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Public Policy Analysis & Opinion A HABIT, NOT A GUIDEPOST NAIC’s response to industry challenges is to react, not to lead By Kevin P. Hennosy
Since 1871, magazine writers have written enough obituaries of the National Association of Insurance Commissioners (NAIC) to fill a small library. A wily old insurance writer is not likely to fall into that same trap. Nevertheless, the NAIC’s June national meeting did exhibit certain signs of impending finality. The NAIC still responds to heat and pressure. The association is feeling plenty of both from the industry and Capitol Hill. Yet the NAIC’s responses seem like “twitches.” They do not seem to be part of any strategic plan. When bad news comes to the NAIC, they respond to that bad news specifically. At the June meeting, the NAIC rushed through a fix designed to respond to the scandal related to “finite reinsurance.” The NAIC response makes changes to the annual financial statement for 2005 that insurers will file in 2006. The Property Casualty Reinsurance Study Group approved proposed disclosures that require an insurer to report to state insurance regulators any agreement that has the effect of altering policyholders’ surplus by more than 3%, or representing more than 3% of premium or losses. The new disclosure is also designed to identify any reinsurance contract that has been accounted for differently under statutory accounting principles compared to general financial statement purposes. Additional reporting requirements regarding contract terms and management’s intention in entering the contract have been included to improve transparency. Study group members also worked toward developing a standard attestation form to be signed by the insurer’s CEO and CFO acknowledging reinsurance contracts that the company has taken “credit” for on its financial statements. The provisions of the attestation include: 1) that there are no separate agreements between the insurer and the reinsurer that could serve to modify the actual or potential losses under the contract, and 2) that the insurer complies with all requirements of NAIC’s statement of statutory accounting principle (SSAP) No. 62, “Property and Casualty Reinsurance.” The proposal was rushed over to the NAIC Blanks Working Group, which holds jurisdiction over the design of the annual financial statement. The working group voted in a super-majority to waive the established rules for disclosure and debate. The working group accepted comments until July 1. In all likelihood these proposals will be adopted prior to the publication of this edition of Rough Notes. The NAIC seems poised to grant final adoption of the changes to reinsurance reporting rules at its national meeting in September. In a highly unusual action, the NAIC will require these changes to the annual statement to apply immediately. The NAIC usually allows insurers at least a year to change accounting and reporting procedures between the adoption of a change to the annual statement and its implementation. In other action related to the reinsurance scandal, the NAIC Casualty Actuarial Task Force will consider the language in the Statement of Opinion related to disclosure of finite reinsurance as well as consider risk transfer testing beyond the so-called 10-10 Rule. The task force is expected to report back to the study group by this month. The proposed enhanced disclosure requirements and the attestation by company management “will clarify the overall impact of finite reinsurance on the industry,” said Joe Fritsch, Director of Insurance Accounting Policy for the New York Insurance Department and chair of the study group. “Since this issue is a priority for state insurance regulators, we believe that this approval will allow the enhanced disclosure of these practices to be identified in the NAIC 2005 property and casualty financial statement.” Just prior to the national meeting in June, the NAIC leadership applauded new European Union (EU) rules governing reinsurance. The Directive on Reinsurance was approved by the EU Parliament on June 7. Once formally approved by the European Council, the directive is expected to be implemented by EU member countries over the next two years. Historically, the supervision of reinsurance varied considerably within the EU and passage of this directive will improve the consistency with which minimum regulatory standards are enacted and applied by insurance supervisors among the EU countries. “We will continue to work with our EU counterparts as part of our ongoing dialogue concerning a variety of topics,” said Alessandro Iuppa, NAIC president-elect and Maine superintendent of insurance. “As insurance regulators we share many of the same concerns and problems, and we can jointly benefit by working together whenever possible.” U.S. insurance regulators also cooperate in other international organizations such as the International Association of Insurance Supervisors (IAIS), the Organization for Economic Cooperation and Development (OECD), the Joint Forum, and the Financial Stability Forum, among others. Many long-time NAIC attendees commented on the unreal attitude that pervades the association. Industry attendees grumbled about the NAIC’s Washington strategy as another round of Congressional hearings loomed. The discontent arose after the NAIC sent two letters to congressional leaders criticizing proposals for federal legislation. In the eyes of most observers, the NAIC made some serious mistakes in how it dealt with Congressman Michael Oxley (R-Ohio), chairman of the House Financial Services Committee, and Congressman Richard Baker (R-La.), chairman of the Capital Markets Subcommittee of the Financial Services Committee. In 2003 and 2004, the NAIC made broad and definitive promises of support to both congressmen, who support the passage of The State Modernization and Regulatory Transparency (SMART) Act. Then, in late March, the NAIC reversed its position. Pennsylvania Insurance Commissioner Diane Koken, in her role as president of the NAIC, posted a 37-page letter to Congressman Baker that was full of criticism for the SMART Act. The letter actually reads more like something you would expect from a state official in response to proposed federal preemption of state jurisdiction. It is the type of letter that the NAIC should have sent to Congress years ago—but it was sent after years of making promises. Today, the letter sounds disloyal rather than strong. Disloyalty is a capital offense in politics. Too make matters worse for the NAIC, the association tried to make it sound like it did not change its position. A news release issued to announce the “reiteration” of the NAIC’s position on the SMART Act, contained the following quotation attributed to Commissioner Koken: “Early in the process, the NAIC identified these three main areas of concern with the SMART Act legislation,” Koken told the two chairmen. “Our concerns are deeply rooted in the basic structure of the SMART Act that mandates federal preemption of state laws and regulations, federal supervision of state regulation, and complete rate de-regulation for all states.” Prior to New York Attorney General Eliot Spitzer’s high-profile investigation of the insurance sector, the NAIC made no such statement in public. The NAIC was a cheerleader for deregulation in the hope that insurers would not support Optional Federal Charter legislation. The National Conference of Insurance Legislators (NCOIL) did not fall into the trap that the NAIC finds itself in now. The state legislators’ group respectfully but firmly denied the SMART Act its support from the very beginning. Advocates of the Act may disagree with NCOIL but they are not mad at NCOIL. Just prior to the summer national meeting, the NAIC received the news that two industry coalitions had been formed to promote federal legislation to create an Optional Federal Charter (OFC) for insurance companies. These coalitions included several large property/casualty companies that had long supported state regulation. The NAIC’s strategic political initiative aimed at attracting political support from the life insurance industry suffered a crushing defeat in June. In March of 2002, the NAIC proposed an interstate compact to approve life insurance, annuities and long term care rates and forms. The proposed compact, known as the Interstate Compact Implementation Task Force, was designed to create a private, Delaware-chartered “compact commission” corporation, which was designed to apply weak review to life insurance products. This task force met at the summer national meeting to discuss rules for the compact dealing with public records and trade secrets. The task force presented a draft rule that applied an expansive definition to trade secret status. In addition, the rule rested the burden to disprove trade secret status with anyone who challenged the withheld data. Michigan Insurance Commissioner Linda Watters, who supports the compact, told the task force that the Michigan legislature would not pass the enabling legislation unless the approach to trade secrets changed. Commissioner Watters was followed by Birny Birnbaum of the Center for Economic Justice, one of the few consumer advocates who support the compact. Birnbaum announced that he could not support the compact if the rule was not changed. The general council of the Florida Office of Insurance Regulation informed the task force that the rule would not pass constitutional muster in his state. To add to the NAIC task force’s headache, the American Council of Life Insurers (ACLI) told the task force that it could not support the compact if the rule did materially change. The task force chair, Maine Superintendent Al Iuppa, admitted that the task force faced a great deal of work ahead of it. At future meetings it will try to find common ground between the two competing positions. The NAIC faces some tough times ahead, including congressional hearings, Government Accountability Office investigations of state regulation, and a budget approval process that promises to be rough. The worst situation that the NAIC faces is a lack of credibility. People do not believe the constant stream of happy talk coming from NAIC officers. Influential and long-time attendees no longer trust the senior NAIC staff. After talking with many NAIC attendees representing a wide range of business interests in June, it was clear that there is no expectation that the NAIC would be a guiding force in fixing the innumerable problems with insurance regulation. What the NAIC has going for it is habit. A 134-year-old habit is hard to break. * The author |
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