The NAIC supports commission to
preempt state insurance regulation.
Scott Sinder and John Fielding
A funny thing happened on the way to the NAIC’s fall
national meeting in Washington. Regulators became reformers.
While that’s a bit of an overstatement, they’re
trying—some willingly, some kicking and screaming.
For years, regulators have discussed how to achieve uniform
laws and rules across the country (after all, this has been the
stated goal of the NAIC since its founding in 1871). They have
had limited success in areas like solvency and, more recently,
life insurance product approvals, but they have never found the
key to achieving broad-based uniformity across the country on
the full panoply of insurance regulatory issues. By and large,
individual states just can’t get past their own parochial
interests. Despite their stated support for uniformity at the
NAIC level, regulators are unwilling or unable to put it into
practice in their states if it means changing their laws and
But this could be changing. Several weeks before their
September meeting, the commissioners revealed they have been
developing a plan to establish national uniformity in insurance
regulation. There’s nothing particularly new about that,
but this plan is different and bolder than what the regulators
have previously suggested.
In late August, after an early draft document was leaked to
the press, the NAIC publicly released a proposal to establish a
national commission that would establish uniform standards in a
wide array of insurance regulatory areas and preempt state laws
that don’t comply with those standards. The National
Insurance Supervisory Commission (NISC) would be authorized by
Congress, and states would affirmatively take action to join
the organization. Members of the commission (the state
commissioners) would develop standards on insurance regulatory
issues that the regulators believe are suitable for uniform
treatment. The current draft document specifies a number of
areas, including producer licensing, company licensing, surplus
lines and product review and approval. It also states that
additional regulatory areas can be added to the uniformity
initiative by a two-thirds vote of commission members.
A uniformity standard would immediately take effect in
member states once the commission approves it, without any
individual state action. States that are not commission members
would have a limited time to enact the standards or be subject
to federal preemption of their laws and rules.
The NAIC plan presumes the creation of an Office of National
Insurance as contemplated under the Obama
administration’s financial regulatory reform proposals
and pending congressional legislation. The commission would be
positioned to serve as a liaison between the state insurance
regulators and the federal government.
Current regulatory reform proposals address insurance in
limited but important ways. A significant flaw in these
proposals is that they lack any built-in insurance regulatory
expertise. The NAIC’s proposal envisions the commission
providing that expertise by coordinating with the Office of
National Insurance for reporting of insurance-related
information and providing a contact point for international
insurance regulatory issues (including trade talks and
policymaking). Presumably, the commission also could serve as
the insurance expert in any federal council that is created in
connection with systemic risk regulation.
The proposal is more an outline than a fully developed plan,
and many questions remain not only in terms of how the
commission would work, but also its constitutionality and the
politics of getting the states, Congress and the administration
to accept it.
The proposal raises potential constitutional issues
discussed internally at the NAIC but not fully vetted by
others. And although the proposal includes preemption for
recalcitrant states, there’s no “stick” that
forces states to initiate the project. And that presents a
Imagine that Congress authorizes the commission and puts
other insurance federal regulation efforts on hold. What
happens, then, if the states never take action to create the
body? There needs to be something in the proposal and the
federal legislation that forces the states to act, either
directly or indirectly.
Politically, the reception has been mixed. At the recent
NAIC meeting, state legislators in attendance (fearing the
potential loss of power) hammered regulators for even
entertaining the notion of a national commission and federal
preemption. This does not bode well for getting the states to
adopt legislation to join the commission. Still, the NAIC has,
in the past, convinced state legislators to share their
authority on solvency and life products. Maybe they can do it
again. To bridge the chasm, regulators are exploring giving
state legislators a strong voice in the commission without
undermining the ultimate goal of uniformity.
At the federal level, the NAIC has flirted with Congress
before, and recently it has been increasingly more open to
engaging Congress on federal involvement in insurance issues.
The NAIC continues to support the surplus lines reform that The
Council has championed (and that recently passed the House a
third time). The NAIC also supports NARAB 2 legislation. It is
not clear how key Congress and Treasury officials will react;
although, NAIC members and staff have reportedly begun their
education efforts in earnest.
It is too early to handicap the fate of this new NAIC
effort, but it should be given credit for bringing new ideas to
the table—ideas that have the potential to actually
improve the regulatory environment for all participants.
Sinder, a partner at Steptoe & Johnson, is CIAB General
Fielding is of counsel at Steptoe & Johnson.