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July 26
09:32 2019

Public Policy Analysis & Opinion

By Kevin P. Hennosy


Two traditional combatants on the insurance public policy battlefield seem to be getting along swimmingly

In the words of America’s greatest newspaper  editor, Perry White of The Daily Planet: “Great Caesar’s Ghost!”

The National Association of Insurance Commissioners (NAIC) and various offices and agents of the federal government seem to be getting along? The two traditional combatants on the battlefield of insurance public policy seem to be getting on swimmingly.

As noted in the July 2019 edition of Rough Notes, the NAIC may become a voting member of the Financial Stability Oversight Council, which will enhance its ability to shield insurers that exhibit elements of systemic risk from federal oversight. Yes, Virginia, that is why the NAIC wants the vote.

Recently, federal officials have delivered supportive messages to the NAIC. If this keeps up, people will talk!

Treasury Secretary weighs in

On May 13, 2019, before one of the NAIC’s periodic gatherings of insurance lobbyists, executives, and state officials, U.S. Treasury Secretary Steven T. Mnuchin endorsed state-based insurance regulation. At the NAIC International Forum, Secretary Mnuchin promised: “As we noted in our 2017 Executive Order report on Asset Management and Insurance, Treasury supports the state-based system of insurance regulation.”

Mnuchin recognized a federal role in the insurance sector. He began with an obligatory tip of the hat to the Federal Insurance Office (FIO), which is about the most recognition that the FIO ever receives. The FIO equates with one of those kitchen tools that newlyweds receive from a prominent family member, so they keep it in case anyone asks about it in the future. Still, the recipients never really know what the tool does.

We certainly live in different times from those days of yesteryear when the late powerful House Committee Chairman John Dingell found multiple ways to poke the NAIC with a sharp stick from Washington.

Secretary Mnuchin put down a marker at the water’s edge. “As U.S. insurance companies compete globally and increasingly look overseas for growth opportunities, the federal government plays an important and necessary role to ensure that our U.S. insurance sector and our companies remain competitive internationally.”

The Secretary’s speech touched on several topics but centered upon efforts to draft new international guidance for insurers’ capital requirements.

The Secretary cited a “Team USA” approach when dealing with the International Association of Insurance Supervisors (IAIS), which develops international standards for insurance public policy. Secretary Mnuchin urged: With regard to our work in these international standard-setting bodies, the U.S. representatives should advocate strongly and collectively for development of international standards that reflect the U.S. regulatory structure. As part of this advocacy, collaboration among the state insurance regulators, the NAIC, the Federal Reserve, and the Federal Insurance Office is critical to ensure that the United States carries a coordinated view in international discussions.

The IAIS program to produce an Insurance Capital Standard (ICS) received Mnuchin’s attention. The Secretary cited three aims of the Treasury Department related to the ICS project. First, Treasury hopes to expand the ICS so it “more appropriately reflects the unique business model of insurers.” Second, the Treasury “defined structure and process for further work and revisions on the ICS during the monitoring period from 2020 to 2024.” And, third, Secretary Mnuchin expressed concern that IAIS produce a work product that “is implementable in the United States.” This concern suggested that the Secretary did not want the ICS to be too prescriptive. In particular, the “U.S. approach to group capital may be deemed ‘outcome equivalent’ to the ICS.”

It sounds like the Treasury Department envisions using the importance of the U.S. insurance sector to shape the IAIS work product: In this broader context of group capital, it is also important that the Federal Reserve and the NAIC continue coordinating and making progress on their respective domestic group capital initiatives. The group capital work of the Federal Reserve and the NAIC are separate but inherently related initiatives. While being respectful of the different mandates of the Federal Reserve and the NAIC, the development of a harmonized approach will minimize regulatory burdens for U.S. insurers. Progress on both of these fronts will also help Team USA’s advocacy for our U.S. state-based system and regulatory approach at the IAIS.

The National Association of Professional Insurance Agents (PIA National) welcomed Treasury Secretary Mnuchin’s comments. “PIA is heartened to hear Secretary Mnuchin state specifically that the Treasury Department supports the U.S. system of state-based insurance regulation and wants international insurance capital standards to recognize and accommodate our system,” said PIA National Counsel and Director of Regulatory Affairs Lauren G. Pachman, Esq.

Senate supports an alternative

In addition to Secretary Mnuchin’s speech, the NAIC welcomed a letter to Federal Reserve Governor Randal Quarles, also dated May 13, 2019, from a bipartisan group of senators discussing the ICS issue. The letter congratulated Quarles for the content of a speech, which cautioned IAIS and other international policy development bodies to keep the interests of the U.S. insurance sector in mind as they write capital recommendations.

With all the aplomb of the Ugly American stereotype, the senators’ letter expressed their doubt that the American insurance sector needed international rules, but commended the Fed Governor for cheering a level of economic nationalism that, in 1930, would have made Reed Smoot and Willis C. Hawley proud: We question the need for an ICS, but appreciate you pointing out that “The standards produced through the IAIS are, of course, not binding upon the United States.” Our concern is that, even if those standards are nonbinding on the U.S., they may still present real and negative ramifications for U.S. insurers operating in markets abroad.

The senators’ letter placed extraordinary expectations on the NAIC and Federal Reserve to develop a defensible alternative to international standards: “The ICS is not intended to be a global mandate and that aggregation approaches to capital, such as those being developed by the NAIC and the Federal Reserve, as well as other well developed and proven capital regimes, are acceptable for purposes of the ICS.”

It seems that the NAIC holds a “Washington Insider” status that it has not enjoyed since the Hoover administration, when it went by the name of the National Convention of Insurance Commissioners (NCIC).

Best interest

The NAIC also sent a “love letter” to the Securities and Exchange Commission (SEC). The insurance regulators opined: The NAIC commends the U.S. [SEC] on finalizing its rules to enhance retail investor protections. The NAIC will take under consideration the SEC’s final rules as we continue our own work in enhancing protections for policyholders through changes to the NAIC’s Suitability in Annuity Transactions Model Regulation. As state insurance departments regulate entities and products that may also be subject to SEC regulation, the NAIC anticipates harmonizing our work where appropriate with due deference to the unique nature of insurance products.

On June 5, 2019, the SEC voted to adopt a package of rules and interpretations aimed at enhancing disclosure requirements designed to construct reasonable investor expectations, which the commission considered for more than two decades.

According to a fact sheet published by the SEC, “Regulation Best Interest imposes a new standard of conduct specifically for broker-dealers that substantially enhances the broker-dealer standard of conduct beyond existing suitability obligations. The standard of conduct draws from key fiduciary principles and cannot be satisfied through disclosure alone. It provides specific requirements to address certain aspects of the relationships between broker-dealers and their retail customers, including certain conflicts related to compensation.”

The new rules reflect the arguments of the broker-dealer sector, which is happy to see the “suitability standard” and fiduciary rule withdrawn from the table.

“The new best interest standard addresses perceived shortcomings in consumer protection without placing undue barriers between insurance and financial professionals and their clients,” said Kevin Mayeux, CEO of the National Association of Insurance and Financial Advisors.

“The higher standard of care preserves the ability of Main Street investors to receive needed products, services, and advice by not favoring one business model over another. It allows them to choose financial professionals who best fulfill their needs and to compensate those professionals in a way that works best for them, whether through commissions or fees,” continued Mayeux.

The Consumer Federation of America (CFA) called the SEC decision an “Anti-Investor Advice Standards [adopted] on Partisan Vote.” The federation released a statement that carried the following assessment by Director of Investor Protection Barbara Roper: “The SEC is throwing ‘Mr. and Ms. 401(k)’ under the bus.

“These new rules seriously erode the Commission’s traditional interpretation of the Advisers Act fiduciary standard, giving brokers virtually unlimited ability to act as advisers, while simultaneously failing to regulate them accordingly, and making it easier for brokers to mislead their customers into believing they are getting trusted, best interest advice when they are actually getting investing recommendations biased by toxic conflicts of interest,” Roper continued.

State regulatory sources expect the NAIC to amend its Suitability in Annuity Transactions Model Regulation to match the lower standard established by the new SEC policies.

The swamp

We certainly live in different times from those days of yesteryear when the late powerful House Committee Chairman John Dingell found multiple ways to poke the NAIC with a sharp stick from Washington. And that was so much fun to watch.

We shall see how this new-found popularity in “the swamp” shakes out.

The author

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.

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