By Arthur D. Postal

Washington

According to industry observers, the National Association of Insurance Commissioners is sending shock waves through the leadership of the House Financial Services Committee by sending a letter that the leadership believes takes a hard line against proposed federal modernization legislation.

“The State Modernization and Regulatory Transparency Act (SMART) is not a concept that NAIC would suggest to Congress,” the letter said. “Our concerns are deeply rooted in the basic structure of the SMART Act that mandates federal preemption of state laws and regulations, federal supervision of state regulation, and complete rate de-regulation for all states. We do not believe that tweaking the language of the SMART Act discussion draft can resolve these basic conflicts.”

An industry official, one of the few given access to the letter, said the committee leadership and staff is concerned because, “it negatively critiques SMART. It doesnt seem they want to engage in this process in a positive way.”

The committee also is voicing deep concern, according to several sources, about a summary paragraph which said a committee of state regulatory agency staffers and commissioners had conducted an intense analysis of drafts of the legislation provided by the committees Republican staff. “Although the NAICs SMART Act review teams were not tasked with reaching policy decisions, their factual findings reveal fundamental problems for preserving essential state regulatory authority if the basic elements of the draft SMART Act bill become federal law,” the letter said.

The letter was dated March 18 and signed by NAIC President and Pennsylvania Commissioner Diane Koken. The NAIC promised to send a copy of the letter and a press release summarizing its contents March 23, but had failed to do so by press time.

However, several copies of the letter were acquired by National Underwriter from industry sources on both the life and property/casualty sides of the business. With Congress in recess, no members of the panels leadership were available for comment, and a committee staffer did not return phone calls seeking comment.

But three of the people contacted who were familiar with the letters comments said the committees leadership and staff regarded the letter as “negative.”

An industry official whose comments represented a consensus of those from whom the document was obtained voiced equal concern that the response could result in the NAIC playing a smaller role in the drafting of the bill than envisioned by Rep. Mike Oxley, R-Ohio, chairman of the committee, when he first unveiled plans for such legislation last April.

“I think the NAIC is making a huge mistake,” this official said. “They are under the misapprehension that reform in the state capitols is an option that federal legislators are looking at, and it isnt. They seem to think there are three options on the table: reform state by state in state capitols; targeted federal legislation to improve the state-based system, the Oxley-[Rep. Richard] Baker [R-La., chairman of the committees key subcommittee] SMART proposal; and third, an optional federal charter, or mandatory federal regulation.

“But,” this official said, “the first option is not an option right now; there will be federal legislation on this topic; and Congress is just beyond conducting oversight. The NAIC misses that point.”

The NAIC letter was in response to a letter sent several weeks ago by Rep. Oxley to the NAIC asking the commissioners to become more involved in the process of drafting SMART. In response, the NAIC sent the four-page letter.

The letter starts out by saying that commissioners are prepared to make themselves available to help with the drafting of SMART and explains why they have not been more available this year.

But most of the letter effectively says the draft bill is fundamentally flawed if its goal is sustaining state regulation of insurance.

“In summary,” the NAIC letter said, “the NAIC review teams found:

–The SMART Act would substantially and negatively impact state regulatory authority to supervise property/casualty, life and health insurance, as well as reinsurance, by establishing federally mandated standards and preempting state laws that disagree with them.

–The SMART Act would create unhealthy regulatory confusion in insurance markets by subjecting state regulations and orders to second-guessing and possible interference by a new federal entity called the State-National Insurance Coordination Partnership. In addition to raising a host of serious legal and practical concerns regarding its composition, powers and administration, this partnership would encourage time-consuming and expensive litigation by those who disagree with state regulatory actions, during which the legitimacy of state actions would hang under a cloud of doubt until a final resolution is reached in federal courts.

–The SMART Act would remove the ability for independent judgment and action by state regulators to protect consumers under state laws and regulations in such important areas as supervising rates and conducting market conduct exams. Even though Illinois often has been cited by SMART Act proponents as the model rate system for all states, the Act would undercut or negate important provisions of Illinois law that make its rate system work.

–In general, the time limits for states to implement the SMART Acts requirements are too short, and many of the Acts provisions seem impractical, unworkable or detrimental to state consumer protection efforts.”

Federal legislation is generally not needed to implement the various provisions of the NAIC regulatory modernization roadmap, the letter says.

“However,” the letter concludes, “federal legislation would be welcome to enable access by all state insurance regulators to the FBI criminal database, to enable sharing of confidential regulatory information among federal and state regulatory agencies, granting liability protection to NAIC as the central data exchange for states, and to grant states equal receivership powers with the federal government.”


Reproduced from National Underwriter Edition, March 25, 2005. Copyright 2005 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.