When legislation enabling an optional federal charter for insurance companies was introduced in the Senate a few weeks ago, the National Association of Insurance Commissioners put forth the interstate compact it has developed as one way of showing the effectiveness of state regulation.
The Interstate Insurance Product Regulation Compact needs 26 states to sign on before it becomes an operating entity and as of April 14, the count stands at 23 with Oklahoma’s participation.
Sometime as early as this spring it is anticipated that enough states will sign on and the compact that will allow life insurers to file products in a single place will become a reality.
Life insurers have been pressing for a single point of filing for more than six years since a precursor of the compact, the Coordinated Advertising Rate and Form Review Authority, was tested and stalled.
But, the interstate compact is having better luck. In the last month alone three states have signed on. It is endorsed by life insurers as a way to speed up product filings, cut costs and increase competitiveness. It’s also pointed to as an example of why state insurance regulation works, according to interviews with National Underwriter.
However, one NAIC funded consumer advocate says the compact, as it stands now, will hurt consumers and deny them protections they have under the current product approval system with state insurance departments.
Both CARFRA, a speed-to-market effort of 10 states that offered a single point of filing but did not create uniform standards, and the compact are projects of the NAIC, Kansas City, Mo.
The compact covers four insurance products: life, disability, annuities and long term care. Products filed with the compact will be governed by standards first adopted by the NAIC and then by the compact commission. To date, 39 have been adopted by the NAIC.
Companies will still have the option of filing with individual states if products are not going to be sold nationally.
The compact should be operational in the first quarter of 2007, although it possibly could be up and running by year-end, according to Alessandro Iuppa, NAIC president and Maine insurance superintendent.
The NAIC will provide a $500,000 grant to help the compact start operations that will be housed in NAIC offices in Washington, Iuppa says. The current System for Electronic Rate and Form Filing will be used, he adds. (SERFF is an electronic filing system that allows companies to submit filings with state insurance regulators. The number of filings jumped from 3,694 in 2001 to 183,362 in 2005.)
The compact will bring benefits to companies and as a whole make the industry more competitive with other financial services industries, Iuppa says. Increased competitiveness will be possible because of the shorter product filing time, which he anticipates will ultimately be a lot less than one or two months. Part of the reason, Iuppa continues, is because it will be a one-stop process and it will be filed electronically. “I envision an all-electronic system,” he says.
Once the initial 26 states have signed on and the compact becomes operational, other states will also join, Iuppa believes.
“In 2002, when we said we would work on the compact, there was a huge amount of skepticism,” recalls Terri Vaughan, currently a professor at Drake University, Des Moines, Iowa, and the initiator of the compact project during her tenure as NAIC president and Iowa insurance commissioner.
Vaughan recounts testifying before Rep. Richard Baker, R-La., chair of the subcommittee on capital markets, insurance and government sponsored enterprises. There was some doubt as to whether a compact would be successful, she says.
The fact that the compact is so close to becoming operational is a “signal that state regulators are willing to make changes” in order to make regulation more efficient, she says.
Regulators in other areas of the financial services industry told her they had considered a compact but did not pursue the idea because they did not think it could be done, Vaughan says.
When insurance regulators at the NAIC decided to pursue a compact, other options such as going to the federal government and suggesting national standards, creating a system state by state, and facing potential deviations among states also were considered, she says.
But, Vaughan notes, it was the deviations among states that had already caused the CARFRA effort to stall and not be used by companies.
Vaughan says she is confident the compact will be used but adds that there were “periods of questioning” when considerable opposition arose from outside the ranks of the NAIC.
At one point as the compact wended through the NAIC process, groups including the National Association of Attorneys General, Washington, and consumer advocates raised concerns about how the compact would work.
Birny Birnbaum, an NAIC funded consumer advocate and executive director of the Center for Economic Justice, Austin, Texas, says he still has concerns. During the development of a model creating the compact and the creation of the compact’s bylaws, he says consumer representatives urged regulators to create a greater role for consumers. But “public accountability has not only been ignored, it has been denied,” Birnbaum says. This is “more than just a mechanical filing process,” he adds.
Birnbaum says that while there is a consumer committee, there is no funding for consumer representatives, which makes it difficult for them to participate.
Without the ability to review filings, it is impossible for consumers or consumer representatives to make sure that products being approved are consumer friendly, Birnbaum says. He challenges what he says are industry assertions that the filings should be kept confidential because they include trade secrets.
And consumer concerns will be more difficult to advance if they cannot be expressed during the actual commission review, he notes.
In many cases, he says, consumers would be better off with the way the system works now through state insurance departments.
Patricia Parachini, a vice president with the American Council of Life Insurers, Washington, disagrees, noting the compact will make it easier to get innovative products to consumers and will not remove a state’s right to retain authority over market conduct issues or oversee how the product is sold.
An insurance department will simply be “outsourcing the form filing approval to this insurance body,” she explains.
Miriam Krol, an ACLI senior director, notes that consumers will be able to ask for a review of a compact commission decision.
“Everyone sees the need for the compact,” says Parachini, who notes the efforts of the NAIC, the National Conference of Insurance Legislators, Troy, N.Y., and the National Conference of State Legislatures, Denver. Of efforts at the state level, she says, “it was not that much of an uphill battle,” noting that the requisite number of states have signed on in two years in what the Council of State Governments says is normally a five- to seven-year process.
“Legislators do see the need for uniformity,” Parachini says.
Efforts will continue to add larger states to the compact. Pennsylvania and Texas have signed on to the compact, and legislation is being considered in Florida, New York, Massachusetts and Ohio, she says. ACLI will also work to add California to the number of compact states, although she notes it has not been engaged in the process at NAIC.
ACLI’s Krol has been participating in work on the compact standards at the NAIC for over three years and says the process is well thought out, has involved compromise and has not been ‘a race to the bottom’ as some had predicted it would.
The standards are broad enough to allow for product innovation, according to Krol. “The standards are not concrete. They are meant to be dynamic.”
For instance, she says the equity index products will probably be taken under consideration this year.
If an entirely new product separate from the four product categories were to emerge, then legislation in the states would have to be amended to reflect that, Parachini says. But Krol adds that most new filings would be new features added to a product that currently falls within the four product categories.
She adds that SERFF will probably be the IT platform for the compact, and it is one that will serve the compact well because about 1,200 to 1,300 companies currently use SERFF as well as 50 state insurance departments.
Initially, the product approval time will be about 90 days, but ultimately, it could be less than 30 days, she continues.
Companies that want to participate in the compact, according to Parachini, should be looking at the standards and should be preparing products that meet those standards in anticipation of the compact becoming operational in a short time.
George Coleman, a vice president of internal and external government affairs with Prudential Financial, Newark, N.J., says the compact is very important to companies, including Prudential, because it provides a single place to file a product and will significantly cut down on the time it takes to get a product approved. In a few cases, the approval process can take up to a year and a half, he continues.
Life insurers’ competition does not face the same 50-state regulatory approval process, he adds. As standards continue to be finalized, Coleman says, it will be important that they represent the view of all states and not just the requirements of one or two states.
Prudential and other companies have long sought more uniform product filing procedures. Coleman recalls its product filing with the compact’s predecessor, the CARFRA project. He calls it a “heroic effort” on the part of regulators but adds that it was also an amalgam of different state requirements.