Does the National Association of Insurance Commissioners – a private trade association - have the right to impose its will on elected state legislatures through accreditation standards written and implemented behind closed doors? This is a question that must be addressed by the new Federal Insurance Office as it prepares a report to Congress on how to improve insurance regulation in the United States.
Over the years, Congress and the Executive Branch have unofficially anointed the NAIC with a type of quasi-official, non-governmental organization status. The NAIC has used this to maximize its own authority and minimize its own accountability.
For instance, is the NAIC registered for federal lobbying purposes? Despite its frequent interaction as a private trade association with Congress and the Executive Branch, the answer is “No.” Are NAIC proceedings subject to the “fresh air” open meeting requirements imposed on state legislatures?
Not according to the NAIC, which chooses to operate under the mantle of a private trade association not subject to “fresh air” meeting requirements. The most egregious example of the NAIC exploiting its unregulated and unaccountable status is its accreditation regime that operates in seeming blatant violation of state and federal anti-trust law.
How did this happen? Under threat of federal insurance regulation, the NAIC developed a certification program based on standards that states were required to adopt. To “encourage” states to seek accreditation, the NAIC added a requirement that accredited states could not accept an examination report of an insurance company domiciled in a non-accredited state unless an examiner from an accredited state had participated in the exam and assisted in the preparation of the exam report.
Former NAIC President Earl Pomeroy stated, “We do not view these standards as voluntary… Rather, the state insurance departments have devised sanctions that are based on their legal power to impose additional regulatory requirements on companies based in non- complying states. As a result of these and other contemplated sanctions, being domiciled in a non- accredited state will increasingly become a liability inducing the states to meet the standards…”
The NAIC sanctions worked. Now, a state legislator can only reject or modify a bill which the NAIC deems an accreditation standard if he or she is willing to subject his or her state to retribution by the NAIC.
Moreover, the NAIC can impose standards that may not be relevant to how effectively the state regulates insurers domiciled there. For instance in a recent panel, a Delaware regulator asserted that Delaware’s highly developed jurisprudence in corporate governance is such that the NAIC should not be requiring the Delaware Department to implement its one-size-fits-all governance standards. Nonetheless, Delaware felt pressured to adopt these procedures lest its own licensed insurers be discriminated against by accredited states.
New York’s past de-accreditation highlights another potential abuse in the NAIC accreditation regime – the discretion to make a subjective determination of who is in compliance. Consider, for example, the divergent treatment of New York and Texas. Then New York State Senator Guy Velella made a principled decision not to hold insurance committee hearings on two model laws which the NAIC required as a condition for continuing accreditation. He publicly made known his opposition to NAIC usurpation of state legislative authority in a letter to the U.S. Attorney General. Result: New York lost its accreditation.
Texas failed to enact a model law that the NAIC promulgated as an accreditation standard. Then Texas Insurance Commissioner Robert Hunter pled the State’s case before a closed door Accreditation Committee meeting and assured the Committee of his intention to seek its enactment in the next legislative session. Result: Texas was found to be in “substantial compliance” and remained accredited.
Few if any other trade association accreditation programs operate under a structure where the members directly accredit themselves behind closed doors. Indeed, one of the basic principles of trade association antitrust law is that the decision of who gets accredited and what standards are applied should be made by an entity independent of the accrediting organization. The disparate treatment of Texas and New York points to the potential danger of an accreditation program with virtually no internal safeguards to preclude decisions based on factors unrelated to regulatory performance including potentially “mutual back-scratching” among regulators, the NAIC, and state insurance departments.