Business Scholarship Podcast
Martin Grace and Jingshu Luo on Model Laws
Mon May 15 2023Description
The episode discusses insurance regulation in the United States, focusing on the role of state regulators, federal regulation, and the National Association of Insurance Commissioners (NAIC). It explores the development and adoption of NEIC model laws and factors influencing state decisions. The episode also highlights the role of the NAIC in policy diffusion and provides key insights on model law adoption.
Insights
Insurance Regulation is Primarily State-based
Insurance in the United States is primarily regulated at the state level, with state regulators responsible for setting rates and overseeing insurance operations.
NEIC Model Laws and Adoption
The NEIC has developed a set of model laws to address insurance company operations in different states. However, not all model laws are widely adopted by states. Factors such as relevance, ease of implementation, and recent updates influence state decisions to adopt model laws.
Factors Influencing State Adoption
State adoption decisions are influenced by the content of the model law, state-level factors such as government ideology and legislative resources, and the influence of neighboring states. Policy differences and the NAIC's support for research and initiatives also play a role.
Role of NAIC and Policy Diffusion
The NAIC plays a central role in model law diffusion, providing support for research and funding new initiatives. The organization sets a barrier for considering new model laws to avoid an overwhelming number. Policy diffusion literature should focus on the content of the policy rather than state-level factors.
Chapters
- Insurance Regulation in the United States
- NEIC Model Laws and Adoption
- Factors Influencing State Adoption of Model Laws
- Role of NAIC and Policy Diffusion
Insurance Regulation in the United States
00:06 - 08:01
- Insurance in the United States is primarily regulated at the state level.
- The regulation of insurance began as a state business and remained that way until after the Civil War.
- The Supreme Court case Paul v. Virginia established that insurance is local and falls under state authority.
- State regulators kept prices high by allowing the industry to organize rate setting bureaus.
- In 1944, the Department of Justice brought an antitrust lawsuit against these rate setting bureaus, leading to federal regulation of insurance.
- The National Association of Insurance Commissioners (NAIC) serves as a clearing house for ideas and helps insurance commissioners with common problems, training, best practices, and model laws.
- Insurance commissioners are either elected or appointed by the governor in most states.
- There is an agency in each state responsible for insurance regulation, usually called the Commissioner of Insurance or Department of Insurance.
- The NEIC coordinates between states to address common problems and resolve issues related to interstate insurance operations.
- Model laws produced by the NEIC help establish consistent regulations across states and protect customers in different jurisdictions.
NEIC Model Laws and Adoption
07:43 - 16:06
- The NEIC has developed a set of model laws to address insurance company operations in different states.
- The certification program ensures that states recognize each other's good performance in insurance regulation.
- There are 195 NEIC model laws, but not all are widely adopted by states.
- The project aims to understand why some model laws are more popular than others and identify common determinants of state decisions.
- Empirical strategy involves studying the willingness to adopt score, which shows which states are more active in adopting model laws.
- New Hampshire, Nebraska, and Illinois have the highest willingness to adopt score, while DC, New York, and New Mexico have the lowest.
- To determine who follows whom in adopting model laws, a machine learning algorithm called NetInf is used.
- NetInf infers leading and following relationships based on the timing of repeated model law adoption decisions.
- The diffusion network shows the key players in the model law adoption process.
Factors Influencing State Adoption of Model Laws
15:38 - 23:51
- The NIC is the center of the IC model law diffusion network.
- Factors that affect state adoption decision include the content of the model law, state level factors, and state peers.
- Legislators consider if the model law is relevant to their state and if it is easy to understand and implement.
- State fatigue can occur if a state has already adopted similar laws and may not adopt a new model law.
- Recent updates or revisions to a model law increase states' willingness to adopt it.
- State level factors such as government ideology, legislative resources, and insurance market size also influence adoption decisions.
- Policy difference is more important than internal political and economic characteristics in adoption decisions.
- States are likely to follow their geographic or ideological neighbors in adopting an IC model law.
- The NAIC's increased budget and staff have allowed them to provide support for research and new initiatives.
Role of NAIC and Policy Diffusion
23:35 - 29:47
- The NAIC provides support for research and funding new model law initiatives.
- Too many model laws can be problematic, so the NAIC sets a barrier for consideration.
- 50-state coordination problems may exist in other regulatory areas like banking, securities, and consumer finance.
- Outside of financial regulation, public utilities are the only area with a similar role to the NAIC.
- Policy diffusion literature should focus on the content of the policy rather than state-level factors.
- Key takeaways from the paper include: NIC plays a central role in model law diffusion, states follow NIC's lead, popular model laws are easy to interpret and different from existing laws, and states are influenced by geographic neighbors and ideological similarity when adopting laws.