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Public Policy Analysis & Opinion A new slowness framework at NAIC New protocols seek to delay development of recommendations By Kevin P. Hennosy At the summer meeting of National Association of Insurance Commissioners (NAIC), a cabal of NAIC leaders took a step that would make it significantly more difficult for the association to adopt policy recommendations. It is interesting to note that the NAIC has not been known for acting with blinding speed, or even timely action. Let’s face it—the NAIC is best known for the slowness of its response to stimuli. Well, you ain’t seen slowness yet. (Editor’s note: Those of us who have had the misfortune to cover the NAIC for many years as I have, have heard the alternative acronym for NAIC—No Action Is Contemplated—and are not as surprised as we should be by this latest development. DHP) While the new proposal seeks to make certain that model laws, regulations and guidelines have a national purpose and consensus support, the leadership-driven major change to the association’s core activity was not circulated or vetted by interested parties before presentation at the national meeting in San Francisco. It appears that Alabama Insurance Commissioner and NAIC President Walter Bell simply had one of those “it is good to be king” moments supported by a small number of minions and a disengaged general membership. The proposal will place hurdles in the path of creating NAIC policy statements. If a proposal seeks the once-influential imprimatur of an “NAIC Model,” concepts must receive prior approval from both a parent committee and the NAIC executive committee. After those twin-approvals have been garnered, drafting can begin by a working group, subgroup, study group or some other collection of insurance regulators. Once the draft proposal is completed, it must be approved by the parent committee and executive committee. Then the proposal must receive the approval of the NAIC membership in plenary session. Under the new rules, if a commissioner votes at the plenary session, the NAIC will view his or her vote as binding in terms of introducing and working for the policy. This kind of Rube Goldberg approach to bureaucratic planning might be fun to draw up on the back of cocktail napkins, but without vetting by a wide variety of perspectives, the approach seems troublesome. Even the once mighty NAIC must at some level understand that it is not the font of all knowledge. What we don’t know can invite long-term trouble. In the words of former Defense Secretary Donald Rumsfeld, “We know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say, we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know.” Yet after the last 10 or 11 years of the NAIC Follies, we should understand that the quest for knowledge or truth is passé and unprofitable. Rather than analyzing Commissioner Bell’s “New Slowness” Framework, the NAIC might rather that we simply defer to another Rumsfeldian Observation: “Needless to say, the president is correct. Whatever it was he said.” Nevertheless, I cannot help but wonder about certain aspects of the New Slowness Framework. I am not sure that anyone really thought through how to apply this theoretical framework in the real world—or at the NAIC. Take, for example, the binding aspect of a regulator’s vote in plenary session. Under what authority is this binding arrangement bound? Has the NAIC found some metaphysical law to constrain the future actions of its voluntary membership? Does this invisible force apply just to the regulator who actually cast the vote, or does it blanket a jurisdiction from that time forward? That is to say, if one commis-sioner votes for a model law, and administrations change before it can be considered by the state legislature, is the new administration bound to the previous administration’s vote? What happens if a state or regulator challenges this binding vote at the NAIC? What if a regulator—suffering from the lingering effects of lobbyist-purchased dinner and drinks the night before—accidentally votes the wrong way? Or maybe they find that the NAIC Legal Department has woefully misinformed the commissioners when explaining what a proposal will do. Has this still committed their lives, fortunes and sacred honor to include the questionable proposal in their state legislative package? What possible enforcement mechanism would the NAIC have? Will the senior staff shuffle funds around in order to buy a fleet of black helicopters for the purpose of attacking rebellious states? Has the NAIC leadership drawn up plans for ritualistic corporal punishment of prodigal commissioners who fail to introduce a model law he or she voted for at plenary session? Will the NAIC executive vice president strike the prodigal regulators from the travel team when she decides who represents the NAIC in overseas travel? Slap my face and call me Emmanuel Bernstein (see 1984), but I would say that there seem to be some problems related to this New Slowness Framework unveiled by Commissioner Bell. At the very time that the NAIC seems to be devolving into something akin to what the Ottoman Empire was to world affairs at the turn of the 20th Century, insurance company trade associations asked for federal lobbying help from the Grey Lady of Insurance Regulation. At the NAIC’s summer meeting in San Francisco, the Property Casualty Insurers Association of America (PCI) urged state insurance commissioners and the NAIC to be an active force in support of the McCarran-Ferguson Act as Congress debates Senate Resolution 618, which would repeal the act. “McCarran-Ferguson is the lynchpin to state-based insurance regulation, and state regulators can be very effective in making the case for the limited antitrust exemption,” said John Lobert, senior vice president of government affairs for PCI. “By adding a strong voice behind McCarran-Ferguson, the NAIC and individual commissioners can explain how it promotes competition in the marketplace by putting small and medium-sized companies on a level playing field with much larger competitors. It is important for Congress to understand that it also creates efficiencies for insurers that translate into savings and choice for insurance buyers.” A PCI statement released to the news media asserts: “The McCarran-Ferguson Act, enacted by Congress in 1945, is a federal law that exempts the business of insurance from some, but not all, federal antitrust laws.” Of course, the statement curiously neglects to mention that the law provides only a limited exemption from antitrust law and Federal Trade Commission oversight “to the extent that the business of insurance is regulated by state law.” The ironic thing about the PCI statement and its curious omission of state regulation is that for the last 15 years the PCI and its two predecessor organizations lobbied “state insurance commissioners and the NAIC” to deregulate wide swaths of the business of insurance. Through direct action and regulatory slight of hand, the state officials responded to that lobbying pressure. An NAIC model law governing commercial lines property casualty insurance “assumes” competitive markets and places obstructions before officials who try to regulate. The argument for state compliance with McCarran-Ferguson is now so weak that the states and the NAIC are not as credible in defending the act as they once were. For all the talk about competition by the defenders of the McCarran-Ferguson Act, much of what the statute protects is anticompetitive behaviors that Congress viewed as serving a public interest. If Congress wanted competition to govern insurance, there was no reason to shield the sector from federal antitrust law and oversight. The PCI statement offers the following examples of anticompetitive behavior shielded by the act when regulated by state laws: “Cooperative actions that are essential to the nature of insurance are exempted only where they are actively regulated by the states. McCarran-Ferguson preserves key insurer practices under state insurance regulation that are in the public’s interest. For example, it allows collective loss-cost data aggregation and ratemaking, standard policy forms and pools or residual markets. These efficiencies could not occur without McCarran-Ferguson.” Of course one can point to more than efficiencies to understand the legislative history of the act. For example, if every insurer developed its own policy forms, it would be impossible for shoppers to make an informed choice through price and product comparisons. In 1945, Congress viewed collective action to write policy forms as in the public interest—as long as states applied affirmative regulation to those collective actions. The McCarran-Ferguson Act was enacted to protect the ability of “little guys” to shop in complex insurance markets, but now the act is being defended on the grounds that it protects little insurance companies. Again according to the PCI statement: “The repeal of McCarran-Ferguson would create an additional layer of federal regulation and drive up administrative and legal costs for insurers. Insurers would face onerous costs for data analysis that they can currently share. Small to mid-sized insurers, with smaller cash reserves, would be particularly hard hit by these costs, and it is conceivable that many of these insurers would not remain solvent. The end result of McCarran-Ferguson repeal is that consumer costs would go up, and consumers would have fewer choices for their insurance needs.” In addition, the PCI warns that insurers could face distasteful legal uncertainty if McCarran-Ferguson is repealed. “The current system of insurance regulation under McCarran has worked well for over 60 years, with established case law and interpretation giving business the certainty needed to engage in the activities surrounding insurance.” Much of that case law is based on statutes drafted by insurance lobbyists at the NAIC and in individual state legislatures. The NAIC meeting in San Francisco was notable for a meeting of a private regulatory entity created to appease life insurers that were inching toward support for an optional federal charter. The Interstate Insurance Product Regulation Commission met on June 1 and approved filing procedures and standards related to life insurance, annuities, long-term care and disability income insurance products. While the entity uses the word commission in its title, it is actually an organization established under Delaware’s lenient incorporation laws. Initially the organization shunned comparisons to regulation, but now it has adopted and embraced the word to the point that its name suggests it is a government entity. The NAIC Legal Department tried to evade the problem by adding language to the interstate compact enabling statute that attempts to ordain that the commission holds some kind of state-like status. I understand that the NAIC believes it is a very important entity, and I am but a layman, but the U.S. Constitution appears to reserve for Congress the power to create new states. American Council of Life Insurers (ACLI) President and CEO Frank Keating issued a statement on the August 1 vote that praised the role of the so-called commission: “ACLI supports the commission as part of a comprehensive effort to achieve a modern, efficient regulatory system that will benefit consumers and companies alike. While ACLI continues to support a dual chartering system of regulation for life insurance, we recognize that many insurers will opt to remain state regulated. The Interstate Insurance Product Regulation Commission, along with other state regulatory reforms ACLI is advocating, will greatly benefit those who choose to do so.” The creation of the so-called commission to conduct interstate regulatory activities appears to violate a Supreme Court decision. In FTC v. Travelers Health Assn., 362 U.S. 293 (1960), the Court cited a statement by Senator Joseph C. O’Mahoney, who brokered McCarran-Ferguson, “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) The so-called commission begs judicial review when one looks at the opinion cited above, which could under the McCarran-Ferguson Framework invite direct application of Federal Trade Commission enforcement. Running business through the so-called commission does not appear to meet the congressional intent of McCarran-Ferguson. Even if the so-called commission were to be ruled “a state” within the definitions provided in McCarran-Ferguson, there is another problem with the flawed attempt at placating life insurers. Take a look at the Court’s reasoning in an earlier case dealing with whether a domiciliary state could regulate on behalf of all states. In Travelers Health Assn. v. Virginia, 339 U.S. 643, 649, the Court ruled that McCarran-Ferguson did not allow the “unwisdom, unfairness and injustice of permitting policyholders to seek redress only in some distant state where the insurer is incorporated.” Those of us who live the exciting life of monitoring insurance regulation live in creative times. “Unwisdom, unfairness and injustice” can be presented in the stead of regulation by state law. * The author |
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