Public Policy Analysis & Opinion
By Kevin P. Hennosy
Strange tales from the history of an NAIC initiative
On Monday, February 22, 2021, the National Association of Insurance Commissioners (NAIC) plans to award a contract for the modernization of the System for Electronic Rate and Form Filing (SERFF). This column touched on the issue of modernization in early 2020, when the NAIC started to plan for enhancements. That process will reach a milestone when the NAIC awards the contract this month.
The request for proposal letter circulated by the NAIC describes the system:
SERFF is a web-based system that facilitates the electronic submission of insurance product filings by insurers and the regulatory review of such filings by insurance regulators. SERFF is widely used, processing more than 550,000 transactions a year, including plan submissions related to the Affordable Care Act (ACA) and product filings submitted to the Interstate Insurance Product Regulation Commission (IIPRC).
Why would the NAIC want to improve rate and form filing when many insurance carriers were lobbying to end rate and form filing altogether?
The NAIC hosts SERFF on the cloud platform of Amazon Web Services (AWS). SERFF’s regulatory communications emanate from 53 local jurisdictions and involve 6,500 insurance companies. The system enables 2,735 regulatory individual IDs and 16,246 insurance carrier individual IDs.
Perhaps this system is not the stuff of rocket science, but it is definitely more complex than the programmable small appliances that still cause many of us angst.
The affirmative regulation of insurance pricing and product design—rates and forms—was the primary reason that Congress granted limited and contingent jurisdiction over insurance to the several states. This means that modernization of SERFF is an important chapter in the saga of insurance regulation.
To the contrary, in 1945, if congressional leaders believed competition alone served the public interest, insurance would have remained under the jurisdiction of federal antitrust law and the Federal Trade Commission. Neither Congress nor the Roosevelt administration believed that a complex product like insurance was appropriate for informed consumer choice, so they empowered the states to regulate the product design, pricing, and marketing of insurance.
SERFF plays a central role in making the American system of state-based insurance regulation more efficient.
No matter how much policymakers and policy advocates praise the concept of efficiency, however, they do not always mean it. The history of both SERFF and the IIPRC provide evidence of the truth in this observation.
Twenty years ago, insurers tried to keep SERFF and IIPRC apart from the NAIC because of the efficiency offered by both initiatives. It is surprising to see both functions relying on the NAIC technical infrastructure today.
Approval for both initiatives was a political offering from the NAIC to keep insurers from seeking federal charters from Congress. This sounds contradictory, but we have to remember we are talking about the politics of the NAIC, which is not a model of statesmanship.
The current era of American insurance regulation began in the latter years of the Clinton administration. Clinton and congressional leaders launched a financial deregulation binge as a means of showing the president to be mature after the prolonged impeachment battle.
After Clinton escaped conviction, the White House and Congress looked around for a major piece of legislation to pass. They grabbed the Gramm-Leach-Bliley Act, referred to by some political pundits as “Monica’s Law,” which repealed New Deal-era statutory separations among banking, securities, and insurance.
The NAIC began lobbying Congress late in the process to protect the McCarran-Ferguson Act as “the law of the land.” The NAIC’s appeal to Congress succeeded, but the association’s leadership knew that factions of the industry might still seek to escape the state-by-state system.
In the years between the Civil War and the New Deal, many insurers pined for the option of a charter from the then-insignificant federal government. As the power and professionalism of the federal government grew under Franklin Roosevelt, the industry consensus changed. As the saying goes, “It is better to face harassment by fifty monkeys than answer to a gorilla.”
But after Clinton and his economic team decided to let Wall Street redesign federal financial oversight, the “gorilla” was looking more like a teddy bear.
As spokesperson for the monkeys, the NAIC began to tout proposals to reduce state regulation under the pretense of increased “efficiency.” Of course, they meant … wink, wink, nod, nod … deregulation.
Which brings us to the turn of the 21st century catchphrase “speed to market.”
This concept supposed that heavily regulated insurers would never be able to respond to consumer demands as fast as lightly regulated banks and securities firms. To enhance insurers’ ability to compete with other financial institutions, the burdensome system of rate and form regulation would need to go away.
Never mind that Monica’s Law established that insurance products sold by banks or securities firms must submit to the same state-based regulatory system as those sold by insurance companies.
Consumers would demand one-stop-shopping for all their financial needs. Insurance regulation should look like the fraternal gaze of a banking supervisor. Stand back, move along; there’s nothing to see here.
In early 2000 the NAIC circulated a document titled The Statement of Intent: The Future of Insurance Regulation, which could be seen as one-stop-shopping for dismantling regulation to fuel speed to market.
At the time The Statement of Intent was issued, the NAIC had considered SERFF for nearly a decade.
SERFF’s history begins in December 1991. The NAIC’s focus was on solvency regulation after a blizzard of insolvencies in the previous five years. It was a time when people brought ideas to the NAIC.
The association leadership made a series of brash statements about improving insurance regulation, and some innocent people took them at their word. For example, a representative of Aflac and a third-party consultant pitched an idea to use the internet to facilitate regulatory filings to NAIC staff. In March 1992, the association created a working group to consider the proposal but limited its jurisdiction to property/casualty filings.
Over the next several years, the working group drew up more and more detailed plans and budgets for a massive expansion of the NAIC information technology capabilities to host SERFF.
By the mid-1990s, major trade associations for property/casualty insurance carriers and individual insurers caught on that the NAIC just might construct SERFF. The carriers and some allied regulators were not pleased. Why would the NAIC want to improve rate and form filing when many insurance carriers were lobbying to end rate and form filing altogether?
In addition, if constructed, SERFF could provide the NAIC a new line of fee revenue, which might make the association less answerable to the insurance sector. Industry trade groups and some conservative state legislators began to criticize the NAIC’s independence—from them.
Furthermore, some industry advocates worried about the creation of a large database of pricing information under the control of the NAIC. Such data could be sold to competitors or captured through litigation by plaintiffs who challenged insurers’ treatment of consumers.
By 1996, the lobbying hammer came down on the SERFF project, and the NAIC leadership placed the proposal into a bureaucratic form of suspended animation.
The revenge did not end with the sidelining of SERFF. The trade groups insisted on the career sacrifice of a senior NAIC staff member for “budgetary” sins. Furthermore, the trade groups bullied the association into changing its corporate legal structure, and in January 2000 it became a Delaware-chartered corporation.
The “new” NAIC issued The Statement of Intent: The Future of Insurance Regulation shortly after the incorporation. That document led to the speed-to-market effort noted previously, which would include the revival of a pared-down version of the SERFF project.
Because, as noted, SERFF addressed only property/casualty rates and forms, the NAIC needed a means to extend speed-to-market initiatives to entice the life insurance sector and others. In 2000, state regulators worried about life insurers seeking an “optional federal charter” more than they were concerned about insurers in the property/casualty sector pursuing this option.
The NAIC proposed forming the Coordinated Advertising, Rate and Form Review Authority (CARFRA) as an incentive to keep life insurers under state jurisdiction. The authority would review and approve products for national distribution.
The association proposed that CARFRA be an NAIC function, which raised the hackles of the association’s political enemies. Those enemies issued the same complaints about fee revenue, the NAIC’s independence, and the protection of trade secrets used by the opponents of SERFF.
Also, some proponents doubted that standards and practices proposed by CARFRA would wield the influence necessary to bring states into line.
The NAIC tried to argue that regulators borrowed from state insurance departments could conduct the regulatory reviews; therefore, all jurisdictions would honor CARFRA decisions. That argument proved unconvincing.
The NAIC retreated and proposed the creation of an interstate compact to conduct the regulatory review, and this became the IIPRC.
The Constitution provides for interstate compacts to allow states to create a joint authority to address regional matters. Generally, national policy issues remain under the jurisdiction of Congress.
Compacts may not reduce the power of Congress without the approval of that body. Some national compacts have sought congressional approval before states began entering into those agreements.
Because the focus of the IIPRC is interstate commerce in several lines of insurance, and states hold only loaned authority over that interstate commerce, the constitutionality of the compact is a subject for debate. The courts have never ruled on that constitutionality or statutory consistency with the McCarran-Ferguson Act.
Still, jurisdiction over interstate commerce in insurance has remained with Congress since the Supreme Court decision in U.S. v. South-Eastern Underwriters Association (1944). Congress loaned the authority to regulate insurance to the several states the next year through the McCarran-Ferguson Act; however, both the congressional conference committee report and several Supreme Court rulings warn that the states do not have the power to transfer that authority. No state may regulate on behalf of another, and states may not transfer the authority to any non-state entity. Compact commissions are not “states.”
It would have been smarter for the NAIC to ask for congressional approval first, before initiating efforts to form a compact commission of national scope. Yet NAIC leaders at the time wanted to defend parochial concerns that they feared would not survive congressional consideration.
The drafting of enabling legislation for the compact proved to be an ugly course in special-interest politics. Some state legislators needed to be assured that they would retain jurisdiction over the compact commission, which preserved their importance to the insurance sector. Various factions of the insurance lobby demanded restraints on the commission.
At one point in the process, this commentator opined that the drafting sessions resembled “the NAIC hanging ornaments on a burning Christmas tree.”
Nevertheless, after two decades of political maneuvering, both SERFF and the IIPRC survive, and they both depend on the NAIC’s information technology infrastructure. No state or federal legislative body applies statutory oversight to either initiative.
Still, it is surprising to see both functions operating on the same NAIC infrastructure.
Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.