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Public Policy Analysis & Opinion Expecting a different result NAIC insists on moving ahead with troubled Interstate Compact By Kevin P. Hennosy The National Association of Insurance Commissioners (NAIC) has announced its leadership for an interstate compact aimed at maintaining support for state insurance regulation in the life insurance sector. In addition to naming regulatory members of the compact commission, the NAIC announced that the commission had retained a former New York Life Insurance corporate vice president to run the day-to-day operations of the compact. Those day-to-day operations consist of granting approval to life insurance, annuity and long term care policy forms that must be accepted in the 28 compacting state jurisdictions. The NAIC leadership proposed the compact as a means of bleeding political support away from proposals for an optional federal charter for insurance companies. National life insurance companies and international insurance interests have pressured Congress for an optional federal charter for many decades, but pressure increased after the repeal of the Glass-Steagall Act in November 1999. In addition to the insurance sector, the banking sector preferred to deal with a single set of rules. Business analysts sometimes point to the lack of an insurance federal charter as the reason that banks have been slower to enter insurance markets than was generally expected in 1999. The NAIC leadership’s interest in undermining support for the optional federal charter was not completely based on the overwhelming desire of state officials to take complaint calls and conduct rate hearings. Since the 1870s, state officials have battled to preserve their claim to the ability to levy premium taxes on insurance business. If the optional federal charter legislation were to pass, the premium tax could easily be lost to the states. Former Iowa Insurance Commissioner Terri Vaughan sprung the idea of a national interstate compact on NAIC quarterly meeting attendees in March 2002. At that meeting in Reno, Nevada, a senior legislative aid for the American Council of Life Insurers (ACLI) exclaimed to this writer, “Kevin, we had no idea she planned this.” Former Commissioner Vaughan was viewed as a close ally of the ACLI during her tenure in the association leadership. Knowledgeable NAIC staff members who asked for anonymity to avoid retribution from the NAIC leadership, expressed their opinion that the proposal came from Principal Financial, an Iowa-based company. The company has never taken public ownership of the proposal. In her tenure as insurance commissioner, Terri Vaughan worked hard to make Iowa insurance regulation friendly to insurance carriers. In one state development publication, then-Commissioner Vaughan promised to maintain “an innovative and flexible regulatory climate that keeps insurance companies thriving and encourages them to grow in Iowa.” Terri Vaughan is now a member of the Principal Financial board of directors. Shortly after then-Commissioner Vaughan proposed the interstate compact, the NAIC formed a regulatory working group to write an enabling statute. In addition, according to a November 8, 2005, presentation made by Anne Henstrand to the Association for Cooperative Operations Research and Development (ACORD), an industry working group was formed to develop the standards that the compact would implement. According to the presentation, participating companies and trade associations included: “Principal Financial, Bankers Life, GE, Hartford Life, ING, The Hancock, Mass Mutual, MetLife, New York Life, Northwestern Mutual, Prudential, Safeco, State Farm, TorchMark, Unum Provident, and Western & Southern Life.” Most life and health insurance trade associations also participated. As a consumer advocate at NAIC, I submitted testimony in opposition to the proposal. While compacts can be useful for regional issues, they tend to fail and foster lawsuits when they expand beyond just a few jurisdictions. With regard to insurance regulation, the compact cedes regulatory authority to a Delaware-chartered corporate entity, which could be seen as contrary to several Supreme Court decisions. The regulatory authority over insurance is borrowed by the states from the Congress and cannot be leant to private entities, nor may one state regulate on behalf of another. As the compact was being drafted, then-Commissioner Vaughan asked me what the NAIC could do to win my support for the compact. I said that if the compact were to be approved by Congress first, a common and successful procedure for large-scale state agreements, then I would support the compact. She said that would not be possible because “you never know what Congress will do.” I was not alone in seeing problems with the compact. The National Association of Attorneys General issued a scathing report on the original draft of the compact’s enabling language. With the exception of Birny Birnbaum (Center for Economic Justice) and Bob Hunter (Consumer Federation of America), the consumer advocates who followed NAIC proceedings at the time opposed the compact’s adoption. (Consumer advocates believed that Messrs. Birnbaum and Hunter supported the proposal only in order to earn a paid consumer advocates position in the compact plan, which then could be used to insert one in optional federal charter legislation.) The American Association of Retired Persons (AARP) declined to endorse the compact but remained on the sideline rather than actively oppose it. The property/casualty trade associations monitored the project but also withheld their support. When the original draft of the enabling statute came to the NAIC membership for approval, it was highly controversial. At NAIC meetings, the vast majority of final work products receive consensus approval, but the interstate compact was hotly debated in December 2002. Thirteen states voted “no” on the compact proposal. The NAIC had great trouble getting the compact approved. The association even retained an outside lobbyist from the Austin office of the law firm Aikin Gump to work the compact issue, an extraordinary effort for a nonprofit association banned from lobbying. It was only after the intervention of congressional leadership that the compact proposal began to receive approval in a material number of states. In 2004, former-U.S. Representative Mike Oxley, then-chairman of the House Financial Services Committee, included the compact proposal in his insurance deregulation bill, the SMART Act. Without this intervention by Chairman Oxley, the NAIC compact proposal was dead in the water. Now, with the passage of congressional leadership to the Democrats, the future of Oxley’s insurance deregulation legislation is at best “uncertain.” Under Democratic control of Congress, Representative Paul Kanjorski (D-Pa.) is expected to become the chairman of the Subcommittee on Financial Institutions of the Financial Services Committee. Representative Kanjorski is a strong supporter of optional federal charter legislation. Rather than receive congressional support, the NAIC’s special interest proposal might receive the stern scrutiny of “legislative oversight.” At the very least, hearings and investigations into the compact could undermine its support by many state legislators who had to vote on the proposal even before the commission existed to establish national standards. If Congress found problems with the compact, it could be dissolved by the vote of a simple congressional majority. On November 15, 2006, the NAIC convened the first meeting of the Interstate Compact Commission at a Virginia resort and the commission installed its Management Committee. In addition, the commission elected a Committee chair, vice-chair and treasurer. The Commission elected Pennsylvania Insurance Commissioner Diane Koken as Management Committee chair; West Virginia Insurance Commissioner Jane Cline as vice-chair; and Minnesota Insurance Commissioner Glenn Wilson as treasurer. Effective December 1, Frances “Fran” Arricale, Executive Director of the Commission, became secretary, according to the Commission’s bylaws. “Each member of the Commission has invested a lot of hard work to get to this point, and they’ve shown their commitment to the success of the Compact,” Koken said. “I look forward to working with my colleagues on the Management Committee, as well as with all Commission members in setting our agenda for 2007 and collaborating to meet these goals and timelines.” The Management Committee is comprised of one member from each of the six largest compacting states, four members from the mid-sized compacting states and four members representing the smaller compacting states, one each from four regional zones. At the end of the commission’s Lansdowne Resort meeting, it announced the hiring of Frances “Fran” Arricale as its first executive director. Arricale appears to be a perfect choice to serve the interests of the compact’s main beneficiaries: national and international life insurance companies. Arricale joins the Commission after having served as associate deputy commissioner and general counsel for the New York City Commission to the United Nations, Consular Corps and Protocol in the Office of the Mayor. In this capacity, she worked on behalf of the city as liaison to the United Nations, foreign government officials and diplomatic representatives. Prior to this, Arricale was a corporate vice president in the Government Affairs office of New York Life Insurance Company. New York Life has lobbied to shape the interstate compact and has benefited from overseas trips taken by NAIC officers and senior staff. On one or more occasion, the company repaid the NAIC for travel expenses incurred by an insurance commissioner during a trip to China. During Arricale’s time based in New York City and Washington, D.C., she managed a portfolio of domestic and international insurance regulatory matters, as well as global financial services and trade issues. These are perspectives that may prove to be contrary to the interest of local and regional companies that will have to compete in a market shaped by the interstate compact. In addition to working with the representatives from each member state, she will coordinate the affairs of the Commission, as well as its legislative, industry and consumer advisory committees. With regard to the consumer advisory activities, Arricale may face some trouble. At the NAIC’s fall national meeting in September 2006, consumer advocates rhetorically pummeled the commissioners over the compact’s early operations. Consumer advocates documented a clear series of actions aimed at diminishing their role in creating the compact’s national standards. As noted above, small and regional companies might see the compact’s activities as a means for the world’s largest insurance concerns to write rules that smaller concerns cannot afford to comply with. From the perspective of small companies, the compact commission might be viewed as a cartel cloaked in regulatory clothing. The NAIC and its affiliated compact commission are writing self-congratulatory news releases, but both entities may face trouble on Capitol Hill. The types of complaints made by consumer advocates and small insurers, coupled with the views of the mega-insurance interests that support the optional federal charter could provide more than enough rhetorical ammunition for an explosive legislative oversight hearing on insurance regulation. * The author |
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