State Legislators Have Questions On NAIC Compact Proposal
Legislators are beginning to ask questions about a life insurance interstate compact proposal that will start showing up on their legislative doorsteps in the next year.
To date, three states– Alabama, Indiana and Iowa– have the proposal for a single point of product filing for life products before them.
But as more state legislatures begin to examine the compact proposal adopted by the National Association of Insurance Commissioners, questions like the ones raised by members of the National Conference of State Legislatures executive committee task force are likely to surface, to judge from a discussion by legislators here.
Questions during the NCSL task force meeting here started with one about the urgency of adopting the compact proposal. Stating he has heard “woe is us concerns from the industry” for a decade or more, Assemblyman Alexander “Pete” Grannis, D-Manhattan, 65th District, and chair of the Assembly insurance committee, asked how much effort it took for insurers to meet different product requirements in different states.
In response, Iowa Insurance Commissioner Terri Vaughan, a driving force in the adoption of the compact at the NAIC, said the urgency is a new phenomenon resulting from implementation of the Gramm-Leach-Bliley Act.
Banks and mutual funds can now compete with insurance companies, she explained, and deviations in product requirements make insurers less competitive. Those deviations among states range from differences in the type size of fraud notices to variations in the structure of nonforfeiture benefits, Vaughan continued.
Grannis asked whether a critical mass was needed for the compact to become effective. Vaughan responded that at least 26 states or states representing 40% of premium volume would have to participate before the compact became operational.
When Grannis asked about participation by larger states, Greg Serio, New York insurance superintendent, said the six largest states are meeting and seeking commonality without sacrificing protections and standards that already exist in their states.
Serio said roughly half of life insurance product filings are on a speed-to-market basis developed for the New York department.
The American Council of Life Insurers was asked by Alabama Rep. Mike Hubbard, R-79th District, at what point it would stop pursuing a state-based solution and focus on a federal response.
That is difficult to determine because the industry is not unified, explained Gayle Yeomans, chair of the task force on product regulation of the ACLI, Washington. However, Yeomans did say it is not industrys “intention to set one proposal against the other. We have a very strong interest in making the compact work.”
The economic impact on states if the compact did not work and federal regulation was implemented was a concern raised by Hubbard. He noted that in Alabama, for instance, there is a $500 million budget deficit.
Premium tax revenue in some states is quite large and with states facing a 15%-20% budget shortfall, that revenue will be increasingly important, said New York State Sen. Kemp Hannon, R-C-I, 6th District.
In addition to premium taxes, assessments on insurers to run the departments would also be impacted if a federal system were put in place, Serio said. Insurers would ask for relief from those assessments, he said. “You could see a significant change for state insurance departments themselves.”
New York State Sen. William Larkin, R-C, 39th District, also noted “what a tremendous beauracracy would be created” if a federal system of insurance regulation were put in place.
The arguments for the compact are “compelling,” according to Vaughan, who said it will improve state regulation. In presenting the case for the compact to state legislators, Vaughan said departments will be able to better allocate resources.
For instance, she says the Iowa department has a staff of 90 with one employee reviewing life insurance product filings. Efficient product review will only become more important given the complexity of products such as equity index annuities and features such as nonforfeiture and other guarantee provisions, Vaughan continued. The compact can provide that efficiency, she said.
What will help states in the interim, said Serio, are setting minimum product filing standards and technology. Those two factors have made it possible for the New York department to reassign staff from product filing to other regulatory tasks within the department, he added.
A good deal of work on the compact already has been done and the National Conference of Insurance Legislators will be taking a more formal position on it later this year, said Tim Tucker, director of state-federal affairs, for NCOIL, Albany, N.Y.
But Birny Birnbaum, executive director of the Center for Economic Justice, Austin, Texas, said more work needs to be done to create a compact that protects consumers.
A compact format offers potential for improving consumer protection, but not the compact currently being advocated to legislators, Birnbaum said. The proposal helps achieve efficiency but not consumer protection, he explained.
Instead of product standards being decided by the compact, Birnbaum suggested that when a certain number of legislatures representing a certain percentage of the total U.S. population adopted a product standard, then the compact would be required to adopt that same standard.
Birnbaum also suggested that a public comment procedure should be established. “There is nothing inherent in consumer involvement that would slow down the model,” he added.
North Dakota Insurance Commissioner Jim Poolman said arguments made by consumer groups that the compact would create a race to the bottom for regulation are not true. “If you go down [to the legislature] and say this is onerous to the industry, I think you will be absolutely kicked out of the chamber you go into.”
But Birnbaum countered by saying it is not necessarily a race to the bottom, but rather “a race to mediocrity.”
Serio said individual state departments can better use resources by more proactively looking for market conduct problems rather than focusing on product filings. Companies have filed “beautiful products” and then altered the product filing once approval was received, he says. The “greatest bang for the buck” is achieved by concentrating on proactive regulation,” he said.
Reproduced from National Underwriter Edition, March 31, 2003. Copyright 2003 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.