NAIC UPDATE
Concessions to both friend and foe place
NAIC in weakened political position
By Kevin P. Hennosy
When the regulatory system suffered attack in the past, the NAIC developed policies to correct problems and disarm its opponents--until now.
Since the turn of the 20th Century, the National Association of Insurance Commissioners (NAIC) has served as the primary defender of the state-based system of insurance regulation. When the regulatory system suffered attack in the past, the NAIC developed policies to correct problems and disarm its opponents--until now.
For the past five years, the NAIC has adopted a policy of appeasement toward those interest groups that have aggressively called for federal insurance regulation. The results have been predictable. Appeasement has not worked.
The insurance regulatory system is under attack from aggressors who expect to profit if that system collapses, and the NAIC can only make concessions in a feeble attempt to sate the aggressors' appetite for power and advantage.
This fight involves many dogs. Large companies expect to defeat smaller local and regional concerns when armed with national charters. National brokers and producers expect to crush local competition if armed with a national license.
Consumers, who do not always get a fair shake from state officials, do not stand to gain from a federal regulator based on the model of the Office of Comptroller of the Currency, which, the Wall Street Journal observed, "takes banks' side against local laws." (January 18, 2002, page 1.)
In short, a large number of local business interests and consumers are dependent on the NAIC's ability to stave off the attack from some of the nation's largest financial institutions and most entrenched special interests, and the NAIC is not responding. It needs to come out fighting soon; the early rounds have passed.
Over the past century, the NAIC succeeded when it developed new, improved and more uniform public policy recommendations for state implementation. The association served that role time and time again, beginning with the Armstrong Committee Investigation in 1907 and most recently with the Solvency Policing Agenda in 1989-90.
The most recent disruption to the regulatory system came when the repeal of the Glass-Steagall Act became a political reality in 1997-98. For decades, Glass-Steagall repeal legislation was introduced mainly as a "fetcher bill"--a means to "fetch campaign contributions" from the banking, insurance and securities lobby. That changed when emboldened Congressional Republicans and a beleaguered Clinton White House began serious negotiations on the legislation.
Most members of the NAIC could see the opportunity for mischief that this repeal legislation held, but no one was willing to speak against it publicly. Many quietly hoped that it would simply collapse under the weight of all the special interest ornamentation it carried.
The NAIC, then led by Wisconsin Insurance Commissioner Josephine Musser, did little to investigate what the repeal of Glass-Steagall would mean to the insurance regulatory framework. Musser made speech after speech endorsing the concept of "financial services modernization."
Of course, one can speculate that Musser had little reason to want to rock the boat with regard to Glass-Steagall repeal since she was organizing a run for Congress at the time. Musser, a Republican, needed support from both the Republican Congressional leadership and from the insurance industry for her campaign. Both the leadership and the industry wanted the bill.
When Musser left her post in Wisconsin for her ill-fated Congressional bid, then-Kentucky Insurance Commissioner George Nichols, III, assumed responsibility for the NAIC leadership and Glass-Steagall repeal legislative strategy. Nichols held hearings, investigated policy options and entered into political negotiations. He banished Musser's "what can we give you approach" to legislative lobbying. The Kentucky commissioner could horse trade where Musser could not.
From the perspective of many observers familiar with the process, Nichols made the legislation that became the Gramm-Leach-Bliley Act (GLBA) a better bill. Nichols continued to play an important role in NAIC policy formation through the first year of state implementation of the GLBA.
From its inception, GLBA implementation was viewed through the prism of another legislative proposal before Congress. Advocates from banking and life insurance were not able to garner a federal charter provision in the GLBA, but Congressional leaders agreed to entertain the issue in follow-up legislation.
However, the NAIC has tried to head off this follow-up legislation by using implementation of the act as a means of lobbying insurance industry sectors not to support federal charter legislation.
Life insurers had long desired more uniformity in state law. The NAIC promised to use GLBA implementation to make rules more uniform--first with regard to company licensing and second with regard to review of products, pricing and advertising.
Unlike their life insurance cousins, property/casualty companies did not want uniform regulation. Instead, property/casualty insurers wanted no regulation at all. For several years prior to the passage of GLBA, NAIC committees had considered proposals of deregulation of commercial lines property/casualty rates and forms and rejected them. However, the NAIC's position on deregulation changed drastically with the passage of GLBA. Rate and form deregulation returned to the agenda in bold print with the NAIC implementing a "speed-to-market" process.
The NAIC's willingness to grant regulatory concessions in return for political support might have proved successful if the association had possessed any backbone. These state officials acted as if they had never learned the lesson that governs the behavior of every successful ward committee person: Make friends when you can, take care of your friends and punish your enemies. Instead, the association offered carrots to friend and foe alike.
When the NAIC began passing out political carrots--even to those factions of the industry that would see them put out of work--the response was Pavlovian. Opponents of the NAIC took the carrot offered and issued a threat so that they would get another, and another and another. Company advocates learned from experience that the NAIC was willing to make concession after concession if regulators heard even a whisper of discontent.
Texas-based consumer advocate Birny Birnbaum described the life industry's effort as "regulatory arbitrage." Advocates for the life insurers asked for and received regulatory concessions from state officials while threatening to cut a deal with federal officials. Then the advocates turned to federal officials and tried to cut a better deal with them while pointing to the flexibility of the states.
One result was the formation by the NAIC of the Coordinated Advertising, Rate and Form Review Authority (CARFRA) to address the complaint that bank products had to undergo only one review before roll-out.
And these concessions have produced no tangible change in the life insurance industry's position. No knowledgeable observer actually believes that the life insurance industry will not eventually push hard for federal charter legislation.
Consumer and producer advocates have watched with amazement at how life insurer advocates have played the NAIC like an elementary musical instrument, but both groups have challenged the concessions made to property/casualty companies. In particular, consumer and producer advocates have opposed the deregulation of policy forms--to no avail. Former Commissioner Nichols encouraged participation by these groups in the Speed-to-Market Initiative, but when Nichols cashed-in and took a job with New York Life, consumer and producer influence over the initiative ended.
Most of the deregulation recommendations come from the "Improvements to State-Based Systems Working Group," a name that only George Orwell could love. If the NAIC were subject to truth-in-advertising standards, it would use the name "Removal of State-Based Systems Working Group."
Ohio Director of Insurance Lee Covington and District of Columbia Superintendent Larry Mirel are leading this panel down the road of deregulation. It should be noted that they patiently listen to consumer and producer advocates, and they smile cordially, before they rule in favor of the industry on every point.
The deregulation effort at the NAIC might ultimately cause problems for state-based insurance regulation in the courts or in Congress.
In the courts, regulators may run afoul of the McCarran-Ferguson Act, the basis of their authority to regulate insurance. The act does not contain a provision for deregulation. The act delegates the states the authority to regulate insurance only to the extent that the states actually use that authority. If the states do not regulate insurance, the McCarran-Ferguson Act applies federal antitrust law and Federal Trade Commission oversight to insurance--something neither the property/casualty insurers nor life insurers could survive under using current business practices.
In the Congress, the NAIC's deregulation recommendations may draw fire. House Financial Services Chairman Michael Oxely (R-OH) has promised to conduct hearings into "modernization" of insurance regulation early this year. Oxely supports deregulation, but the ranking Democrat on the committee does not. Rep. John LaFalce (D-NY) has already introduced a bill that would repeal McCarran-Ferguson, apply community reinvestment rules and establish strong anti-redlining provisions for insurers.
The LaFalce bill has little chance of getting out of committee, but it does mean that congressional members and staff will investigate the current trends in insurance regulation with an eye toward increased regulation. The NAIC will have some uncomfortable questions to answer.
On the Senate side, Senator Charles Schumer (D-NY) has introduced a federal charter bill. The bill would give the life insurance industry and the banks much of what they want but would still subject insurance operations to state oversight. One can expect the Senate to ask just what that oversight looks like. Again, the NAIC might have some uncomfortable questions put to it.
Historically, the NAIC has done best when working affirmatively to improve regulation and make it more uniform. The appeasement-oriented approach that it has followed recently does not fit that mold. On the property/casualty side the NAIC has taken a step further and emulated another failed strategy. By recommending the deregulation of rates and forms, the NAIC could be viewed as "burning the village in order to save it." It should not take Walter Cronkite to point out their folly there. *
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.