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Regulation and Compliance > State Regulation

State insurance concerns bubble up to federal level

By Elizabeth D. Festa

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Federal regulators showed they are paying attention at the state level even as state regulators want to be heard on the international level. 

Eighteen state insurance commissioners — the executive layer of the membership of the  National Association of Insurance Commissioners (NAIC) – plus its CEO, former Sen. Ben Nelson, met with Treasury Secretary Jacob Lew this morning with the goal of working together to modernize the system of insurance regulation and getting the states’ voice heard internationally.

Lew stressed the role of Treasury’s Federal Insurance Office (FIO) in carrying out what he termed a hybrid model for insurance regulation.

According to a Treasury Department summary, the group discussed FIO and aspects of its recently issued Modernization Report.

The meeting grew out of a smaller NAIC leadership meeting with President Obama on the Patient Protection and Affordable Care Act’s rollout issues, to which the state regulators added flood insurance issues in states like Louisiana and the frustrations with the Federal Insurance Office. 

Lew, according to a Treasury statement, said it was important to have an insurance framework that safeguards the financial system and Treasury’s interest in identifying areas for agreement and common objectives. 

Florida Insurance Commissioner and NAIC past President Kevin McCarty said the meeting went “very well” and Lew was supportive of state-based regulation. McCarty said it was the start of a good relationship with Treasury. 

At the meeting, Lew supported the international role of FIO, as it is authorized by statute to coordinate federal efforts and develop federal policy on prudential aspects of international insurance matters, including representing the United States, as appropriate, in the International Association of Insurance Supervisors (IAIS) and assisting the secretary in negotiating covered agreements.

Lew also discussed Treasury  fostering “a race to the top” internationally and underscored the U.S. government’s continued focus on higher global standards, a clear reference to the global capital standard handed down to global insurance supervisors by the G-20‘s Financial Stability Board (FSB).

The NAIC raised the issue of a lack of state regulatory membership on the FSB, which is handing down key policy mandates to the IAIS and banking supervisory bodies. Treasury, along with the SEC and the Federal Reserve, are the only U.S. members of the FSB. 

The NAIC was expected to try to persuade Treasury to include the state insurance regulators in the FSB dialogue given that matters that concern insurance regulation continue to percolate at that high level. However, this is not something Treasury can likely do unilaterally although it seemed the NAIC may expect it going forward from its statement. 

“We are extremely pleased with the Secretary’s statement of strong support for the state-based regulatory system. The focus of the meeting was on significant international developments, including the ongoing EU/U.S. dialogue and Solvency II, the inclusion of state regulators in the work of the (FSB), and efforts to develop a global capital standard,” said Louisiana Insurance Commissioner and NAIC President Jim Donelon in a statement. 

Lew instead, according to the Treasury summary, emphasized that Treasury and state regulators should work together to modernize the system of insurance regulation and continue engagement around these issues.  Nelson agreed in his press statement, stating that NAIC looks forward to a continued dialogue on issues of mutual interest with the Treasury Department “that strengthens our state-based system of regulation.”

One of these areas where Treasury has deferred to the state regulatory side is on group supervision, according to Pennsylvania Insurance Commissioner Michael Consedine, NAIC secretary-treasurer. Consedine spoke up during the NAIC Financial Condition Committee meeting later that day. 

Consedine used that element to address an amendment to the NAIC Model Holding Company Act to encompass this and other issues coming up on the international supervisory front.

At FIO Director Michael McRaith’s suggestion, the group agreed to communicate on a regularly-scheduled basis in the future.

Rhode Island Insurance and Banking Superintendent Joe Torti III noted during the Financial Condition Committee meeting that corporate governance  of insurance companies and use of captive insurers were singled out in the FIO report and that the NAIC intends to continue to address those issues in the coming year. 

On captives, the Treasury’s Office of Financial Research (OFR) today, in its annual report on threats to stability, also singled out captives with regard to major financial data gaps. 

OFR noted that state insurance regulators, through the NAIC, have been exploring options for increasing transparency in the area.

“Although there are several ways to achieve this, one option could be to require captive insurers to submit public financial filings,” the OFR report stated. 

Torti told National Underwriter he has always been for  disclosure, and that it is in the recommendations of the NAIC white paper  he helped usher in. The recommendations are before the Principles-Based Reserving Implementation (PBR) Task Force now, which Torti chairs. 

“Disclosure is essential, but is not enough to win the day, ” said New York Department of Financial Services Superintendent Ben Lawsky about the OFR report.

New York is still for a moratorium on these types of transactions, Lawsky affirmed, and a deputy noted companies can expect greater disclosure requirements for companies doing business in the state in the coming year.

On corporate governance, there is also movement of sorts at the state level.  However, corproate governance of the NAIC was the focus at this NAIC meeting.

Connecticut Insurance Commissioner Tom Leonardi, who attended the Lew meeting, stressed in a letter Dec. 11 and in an address to the Executive Committee Dec. 16, the day before the Lew meeting, that corporate governance of the NAIC is in a sad state of repair and urgently needs an outside consultancy review.

Although the tone of the letter floored many, commissioners, such as Merle Scheiber of South Dakota and others, expressed concern about not addressing the need for corporate governance oversight and sticking it in a committee where something may not happen. Others pointed out that corporate governance procedures hold that the committee process is the right path. 

“There is a lack of understanding of the role and responsibilities of the NAIC as a fiduciary,” Leonardi wrote in his letter. “Instead of doing the right thing, the culture of the leadership is to first ask: ‘Do I have the votes,’ ” he charged.

“The future of state-based regulation is on the line and the stakes have never been higher,” Leonardi wrote. “We cannot choose our fellow commissioners or always compensate for each other’s weaknesses, but we can make sure that our organization is structured and governed in a way to minimize the negative consequences of those realities.”

At the Financial Condition Committee today, Leonardi criticized the vigorous and rather edgy procedural debate occurring over a health insurance accounting principle revision by noting, “We are playing right into our enemy’s hands and saying to these guys, we don’t know what we’re doing.”

The “enemy” was not identified but likely represents the threats to state regulation seen at the federal and international levels. 

State regulators were arguing about the protocol of voting on or adopting something rejected in a lower committee related to the Affordable Care Act’s guaranty fund and other assessments.

Calendar year accounting for the fees was at issue. “They are collecting money that doesn’t belong to them, Steve Johnson of Pennsylvania said of the fees the health insurers collect. They should record it as a liability.” 

“This is surplus relief for the health industry disguised as accounting,” said the regulator from Virginia.

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