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Regulation and Compliance > State Regulation

Former Commissioners Weigh In On Federal Standards

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The National Association of Insurance Commissioners continues to oppose federal standards for state insurance regulation, but several former regulators have different ideas.[@@]

The former regulators agreed on the need for a mechanism that could increase uniformity in insurance regulation here at a hearing organized by the Capital Markets Subcommittee of the House Financial Services Committee.

Several of the 5 regulators who testified at the hearing also took issue with the NAIC’s analysis of a draft of the proposed State Modernization and Regulatory Transparency Act.

The staff of the House Financial Services Committee is drafting the SMART Act.

The NAIC, Kansas City, Mo., says provisions in the current draft of the act that could lead to preemption of state authority would be bad both for insurers and for their customers.”

But the preemption provisions in the proposed bill are only a “last resort,” former Ohio Insurance Commissioner Lee Covington, who supports the idea of coming with a mechanism for increasing uniformity, said at the hearing.

Rep. Paul Kanjorski, D-Pa., ranking minority member of the subcommittee, used the hearing to drum up support for an optional federal charter, or OFC, especially for life insurance companies.

An OFC system could give insurers a chance to choose between state regulation and federal regulation.

“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.

“The consensus for creating such a charter continues to grow,” Kanjorski said. “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.”

Although the 5 former commissioners who testified all agreed on the need for some form of federal action, Diane Koken, Pennsylvania commissioner and president of the NAIC, 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,” Koken said.

“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.

Koken argued that past efforts to preempt state insurance regulatory authority, such as efforts to give the federal government control over the National Flood Insurance Program and the Employee Retirement Income Security Act, have hurt lawmakers’ constituents.

“Marketing life insurance is an area where we agree with industry that greater uniformity is needed,” Koken said. “Where appropriate, NAIC and the states are working to achieve full regulatory uniformity to benefit both consumers and insurance providers.”

Koken talked about NAIC efforts to increase uniformity by developing an interstate regulatory compact.

Koken said the number of states in the in the compact will soon grow to 17 and that those states represent about 23% of U.S. insurance premium volume. She estimated 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 7 to 10 years to get them from the planning stage to becoming operational.”

Covington and Mike Pickens of Arkansas, a former NAIC president, disagreed with Koken’s comments about preemption.

Covington said gives states an SMART opportunity to maintain a state based regulatory system with needed reforms.

“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,” Covington said.

Pickens said he is a strong supporter of state insurance regulation and is opposed to federal preemption of state insurance laws.

“But, significantly, preemption need never occur under the SMART proposal,” Pickens said. “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.”

Greg Serio, former New York insurance commissioner, sought to bridge the gap between the NAIC and the committee by urging 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.

Serio said 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, just as national self-regulatory mechanisms in the securities industry have helped state securities regulators.

Organizations such as the Insurance Marketplace Standards Association, Washington, “have shown that self-regulatory bodies can thrive in insurance, and even achieve regulatory efficiencies for its companies,” Serio said.


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