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My Way

As some regulators push for uniformity, they’re thwarted by attitudes of “I don’t care what the rest of you are doing; we do it best in my state, and I’m not changing.”

By  Scott Sinder and John Fielding

The organizing principle of the NAIC when it first met in 1871 was to create a system of state insurance regulation where each state had the same laws and regulations. Nearly 140 years later, we are still waiting for state regulators to fulfill that promise. The most recent meeting has brought them (and us) no closer to that goal.

To be fair, state regulators, through the NAIC, have been trying to make state laws and regulations uniform (or at least “seamless”) from state to state. They have had limited success, such as the financial solvency accreditation program and the interstate insurance compact for life insurance product approval. Even in producer licensing, there have been some improvements from the mess 10 to 15 years ago (aided by the threat of a federal licensure clearinghouse). But these partial successes cannot obscure the undeniable fact that uniformity is not the norm. Regulators can’t change it on their own.

The differences among the states—not only in laws, rules, processes and procedures, but in the ways they interpret them—impose huge administrative burdens and costs on the industry. Every insurance consumer feels these costs, and there is no evidence that the differences among the states lead to any additional consumer protection benefits.

Are Iowa insurance consumers more vulnerable than consumers in other states due to the fact that Iowa does not license insurance agencies (as many states do)? Are consumers better protected if a state requires a surplus lines filing on a quarterly or a monthly basis, or right after a policy is placed? Are insurance producer applicants in Illinois (where licensing examination pass rates hover around 80%) simply more intelligent than applicants in other states (where the pass rate can be as low as 40%)? Or is it better for some reason for consumers to have fewer applicants pass the exams? Are consumers better protected in states that permit a producer to be paid by commissions and fees vs. only commissions or only fees?

There are hundreds more examples, of course, and we do not have all the answers. The point is, if a regulatory requirement is necessary for the protection of consumers in State A, what about State B? Conversely, if it is not necessary in State B, why State A? There is no good answer.

It appears to be a combination of “That’s the way we’ve always done it” and “I don’t care what the rest of you are doing; we do it best in my state, and I’m not changing.” Of course, they do not admit that publicly. In public, uniformity is almost an article of faith for the regulators.

This frustrates you, and it also frustrates many of the regulators. A number of the commissioners, particularly those in leadership roles, have been pushing hard on uniformity for a while. New Hampshire commissioner Roger Sevigny, the NAIC’s president this year, has been committed to achieving uniformity in producer licensing, and The Council has been working to help him get there. Unfortunately, it’s not a follow-the-leader group, even if the leader has the best ideas.

One way states could achieve uniformity is through a “federal tools” type of approach: Use federal legislation as a lever to force the states to enact uniform insurance regulatory requirements. Sevigny has suggested the NAIC might be open to this approach, and it has been helpful in connection with the surplus lines legislation that The Council has championed on Capitol Hill.

The problem, however, is that the regulators balk at the use of federal leverage. Unwilling to make the compromises necessary to develop uniform requirements and consistent consumer protections, they fall back on the “we do it best in our state” argument.

This was on full display at the NAIC’s recent meeting in Minneapolis. Financial services regulatory reform was a major topic of discussion at the meeting and the subject of a marathon regulator-only session. The commissioners met for five hours one day to discuss their position on regulatory reform and reportedly came up with nothing but disagreement. Apparently, there is a significant split between those regulators who see a role for the federal government in insurance oversight and welcome federal assistance in achieving uniformity and those who, despite their lip service, are intent on protecting their prerogatives.

The pressures on commissioners—from their governors and local interests among others—cannot be discounted. It may be very difficult for some regulators to push for reform. But insurance is about keeping promises, and the promise of uniformity has been a long time coming. The current crisis, despite its devastation, has given us an opportunity to fix the weaknesses in our regulatory system. The state insurance regulators should use the opportunity to fulfill a promise they made 138 years ago.

Sinder, a partner at Steptoe & Johnson, is CIAB general counsel.
Fielding is of counsel at Steptoe & Johnson.

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