NAIC ANALYSIS & OPINION
NAIC confuses pretense for policy
By Kevin P. Hennosy
After the repeal of the Glass-Steagall Act by the Gramm-Leach-Bliley Act, one would expect the NAIC to build an updated regulatory framework. This has not been the case. Instead, the association spends its time debating proposals that masquerade as policy proposals and regulatory frameworks.
The National Association of Insurance Commissioners (NAIC) convened for its fall quarterly meeting in early September in New Orleans--a city known for self-delusion and carpe diem fantasy. The NAIC fit right into the environment.
In New Orleans, the NAIC costumed itself in proposals for interstate cooperation that no one believes will ever be achieved. The association continued to engage in negotiations where the NAIC offers strands of favors to industry trade groups who make coy promises to present their political intentions to the frustrated regulators.
This is not to suggest that the NAIC succumbed to the wilds of Bourbon Street. The association conducted its usual round of 150 sessions at the fall convention. The sessions were well attended and businesslike. The public relations staff issued a ream of "news" releases complete with strenuously concocted quotes from association leaders.
At the New Orleans meeting, the NAIC trumpeted "news" concerning the following topics: 1) Plans near completion to establish an interstate compact for premium rate, policy form and advertising review system; 2) The decision to eliminate insurable interest requirements for corporate-owned life insurance products; 3) The presentation of awards to three states that comply with minimum standards for information technology and one state that complied with minimum standards for solvency surveillance; 4) The continued consideration of a number of manuals for insurance regulators and the report of "progress" on a number of policy issues; 5) The receipt of a "preliminary verbal report" on the use of credit scores in underwriting and rating; and 6) The self-certification by the NAIC that a sufficient number of states have enacted reciprocal producer licensing requirements under the Gramm-Leach-Bliley Act--a certification that almost certainly will be challenged in federal court.
Despite the laudable efforts of the public relations staff to identify newsworthy actions taken by the NAIC, the meeting was not viewed as particularly eventful. Attendees from industry, consumer advocacy and journalism agreed that nothing much happened.
Tradition
If it were not for the importance that the NAIC traditionally has held in the insurance public policy process, one could excuse its masquerade ball. But the NAIC does hold responsibilities that cannot be achieved through "let's pretend" games. "Achievement-by-news release" just does not cut it.
This lack of activity should not concern only columnists whose beat includes the NAIC. The NAIC has been around a long time--since 1871. In that time it has assumed various roles and responsibilities in the policy-making process. What the NAIC does or does not do makes a difference to insurance professionals and insurance policyholders.
The NAIC earned its place in the policymaking process by providing practical support to the insurance regulatory framework. The operative term in that statement was "practical support." More often than not, providing practical support has meant looking at parochial problems with state insurance regulation and developing solutions from the perspective of the national interest.
The NAIC's history holds many examples of putting the national interest before parochial interests. The formation of the uniform annual financial statement in the 1870s supplanted many parochial reporting formats but provided the basis of national solvency regulation. The NAIC's formation of the Securities Valuation Office established a uniform national system for investment reporting at the expense of inadequate local rules at the turn of the 20th century. In the 1940s, the NAIC developed a national framework for rate, form and trade regulation when the old system of private cartels was ruled illegal. In the 1960s, the NAIC championed the guaranty fund system. In the 1990s, the NAIC initiated an accreditation program to counter parochial interests' cancerous effects on insurer solvency on public trust.
After the repeal of the Glass-Steagall Act by the Gramm-Leach-Bliley Act, one would expect the association responsible for the policy recommendations listed above to build an updated regulatory framework. This has not been the case. Instead, the NAIC spends its time debating proposals that masquerade as policy proposals and regulatory frameworks.
Instead of developing regulatory frameworks, the NAIC has run from one trade group to another with proposals that amount to flowers and chocolates. For two years the NAIC has behaved like a lover with dependency issues.
Search for uniformity
For example, take the proposal to form an interstate compact to govern policy form, premium rate and advertising review by regulators. The proposal has become the primary means by which the NAIC membership hopes to keep the life insurance industry from seeking federal charter legislation from Congress.
The compact proposal has attracted no more than lukewarm support from regulators, consumer groups and industry advocates. What support it has received owes more to personal respect for Iowa Insurance Commissioner and NAIC President Terri Vaughan than any great belief that the compact will work.
The proposal seeks to establish a statutory agreement among states that will result in uniform and timely review of rates, forms and advertising. The agreement will address life insurance, annuities and possibly long term care insurance.
The NAIC tried to establish a voluntary system in 2000 under the name Coordinated Advertising, Rate and Form Review Authority (CARFRA). Originally the system was envisioned to include all lines of insurance. Property/casualty insurers quickly rejected the system in favor of lobbying for deregulation. Life insurers worked with the NAIC to test the proposal, which resulted in the approval of one product in the summer of 2001.
The voluntary system was rejected because its findings did not have the force of law and could be challenged in any or all jurisdictions. Some NAIC members proposed seeking a federal charter for CARFRA, which would have assured uniformity and participation in all state jurisdictions. That proposal was killed by large states that felt they would loose status under a federal framework.
Elusive support
In New Orleans, a new draft of the interstate compact proposal was released for comment. Life insurance advocates promised to continue to work with the NAIC on the proposal but could not endorse it. Property/casualty advocates will not endorse the proposal unless the NAIC agrees to recommend the deregulation of personal lines, which is not likely. Some consumer advocates will support the compact proposal if it includes provisions for a funded but independent office of consumer advocacy with standing to seek redress in the courts.
With regard to consumer group support, insurance regulators will seek the endorsement of the American Association of Retired Persons (AARP), which has tentatively opposed the proposal. AARP is not likely to endorse a compact proposal that includes
long term care insurance.
Consumer advocates generally believe that the compact will enforce national standards based on a "least common denominator" approach. In such a case, states with strong consumer protections for long term care, like California, will face pressure to roll back those protections.
Life insurers have told the NAIC that they cannot support a compact proposal that does not include long term care insurance. Officially this position rests on the belief that long term care insurance and life insurance share underlying tenets. Unofficially, life insurance company lobbyists say that they have to push for inclusion of long term care at the NAIC level because they will ask Congress to include long term care in any federal charter legislation--to preempt state rules like California's. The life insurers want to remain consistent.
To address this and other concerns, the NAIC has included "opt-out" provisions in the compact. As a result, the compact will never achieve the level of uniformity that the NAIC wants the proposal to achieve. Some states will opt out completely and others will opt out of particular provisions. In either event, the goal of uniformity is lost.
Decoration
Each draft of the compact proposal becomes longer and more convoluted in the effort to attract participation of one special interest or another. Statutory complexity leads to dissatisfaction. Dissatisfaction will further undermine uniformity.
When it comes right down to it, an interstate compact is nothing more than the Articles of Confederation that failed in the 18th century because it did not effectively regulate interstate commerce. Why would anyone think the format would work better in the 21st century?
The NAIC's fixation on the interstate compact appears to be an exercise in self-delusion. Each draft of the NAIC interstate compact proposal adds another string of lights and a few more ornaments to decorate a burning Christmas tree.
Muckraking
The NAIC might dismiss criticism from commentators in the press as "muckraking." Perhaps it is. Let us not forget that muckraking served a vital role in the improvement of American life. In the words of Ray Stannard Baker (1870-1946), a muckraking journalist for the American Chronicle, "We 'muckraked' not because we hated our world but because we loved it."
The NAIC is not living up to its potential. If the association had adopted its current strategy with Congress and the company trade groups in 1945, insurance would have been subjected to antitrust law and Federal Trade Commission oversight.
It is time for the NAIC to engage Congress and reshape the regulatory framework that is, after all is said, dependent on federal authority to hold it together. The only way that the symphony of states can play in harmony is with federal direction. Unless the NAIC demonstrates a willingness to cut its own deal with Congress, the enemies of the state regulatory framework have no reason to respect or fear the NAIC. In political circles, weakness
breeds contempt.
In New Orleans or elsewhere, public policy development should not be driven by the chant: Throw me something, Mister! *
The author
Kevin Hennosy, an insurance writer specializing in the history and politics of insurance regulation, covers the proceedings of the NAIC (National Association of Insurance Commiss-ioners) for Rough Notes readers. Hennosy began his career with Nationwide Insurance Companies and then served as public affairs manager for the NAIC. He has written extensively on insurance regulation and testified before the NAIC as a consumer advocate. He is currently writing a history of insurance and its regulation in the United States.