Leader's Edge logo Legal Ease by Scott Sinder Tell the Editor
Legal Ease by Scott Sinder Wheel of Misfortune

The NAIC continues to run in place, although there are signs it may step off its treadmill on occasion.

By  Scott Sinder and John Fielding

The NAIC’s spring national meeting place in Orlando, Fla., was apt—a huge convention hotel with a glass roofed atrium that made us feel like we were in a cage running endlessly on gerbil wheel—lots of work but no progress.

The regulators started their 137th year doing the same old thing—lots of talk about producer licensing uniformity, product approval, protecting consumers and the whole panoply of pressing regulatory issues—and little action except for self-congratulatory speeches that convinced no one but themselves that the state regulatory structure is “stronger than ever.”

OK, to be fair, there was some activity of note in the Land of Disney. Perhaps most interesting from my perspective, most of the regulators finally came to agreement on comments regarding the Non-Admitted and Reinsurance Reform Act (NRRA). Based on conversations with several commissioners, it appears there is general agreement that the regulation of surplus lines insurance—particularly state premium tax methods—is hopelessly confusing and needlessly complicated. (Imagine that!) For that reason, the commissioners are supporting federal action. To be clear, they have not come out in support of the NRRA itself, but conceptually, they are behind the legislation’s surplus lines provisions. (The reinsurance title is another matter altogether. Regulators oppose those provisions and will push to remove them.)

But we digress. With respect to surplus lines, regulators support the centralization of authority in the home state of the insured and streamlining the tax payment process to resolve the mess caused by the states’ current tax-allocation rules.

The regulators’ comments on the NRRA come very late in the game and could be viewed as the NAIC’s typical obstructionist approach to congressional efforts at reform.

State regulators, though, view this differently. (Imagine that!) Mike McRaith, the director of the Illinois Insurance Department, says this is a real change from the NAIC’s typical “just say no” approach to federal regulatory reform efforts. Echoing statements by NAIC President (and Kansas Commissioner) Sandy Praeger, McRaith says the group’s willingness to constructively engage on a congressional bill illustrates a new willingness to support federal legislation targeted at specific regulatory issues where, for whatever reason, the states are unable to achieve the reform they and the rest of us deem necessary.

Let’s hope McRaith is right. The NAIC would do well to move away from turf protection. Its knee-jerk defensive response to every congressional effort to reform insurance regulation helps no one.

Although many would argue the NAIC is ineffective on Capitol Hill and the regulators’ views do not matter, their opposition would be worrisome since it is always easier to kill legislation than to get something passed. When a regulator raises concerns about a bill, it’s certainly not going to smooth the path to adoption. So, if the regulators are serious about this new “constructive engagement” approach to federal legislation, it might help achieve some needed reforms.

The surplus lines bill is the first test, with more coming down the pike, including the just-introduced “NARAB II” proposal that may push the regulators beyond their comfort zone.

And don’t even think about the optional federal charter legislation. Regulators will run on that gerbil wheel from now until the end of time before they will contemplate constructive engagement.

In other NAIC “action,” the producer licensing initiative continues. The NAIC conducted a 50-state (and D.C. and Puerto Rico) audit of producer licensing requirements to gauge compliance with NARAB’s reciprocity requirements and the NAIC’s own uniformity standards. The final report lacked state-specific information, which effectively prevents us from engaging with the states that need to make changes. With most state legislatures getting ready to pack their bags for the year, there isn’t much we could accomplish this year anyway. Yet, the NAIC is moving ahead, having reconstituted its NARAB Working Group and charging it with reviewing the criteria for meeting NARAB’s reciprocity standards.

Roger Sevigny, NAIC president-elect and New Hampshire commissioner (who is spearheading the effort), has gone so far as to intimate that some states may be out of compliance. This would mean the states could fall below the required threshold, which would require NARAB to automatically kick in.

I don’t for a minute believe that will happen, but the NAIC should really think about it. The Gramm Leach Bliley Act’s NARAB provisions are kind to the NAIC, giving the organization a good deal of power. They could do much worse under NARAB 2.

Finally, the NAIC also adopted a conflict of interest policy that will apply to regulators attending NAIC meetings and events. Modeled loosely on congressional ethics rules, but without the possible prison sentence for violators, the policy prohibits gifts and meals from lobbyists and other agenda-pushers. It will, no doubt, save us all a good deal of money, but regulators will likely be hungry after all that running in place.

Sinder, a partner at Steptoe & Johnson, is CIAB General Counsel.

Fielding is of counsel at Steptoe & Johnson.

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