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Preemptive Strike

The NAIC supports commission to preempt state insurance regulation.

By  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 rules.

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 risk.

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 Counsel.
Fielding is of counsel at Steptoe & Johnson.

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