The NAIC assures federal
lawmakers that all is well
Lawmakers should empower the FIO to affirmatively regulate
the business of insurance regarding climate change and other issues of national importance.
By Kevin P. Hennosy
Writing for a monthly magazine is something akin to having a conversation with people who live in the future. The writer feels a palpable disadvantage in participating in such a conversation because the reader knows what happened in the intervening weeks since the writer’s deadline.
Usually, the writer with responsibility for public policy issues can hedge the risk of looking totally uninformed about current events by keeping discussions rooted in historical trends.
Take, for example, this edition of Rough Notes: The deadline for submitting this column was November 5, 2024, a national Election Day of undeniable importance. Control of the House of Representatives, the Senate, and the Executive Branch were all up for grabs with vast differences between competing visions for public policy. And that observation does not even consider the contests at the state level.
At times of uncertainty like these, the best thing an insurance writer can do is turn to the National Association of Insurance Commissioners (NAIC), because there has not been material change there for the past quarter of a century.
Now, some will say that the opinion offered in the paragraph above is a cruel, heartless, and harsh assessment of the NAIC. Those pearl-clutching commenters would be correct. But submitted for their approval is the NAIC’s September 16, 2024, letter sent to U.S. Representatives Sean Casten (Ill.) and Maxine Waters (Calif.), as well as Senator Sheldon Whitehouse (R.I.).
On August 12, 2024, Casten, Waters, and Whitehouse queried the regulators’ association concerning recommendations made by the Federal Insurance Office (FIO). The FIO reached out to the NAIC on climate change issues in 2023. The recommendations targeted insurance public policy related to climate change. The lawmakers asked the NAIC to respond to those recommendations, since the association had gone an exceptionally long time without responding to the FIO.
Obviously, FIO labored under the misconception that the NAIC would respond with goodwill and maturity; bless the FIO’s collective hearts. The federal lawmakers put on their Truant Officer hats and reached out to NAIC.
Anyone familiar with the NAIC’s ways and habits will not be surprised by the NAIC’s tardiness. Nor should anyone be surprised if historians learn that the NAIC might still owe a comment letter asked for during the McKinley Administration. Had the federal lawmakers not penned a letter to the NAIC, the association might have taken up the FIO recommendations sometime after the McKinley Administration comment letter.
The Troika of Lawmakers made clear in their letter to the NAIC that they believe that the insured and uninsured losses resulting from stronger and more frequent storms is a drag on the U.S. economy. The lawmakers’ letter cited that The Financial Stability Oversight Council (FSOC) asserted in 2021 that “climate change is an emerging threat to the financial stability of the United States.” Furthermore, “Treasury Secretary Janet Yellen, chair of the FSOC, has flagged concerning trends in the insurance markets.”
The Casten, Waters, and Whitehouse letter observed that “[I]n response to rising insured losses due to climate change, large home insurers are requesting significant rate increases from state insurance commissioners across the country, increasing policy exclusions, avoiding renewals in unprofitable markets, and implementing higher deductibles in areas with substantial exposure to climate events.”
The federal lawmakers even stroked the collective ego of the NAIC by observing: “Given the NAIC’s role as an organization governed by insurance commissioners and one that develops model legislation, regulations, and best practices for states to consider adopting, we write to inquire about the status of the NAIC’s adoption of the 18 relevant recommendations made by the FIO around integrating climate-related financial risks into U.S. insurance supervision and regulation . …”
Taken upon its face, the last observation would suggest that this thing called the NAIC should be found in civics textbooks or have a monument on the Washington Mall. The three lawmakers knew quite well what the status was of “the NAIC’s adoption of the 18 relevant recommendations made by the FIO.” NAIC ignored the FIO.
In the NAIC’s response to the federal lawmakers, the association managed to use many words to say nothing. For example: “The strength of the U.S. state-based insurance regulation system to protect consumers and ensure solvent markets lies in both the flexibility of individual states to employ diverse strategies that respond directly to unique risks and market developments and the commitment of regulators to take collaborative action, gather and share data, promote best practices, and respond to national issues through the NAIC.”
Sure thing, commissioners. Up is down. Black is white. There is no problem in property insurance markets, comrade. That is why policyholders are so happy when their premium or cancellation notice arrives in the mail that they greet their postal carrier with sweets and flowers.
The NAIC’s entire September 16 letter consists of vague promises of better times in the future. “Through the NAIC, state insurance regulators are coming together to execute on a national strategy for climate risk and resilience with clear, actionable goals and objectives to assist regulators, consumers, and insurers in managing the risks of climate-related disasters,” wrote the NAIC without providing any concrete evidence of any such “Kumbaya” moment.
Casten, Waters, and Whitehouse will know better. The lawmakers noted in their August letter to NAIC Federal Reserve Chair Jerome Powell, who “shared with Congress that rising insurance costs were producing continued inflationary pressures.” Insurance premiums are a pocketbook issue.
One can cut the NAIC some slack. The association follows a policy development process that harkens back to the Articles of Confederation, which collapsed under the weight of parochialism. Thankfully, the Federalist Framers kicked that system to the curb with the U.S. Constitution, but that reform does not extend to the NAIC.
Reviewing the NAIC response to Casten, Waters, and Whitehouse, one notices that the test does not include a reference to climate change. The NAIC uses the term “climate risk.” If they referred to climate change, the communication could not pass muster for distribution in Florida state offices. That is because a state law enacted last year deleted all references to climate change from state documents and statutes—no matter how much it costs to insure a coastal property in Florida. The Florida case is an example of lingering parochialism driving national policy, which is why the Federalists enacted the Constitution.
If one really wants to understand the NAIC, do not reach for civics textbooks. Once again, consult the philosophical touchstone of Western society, National Lampoon’s Animal House. For example, the scene when Dean Vernon Wormer asked his lacky Greg Marmalard, “Greg, what is the worst fraternity on this campus?” Marmalard replied, “Well that would be hard to say, sir. They’re each outstanding in their own way.” This magazine is famously “safe for work,” so readers will need to look up the Dean’s retort to Marmalard’s fanciful riffing.
Which brings us to a second example drawn from Animal House, which is informative when trying to understand the NAIC. There is a scene after Dean Wormer has sprung his Double Secret Probation trap, and Delta House President Robert Hoover testifies before a disciplinary committee, “I don’t think you can fully judge a fraternity without looking at the positive qualities of the people in it. The Delta House has a long-standing tradition of existence to its members and to the community at large.”
Marmalard’s and Hoover’s vacuous comments are the kind of responses in which the NAIC specializes. The association cannot call out any of its members for not regulating the business of insurance. That dynamic is fine for a commercial trade association, but the NAIC is too often treated as a quasi-policymaking body. The NAIC does not deserve that standing.
Since 1871, the NAIC has maintained a “tradition of existence” while trumpeting to the world that it was a tradition of excellence. Lawmakers should empower the FIO to affirmatively regulate the business of insurance regarding climate change and other issues of national importance.
The author
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.
