Public Policy Analysis & Opinion
The NAIC declares a critical stage in state-based insurance regulation
“The NAIC and its membership are at an exciting crossroads—a critical stage of regulatory developments in the insurance sector.”
On February 7, 2018, the National Association of Insurance Commissioners published a new strategic plan in which an “exciting crossroads” perfectly coincides with a “critical stage.” Will someone roust Dick Button from his well-earned retirement to provide this commentary?
A historical review of legal opinions makes abundantly clear that McCarran-Ferguson does not allow for the transfer of regulatory authority to the NAIC or any private entity.
Personally, this humble scribbler feels overwhelmed by the moment. May we have an “Amen” and a “Woo-hoo”? Who does not share in this wild excitement?
When the last confetti fleck settles to the floor and the last noisemaker goes silent, we may learn that the entire NAIC burlesque was a touch oversold.
For example, the insurance regulatory framework still relies on the McCarran-Ferguson Act of 1945, which implements congressional authority as established by the U.S. Constitution. Judicial review of both documents created a body of case law and legal precedent that stands unshaken by recent decisions.
So why now? Why did the NAIC roll out a new strategic plan? The NAIC provided a list of transformative changes in the insurance sector to justify the new plan. “Rising demand for simplified and near instantaneous purchase transactions,” which does not suggest much of an ongoing role for those 19th century ghosts—agents and brokers.
Whenever it comes time to ponder why the NAIC did something, many colorful possibilities come to mind.
We might ask whether the NAIC leadership visited some exciting crossroads around midnight to meet a shadowy figure who wanted to make a deal. “Yes, commissioners, your mortal life will be most enjoyable, and the transition will not be your concern,” the shadowy figure hisses.
Or maybe we should consult the secular authority of George Orwell to understand this new edition of the NAIC strategic plan. We could imagine the NAIC’s Inner Party Leader-for-Life Andrew Beal meeting with some new insurance commissioner in a bland conference room and saying in soulless tones:
“Commissioner, I notice that you have the disparaged old edition of the strategic plan, which does not reflect today’s critical stage. Why don’t you borrow my copy of the New Edition. Look here; now we use the term ‘collective regulation.’ And, of course, some things remain the same: We still say regulate every time we mean deregulate; however, you must believe you are regulating without hesitation. Now, have another quaff of Victory Gin and sign these papers.”
Yes, once again we are off on a bad tangent shamelessly stealing from lore and literature.
In all likelihood the timing of the new strategic plan is related to the association’s 2017 hiring of a new chief executive officer who wants to set a course for his term. The new plan begins with a list of supposedly material changes to the insurance sector and markets that demand a new approach.
Like any strategic planning document, the NAIC plan contains an unhealthy dose of buzzwords and meaningless phrases, but it also suggests improvements to the regulatory system. All the plan’s proposals consist of platitudes and jargon, but a few suggestions promise a more effective and efficient insurance regulatory system.
If the truth were in the NAIC, the strategic plan would explain its purpose regarding the advancement of insurance regulation toward an old goal that government officials have never achieved: regulation of the business of insurance to protect the public interest. Implement the regulatory requirements of the McCarran-Ferguson Act of 1945. That’s all.
In the late 1940s and 50s, the insurance sector feared immediate application of the federal antitrust law and Federal Trade Commission enforcement, so the sector lobbied state officials to play it pretty straight when building a regulatory framework. By the 1960s, parochial interests within the insurance sector split that lobbying power, and the states started to take liberties with the regulation of pricing. In the 1970s, the Nixon, Ford, and Carter administrations all demonstrated an infatuation with business deregulation, which emboldened insurers to start weaving fairytales concerning “regulation by competition” without the application of antitrust law or FTC enforcement, which is not what Congress meant in 1945. Conditions deteriorated when conservative majorities took control of Congress in 1995. Since that time the congressional calls for McCarran-Ferguson implementation have become nothing more than weak whispers about ancient lore.
Yet the NAIC’s new strategic plan does present a few “shiny objects” that deserve a look.
For example, the plan embraces the goal of erasing the parochial divisions among different discipline of insurance regulation by integrating data sets and analysis:
Leverage data across internal regulatory domains and external sources of market conduct, financial solvency, the System for Electronic Rates and Forms Filing (SERFF), and State Based Systems (SBS), and provide state insurance regulators easy access to this data.
I championed a similar initiative in the early years of this century as a consumer advocate at NAIC. The approach did not win many supporters at that time. The division between financial regulation and market conduct (the poor and mistreated sibling of the former) proved impossible to correct.
The major property/casualty carrier trade groups opposed it. The carriers offered the fallacy that the only appropriate role for public oversight was regulating (or “supervising”) solvency. Companies did not want regulators nosing around activities of “the business of insurance,” which might lead to charges of unfair trade or claims practices such as redlining or other offenses. Also, some market misconduct could be uncovered—for example, slow claims payments could point to a company with solvency problems—which the property/casualty lobby did not want regulators looking at after all. “Close the door, close the door—Don’t let the doctor come in tonight!”
The market conduct regulators were not much more help. First of all, since the 1970s the market conduct discipline of state insurance regulation developed into a fiefdom—no matter how underfunded and disrespected the fiefdom was in the grand scheme of insurance regulation. Some older market conduct regulators remembered the days when financial examinations included market conduct-related questions and the financial examiners just skipped those pages of the Examiners’ Handbook.
Now keep in mind that the separation of financial and market regulation runs counter to insurance regulatory history. And the argument that solvency regulation is supreme is nothing less than The Big Lie. The complaint filed in U.S. v. South-Eastern Underwriters Association (1944) dealt with issues that today’s regulators would classify as market conduct violations. The court ruled that insurance falls under federal jurisdiction as interstate commerce.
Early the following year, Congress responded to the decision by passing the McCarran-Ferguson Act. The law did not segregate solvency regulation from market regulation. Senator Joseph C. O’Mahoney (D-Wyo.), who brokered the legislation, repeatedly called for “affirmative regulation,” where state officials went looking for problems of all sorts.
The NAIC goal of integrating data and analysis functions without regard to financial, market, or other parochial category reflects the Supreme Court’s most complete interpretation of the limited contingent delegation of authority over insurance made by Congress to the states by the McCarran-Ferguson Act.
In Securities and Exchange Commission v. National Securities (1969), the court set aside a ruling by the Arizona insurance commissioner because the commissioner stated that the action served the interest of shareholders. The court reminded states that McCarran-Ferguson did not grant insurance regulators jurisdiction over shareholder interests; the relationship between insurer and shareholder was governed by the SEC.
In writing that decision, Justice Thurgood Marshall defined the phrase “business of insurance” and described what activities should be “regulated by state law” under McCarran-Ferguson:
The relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement—these were the core of the “business of insurance.” Undoubtedly, other activities of insurance companies relate so closely to their status as reliable insurers that they too must be placed in the same class. But whatever the exact scope of the statutory term, it is clear where the focus was—it was on the relationship between the insurance company and the policyholder. Statutes aimed at protecting or regulating this relationship, directly or indirectly, are laws regulating the “business of insurance.”
This ruling remains vital to understanding the tenets of insurance regulation, although officials have drifted away from those tenets over the past half century. The McCarran-Ferguson Act provides for the restoration of FTC and federal antitrust enforcement “to the extent that the business of insurance is not regulated by state law.” The National Securities decision defines what “business of insurance” means: the whole “relationship between insurer and insured.”
The states’ charge under federal law is to regulate the business of insurance—not insurance markets. Markets include investors and other stakeholders beyond the business of insurance. If Congress’s goal was to regulate markets, it simply would have let federal antitrust law (FTC oversight) apply to the business of insurance after the Supreme Court ruled in June 1944 that insurance is interstate commerce.
The new NAIC strategic plan makes ample use of the term “collective regulation.” From the perspective of reason and modernity there is much to like in that term, but the devil is in the details.
A historical review of legal opinions makes abundantly clear that McCarran-Ferguson does not allow for the transfer of regulatory authority to the NAIC or any private entity. Neither may one state regulate on behalf of another state, which calls into question the traditional deference paid to each insurer’s state of domicile. Based on the conference committee report that resulted in the passage of McCarran-Ferguson, which the Supreme Court cited in material opinions, Congress intended each state to regulate the business of insurance using its authority and action.
Collective regulation has always proved a “bridge too far.”
Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide Insurance Cos. and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.