NAIC PICKS A FIGHT WITH SENATE BANKING COMMITTEE CHAIR

Offer “thoughts and prayers” to the NAIC leadership

In the spring of 2022, U.S. Senator … Sherrod Brown (D-Ohio) began asking important questions concerning the role of Private Equity Funds (PEFs) in the business of life insurance, including the retirement benefit products sold by insurers.

By Kevin P. Hennosy

In the spring of 2022, U.S. Senator and Senate Banking Committee Chairman Sherrod Brown (D-Ohio) began asking important questions concerning the role of Private Equity Funds (PEFs) in the business of life insurance, including the retirement benefit products sold by insurers.

In a March 16, 2022, letter to the Federal Insurance Office (FIO) and the National Association of Insurance Commissioners (NAIC), Senator Brown expressed his “concern that insurance investment products workers depend on for their retirement are being transferred to these risky companies that have a track record of undermining pension and retirement programs.”

The Banking Committee Chairman asked the FIO “in consultation with NAIC, [to] work to collect additional data from insurers and then further study this matter so it may issue a report to Congress no later than May 31, 2022 … .”

Human folly

In a letter dated May 31, 2022, containing thinly veiled rhetoric, the NAIC told Senator Brown to, um, pound sand. This arrogant act on the part of a private corporation that, at best, shills on behalf of state officials who hold jurisdiction over the “business of insurance” only through loaned authority given by a federal statute, caused this commentator to recall a quote from President John F. Kennedy:

“There are three things in life that are real, God, human folly, and laughter. The first two are beyond our comprehension, so we must do what we can with the third.”

Reading the NAIC letter, one could almost hear Senator Brown laughing with a quiet tone of self-assurance. Remember, the NAIC lives in a glass house because it thumbs its nose at federal tax filing rules. Nevertheless, the private corporation’s federal government relations office drafted a letter for signature of the corporation’s leadership, which cast the first stone at the chair of a powerful Senate committee.

Hogwash

On the last day of the Senator’s deadline, the NAIC delivered a letter remarkable for its misleading voice.

Keep in mind that the senator’s information request notes that documents produced by state insurance regulators, or whatever one chooses to call them, cite concerns about PEFs’ role in the life insurance sector.

Senator Brown’s request notes that “at the [NAIC] December [2021] Financial Stability Task Force Meeting, they noted that domestic and international regulators are concerned about PE-owned and traditional insurers with complex structures and riskier investment activities that may pose systemic risks.”

In addition, Senator Brown mentioned in his request, “In FIO’s most recent report, [NAIC] point-ed out these arrangements have become increasingly common over the last decade.”

The first six pages of the NAIC letter consist of utter hogwash that avoids opining on a topic the NAIC preferred not to discuss with a member of the U.S. Senate.

For example, the NAIC letter observes with dismissiveness: “As Chairman of the Banking Committee, you know well the long decline of private defined benefit plans as a pillar of American retirement security. The reasons for this decline are complex but have been well documented by others and explored by Congress.”

Following that logic, senators really should not discuss funding research and development of cancer treatments because the illness is “complex but ha[s] been well documented by others and explored by Congress.”

In the memorable words of Gozer the Gozerian in Ghostbusters: “The choice is made … the Traveler has come!”

The NAIC letter continues: “To be clear, we are not attempting to defend or rationalize the demise of traditional pensions, and we can certainly appreciate the apprehension of those retirees or future retirees when they see their retirement security being transferred from their employer to an insurance company [sic] they might have no relationship with.”

Well, that commitment to un-interestedness should make everyone feel better! The Titanic hit an iceberg: The deed’s done so there is no need to send rescue ships. Thin the herd!

Digging the proverbial hole deeper, the NAIC letter continues: “What we can say for certain, however, is that if a life insurer steps in, state regulators step up, and subject that insurer to a full suite of solvency monitoring tools and requirements to ensure that it will be there to honor those commitments, regardless of its ownership structure.”

One can almost hear the storied corrupt cop on the beat standing in front of a crime scene saying: “Keep moving Senator, there’s nothing to see here! Remain calm, all is well!”

Sworn testimony?

Well, just hold on “Sparky!” You just may find yourself answering inconvenient questions.

Sure, Senator Brown sports a curly head of hair that sometimes looks like he only gets it cut just before the first day of each school term. Do not underestimate this man’s steel. Senator Brown also has a boyish smile—until he doesn’t.

Unlike many successful politicians of his generation, Sherrod Brown does not take himself too seriously. In his first run for statewide office, his campaign ran an ad that poked fun at his first name—so people remembered his name.

Having watched Senator Brown, his devotion to wage-earning families, and persistence in serving the interest of those families since his election as Ohio Secretary of State in 1982, this commentator knows that the Senator is not a person to mislead. Sherrod Brown takes his public charge very seriously. Senator Brown is an experienced legislator who knows how to wield the power available to him to find the truth.

Brown’s choosing

Senator Brown will decide the place,time, and methods his committee employs to apply legislative oversight. The Chairman of the Senate Banking Committee just may not take kindly to the NAIC’s disregard for their inquiries. The committee has access to research, hearing rooms, hot lights, and a tool called “sworn testimony.”

What if the NAIC leadership received an invitation to discuss the validity of the information communicated in the response letter before the Senate Banking Committee?

The committee could compel the NAIC leadership to answer all kinds of inconvenient questions.

For example, the committee could launch lines of inquiry to establish the public interest standing of the NAIC. The Chair or members of the committee could ask the NAIC leadership about the corporation’s funding, including the funding of the NAIC’s affiliates and transfers between and among those legal entities. Short of pleading protection under the Fifth Amendment, the NAIC leadership would have to disclose those long-hidden details.

The committee’s members may express interest in the NAIC’s refusal to file a Form 990 with the IRS as an “instrumentality of the states,” at the same time it denies the Freedom of Information Act request as a “private entity.”

Or an engaged member of the committee may ask about the unbid contracts that the NAIC binds with state insurance departments without regard for state bidding procedures, conflict of interest rules, or state attorneys general opinions.

Regarding the international aspect of insurance: Does the NAIC still accept money from insurers to reimburse international travel by state insurance commissioners as they did in the past? (Yes, Virginia, the receipts exist, and I have seen some of them.)

Then, if there is time, and the committee can define what time is available, the leadership may receive questions about “the suite” of solvency methods that the states “can” apply to insurers. For example, the NAIC letter touts the regulatory power of Own Risk and Solvency Assessment (ORSA), which the NAIC Proceedings will document as a system to foster self-regulation by life insurers.

State action?

This hellscape of questions could easily lead to the McCarran-Ferguson Act (PL 15 of 1945), which we should remember the “Upper House” of Congress negotiated with the Roosevelt Administration, non-cartel insurers, and the National Association of Insurance Agents—today’s Independent Insurance Agents and Brokers of America (IIABA).

Does the risk of loss flow to the PEFs or to the retirees? If the latter is true, this is not insurance and therefore beyond the jurisdiction loaned to the states by PL 15 of 1945.

As the Conference Report on McCarran-Ferguson specifies: “Nothing in the proposed law would authorize a State to try to regulate for other States, or authorize any private group or association to regulate in the field of interstate commerce.” (91 Cong. Rec. 1483.)

Does not the limited and contingent delegation of jurisdiction to the states by Congress over insurance end with self-regulation through ORSA by private insurers—or investment funds like PEFs?

Do the PEFs operate outside of the jurisdiction as defined by McCarran- Ferguson, or is the loan of authority called back to Congress through lack of “state action?”

Oh, my goodness, these questions—answered under oath—keep piling up!

And let us not forget, because the NAIC Proceedings—the official record of the corporation’s meetings—document that the activities of PEFs raise regulatory concern, before the NAIC leaderships posteriors hit a chair, other state regulators may have testified to the problem.

The jig is up

When one faces a questioner driven to find the truth, it is best just to admit “the jig is up.”

If one conducts a Google search for the NAIC, the search engine produces the following slogan: NAIC-Supporting Insurance, Regulators, & Public Interest. A telling arrangement of words. Senator Brown and the committee staff will notice that “Insurance” runs first, and “Public Interest” runs in the “show” position.

With a bit of staff support, the committee could absolutely ruin a visit to Washington D.C. for the NAIC leader-ship—who must answer questions “under oath.” No dinner and cocktails on the NAIC American Express would make the memory of that experience fade.

Call me an ex-patriot Buckeye, but personally I would not cross Senator Brown by bloviating in his general direction. If Senator Brown asks uncomfortable questions, answer them with directness and honesty. If the answers prove problematic, try to become part of the solution to the problem.

The author

Kevin P. Hennosy began his insurance career in the regulatory compliance office of Nationwide and then served as public affairs manager for the NationalAssociation 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.