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Do NAIC Accreditation Standards Violate Anti-Trust Law?

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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.

At stake here are wider implications. When promulgated as accreditation standards, laws like risk-based capital, fronting, credit for reinsurance, and the NAIC’s Non-Admitted Insurers Act can determine who and under what conditions insurers and reinsurers will do business in the U.S. The standards are promulgated by a private association operating without the public accountability or due process standards to which state legislatures and Congress are subject, and with seemingly no restriction on potentially illegal collusive activity.

Moreover, the NAIC accreditation program profoundly affects state legislative processes; the staffing and regulatory conduct of insurance departments; the costs and commercial conduct of domestic insurers; access of insurance consumers to alternative insurance facilities and alien insurers; and ultimately the cost and availability of insurance products. Yet this tremendous influence is exercised by a private trade association composed of commissioners whose average tenure in office is less than three years and whose operation is often dominated by staff and a few officials who remain in office longer than other commissioners.

The sanction component of the NAIC accreditation program mandating the non-acceptance by accredited states of examinations performed by non-accredited domiciles, places intended hardship on all of a non-accredited state’s insurers, who are subject to duplicative and expensive examinations. Such a refusal to accept an unaccredited state’s examinations may have nothing to do with the integrity of a non-domiciliary state examination of that insurer; thus for example if a captive domicile loses its NAIC accreditation because of how it regulates risk retention groups, all that state’s licensed insurers, whether or not RRG’s, would face the concerted refusal of accredited members to accept that state’s examinations, even if the non-accredited state used accreditation standards to examine traditional insurers. This undoubtedly constitutes a boycott as defined in the U.S. Supreme Court decision of Hartford Fire Insurance Company vs. California. That the NAIC is not an entity with anti-trust immunity was established in Preferred Mutual Risk Retention Group vs. Cuomo.

Thus, you have the NAIC, a private trade association, leading a boycott sanctioned accreditation program based on required enactment of model laws and procedures with none of the procedural safeguards imposed on state or federal legislatures or agencies, and whose members act as exclusive judge and jury as to which states become accredited and which do not. This is not a sound basis for public regulation.

All this was summarized by then-Assistant New York State Senate Majority Leader, Guy Velella in a letter stating that the NAIC “is a private association of state insurance commissioners which has an independent staff of over 300 individuals who develop model legislation to regulate all aspects of the insurance market. Once model legislation is developed and approved by the NAIC Board behind closed doors, this organization then requires each state to adopt a law to implement the ‘suggested’ change. Should a state refuse to adopt a ‘suggested’ change, the NAIC and its member states can impose sanctions to adversely affect that state’s domestic insurance industry and market until the ‘suggested’ change is implemented. As a New York State Senator, I resent the fact that important policies concerning the regulation of the insurance industry are being set by a private board that is not open to the public, elected by no one, and not subject to public disclosure.”

“The NAIC is a private organization that has, in my opinion, operated in a collusive manner, restrained trade and commerce among states in the insurance industry. Further, by its activities, it has apparently substantially lessened competition and by its directives to state governments and insurance companies tended to create a controlled market or monopoly situation in the insurance market. I believe the NAIC’s actions to establish a controlled and cohesive market are in direct violation of the Sherman Anti-Trust Act and Clayton Anti-Trust Act.”

“Members of the insurance industry and general public should not have their ability to communicate to regulators compromised by vulnerability to anti-trust prosecution should the NAIC accreditation program be found to be not to be anti-trust compliant, nor should state legislators be frozen out of a process whereby a private trade association essentially preempts a legislator’s freedom of choice lest refusal to enact accreditation-based standards could severely disadvantage the licensed insurers of the legislator’s state.”

An accreditation program can promulgate quality regulation without engaging in anti-trust violation or freezing out state legislators. It is vital that the Federal Office of Insurance Regulation forcefully engage the NAIC to undertake much needed structural reform of its accreditation program to comply, at a minimum, with state and federal anti-trust law.

Jon Harkavy is vice president & general counsel of Risk Services, LLC. The views expressed in this article are those of the author and not necessarily those of Risk Services.


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