An announcement by the National Association of Insurance Commissioners in March 2002 at the Reno, Nevada, Spring Meeting caught most attendees by surprise. NAIC President and Iowa Insurance Commissioner Terri Vaughan unexpectedly unveiled a state-based initiative to implement a nationwide uniform filing and approval process for life and annuity products.
What is most surprising is that the key component of this initiative is the formation of an interstate compact. The NAIC as an institution has not been supportive of compacts in the field of insurance regulation. The NAICs announcement states that this endeavor will be led by a new Interstate Compact Working Group, reporting directly to the executive committee of the NAIC.
While the goal of this NAIC initiative is to create a national system of state-based insurance regulation for life and annuity products as an “option” for companies seeking to sell products on a multi-state basis, the details are yet unclear. If developed properly, this initiative could provide a path to reform that the life insurance industry has been looking for.
I and others who support the use of compacts in regulation applaud the NAIC for taking this bold step. It is still unknown how much support the idea has within the NAIC member ranks. Keep in mind it is relatively easy to appoint a working group to study things. Yet, I am encouraged by this action since it might mean the less likelihood of a serious effort to move to federal regulation. It may also signal that the NAIC is really serious about reform and working smarter to achieve it.
Today, more than ever, there is an urgency to strengthen and reform state regulation to meet the demands of the new financial services marketplace.
In the past, inefficiencies resulting from regulation by 50 states and the District of Columbia were tolerable because all insurance companies faced the same problems. But today, life insurers provide a variety of financial products and services for their customers and are in direct competition with brokerages, mutual funds and commercial banks, non-insurance firms with far more efficient systems of product regulation, often with a single, principal regulator.
For life insurers, making regulation of product approval more efficient is an urgent priority.
The idea of using an interstate compact to improve state regulation is not new. But unlike the past when the use of compacts was suggested, today there are compelling reasons to mobilize and act quickly.
Drawing upon the prior work of others and with the groundbreaking efforts of the National Conference of Insurance Legislators, I and several others saw an opportunity to use the compact as a vehicle to not only establish the Interstate Receivership Commission to address problems with the existing receivership system, but also to address other areas of regulation.
When the NAIC commences its drafting of the new compact, certain fundamental decisions will have to be made. These will be similar to those confronted when the insurance receivership compact was drafted:
- Will existing state resources be replaced or retained and utilized in a better fashion?
- Should larger states have a greater voice in the administration of the compacts powers and authority?
- What relationship will the administrative entity created by the compact (the “Commission”) have with the NAIC?
- What should be the scope and subject area of the compact?
- What are the “ills” in the current state system that the compact needs to address?
- How can the compact be constructed to achieve acceptance by all stakeholders?
I offer here several thoughts on these questions, as well as how to get the compact up and running quickly.
What the New Compact Could Look Like
The goal is obvious–create a system that will allow life insurers to bring products to market in all jurisdictions quicker. The impediments to achieving that today is not only that products have to be approved in 50 jurisdictions, but each of those states have differing rules, many of which are antiquated, and states may have disparate staff competency.
The compact legislation does not have to create a new and untested bureaucracy. To do so would be counterproductive to acceptance and passage.
To address these problems the compacting states can agree that a product approved in one jurisdiction can be sold in all compacting states. The compacting states, through the “Commission,” can create the standards and rules for approval of products.
To deal with proficiency of staff, the compacting states can require that a state meet certain requirements with respect to staff qualifications and review procedures. Those states that meet those standards could be granted “reviewer” status and those that did not would be bound by decisions of the “reviewer” states. Disputes between an insurer and a “reviewer” state would be resolved by the “Commission.”
States with larger insurance markets should not have a greater voice in the administration of the compacts provisions. This notion was rejected when the receivership compact was drafted. It should be discarded here for the one state/one vote principle. Any other process would necessitate a complex check and balance system to be fair to smaller jurisdictions.
The administrative entity (the “Commission”) created by the compact would not need to have a relationship with the NAIC. Being a governmental entity it would need to observe such standards of behavior commonly expected of such institutions. Openness, due process, accountability, and transparency in all matters should be expected. It would not be able to “float” between government and private enterprise.
Nominal self-sustaining fees, paid by insurers, would provide compensation of “reviewer” member states for their services and to cover the administration and oversight costs of the compacts commission.
The scope of the compacts provisions should include not only life and annuity products but also related areas such as disclosure and sales practices. Language should be incorporated to ward off unwarranted class action litigation, which is haunting the industry today.
The compact legislation does not need to include specificity as to rules for products, review procedures and the like. These can be developed later. Of course, the commission should be given a deadline for getting it done. When it is done, consideration should be given for a “file and use” system for certain types of products.
How to Get It Done
The National Conference of Insurance Legislators (NCOIL) is the logical organization to work closely with the NAIC on this initiative. NCOIL is the “father” of compacts in regulation. It is unfortunate that the NAIC press release did not recognize NCOILs contribution, but the NAICs institutional memory sometimes fails.
Legislator support is critical. The earlier there is “buy in” from state legislators, the greater the chance for their support. This support will be easier to obtain if existing state resources are used but subject to new rules and procedures.
The advantages and practicality of a compact to address troublesome product approval issues are obvious. With uniform standards, consistent interpretation of those standards, and a single point of contact for dealing with multiple jurisdictions, insurers will be able to achieve speed to market advantages.
To protect consumers, new products will receive more in-depth scrutiny rather than slipping through a bureaucracy. Insurance department technicians will be working with a new set of rules–rules that are far more responsive to todays products.
The interstate compact device could be a very important and potent tool for state regulation, while fully preserving state sovereignty and independence. At a time when the states are under the gun of Congress to achieve efficiency and uniformity in several important areas of insurance regulation, this compact initiative merits our close attention.
James W. Schacht is national director of the insurance regulatory practice at PricewaterhouseCoopers LLP in Chicago and a former insurance director of Illinois. The views expressed in this article are solely those of the author and not necessarily those of PricewaterhouseCoopers. He can be reached via e-mail at email@example.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, June 3, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.