international importance.” 63 Lastly, it can preempt state
insurance measures to the extent that, in the determination of the Director of the FIO, the
measure is inconsistent with a covered agreement and results in less favorable treatment of a
foreign insurer. 64 The preemption must achieve “a level of protection for insurance or
reinsurance consumers that is substantially equivalent to the level of protection achieved under
State insurance or reinsurance regulation.” 65 However, certain state measures, such as coverage
requirements and rate approval, cannot be preempted. 66
In December 2013, the FIO produced a long-awaited report entitled “How to Modernize
and Improve the System of Insurance Regulation in the United States.” 67 Although the report
recognized the disadvantages of the state-based system of regulation, it came short of advocating
for comprehensive preemption of all state regulation, noting that many aspects of the insurance
business are best regulated on a local level. Instead, the FIO advocated for future federal
preemption only in the limited areas in which states failed to make necessary reforms. 68
II.
The General Agreement on Trade in Services and Its Restrictions on Insurance
Regulation
The General Agreement on Trade in Services (“GATS”) prohibits countries from
enacting certain discriminatory measures that affect the international trade in services. Each
country has committed to general deregulatory principles applicable to all service sectors, with
62
Id. § 313(c)(1)(E).
Id. § 313(c)(1)(G).
64
Id. §§ 313(c)(1)(F), 313(f).
65
31 U.S.C. § 313(f) (2012).
66
Id. The FIO has not yet used its preemption power. See, e.g., FEDERAL INSURANCE OFFICE, U.S. DEPARTMENT OF
THE TREASURY, 2012 PREEMPTION REPORT, available at http://www.treasury.gov/initiatives/fio/reports-andnotices/Documents/2012%20Preemption%20Report.pdf.
67
See FEDERAL INSURANCE OFFICE, supra note 43.
68
See id. at 5, 65.
63
the option of agreeing to additional commitments for specific service sectors. As a whole, the
17
commitments are pro-competitive, limiting the policy options available to domestic regulators.
The United States has committed its insurance sector to significant regulatory restrictions
under GATS. With some exceptions, both federal and state insurance regulation is restricted by
the three principles at the core of the GATS system of deregulation—most-favored-nation
treatment, national treatment, and market access—as well as by other GATS provisions, such as
those restricting the establishment or authorization of monopolies and exclusive service
providers. 69 In fact, a number of countries with mature financial systems, including the United
States, have adopted the Understanding on Commitments in Financial Services, an ancillary
agreement which binds countries to significant market access and national treatment
commitments for insurance and other financial services. 70
Despite these broad commitments, the United States has explicitly exempted a number of
its laws and practices from GATS. Many of these insurance-related exceptions are state-specific,
reflecting the fact that insurance regulation takes place primarily on the state level. For instance,
in certain states, government-owned or government-controlled insurance companies, whether
domestic or foreign, are not authorized to conduct business. Some states have no mechanism for
licensing the initial entry of a non-United States insurance company as a subsidiary or a branch,
unless that company is already licensed in some other state. Because of the exceptions
delineated by the United States in its Schedule of Specific Commitments, none of these state
insurance measures violate the United States’ commitments under GATS. 71 Furthermore, GATS
69
See, e.g., GATS, supra note 10, at arts. II, VIII, IX, XVI, XVII. All of these GATS provisions apply explicitly to
measures taken by subnational governments. See id. at art. I.3(a).
70
See World Trade Organization, Understanding on Commitments in Financial Services, Apr. 15, 1994 [hereinafter
Understanding].
71
See United States, Schedule of Specific Commitments Supplement 3, Feb. 26, 1998. In addition, at the entry into
force of GATS, each country had the opportunity to make exemptions to its most-favored-nation treatment
commitment, a general obligation that would otherwise be applicable to all service sectors. The United States made
18
does not apply to “services supplied in the exercise of governmental authority,” defined as “any
service which is supplied neither on a commercial basis, nor in competition with one or more
service suppliers.” 72
A. Current GATS Commitments Affecting Insurance Regulation
a. Most-Favored-Nation Treatment
Under the principle of most-favored-nation (“MFN”) treatment, the United States must
treat the service suppliers of all WTO member countries equally. GATS Article II provides that
“[w]ith respect to any measure covered by this Agreement, each Member shall accord
immediately and unconditionally to services and service suppliers of any other Member
treatment no less favourable than that it accords to like services and service suppliers of any
other country.” 73 “[T]reatment no less favourable” has been interpreted to include de facto, as
well as de jure, discrimination. 74
b. Market Access
The principle of market access governs the degree to which service suppliers of other
WTO members have access to United States markets. GATS Article XVI prohibits the United
States from limiting the number of service suppliers in the insurance market; the total value of
service transactions or assets; the total number of service operations or the total quantity of
service output; the total number of natural persons that may be employed in a particular service
sector or that a service supplier may employ and who are necessary for, and directly related to,
the supply of a specific service; and the participation of foreign capital. Article XVI also
one such exemption for insurance, applicable only to measures “according differential treatment in regard to the
expansion of existing operations, the establishment of a new commercial presence, or the conduct of new activities”
in limited circumstances in which another country has discriminated against United States citizens. See United
States, List of Article II (MFN) Exemptions Supplement 3, Feb. 26, 1998.
72
GATS, supra note 10, at art. I.
73
Id. at art. II.
74
See European Communities—Regime for the Importation, Sale and Distribution of Bananas: Report of the
Appellate Body, WTO Doc. WT/DS27/AB/R, ¶ 234.
19
prohibits measures that restrict or require specific types of legal entities or joint ventures through
which a service supplier must supply a service. 75
c. National Treatment
The principle of national treatment, as embodied in Article XVII, requires that “each
Member shall accord to services and service suppliers of any other Member, in respect of all
measures affecting the supply of services, treatment no less favourable than that it accords to its
own like services and service suppliers.” Treatment is “less favorable” if it “modifies the
conditions of competition in favour of services or service suppliers of the Member compared to
like services or service suppliers of any other Member,” regardless of whether the treatment is
formally identical or formally different from the treatment accorded to the country’s own service
providers. 76
B. Future GATS Commitments Affecting Insurance Regulation
In addition to the commitments already made by the United States, GATS and its related
documents clearly contemplate the further liberalization of trade in services. GATS Article XIX
stipulates that members shall enter into “successive rounds of negotiations, beginning not later
than five years from the date of entry into force of the WTO Agreement and periodically
thereafter, with a view to achieving a progressively higher level of liberalization.” It states that
“[t]he process of progressive liberalization shall be advanced in each such round through
bilateral, plurilateral or multilateral negotiations directed towards increasing the general level of
specific commitments undertaken by Members under this Agreement.” 77 In addition, the
75
See GATS, supra note 10, at art. XVI. In the Understanding on Commitments in Financial Services, the United
States made additional insurance-related market access commitments. See Understanding, supra note 70.
76
GATS, supra note 10, at art. XVII; see China—Measures Affecting Trading Rights and Distribution Services for
Certain Publications and Audiovisual Entertainment Products: Report of the Panel, WTO Doc. WT/DS363/R, ¶
7.978–7.979.
77
Id. at art. XIX.
20
Understanding on Commitments in Financial Services expresses WTO members’ support for the
elimination of a variety of non-discriminatory measures not explicitly articulated in GATS:
Each Member shall endeavour to remove or to limit any significant
adverse effects on financial service suppliers of any other Member
of: (a) non-discriminatory measures that prevent financial service
suppliers from offering in the Member's territory, in the form
determined by the Member, all the financial services permitted by
the Member; (b) non-discriminatory measures that limit the
expansion of the activities of financial service suppliers into the
entire territory of the Member; (c) measures of a Member, when
such a Member applies the same measures to the supply of both
banking and securities services, and a financial service supplier of
any other Member concentrates its activities in the provision of
securities services; and (d) other measures that, although
respecting the provisions of the Agreement, affect adversely the
ability of financial service suppliers of any other Member to
operate, compete or enter the Member's market; provided that any
action taken under this paragraph would not unfairly discriminate
against financial service suppliers of the Member taking such
action.” 78
Along these lines, the WTO’s ongoing Doha Round negotiations may lead to further
liberalization of services, including the improvement of market access commitments and the
elimination of exceptions to those commitments. 79
Additionally, Article VI.4 of GATS provides a particularly strong framework for
increasing deregulation. In order to ensure that measures relating to qualification requirements
and procedures, technical standards, and licensing requirements do not constitute unnecessary
barriers to trade in services, the Council for Trade in Services is tasked with developing any
necessary “disciplines,” which will ensure that such standards and requirements are, inter alia,
“(a) based on objective and transparent criteria, such as competence and the ability to supply the
78
Understanding, supra note 70, at art. B.10.
Doha Round negotiations are proceeding along two tracks. The first involves bilateral and plurilateral
negotiations to improve members’ specific commitments in the areas of market access, national treatment, and mostfavored-nation treatment. The second involves multilateral negotiations to establish any necessary rules and
disciplines that will apply to all WTO members. See Services Negotiations, WORLD TRADE ORGANIZATION,
http://www.wto.org/english/tratop_e/serv_e/s_negs_e.htm (last visited Jan. 8, 2014).
79
service; (b) not more burdensome than necessary to ensure the quality of the service; (c) in the
21
case of licensing procedures, not in themselves a restriction on the supply of the service.” 80 An
accounting discipline, including standards for the licensing of accountants, has already been
developed by the Council for Trade in Services. 81 A discipline affecting the licensing of insurers
could follow. 82
C. The Dispute Settlement Process for GATS Violations
Violations of GATS are resolved through the dispute settlement procedures established
by the Understanding on Rules and Procedures Governing the Settlement of Disputes (the
“Dispute Settlement Understanding” or “DSU”). 83 Two aspects of the process are particularly
worthy of note. First, under the DSU, U.S. states have no formal role in the dispute settlement
process. Rather, the federal government must defend any state statute at issue. Second, the DSU
places decision-making responsibility in the hands of independent experts. After the short period
of consultations have concluded, the panel and Appellate Body make determinations on the
narrow issues at stake without regard to external considerations, such as the difficulty a party
might face in repealing or preempting a statute enacted by a subnational unit. Both the states and
the federal government are therefore limited in their influence on the outcome of the
proceedings.
80
GATS, supra note 10, at art. VI.4.
See World Trade Organization, Decision on Disciplines Relating to the Accountancy Sector, WTO Doc. S/L/63,
Dec. 15, 1998, available at http://docsonline.wto.org/imrd/directdoc.asp?DDFDocuments/t/s/l/63.doc.
82
See Services Negotiations, WORLD TRADE ORGANIZATION,
http://www.wto.org/english/tratop_e/serv_e/s_negs_e.htm (last visited Jan. 8, 2014) (listing domestic regulation as
one of four main priorities of Doha Round services negotiations). Currently, members are negotiating a set of
horizontal disciplines that would apply to all measures affecting trade in services within the scope of GATS, rather
than to specific sectors. See WTO Negotiations on Domestic Regulation Disciplines, WORLD TRADE
ORGANIZATION, http://www.wto.org/english/tratop_e/serv_e/dom_reg_negs_e.htm (last visited Jan. 8, 2014); see
also World Trade Organization, Working Party on Domestic Regulation, Disciplines on Domestic Regulation
Pursuant to GATS Article VI:4: Chairman’s Progress Report, WTO Doc. S/WPDR/W/45, Apr. 14, 2011, at 5
(“[O]ne of the most difficult subjects in these negotiations has been the question of whether a normative standard in
the form of a "necessity test" should be included into the disciplines. On this subject, Members appear to have
fundamental differences on the very principle of whether such a normative standard is needed.”).
83
See DSU, supra note 12, at app. 1; GATS, supra note 10, at art. XXIII.1.
81
22
When the Appellate Body deems a measure to be inconsistent with a party’s obligations
under a covered agreement, the Appellate Body must recommend that the measure be brought
into conformity with the agreement. 84 It may also suggest ways in which the party could bring
the particular measure into conformity. 85 If the party does not correct the measure, the DSB may
authorize punitive trade sanctions against the party. 86 If the party instead choses to modify or
remove the commitment at issue from its schedule of commitments, the party must make
compensatory payments to any affected countries. 87
III.
Limited Avenues for State Input in WTO Negotiations and Dispute Settlement
Although the DSU provides no formal role for states in the dispute settlement process,
the Uruguay Round Agreements Act, the implementing legislation for the Uruguay Round of
WTO negotiations, provides a limited avenue for states to influence international insurance
issues. 88 First, the implementing legislation requires the federal government to consult with the
states on WTO issues that affect the states. The U.S. Trade Representative must establish a
consultation process under which the States are informed on a continuing basis of matters under
the Uruguay Round Agreements that directly relate to, or will potentially have a direct impact
on, the states. The states must also be provided an opportunity to submit to the Trade
Representative information and advice with respect to these matters. The Trade Representative
84
Id. at art. 19.1.
Id.
86
Id. at art. 22.
87
See id. at art. 21.
88
See 19 U.S.C. § 3512 (2012); see also H.R. REP. NO. 103-316 (1994), reprinted in 1994 U.S.C.C.A.N. 4040, 4052
[hereinafter Statement of Administrative Action] (“The Administration is committed to take into account the views
of state governments in implementing the Uruguay Round agreements with respect to any matter that may directly
affect their interests.”). This provision was the result of heavy lobbying by the National Association of Attorneys
General, the Multistate Tax Commission, and other state organizations. John Kincaid, The International
Competence of U.S. States and Their Local Governments, in PARADIPLOMACY IN ACTION: THE FOREIGN RELATIONS
OF SUBNATIONAL GOVERNMENTS 111, 124 (Francisco Aldecoa & Michael Keating eds., 2013).
85
23
must take this information and advice into account when formulating the United States’ positions
on WTO issues. 89
Second, the states must be notified if any WTO member requests consultations with the
United States under the DSU. 90 Within 30 days of receiving such a request for consultations, the
Trade Representative must consult with representatives of the states concerned regarding the
matter. As the dispute progresses, the Trade Representative must make every effort to ensure
that the states concerned are involved in the development of the position of the United States.
This includes providing the states the opportunity to advise and assist the Trade Representative
in the preparation of factual information and argumentation for any written or oral presentations
by the United States in consultations or in proceedings of a panel or the Appellate Body. If a
dispute settlement panel or the Appellate Body finds that the law of a state is inconsistent with
any of the Uruguay Round Agreements, the Trade Representative shall consult with the state
concerned in an effort to develop a mutually agreeable response to the report of the panel or the
Appellate Body and shall make every effort to ensure that the State concerned is involved in the
development of the United States position regarding the response. 91
Despite these provisions, the federal government nevertheless has the authority to
preempt any state measure in violation of the United States’ commitments under GATS. The
preemption of a state insurance statute may be effectuated through legislation, litigation, or the
action of the Director of the FIO. In a preemptory lawsuit, the report of a dispute settlement
89
19 U.S.C. § 3512(b)(1).
Id. § 3512(b)(1)(C).
91
Id. § 3512(b)(1). The USTR also communicates with the Intergovernmental Policy Advisory Committee
(“IGPAC”), an organization of state and local officials. See PUBLIC CITIZEN, STATES’ RIGHTS AND INTERNATIONAL
TRADE: A LEGISLATOR’S GUIDE TO REINVIGORATING FEDERALISM IN THE ERA OF GLOBALIZATION 10 (2007),
available at http://www.citizen.org/documents/Guide_2.9_Final.pdf; Statement of Administrative Action, supra
note 88, at 4050–51.
90
panel or the Appellate Body is not considered binding or otherwise accorded deference. 92
24
Rather, the United States must prove de novo that the state law is inconsistent with the agreement
in question. 93 At least 30 days before the United States brings such an action, it must submit
reports to Committees of the Senate and House certifying that it cooperated with the state
throughout the dispute settlement process and describing any efforts it made to resolve the matter
with the state concerned by other means. 94
As a result, the states have little influence in WTO negotiations and dispute settlement. 95
Even with the statutory protections in the Uruguay Round Agreements Act, state officials
frequently state that they are allowed to provide only minimal input on the international stage. 96
Moreover, the states have no ultimate authority to block federal action. If the federal
government agrees to an insurance commitment that violates state law, the state must repeal its
statute or face preemption.
92
19 U.S.C. § 3512(b)(1)(B)(i). Litigation between the federal government and the states was intended to be a “last
resort” if a collaborative solution could not be reached. See Statement of Administrative Action, supra note 88, at
4053.
93
19 U.S.C. § 3512(b)(1)(B)(ii).
94
See id. § 3512(b)(1)(C).
95
See PUBLIC CITIZEN, STATES’ RIGHTS AND INTERNATIONAL TRADE: A LEGISLATOR’S GUIDE TO REINVIGORATING
FEDERALISM IN THE ERA OF GLOBALIZATION 9 (2007), available at
http://www.citizen.org/documents/Guide_2.9_Final.pdf (noting that trade-related consultations with the states have
been “extremely limited or nonexistent” in many areas).
96
See, e.g., PUBLIC CITIZEN, IMPLICATION OF THE WTO’S GENERAL AGREEMENT ON TRADE IN SERVICES FOR
UNIVERSAL HEALTH CARE, NONPROFIT HOSPITALS AND STATE HEALTH CARE REFORM INITIATIVES 3 (2007)
(“During the Uruguay Round of trade talks, the [USTR] failed to consult directly with elected state leaders before
signing up the insurance sector . . . to the constraints of GATS.”); PUBLIC CITIZEN, STATES’ RIGHTS AND
INTERNATIONAL TRADE 1, available at http://www.citizen.org/documents/ACF683B.pdf (“The current consultation
system includes rare direct consultation only with governors on procurement issues; indirect consultation services
and other matters through a state Single Point of Contact (SPOC); and limited suggestions through the governmentappointed Intergovernmental Policy Advisory Committee (IGPAC) . . . .”); Letter from Maine Citizen Trade Policy
Commission to Senator Olympia Snowe, Senator Susan Collins, Congressman Thomas Allen & Congressman
Michael Michaud (July 5, 2005), available at http://www.maine.gov/legis/opla/CTPClet7-5.pdf (“The USTR has
demonstrated a failure to communicate openly and in a timely fashion with an appropriate range of contacts in the
states.”).
IV.
Hypothetical Insurance Violations and Dispute Settlement
25
GATS and the WTO’s accompanying dispute settlement process places pressure on the
division of regulatory authority over insurance between the federal government and the states. In
the McCarron-Ferguson Act of 1945, Congress explicitly left much of the regulation of insurance
to the states. But if the Appellate Body or a panel convened under the DSU determines that a
state statute violates GATS, the federal government has a strong incentive to preempt that statute
or convince the state to repeal it. By restricting the policy alternatives available to state
policymakers and increasing the potential for federal preemption, GATS threatens the capability
of states to adapt their regulatory systems as they see fit.
These concerns could play out as follows. A state legislature or insurance commissioner
could take a variety of actions that would effectively discriminate against foreign insurance
companies in favor of domestic insurance companies. For instance, a commissioner might treat
foreign insurance companies unfavorably in the application of rate review or in the imposition of
penalties for unlawful behavior, or a state legislature might increase its domestic ownership
requirements for insurance companies. These actions would likely violate GATS’s national
treatment provision. 97 Alternatively, if the United States removed any of the exceptions to its
specific commitments, such as those exempting states’ current domestic ownership requirements,
a state statute presently in force could violate GATS without any action on the part of state
officials.
State health insurance reforms may be particularly likely to conflict with GATS. To
address high health care costs, poor health care quality, and low access to care, state legislatures
have reformed their health insurance markets in increasingly aggressive ways. Many proposed
reforms, and some enacted reforms, could violate current GATS commitments. Universal
97
See GATS, supra note 10, at art. XVII.
single-payer health insurance, on either the state or federal level, would likely violate GATS’
26
prohibition of new monopolies. 98 Minimum benefits requirements for plans offered in state
health insurance exchanges could violate GATS’s market access provisions or its ban on the
establishment or authorization of a small number of exclusive service providers. 99 A state
“public option” health insurance plan, if subsidized by the state, would also likely violate GATS.
If the public option competed with private health insurance plans—as it is designed to do—it
would not be exempt from GATS as a service supplied in the exercise of government
authority. 100 The public option would likely contravene GATS’s national treatment principle,
assuming that the subsidies or other favorable treatment it received from the state were not
available to private plans. 101 If the public option had the effect of placing a numerical quota on
the number of service providers that could enter the market, it would violate GATS’s market
access provision. 102
Perhaps most importantly, the Council for Trade in Services might develop disciplines on
domestic regulation under GATS Article VI.4 that would restrict the licensing requirements
states could adopt. These disciplines might go so far as to prohibit any state licensing
requirement “more burdensome than necessary to ensure the quality of the service.” 103 Under
98
See PUBLIC CITIZEN, IMPLICATION OF THE WTO’S GENERAL AGREEMENT ON TRADE IN SERVICES FOR UNIVERSAL
HEALTH CARE, NONPROFIT HOSPITALS AND STATE HEALTH CARE REFORM INITIATIVES 4 (2007); Patricia J. Arnold
and Terrie C. Reeves, International Trade and Health Policy: Implications of the GATS for US Healthcare Reform,
63 J. BUS. ETHICS 313, 322 (2006); Nicholas Skala, The Potential Impact of the World Trade Organization’s
General Agreement on Trade in Services on Health System Reform and Regulation in the United States, 39 INT’L J.
HEALTH SERVICES 363, 371–73 (2009).
99
See PUBLIC CITIZEN, PRESIDENTIAL CANDIDATES’ KEY PROPOSALS ON HEALTH CARE AND CLIMATE WILL
REQUIRE WTO MODIFICATIONS 7 (2008), available at
http://www.citizen.org/documents/PresidentialWTOreport.pdf; Skala, supra note 98, at 375.
100
See GATS, supra note 10, at art. I.
101
See Skala, supra note 98, at 374.
102
See PUBLIC CITIZEN, IMPLICATION OF THE WTO’S GENERAL AGREEMENT ON TRADE IN SERVICES FOR UNIVERSAL
HEALTH CARE, NONPROFIT HOSPITALS AND STATE HEALTH CARE REFORM INITIATIVES 4 (2007).
103
See GATS, supra note 10, at art. VI.4; supra notes 82–84 and accompanying text.
27
this standard, long delays in the processing of insurance licenses could violate GATS. 104 A new
discipline might even subject the entire state system of licensing to a GATS challenge. 105 If the
costs of complying with multiple states’ licensing requirements are deemed to be more
burdensome than necessary, the United States might have no choice but to create a federal
agency for the licensing of insurers.
If an insurance reform statute passes both houses of the legislature and is signed by the
governor, it becomes law within the state. Considering the wide latitude accorded to states to
enact insurance regulations, the aforementioned insurance statutes could not reasonably be
attacked on constitutional grounds. Once such a statute took effect, however, another country
might decide to initiate consultations with the United States under the DSU if that country
believed that the state statute violated GATS to the disadvantage of its insurers. A country could
challenge a state law if the law caused foreign insurers to suffer economic loss on a
discriminatory basis. But foreign insurers also recognize that the state system of regulation,
considered as a whole, creates high administrative costs for both domestic and foreign
insurers. 106 Foreign insurers could eliminate the fragmented system of licensing and regulation
altogether by challenging the system itself under the new domestic disciplines currently being
104
Statutes with stringent licensing requirements or regulations might also be at risk. In 2012, for example, the
Massachusetts legislature enacted substantial health care payment reform that, inter alia, imposed maximum annual
cost growth limits for health insurers, required greater transparency for health insurers, and mandated that health
insurers offer more plans with tiered provider networks. BLUE CROSS BLUE SHIELD OF MASSACHUSETTS
FOUNDATION, CHAPTER 224: WHAT DOES IT MEAN FOR HEALTH PLANS? 1 (2012), available at
http://bluecrossmafoundation.org/sites/default/files/download/publication/Chapter%20224%20Health%20Plans.pdf
. To the extent that noncompliance with these requirements could affect an insurer’s licensing status, the
Massachusetts statute could be subject to challenge under a discipline adopted pursuant to Article VI.4.
105
See PUBLIC CITIZEN, IMPLICATION OF THE WTO’S GENERAL AGREEMENT ON TRADE IN SERVICES FOR UNIVERSAL
HEALTH CARE, NONPROFIT HOSPITALS AND STATE HEALTH CARE REFORM INITIATIVES 5 (2007).
106
See FEDERAL INSURANCE OFFICE, supra note 43, at 5 (“[P]er dollar of premium, the costs of the state-based
insurance regulatory system are approximately 6.8 times greater for an insurer operating in the United States than
for an insurer operating in the United Kingdom, and increase costs for [property and casualty] insurers by $7.2
billion annually and for life insurers by $5.7 billion annually.”); ARNOLD, supra note 38, at 7 (“The need to comply
with regulatory regimes in fifty different States makes it difficult for foreign insurers to enter the US insurance
market.”); Arnold & Reeves, supra note 98, at 320.
negotiated. Even panel and Appellate Body determinations that individual state insurance
28
statutes violated GATS could pressure the federal government to centralize its insurance
regulatory authority in the federal government. For these reasons, countries with expansionminded insurers have strong incentives to challenge state statutes under GATS.
If another country initiated consultations with the United States, the federal
government—not the state—would have to defend the state statute in any ensuing dispute
settlement proceedings. Under the Uruguay Round Agreements Act, the state would play a
minimal advisory role to the federal government. But the state would not be formally recognized
as a third party before the DSB and therefore could not make written submissions or participate
in panel or Appellate Body hearings on its own accord.
If the DSB concluded that the statute did not violate GATS, no further action would be
necessary on the part of the state or the federal government. If the statute did violate GATS,
however, the federal government would have several options: it could negotiate with the state for
repeal of the statute; Congress could expressly preempt the statute; the FIO could expressly
preempt the statute; or, the federal executive branch could initiate a preemptory lawsuit against
the state. The federal government has important economic reasons to ensure that states comply
with dispute settlement rulings. If a state statute remains in effect after an adverse panel or
Appellate Body ruling, the DSB could authorize punitive trade sanctions against the federal
government. 107 The state might feel the brunt of these sanctions. Yet because only federal
representatives sit at the bargaining table in the WTO, the states do not experience the full
international political consequences of their refusal to comply with the DSB.
107
See DSU, supra note 12, at art. 22.
V.
Recommendations for Preserving a Dual System of Insurance Regulation
29
The Unites States’ GATS commitments serve important economic goals. The
elimination of barriers to the expansion of trade in services is designed to promote the economic
growth of all countries involved in international trade. 108 For United States service suppliers to
realize these benefits, the nation must be willing to open its own borders to foreign firms. But
the aims of international cooperation must not take precedence over the protections afforded to
policyholders and citizens at large by the current system of domestic insurance regulation. The
preservation of these consumer protections requires that the values underlying the traditionally
strong role of states be given a greater platform in the ongoing Doha Round of WTO
negotiations.
The creation of the FIO, the recent drafting of several legislative proposals for federal
licensing and regulation of insurers, and the broader movement for a stronger federal role in the
insurance market could represent a domestic policy determination that the public interest is best
served by greater federal oversight over insurance. State insurance commissioners may in fact
be more likely to be “captured” by the insurance industry. Federal regulation may save insurers
administrative costs. Above all, a federal insurance agency may be the only institution able to
manage the systemic risks posed by large financial institutions with national insurance activities.
The advantages of federal regulation may more than compensate for the possibility that federal
officials would be less likely to understand the unique needs of each state, would be less
accountable to the people, and would possess less flexibility to experiment with new policies. 109
If so, any effort by the United States to increase the liberalization of trade in insurance services
108
See, e.g., GATS, supra note 10, at pmbl. (“Wishing to establish a multilateral framework of principles and rules
for trade in services with a view to the expansion of such trade . . . as a means of promoting the economic growth of
all trading partners and the development of developing countries . . . .”); NELLIE MUNIN, LEGAL GUIDE TO GATS 37
(2010).
109
See supra Part I.C.
during the Doha Round may reflect, rather than shape, the already-existing need for a stronger
30
federal role.
But several aspects of the United States’ involvement in the WTO should give cause for
concern. When negotiating international agreements, the United States ordinarily takes a wide
range of considerations into account; the proper balance of insurance regulatory authority within
the United States may be only one factor of many considered by the federal officials
participating in the negotiations. Moreover, the DSU establishes dispute settlement panels of
independent experts unaffiliated with any government and allows other countries to decide
whether and when to bring a complaint to a panel, leaving much out of the hands of both federal
and state policymakers. 110 As a result, the lack of attention paid to state interests during both the
negotiation and enforcement of GATS obligations poses a substantial threat to state sovereignty.
To address these concerns, the United States must commit to providing a greater avenue
for state input on international insurance issues. The Uruguay Round Agreements Act requires
the federal government to conduct minimal consultations with the states, 111 and Dodd-Frank
authorizes the FIO to consult with the states on certain international insurance matters. 112 These
consultations with federal officials must be meaningful and continuous. Federal officials must
understand the history of state insurance regulation and must endeavor to use the information
obtained through the consultation process to avoid infringing on state statutes and practices.
In particular, Congress should alter the FIO’s organic statute to provide greater protection
to state insurance regulations. The FIO currently serves in a dual role with respect to the states:
on the one hand, it solicits the views of state insurance officials on international insurance issues;
on the other hand, it can preempt certain state insurance statutes that are inconsistent with
110
See supra Part II.C.
See 19 U.S.C. § 3512.
112
See 31 U.S.C. § 313.
111
31
international agreements. 113 Congress should make clear that the FIO’s authority extends to the
identification of state insurance laws and practices that might conflict with current or future
international obligations, but not to the preemption of state insurance statutes. By sharing the
information it gathers with other federal officials, the FIO can effectively serve as a federal voice
for state concerns.
Furthermore, the United States must not agree to additional GATS insurance
commitments that impede on state regulatory authority. The federal government must not enter
into any new obligations in conflict with the state laws currently in force. It must also refuse to
agree to any disciplines on domestic regulation that would affect the states’ licensing or
regulation of insurers. A discipline with a strong “necessity test” could subject the entire state
system of regulation to a challenge under GATS.
These proposals will help to ensure that GATS commitments are negotiated and enforced
with state interests in mind. The domestic regulation of insurance must be grounded in the
values that have traditionally shaped the division of regulatory authority between the federal
government and the states, and state laws and practices aimed at protecting consumers must not
give way to international considerations unattached to these values.
113
See id.