NAIC, Regulators Need To Act Before Congress Threatens Action

Its getting to be a familiar refrain. The 50 states and the District of Columbia develop confusing, overlapping and inefficient procedures for performing certain core regulatory functions.

Insurance companies complain about the lack of uniformity and unnecessary expenses in the system. The states and the National Association of Insurance Commissioners promise to try and do something about it, but despite sincere efforts, any improvements are marginal, at best.

Then, Congress gets into the picture. The committee with jurisdiction over insurance holds a hearing during which committee leaders threaten to introduce legislation unless the system improves.

In response to either the threat of legislation or the actual passage of legislation, some improvements are finally made. But this entire process takes several years, and the improvements are only sufficient to reduce the heat from Congress for a few years or so.

There has to be a better way. The states and the NAIC need to find some mechanism that will allow them to respond more quickly to changes in the marketplace and achieve the necessary regulatory reforms without the constant badgering from Congress.

Failure to do so could lead to a more active and direct federal role in insurance regulation which many in the regulatory community and the industry will not like.

The most recent issue to come before Congress was market conduct. The U.S. General Accounting Office released a study during a House Financial Services Subcommittee hearing saying that state regulation of market conduct lacks effectiveness.

While NAIC is trying to improve the system, GAO said, NAIC and the states have not yet agreed upon appropriate laws, regulations, processes and resource requirements that will support the goal of an effective, uniform market oversight program.

One gets a sense of d?j? vu when reading the GAO report. Similar complaints were raised in the early days of Rep. John D. Dingells investigation of insurance company solvency in the late 1980s.

Ultimately, NAIC responded with its solvency accreditation program to upgrade solvency regulation and stave off federal government legislation.

Complaints about a lack of uniformity in producer licensing also led to the threat in the Gramm-Leach-Bliley Act to create a National Association of Registered Agents and Brokers unless states took steps to harmonize their licensing requirements.

Again, despite discussions of producer licensing reform that had been going on, literally, for decades, only the threat of federal intervention produced results.

On market conduct, the National Conference of Insurance Legislators is responding to the latest challenge by developing a self-policing program to upgrade and streamline compliance.

It is a good idea and, when fully developed, may become the backbone of a modern, national regulatory system. But as always, the trick is to get it implemented in every jurisdiction. It cant be allowed to die on the vine like so many model laws developed by NAIC.

With increasing congressional scrutiny on core regulatory issues and growing dissatisfaction at the pace of regulatory reform within the industry, the future of the state regulatory system is at stake.


Reproduced from National Underwriter Life & Health/Financial Services Edition, June 2, 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.