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Regulation and Compliance > State Regulation

Getting Clarity on the NAIC

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In the wake of the seismic 2010 mid-term elections, market-watchers of the insurance regulatory landscape will be keeping tabs as much on developments in Kansas City and New York as they will in Washington. For it is in all three cities that the National Association of Insurance Commissioners does business.

Carriers, broker-dealers, agents and advisors in the multi-billion dollar life insurance arena would be well-advised to take notice. The NAIC, an organization composed of the chief insurance regulatory officials of the 50 states, the District of Columbia and five U.S. territories, has been a chief catalyst behind sweeping regulatory changes impacting the industry.

See also these “Inside the NAIC” feature articles:

Follow the Money: Bankrolling the NAIC

Who’s Watching the NAIC Henhouse?

A Flawed but Diligent Watchdog

Schiff Speaks Out

Local Politics

Through its development of model laws and rules for the jurisdictions it oversees, the NAIC, say experts, is helping to guide state insurance regulation touching on such diverse areas as product suitability, financial regulation, healthcare costs and market conduct. The NAIC’s influence extends also to climate change, consumer education, solvency modernization and technologies for processing forms and filing fees.

To carry out its overriding objectives–protecting consumers and maintaining the financial stability of the insurance industry–the NAIC leverages formidable resources: a $70 million budget; a 400+ employee staff that provides financial, actuarial, legal, market conduct economic expertise; and extensive systems linking the nation’s insurance departments.

“The NAIC tackles an immense number of issues–many not of their own making,” says William Woodyward III, an attorney at Mitchell, Williams, Selig, Gates & Woodyward PLLC, Little Rock, Ark. “And, by and large, I think they’re doing a pretty good job of it.”

That view is representative of the NAIC-watchers interviewed by NU for this article: all former insurance commissioners who currently represent different sectors of the industry before the NAIC. But while they commend the organization’s growing clout and effectiveness, these now independent observers also see an imperfect process by which the association arrives at model legislation. Topping the list of complaints: the process is not sufficiently open.

Smoked Glass

Among the critics is Jim Atterholt, the chair of the Indiana Utility Regulatory Commission, Indianapolis, and a former Indiana insurance commissioner. While acknowledging that transparency was “getting better” during the close of his term, Atterholt says that too many of the NAIC’s past meetings were unnecessarily secretive.

“Many industry trade associations were extremely frustrated by this,” he says. “They would receive little or no notice of meetings, be closed off from certain stages, not be allowed onto certain conference calls or be denied access to key documents. When you alienate constituency groups through such secrecy, getting bills passed at the state level becomes more difficult.”

A recent focus of critics was the NAIC Executive Committee’s adoption on August 17 of the Medical Loss Ratio (MLR) Blanks Proposal to implement a provision of the Patient Protection and Affordable Care Act. Arc Monroe, who like Woodyard is an attorney at Mitchell Williams and a former Arkansas insurance commissioner, says that industry and consumer reps were allowed an adequate hearing on proposed MLR ratios early during the public comment period but were not given access during critical concluding meetings.

“When you’re talking about an issue that affects an entire industry–in this case how to calculate medical loss ratio–then industry players should be involved in the process all the way through. We were cut out at the conclusion and only heard about what was going on second-hand.”

In a written response to NU, NAIC President-elect and Iowa Commissioner Susan Voss disputes this charge. The model law development process, she says, is “open and transparent” and allows for interested parties to offer input during the development and approval phases, ensuring a “thorough and open debate.”

Underscoring her point, she cites statistics attesting to the association’s inclusiveness in the health care reform debate: more than 280 open meetings and conference calls; 400-plus comments submitted by regulators, consumer advocates and interested parties; and 7,665 conference call participants.

“We understand that the final MLR regulation did not include everything interested parties wanted,” she says. “Criticizing the process is sometimes a predictable move when this happens.”

We are very proud of the work the NAIC and all of the members accomplished in adopting the final regulation,” she adds. “Throughout the process, we invited and welcomed input from the industry and consumers. We stand by the results.”

Still, even strong proponents of the process say there is room for improvement. Thomas Hampton, a former D.C. insurance commissioner and a senior advisor for the insurance regulatory practice at SNR Denton, Washington, says the NAIC should seek to limit company-specific discussions so as to make meetings more accessible. The NAIC could also polish information communicated to the public to make issues before the commissioners easier to follow.

Commenting on this criticism, NAIC’s Voss acknowledged that insurance regulation can be complex and technical and that “not all parties wishing to participate in the Model Law process have the same level of technical experience.”

“The NAIC allows access to the process, giving any interested party the opportunity to follow the development of a model and monitor on behalf of their constituents,” Voss adds. She notes also that call notices and drafts are posted on the NAIC website, and that Web-based viewing technology is used during drafting calls.

For Cathy Weatherford, a former NAIC CEO and current president and CEO of the Insured Retirement Institute, Washington, the NAIC could ensure more equitable outcomes by taking a more “holistic approach” to building model laws and regulations. She says an improved annuity suitability model, which Iowa and Wisconsin have so far adopted, could have been achieved if the NAIC had more thoroughly researched the model law’s impact on, and elicited greater input from, the various stakeholders.

Letting consumers have a say

Chief among them are consumers, whom Poolman says could be better represented at NAIC meetings. “There are more paid than unpaid consumer reps at meetings, many of whom represent the interests of a certain organization,” he says. “The most vocal consumers [attack] the NAIC because they think it’s their role to do so. More independent consumer reps are needed.” (Editor’s Note: For more on the NAIC lobbying process, see Trevor Thomas’ feature in this issue.)

The more that consumer and industry reps believe the NAIC has adequately taken into account their concerns on an issue, sources say, the greater the chance of securing an NAIC recommendation where it counts: in the 50 state legislatures that ultimately must enact NAIC proposals.

On this score, experts widely agree that the organization’s track record has improved markedly in recent years. Since the NAIC bifurcated its legislative process two years ago–giving priority to proposals that secure a two-thirds vote of the group’s Plenary and Executive Committee members; and classifying other measures as voluntary “advisories”–the organization has had greater success in securing the states’ adoption of model laws and regulations.

“By prioritizing model legislation, you increase your chances of success dramatically,” says Atterholt. “Conversely, the more model laws you suggest, the likelier it is that a legislature will depart from the NAIC’s intent through modifications and amendments.”

To help secure buy-ins earlier in the model law adoption process, sources say, the NAIC has enhanced communications with senators and representatives through the National Conference of State Legislatures and the National Conference of Insurance Legislators. NCOIL representatives also regularly attend NAIC meetings to offer input on draft proposals.

Herding Cats

Emblematic of the NAIC’s more notable successes in recent years is the Interstate Insurance Compact, which aims to improve speed-to-market conditions for life insurance, annuity, disability income and long-term care products by establishing a single point-of-filing for product review. The NAIC members, sources say, brought a laser-like focus to winning state legislatures’ approval of the compact, as the commissioners themselves lobbied their states on behalf of the effort.

“Universally embraced by the NAIC, the Interstate Compact was a wonderful, coordinated effort that had a huge policy impact,” says Atterholt. “The NAIC put a lot of resources behind the initiative. And the Compact thwarted a federal takeover of insurance regulation, which was a key motivator underpinning the push.”

To date, 36 states have adopted the Compact–the model law became operational in 2006 after 26 states signed on–and it’s now under consideration in several other states. Yet, as backers of the initiative concede, it would be unusual for the NAIC to achieve a 100% adoption rate among all 50 states, the District of Columbia and American territories (American Somoa, Guam, Puerto Rico, the U.S. Virgin Islands and the Northern Mariana Islands.)

That is, they say, due to the inherent difficultly of achieving uniformity in a state-based regulatory system that involves so many jurisdictions. The challenge is all the greater because of the often high turnover of key players. Among them: state legislators who have limited time to devote to NAIC prerogatives because they work part-time and/or are subject to term limits.

And then there are the insurance commissioners. Many of them, either because they failed to get reelected in the recent November elections or reappointed by their states’ governors, may not be returning to the NAIC in 2011. The hemorrhaging of expertise, as in past election years, is an ongoing concern.

Dealing with the Politics

(An NAIC spokesperson said at press time that the organization will have a still undetermined number of new members appointed by governors. Of the four commissioners who were up for election this year–those in California, Georgia and Oklahoma and Kansas–only the last will remain in office.)

“The insurance industry is regulated by people–the commissioners–who come and go almost yearly,” says George Dale, a senior public policy advisor at the law firm Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, Jackson, Miss., and a former Mississippi insurance commissioner. “That is a serious weakness because it can result in a loss of momentum on key initiatives.”

The loss of talent can be all the greater if voters and public officials to whom the insurance commissioners are accountable–individually and, under the NAIC umbrella, collectively–remove commissioners from office en masse because they’re perceived as acting contrary to their states’ interests. That threat is especially evident, says Atterholt, when the commissioners take positions on such politically charged issues as healthcare, climate change and federal regulation of the insurance industry.

That the NAIC accomplishes as much as it does, he adds, is testament to the “comity” among members who have multiple constituencies, are divided by political philosophy and party, and who bring to their positions widely varying levels of expertise. But Hampton says that one’s background in the insurance industry is not a reliable indicator of how effective a commissioner will be on joining the NAIC.

“You don’t have to be like me: someone who came from the field,” says Hampton. “This is a total misconception. Some of the best commissioners hail from other disciplines. The key to success is how much you’re willing to work at the process and be fair in taking into account various viewpoints when arriving at decisions.”

Perhaps. But some question whether the commissioners can be entirely fair and free of conflicts given the character of the NAIC–a not-for-profit organization composed of public officials that, when it deems necessary, will withhold information from the public. Additional possible conflicts of interest arise from how the NAIC generates revenue through fees, publications, subscriptions, state assessments and educational services from industry players that have a vested interest in the NAIC’s decisions. (Editor’s Note: For more on how the NAIC makes and spends its revenue, see Elizabeth Festa’s feature on p.16 of this issue.)

Others, however, see the revenue component as a non-issue.

“The insurance industry has to be expected to pay for good quality regulation,” says Monroe. “This is simply part of doing business.”

Adds Atterholt: “The NAIC has kept funding from distorting the process. It’s funded by member companies, but it would be unfair to say the companies control the process. The NAIC has done a pretty good job of putting a firewall between the two.”


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