Battle brewing over move to establish federal standards for state regulation

washington

A big battle is brewing between the National Association of Insurance Commissioners and the leadership of the House Financial Services Committee over efforts in Congress to draft federal regulatory standards legislation.

NAIC officials say they are cooperating with the committee’s leadership and staff in the drafting of the State Modernization and Regulatory Transparency Act–better known as SMART. However, the committee’s Republican leadership apparently perceives that the NAIC is seeking to delay action on the bill to retain the current regulatory scheme, which emphasizes state oversight.

The issue is pressing because the committee has set a July 15 target date for action on the bill–and, apparently, the bill has bipartisan support.

In a letter dated May 16 to the NAIC leadership, Rep. Richard Baker, R-La., who chairs the panel’s Capital Markets Subcommittee, said that since all the NAIC could provide the committee was categorical denunciation of the committee’s own work product on the issue, he didn’t think it would serve any purpose for the leadership to meet with the regulator group until members submitted their own proposal for reform.

One congressional source called the letter “very strong.” The source, who opposes the legislation in principle, nevertheless says that for the committee to put its thoughts on paper in such language is “extraordinary and reflects the extreme disappointment of the committee at the recent actions of the NAIC in opposing modernization legislation.”

However, in a telephone interview, Diane Koken, president of the NAIC and Pennsylvania’s insurance commissioner, denied any lack of cooperation. “We are not attempting to delay anything,” she says. “We welcome opportunities to meet with committee officials and assist in any way.”

Koken says the NAIC leadership is aware of the July 15 target date for action.

The difficulty between the committee and NAIC leadership stems from the fact that state insurance commissioners–and probably governors and state legislators as well–believe the committee is seeking to reduce state authority.

In her comments to NU, Koken notes that her members support regulatory “modernization”–that is, compacts and other mechanisms initiated by the states that would create oversight uniformity.

By contrast, the House committee is drafting legislation that would establish federal standards for state regulation. This key difference was voiced in a May 9 letter signed by Koken that triggered Rep. Baker’s strong response.

“Our major concerns with the current draft SMART Act are centered on the organizational and legal structure it would employ to achieve the modernization goals we all share,” she wrote.

“Consequently, NAIC members believe we provide constructive assistance to you and your staff when we point out basic constitutional and operational problems associated with the SMART Act that would undermine its stated purposes and negate important state consumer protection laws,” she added.

“We also believe it is constructive to tell you upfront that certain SMART Act provisions, such as mandatory rate de-regulation, would be harmful to both consumers and industry,” she wrote.

Rep. Baker’s staff would not comment on the letter, nor would Rep. Mike Oxley, R-Ohio, who chairs the full Committee.

The letter from Rep. Baker implied that the NAIC leadership is seeking to delay indefinitely congressional action on insurance modernization legislation by not participating in the drafting of SMART.

The letter sought to delay further a meeting between Koken and Rep. Baker that had been scheduled originally for late April, and would have been a follow-up to a letter in which NAIC officials outlined specific criticisms of drafts of SMART. (See accompanying infographic.)

The meeting originally had been scheduled for April 28, and Koken’s May 9 letter sought further delay. It followed the decision of the NAIC to send a letter on April 22 “transmitting the NAIC’s 35 pages of objections to virtually all aspects of the proposed SMART Act,” which “makes quite clear the organization’s position on meaningful reform,” Rep. Baker said in his letter.

However, Koken said last week that the original meeting “had to be rescheduled for reasons not related to the NAIC.”

Sen. Baker’s Reaction

The one-page letter from Rep. Baker told the NAIC: “Please know that I consider myself fully apprised of the organization’s thoughts on the matter, and I do not believe a meeting is required for me to further familiarize myself with your objections.”

Rep. Baker added he thought it “important for the NAIC to take a leadership role in the current reform effort.

“Accordingly,” he went on, “I invite you to submit for my consideration a meaningful, enforceable and effective proposal for federal legislative action that will achieve the necessary reform.”

Until the NAIC offers “an alternative proposal as I have requested,” Rep. Baker added, “I do not believe it advisable to revisit your prior correspondence and request. Please forward your recommendations at your leisure and be assured of my prompt reply.”

“We are always willing to meet with the chairman–and recently met with Chairman Oxley,” Koken said. “We also hope to meet with Chairman Baker at some point.”

Moreover, she added, “NAIC staff is engaged in discussions and providing input to the Financial Services Committee.”

Infographic: with Capitol Hill shot

Flag: SMART Objections

Head: What Are Regulators’ Beefs?

The following is a summary of key findings by the SMART Act Review Teams created by the NAIC to review provisions of the proposed bill to set federal standards for state insurance regulation.

o “…By establishing federally mandated standards and preempting state laws…consumers would be denied the benefits of important state consumer protection laws and regulations.

o “The bill would create regulatory confusion in insurance markets by subjecting state regulatory authority to second-guessing and possible interference by a new federal entity…

o “The bill would remove the ability for independent judgment and action by state regulators…in such important areas as supervising rates and conducting market conduct exams.

o “Most specified time limits for states to implement the SMART Act’s requirements are unrealistically short….

o “The NAIC welcomes federal legislation that would permit equal access by all state insurance regulators to the FBI’s criminal database, enable sharing of confidential regulatory information, and grant states equal receivership powers with the federal government.