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Push For The Compact Intensifies

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An initiative that would channel life insurance product filings through an interstate compact is the focus of intensified efforts on the part of insurance regulators who hope to present a finalized plan to legislators within weeks.

“The action is not in the states now. The action is with the NCSL and NCOIL,” says Terri Vaughan, Iowa insurance commissioner, immediate past president of the National Association of Insurance Commissioners and an initiator of the idea of a compact approach.

The Interstate Insurance Product Regulation Compact was just made law in Iowa and was introduced this legislative session in Alabama and Indiana.

But, before regulators and legislators turn their full attention to state houses, legislators at the National Conference of State Legislatures, Denver, and the National Conference of Insurance Legislators, Albany, N.Y., must support the proposal, according to Vaughan.

Indeed, the NCSL is looking at the compact as well as proposed amendments to it. NCSLs task force could vote on the proposal later this month and present it to the organizations executive committee for full approval during its annual meeting in San Francisco in July.

The National Conference of Insurance Legislators, Albany, N.Y., could take action during its meeting in Williamsburg, Va., in July.

Vaughan says that as current work on product standards for the interstate compact shows, regulators are determined to make the compact operational.

Compact standards are now being developed for products including annuities, disability insurance, long term care insurance and life products.

In fact, regulators are developing those standards now in anticipation of the summer NAIC meeting in mid-June. Discussions are turning not only to the nitty-gritty of creating standards but also to broader topics such as how to meet consumer needs without causing unnecessary expense for companies.

For instance, during a recent working session of regulators who are developing annuity standards, the issue arose over what a state insurance deparment would do if it has legal requirements to meet but compact standards ultimately require something different.

Texas, for example, requires that there be a disclosure of guaranty fund participation and a toll-free number for a carrier in the policy contract. However, not all states have such a requirement.

So, the discussion centered on whether a standard should encompass those requirements.

A blank sheet approach is being recommended by NAIC leadership with the best standards developed regardless of existing requirements, David Parsons, Alabama insurance commissioner, noted.

Given that blank sheet approach, according to Birny Birnbaum, executive director of the Center for Economic Justice, Austin, Texas, regulators should strive for the highest standards available even if they are deviations from what is normally required for product filings.

“If a deviation ends up as a standard, it is not necessarily a bad thing. Just because it isnt there doesnt mean that it shouldnt be there,” said Birnbaum.

Regulators were also receptive to a request from Birnbaum that a survey be done at the end of the project to see how standards measured up with existing state requirements–tougher, the same or less stringent.

Regulators working on disability insurance standards are starting with a more general discussion of issues. DI standards are at a more initial stage because they were not developed for the Coordinated Advertising Rate and Form Review Authority, the compacts predecessor.

In particular, the issue of the length of contestability for DI products was discussed. Birnbaum questioned why a contestability period needed to be two years instead of a shorter period of time such as three months.

If the issue is misrepresentation, then he asked regulators what a longer contestability period would do to prevent misrepresentation on an application. In fact, he argued, it could make it more difficult to determine misrepresentation.

If a condition was identified during a shorter time period, it could be easier to argue that it was omitted and that there was a misrepresentation. With a longer contestability period, a condition could have legitimately developed, he said.

But some regulators said a longer contestability period is advisable because substantial sums of money are involved and a shorter period would encourage policyholders to omit medical information for a short time in order to receive benefits.

In response to a point made that there is sometimes no way of knowing about a misrepresentation until a claim comes in, Birnbaum said it sounded like post-claims underwriting is being encouraged.

During the discussion, it was noted that there is a distinction between fraud and misrepresentation because fraud can be pursued regardless of a contestability period.

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.