At a hearing last week, the National Association of Insurance Commissioners continued its policy of steadfast opposition to federal legislation imposing “standards” on state regulators, but five former regulators took a more measured approach, with several warning that some mechanism for establishing uniformity in state insurance regulation is imperative.
Several of the regulators also took issue with the NAIC’s doomsday analysis that the proposed legislation–the draft State Modernization and Regulatory Transparency Act–incorporates “unacceptable levels of federal preemption that would create both legal and practical problems for the insurance industry and its customers.” In fact, said former Ohio Insurance Commissioner Lee Covington, preemption provisions in the proposed legislation are only a “last resort.”
SMART currently is being drafted by the House Financial Services Committee staff. The hearing was held by the Capital Markets subcommittee.
Rep. Paul Kanjorski, D-Pa., ranking minority member of the subcommittee, used the hearing to drum up support for an optional federal charter, especially for life insurance companies.
“Rather than overlaying a federal bureaucracy on top of state regulation, an OFC would, in my view, create a sensible, separate and streamlined regulatory system.”
Kanjorski said in his opening statement that “the consensus for creating such a charter continues to grow.” He added that “the dual oversight has worked well for banking. Moreover, because of its standardized products and nationwide marketplace, the life insurance industry, from my perspective, is particularly ready for the adoption of an OFC.”
Despite the apparent consensus of the five former commissioners for some form of federal action, Diane Koken, Pennsylvania commissioner and president of the National Association of Insurance Commissioners, was steadfast in opposition to the bill.
“The states believe it is constructive to point out basic constitutional, legal and operational problems that would undermine the SMART Act’s stated purposes,” she said. She added that “state insurance regulators are public servants representing the same people who are your congressional constituents,” clearly implying that the regulators would seek to pressure committee members in their own districts if they continue to proceed with the bill.
“The draft SMART Act incorporates unacceptable levels of federal preemption that would create both legal and practical problems for the insurance industry and its customers,” Koken testified.
“Federal preemption of state insurance regulation denies your congressional constituents the benefits of important state services and protections, as has already been proven in existing federal programs, such as FEMA in its administration of the National Flood Insurance Program, and ERISA through its taking away state authority to assist your constituents,” Koken said.
Specifically regarding life insurance, she noted, “Where appropriate, NAIC and the states are working to achieve full regulatory uniformity to benefit both consumers and insurance providers. Marketing life insurance is an area where we agree with industry that greater uniformity is needed.”
To accomplish this, she said, “the NAIC negotiated development of an appropriate interstate compact, with full input from industry and consumer representatives.” An interstate compact, Koken said, “is the best way to get the job done while preserving effective state consumer protections.”
Koken said the number of states in the compact will soon grow to 17, which represents approximately 23% of the premium volume in this country. She estimates that the compact will become operational in 2006, calling it a “remarkable achievement, considering the general rule of thumb for compacts is that it takes anywhere from seven to 10 years to get them from the planning stage to becoming operational.”
Ohio’s Covington and former Arkansas Commissioner Mike Pickens, who was also a former NAIC president, disagreed with Koken’s comments about preemption.
“SMART provides the opportunity for states to maintain a state-based regulatory system with needed reforms,” Covington said. “While some may object to the preemption provisions, which should only be used as a last resort, the question exists as to what other options do policymakers have if the states cannot institute the agreed upon reform initiatives.”
Pickens said, “I am a strong supporter of state insurance regulation. I also am opposed to federal preemption of state insurance laws. But significantly, preemption need never occur under the SMART proposal.”
He explained that SMART “does not use ‘preemption’–but rather the ‘threat of preemption’–to help state regulators overcome the political and other obstacles that exist in some states so that they can in fact implement, enforce and continue to regulate their promised reforms.”
In his comments, Greg Serio, former New York insurance superintendent, sought to bridge the gap between the NAIC and the committee by cautioning everyone to work together.
“Maintaining the long-term perspective of preserving the state-based system of insurance regulation–not simply because it has been the historical method of regulation but because it is the system best-suited to meet the demands of a changing world–will be all the motivation that regulators need to understand and embrace the give and take of the SMART deliberative process,” Serio said.
In implying that cooperation by the NAIC will help the state-based system, Serio said that uniformity of laws and regulation will allow the state-based system of regulation to become more effective and efficient in its enforcement of the law.
Citing the self-regulatory mechanism model now in place in the securities market and embodied effectively in the National Association of Securities Dealers, Serio said it “can be greatly replicated and enhanced in the insurance sector through greater uniformity of laws and transparency in regulatory processes.”
Serio mentioned that such organizations as the Insurance Marketplace Standards Association–”once challenged by regulators to provide greater disclosure of information and transparency of process–has shown that self-regulatory bodies can thrive in insurance, and even achieve regulatory efficiencies for its companies.”
Strong support for rate deregulation, a strong priority of the property-casualty industry, was voiced by two other former commissioners–Ed Muhl, who served in both New York and Maryland, and Nat Shapo, former Illinois insurance commissioner.
Caption for Koken
“The draft SMART Act incorporates unacceptable levels of federal preemption that would create both legal and practical problems for the insurance industry and its customers,” said Diane Koken, president of the NAIC.
Caption for Pickens
SMART “does not use ‘preemption’–but rather the ‘threat of preemption’–to help state regulators overcome the political and other obstacles that exist in some states so that they can in fact implement, enforce and continue to regulate their promised reforms,” said Mike Pickens, former NAIC president.