Public Policy Analysis & Opinion
Questions arise about the association’s finances
At the National Association of Insurance Commissioners (NAIC) spring national meeting, the Delaware-chartered organization launched an initiative to become a player in the technology sector by empaneling an Innovation and Technology (EX) Task Force. Michigan Insurance Director Patrick M. McPharlin and Oregon Insurance Commissioner Laura Cali Robison will lead the task force as chair and vice chair, respectively.
“This is an important step in our efforts to increase our engagement in new and innovative technologies,” said Ted Nickel, NAIC president and Wisconsin insurance commissioner, in a public statement released in early March. “Insurance regulators have a critical role to play in supporting innovation. This includes working with individuals and companies creating new product offerings and services to meet consumer expectations, while ensuring consumers are adequately protected.”
According to the NAIC statement, the task force will “help insurance regulators stay informed on key developments, including new products and services from start-up companies, as well as established insurance industry players. The task force reports directly to the NAIC Executive Committee.”
For many years a panel has been charged with following technology issues. Apparently this task force is designed to do more than provide expertise on technical matters. “Supporting innovation” and working with “individuals and companies creating new product offerings and services” reek of something different: something unrelated to a private corporation supporting state officials’ activities to regulate “the business of insurance under state law.”
Once again the NAIC seems to be preparing to position itself at the crossroads of Revenue Way and Compensation Street. If a technology provider wants to sell a product or service to state regulators, insurance carriers, producers, or related actors, the NAIC will exert influence over that transaction.
And, as noted in this column before, the NAIC does not open its books for inspection. Oh yes, they put together financial budgets and hold hearings before assembled audiences of insurance lobbyists. That, however, does not equate to “opening the books.”
We also know that the NAIC often has allowed funds to move through its accounts to pay for commissioner travel on the dime of regulated entities, which would have violated state ethics laws. What if a technology firm that sought to be a vendor in several states welcomed a delegation of state officials “on NAIC business” and reimbursed the NAIC? Who would ever know? The NAIC does not file a tax return in any jurisdiction, nor does it file a Form 990 Financial Disclosure Statement with the Internal Revenue Service, which other tax-exempt organizations do. The NAIC’s finances remain a black hole, and this invites money laundering.
In addition to garnering influence in the technology sector, the task force will convene working groups on big data, cybersecurity, and the automation of regulatory review.
The Big Data Working Group received multiple charges from the task force. First, the working group will “gather information to assist state insurance regulators in obtaining a clear understanding of what data is collected, how it is collected, and how it is used by insurers and third parties in the context of marketing, rating, underwriting, and claims.”
If that charge was not broad enough, the task force directed that it “includes an evaluation of both the potential concerns and benefits for consumers, as well as the ability to ensure data is being used in a manner compliant with state insurance statutes and regulations.”
Furthermore, the task force expects the working group to report on the “regulatory use of data to improve the efficiency and effectiveness of insurance regulation.” This effort might ignite the old and misinformed cry from insurance carrier lobbyists that insurance regulation should not consider anything beyond financial data.
The Cybersecurity Working Group also received multiple charges from the Innovation and Technology Task Force, but it was slow to post them for public review. Perhaps it took time to translate the directives from the original Russian? For some time the NAIC has been drafting an Insurance Data Security Model Law. Certainly this project was consuming the working group’s initial attention. Also, the working group will monitor federal legislation that at least indirectly addresses cybersecurity issues.
Speed to market
Since repeal of the Glass-Steagall Act in 1999, the NAIC has used the term “speed to market” to describe deregulation. The Innovation and Technology Task Force empaneled a working group to identify ways to apply technological methods to the state’s deregulation efforts, to create the impression of state action. To comply with the limited and contingent loan of authority over insurance that Congress made to the states, the states must act to use the authority.
The working group operates under a three-part mission statement.
First, the working group “serves as the NAIC focal point for modernization of the insurance product filing and review processes.” Over the past 25 years “modernization” has become an Orwellian term of art in the financial sector. Regulatory modernization means reversion to policies that predate 1933. Ignorance is strength, Mr. Smith.
In addition, the working group monitors “the development and implementation of speed-to-market efficiencies and the System for Electronic Rate and Form Filing (SERFF).” Monitors is a key word because nothing happens to the SERFF framework without the approval of the property/casualty insurance carriers’ lobbying army. The SERFF framework could be much more efficient and effective than it is today, but the carrier lobbyists make certain that SERFF does not become “too” efficient or effective.
Furthermore, the working group provides “support to the Interstate Insurance Product Regulation Commission (IIPRC) for initiatives that require uniformity and policy changes within the states, where necessary.” This Interstate Compact provides a rubber stamp for life insurance and long-term care products so that they might “compete” with other investment products. The ability to receive “regulatory” approval from a single private entity saves them time.
Of course, this is not the system that the drafters of the McCarran-Ferguson Act had in mind. Nor is it consistent with a bedrock Supreme Court decision that interprets the act. In FTC v. Travelers Health Association 362 U.S. 293 (1960), where the court drew from the congressional conference committee report written as Congress gave final consideration to the McCarran-Ferguson Act:
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.
Even without the unique framework constructed by the McCarran-Ferguson Act, the interstate compact should have been presented to Congress for approval or disapproval. The NAIC’s interstate compact violates the constitutional use of compacts between and among states. The NAIC’s compact seeks to reduce the constitutional authority of Congress by creating in a sector of interstate commerce a national policy framework that’s an alternative to Congress.
From the perspective of the statute, as well as the conference committee report and court decision noted above, the compact seeks to do harm. The compact both allows states “to regulate for other states” and allows a private entity to regulate. Also, through the creation of a compact commission, the NAIC’s compact establishes a “private group or association to regulate in the field of interstate commerce.”
The Constitution provides for interstate compacts to address regional issues where the public interest demands uniformity. Even in such cases, any compact that in its action serves to reduce congressional jurisdiction may be disallowed by Congress.
Interstate commerce, e.g., the business of insurance, is not a regional issue. Congress did not lend jurisdiction to the states for the purpose of transferring it or allowing one state to regulate on behalf of the other. The Interstate Compact should be struck down by Congress.
Just before the 2017 NAIC spring national meeting in April, the National Insurance Producer Registry (NIPR) released its annual report. For 20 years the NAIC affiliate has provided a centralized asset for processing producer licensing-related transactions. A blended board of directors drawn from insurance regulation and regulated entities oversees the NIPR. The NAIC benefits financially from the NIPR operations through “administrative fees.”
“2016 not only marked a milestone anniversary for NIPR, but we also processed a record-breaking 27.5 million transactions, representing a 9.57% increase over 2015,” said Karen Stakem Hornig, NIPR executive director.
“Today NIPR is at the heart of the nation’s producer licensing system, providing one-stop shopping for all aspects of electronic producer licensing,” added Roger Sevigny, NIPR board of directors president and New Hampshire insurance commissioner. “Underlining everything we do is our commitment to delivering an outstanding experience for our customers and stakeholders.”
Those interested in learning more about the NIPR should visit the NAIC website (www.naic.org). The online edition of the annual report features audited financial statements and video messages from Hornig, NIPR board members, and NIPR staff!
Ain’t America great?
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 Companies 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.