Non-territorial Special Jurisdictions in the U.S. Insurance Market

Abstract

Like most nations, the United States heavily regulates the insurance business. Regulators focus on pre-approval of forms and rates, insurer solvency, and licensing providers. Because insurance regulation is almost exclusively the province of state governments, the U.S. insurance market is highly fragmented. In three areas, however, the federal government has preempted state regulation to a degree, creating opportunities for a law market to develop. This article discusses how the preemptions created by the US Congress for purchasing groups (PGs), risk retention groups (RRGs), and surplus lines insurance have created non-territorial special economic zones (SEZs) for portions of the insurance market. The paper backs this idea by, first, analyzing how surplus lines insurance gives insurance buyers access to insurers not licensed in the buyers’ jurisdictions for coverage not available otherwise; second, by examining how risk purchasing groups (PGs) allow buyers to band together to buy insurance despite state laws prohibiting the practice; and third, by discussing how risk retention groups (RRGs) allow groups of insurers to create their own insurer, obtain regulatory approval from a single state, and then provide insurance nationwide. The regulation of these non-territorial SEZs differs in kind from the more traditional state regulation of insurance. It is less “onesize-fits-all” and it is more focused on solving the problems of market gaps. Several states have emerged as leading domiciles, embracing a regulatory approach that sets them apart from those jurisdictions which have not. All three examples provide valuable lessons for constructing non-territorial SEZs in other areas. In this article, I argue that although these federal laws created to expand access to insurance, were not explicitly focused on creation of an SEZ, they do in fact create non-territorial SEZs. Thus there are de facto SEZs for surplus lines, RRGs, and PGs, defined by subject matter rather than geographical boundaries. This, in turn, suggests an alternative pathway to geographical SEZs, one which can expand competition among legal systems. By examining the experience with the federal government’s creation of a national “law market” for these types of insurance, the paper shows how non-territorial SEZs can be used to facilitate regulatory competition that expands the choice set for consumers.