NAIC ANALYSIS AND OPINION
NAIC fails to certify any state's agent licensing effort
By Kevin P. Hennosy
The June meeting was supposed to include the certification that enough states had successfully passed uniform agent licensing legislation, followed by a raspberry in the direction of Washington, D.C.
It was supposed to have been a done deal, but it was not. The National Association of Insurance Commissioners (NAIC) has been lauding states' efforts to adopt new rules governing agent licensing. And the June meeting was supposed to include the certification that enough states had successfully passed uniform agent licensing legislation, followed by a raspberry in the direction of Washington, D.C. But all the trash talk about political success fell silent at the NAIC summer national meeting.
State officials have until November of this year to establish reciprocal and consistent licensing requirements in 29 states. If states do not reach this goal, a federally chartered entity called the National Association of Registered Agents and Brokers (NARAB) will come into existence under the Gramm-Leach-Bliley Act (GLBA).
When the NAIC met in June, regulators were speculating that 29 to 31 states would be "certified" by the end of the national meeting. However, when the NAIC NARAB Working Group met on June 10, the regulatory membership had an uneasy look.
The working group met for 10 minutes in public session. When the open meeting closed, attendees were told that the announcement concerning state certifications would follow in 10 or 15 minutes.
Non-regulatory attendees were ushered from the room and the doors were closed. An expectant crowd gathered outside the meeting room, rather like St. Peter's Square after the death of a Pope. Forty minutes passed. There was no white puff of smoke.
The meeting broke up. No announcement was made. On June 19, an NAIC official in Kansas City told Rough Notes that no certification announcements were expected until the fall national meeting in September.
What went wrong? The regulators have not said officially what the problem was. If one asks too persistently, the response sounds like something out of Doctor Zhivago: "There is no problem comrade--and your attitude is noticed."
Protection
Perhaps the first sign of impending trouble came on June 5, when the Independent Insurance Agents and Brokers of America (IIABA) wrote a letter to the co-chairs of the NARAB Working Group. The letter raises serious questions about state compliance with GLBA.
The letter states that since the NAIC has elected to comply with GLBA's "reciprocity option," rather than establishing statutory "uniformity," the states must comply with a two-pronged legal test.
The states must comply with a provision of the GLBA that outlines the permissible elements of reciprocity. In addition, states are allowed to retain certain local consumer protection laws that may otherwise conflict with the reciprocity requirements--the so-called "saving provision."
The IIABA letter advised the regulators that, "Agent and broker licensing reform need not come at the expense of consumer protection. The Congress enacted the saving provision to make this expressly clear."
The IIABA expressed concern that some states "have adopted an interpretation of the saving provision that would essentially read it out
of existence."
Protectionism
One man's consumer protection is another man's protectionism. On June 11, the Council of Insurance Agents and Brokers (CIAB) announced litigation it brought against two states, Nevada and Florida, alleging "regulatory insurance protectionism."
The CIAB filed suit to enjoin the enforcement of counter-signature laws. While the CIAB was a seminal influence on Congressional adoption of the NARAB provision, the litigation relies on constitutional rather than statutory arguments. Still, the timing of the litigation will play into the NAIC's consideration of NARAB implementation.
A public statement from Ken Crerar, CIAB president, explained, "The Council believes that the disparate treatment of nonresident insurance agents and brokers caused by these counter-signature laws is unconstitutional because it provides resident insurance agents and brokers with an unfair advantage over those insurance agents who do not reside in these states."
Traditionally state officials have defended counter-signature laws as a means to establish a representative in insurance transactions. Privately, local producers will concede that counter-signature laws prevent large out-of-state concerns from using their financial strength as a competitive advantage against smaller local producers.
The CIAB's membership consists of the nation's largest insurance producers who sell commercial lines products and benefits packages. The CIAB has fought to eliminate barriers to national players in local markets.
According to Crerar's statement concerning counter-signature laws, "These laws serve as nothing more than reminders of the protectionism the Council fought to eliminate when it supported the NARAB provision of the GLBA."
Regulators, legislators and the courts will have to decide whether reminders of protectionism do indeed result in unconstitutional behavior. Counter-signature laws have proved contentious for many years, but Congress declined to eliminate them expressly under the GLBA.
Heavy lifting
The NAIC seems unwilling to accept allies or enemies--so they lose the former and fight the latter alone. The regulators seem ill at ease having to pick between two important trade associations representing competing producer interests. The NAIC leadership has struck a pose not unlike the proverbial deer in the headlights.
Certainly, the NAIC owes more to IIABA than CIAB when political capital is counted. It is unclear to most observers why NAIC does not vigorously support its allies with policy recommendations. If the NAIC had done so, states would have made greater use of the "savings provision" under the GLBA.
The local-agent-dominated IIABA has done the heavy lifting on NARAB implementation--including lobbying for passage of the NAIC's Producer Licensing Model Act. The IIABA reports that 46 states have advanced licensing reforms in the past two legislative sessions. This effort made the NAIC look good.
According to IIABA Vice President of State Government Affairs and State Relations Wesley Bissett: "From the outset, IIABA, its state affiliates and its individual members have played a major role in the development of the model act and in securing its adoption in this large majority of states. When others said it could not be done, we rolled up our sleeves and went to work."
The NARAB provision puts CIAB in the cat-bird seat. The CIAB wins no matter how the implementation of the GLBA turns out. If states make their licensing system reciprocal and consistent, then the national producers are more competitive. If the states fail to meet this test established by the GLBA, the CIAB will realize the national licensing entity that it has proposed for the benefit of those same national producers.
Crerar's statement hints at areas where future action might come: "While more than 40 states have enacted some form of the NAIC's Producer Licensing Model Act, there are still several states that have not adopted the model as part of their producer licensing laws, including the top two property/casualty markets in the country--California and New York."
The CIAB will closely examine state licensing frameworks in the next few months. The association has proved willing to go to court to achieve what it cannot achieve politically. The NAIC can be as nice as it wants to the CIAB but the agent and broker trade association and NAIC members seem destined to become parties to a suit.
The NAIC leadership seems to lack an understanding of the basic tenet of politics--take care of your friends. In recent years, the opposite has been true more often than not. If an interest group wanted attention and favorable treatment from the NAIC all they had to do was threaten it.
Perhaps this is why NAIC meeting attendees spend time joking about establishing a pool to take bets on when the 131 year-old association will close its doors.
A couple of pieces of good news
One bit of bright news that emanated from the NAIC summer national meeting related to the National Insurance Producer Registry (NIPR). The NIPR was created to support a system of producer licensing that meets the reciprocity principles of Gramm-Leach-Bliley and to support efficient appointment procedures.
At the NAIC meeting in Philadelphia, the NIPR Board of Directors was expanded to include more representation for producers and regulators. The original board was established at a time when company trade associations were pressing for more control of NAIC functions. Since the NAIC needed insurer money to fund the NIPR, company representatives were given more seats than producers under the original corporate structure. Regulators have held and will continue to hold a bare, one-seat majority on the board.
Through the addition of two producer representatives and two state insurance regulators, the vote expands the number of directors of the corporation from nine to 13. NAIC President and Iowa Insurance Commissioner Terri Vaughan praised the change.
"These new board members reflect the growth of NIPR as a valuable tool for regulators and industry alike--and, along with that, our desire to be inclusive as we continue to develop and improve upon the system," said Vaughan.
Producer representatives also welcomed the change. "Preserving the balance between the private and public sectors while expanding the board will only improve the communication between the states and the industry, bringing a broader perspective and cooperation among all affected parties," said Bill Anderson with the National Association of Insurance and Financial Advisors (NAIFA).
OCC
On June 13, just after the closure of the NAIC national meeting, producer and consumer groups as well as the NAIC received an unexpected piece of good news when Massachusetts Governor Jane Swift announced her intention to sue the U.S. Comptroller of the Currency over the federal agency's move to pre-empt the Commonwealth's consumer protection laws regarding the sale of insurance by banks.
"This action is based on the right of Massachusetts and every other state to not have an unelected federal bureaucracy overturn provisions designed to protect consumers,"
Swift said.
Swift has asked Attorney General Thomas Reilly to execute the legal action in federal court on behalf of the state's Division of Banks and Division of Insurance.
The litigation seeks to annul a March 18 determination by the federal Comptroller of the Currency that a bill passed by Congress in 1999 preempts three Massachusetts statutory provisions regulating insurance sales by banks.
The provisions, in place since 1998, restrict how banks can utilize deposit relationships and lending relationships in order to sell insurance products to customers.
The first provision prohibits non-licensed bank personnel from referring customers to licensed insurance agents or brokers except upon inquiry initiated by the customer.
The second prohibits non-licensed bank personnel from receiving any additional compensation for insurance referrals, regardless of whether the compensation is conditioned upon the sale of insurance.
The third provision requires a bank to refrain from making an insurance solicitation in connection with a home mortgage or home equity loan application until after the bank has approved the loan.
"The bedrock principle of state's rights is as important an ingredient in this action as the consumer protection measures that we are attempting to preserve. State's laws should not be overturned by a federal bureaucracy unless there is a clearly articulated Congressional intent to do so, which in this case, there is not," Swift said. *
The author
Kevin P. 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.