Public Policy Analysis & Opinion
If you want a friend in Washington, buy a dog
NAIC’s dozen years of deregulation produces few friends
By Kevin P. Hennosy
After a dozen years of pandering to the base desires of insurance trade associations, you would think that the National Association of Insurance Commissioners (NAIC) would be able to claim a few more friends, but such is not the case. The association continues to lose support for state insurance regulation in the insurance sector.
In the hope that the NAIC could deregulate its way to security, the association’s management oversaw the dismantling of an efficient and integrated regulatory structure over insurance. The NAIC management supported model laws and regulations that either tied the hands of regulators or defined broad swaths of the sector to be deregulated, without regard for the regulatory requirements placed on the states by the McCarran-Ferguson Act.
The deregulation initiatives were welcomed by the industry but did nothing to change the largest carriers’ continuing support for a federal standing through an optional federal charter (OFC). And because of the NAIC management’s active support for deregulation, the association has little credibility before Congressional committees or with national consumer groups.
On April 15, the NAIC received another body blow when a long-time champion of state regulation announced that it would consider endorsing OFC legislation. The National Association of Insurance and Financial Advisors (NAIFA) announced that its board of directors would recommend approval of a change in association policy by granting “conditional support” for the OFC concept, while continuing to support state regulation. The recommendation now goes to NAIFA’s National Council for its consideration and approval during the NAIFA Annual Convention and Career Conference, September 6-10 in San Diego.
“The NAIFA Board took this action to help craft legislation to protect our members and clients as the U.S. Congress is considering an OFC proposal known as the National Insurance Act,” commented Jeffrey J. Taggart, CLU, ChFC, LUTCF, president of NAIFA. “In addition, on March 31, 2008, the U.S. Department of the Treasury recommended that Congress adopt an OFC for insurance,” said Taggart.
NAIFA leadership has considered taking this step for several years. The leadership received considerable pressure from life insurance carriers to join the American Council of Life Insurers (ACLI) in supporting the concept of an optional federal charter. The pressure from the life insurance carriers was more influential than it would have been a decade ago because NAIFA suffered a massive loss in dues revenue after a large reduction in membership.
Carriers came to the rescue of NAIFA by pledging to encourage their agents to join NAIFA. NAIFA staff also suggested that the ACLI may have helped NAIFA financially several years ago, support which could have reduced NAIFA’s independence vis-à-vis the carriers. He who pays the piper calls the tune.
In announcing the board’s favorable recommendation on the OFC, NAIFA also reiterated its policy on insurance regulation:
NAIFA’s current policy on Insurance Regulatory Reform (IRR) allows for consideration of state and federal regulatory reform modernization proposals. Should the National Insurance Act become law, NAIFA wants its members to have the option to remain licensed and regulated at the state level. NAIFA believes any modernization proposals should promote consumer protection, streamline agent licensing, improve product speed to market, and strengthen the competitiveness of the insurance industry.
Although the NAIFA board’s discussion of a change in policy on the concept of OFC has been well known and communicated to the NAIC for several years, the NAIC issued a statement that was reminiscent of Captain Renault in “Casablanca,” who famously uttered: “I am shocked, shocked to find out that there is gambling going on in here!”
“NAIFA has been a long-standing supporter of the NAIC and the state-based system of insurance regulation. So, we are certainly surprised and disappointed that NAIFA’s board would suddenly change course on this important consumer-protection issue—especially without the benefit of having the full feedback and support of its 225,000 members,” said Kansas Insurance Commissioner and NAIC President Sandy Praeger. (It is interesting to note that NAIFA claims to have only 60,000 members, so if Commissioner Praeger is asked to count the votes at the NAIFA convention, things could get interesting.)
Praeger continued, “Considering that this measure still needs to be voted on by the NAIFA membership at large—and the governing board’s decision refers to certain conditions that would need to be satisfied—we remain hopeful that NAIFA’s membership will ask its board to reconsider its position.”
Apparently, the NAIC leadership believes it can appeal to “agents in the field” by raising doubts related to how customers would be treated under a federal system. “Indeed, insurance agents’ and financial advisors’ primary responsibility is to their clients, helping them make sound financial decisions that are in their best interest. As such, NAIFA’s members represent an important link between insurance companies and consumers. After considering the potential impact an OFC would have on their clients, NAIFA’s members will surely agree that an optional federal charter combined with consumer protections is like oil and water—they simply do not mix, even with myriad caveats,” observed Praeger.
This could be a very persuasive argument when one looks at the sorry history of federal financial oversight over the past 30 years.
“The plain and simple truth is optional federal chartering would create a new federal bureaucracy from scratch and allow insurance companies to ‘opt out’ of comprehensive consumer protections and state oversight. Current OFC proposals would gut consumer protection, while outsourcing most critical regulatory functions to an industry-run self-regulatory organization,” argued Praeger.
Of course, this argument would be far more convincing, if the NAIC did not have a well-documented history of gutting consumer protection over the last 12 years. In addition, in the area of life insurance, annuities and long term care insurance, the NAIC has conducted a bit of outsourcing as well.
Interstate Insurance Product Regulation Compact (IIPRC) is a private facility which is not under the control of the NAIC or any state jurisdiction and could easily be described as “an industry-run self-regulatory organization.” The initial standards used to gauge the worthiness of products brought to the IIPRC were written by lobbyists (overwhelmingly representing carriers) at a series of NAIC quarterly meetings. In recent testimony before Congress, the executive officer of the compact stressed the speed with which the IIPRC grants approvals, and paid little more than lip service to consumer protection. The testimony cited that in the IIPRC’s first year of operations, product approvals were granted in 38 days, but there was no mention of any product being rejected. The IIPRC was designed to be a massive rubber stamp, and that is what it appears to be.
The one issue that has raised the ire of some insurance executives with regard to the IIPRC is the requirement that companies pay to participate in the NAIC-operated System for Electronic Rate and Form Filing (SERFF) before they can access the “big rubber stamp.” The true nature of SERFF has always been a shadowy question. In the mid-1990s, NAIC staff developed a plan to operate an electronic rate and form filing system, and the property/casualty industry killed it. Opponents did not want the NAIC to have the access to another fee-based revenue source or the residual database that would result.
The proposal was revived as part of a deal in 2000 in which the NAIC promised to push for deregulation in return for insurers withholding their support for OFC legislation. Part of that agreement called for the creation of a SERFF framework that offered “speed to market” for the industry and which used a protocol that did not rely on a central database. Negotiations ensued that resulted in an unincorporated entity to run SERFF that included a governing board populated by companies that agreed to provide the seed funding for the project.
Recently, an NAIC staff attorney reviewed the SERFF bylaws and found them legally challenged. A new set of bylaws was written that relegated the industry participants to an “advisory board.” At the NAIC 2008 Spring National Meeting, attendees learned about the advisory board, and it did not go over well. They went home grumbling about another money grab by NAIC Executive Vice President Cathy Weatherford. This dust up has not been settled.
The life insurance carriers seem prepared to challenge Commissioner Praeger’s consumer protection argument head on. The ACLI issued a statement in mid-April which proposed that the regulatory framework contained within Rep. Paul Kanjorsky’s (D-Pa.) proposal would do a better job protecting consumers than the current state framework.
“An OFC, as set forth in the National Insurance Act of 2007 (H.R. 3200), represents our best opportunity to advance regulatory modernization in a manner that works for consumers, the industry and the economy. At its core, the NIA is a strong consumer protection bill, which focuses on a robust centralized system that emphasizes safety and soundness and consistent market conduct regulation,” said Alastair Shore, chief underwriter of CUNA Mutual Group, in testimony before the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.
Shore continued, “These consumer protections are reinforced through separate consumer affairs and insurance fraud divisions and a new federal ombudsman. Together, these regulatory powers will create a presence that is more responsive to consumers than the current, fragmented state regulatory system.”
For more than a decade, the senior staff management at NAIC bent over backwards to flirt with the political appetites of the nation’s largest insurers and the trade associations that answer to those companies. Rather than work on ways to make insurance regulation more efficient and effective, the NAIC management convinced the association’s elected leadership to accept deregulation and seek out new fee-based services for the NAIC. The result is an unsupervised “nonprofit” entity in Kansas City, Missouri, which reports a budget of $80 million but has placed the states in a very poor position to argue that they should retain their jurisdiction over insurance and their ability to tax it. *
The author
Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. 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 and is an adjunct professor of political science at Avila University.