Martin F. Grace & Hal S. Scott, Optional Federal Chartering of Insurance: Rationale and Design of a Regulatory Structure (GSU/Brookings/AEI Conference: The Future of Insurance Regulation, July 9, 2008).
Abstract: The U.S. insurance industry is primarily regulated by the states. This is in contrast to the regulatory structure for other financial intermediaries which have a significant federal regulator. Banks, for example, may choose to be regulated by either the federal government or by the states. Recent legislation proposes to provide a similar optional federal chartering (OFC) system for insurers. Given the proposed legislation we make two contributions to the discussion. First, we examine the case for optional federal charters focusing on the costs and benefits of regulation at the federal versus the state level and conclude that and optional federal chartering system dominates the status quo. Second, we add to the discussion by describing what additional issues need to be addressed if we adopt an insurance OFC system. While the merits of OFC have been much debated, comparatively little consideration has been given to the matter of how such a system should function if enacted.