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Republican Questions Constitutionality of Insurance Regulatory System

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If supporters of the state-based insurance regulatory keep going after the Federal Insurance Office, critics of that system that could go after the National Association of Insurance Commissioners (NAIC).

Rep. Ed Royce, R-Calif., a longtime critic of the NAIC, raised the possibility of an attack on the NAIC’s efforts to coordinate state insurance regulation Tuesday, during a hearing in Washington organized by the House Financial Services Committee’s housing and insurance subcommittee.

“States cannot uniformly act when there’s a crisis,” Royce said. “That’s just a practical reality here.”

(Related: FIO Modernization Report: It’s Out, But Where Is It Going?)

When the NAIC, a private group for state insurance regulators, has tried to make up for its lack of legal authority to coordinate state regulatory efforts, it has filled the void using mechanisms that are not constitutional, Royce said.

“How could a private corporation have evolved into being able to effectively dictate nearly the entire insurance regulatory structure in the United States?” Royce asked.

He objected to NAIC insurance regulatory agency accreditation standards that encourage states to incorporate updates to some NAIC standards automatically, “by reference,” rather than putting the update-related changes through the usual legislative approval process.

Royce, the third highest-ranking Republican on the housing and insurance subcommittee, said he would like to see the House Financial Services Committee hold future meetings on that issue.

Royce has been critical of the NAIC for years, without attracting much visible support for that position. It’s possible that the shift toward populism among House Republicans could weaken his position, by increasing support for the idea of state-based insurance regulation. But the shift toward populism could also increase interest in scrutiny of existing financial services regulatory strategies.

The housing and insurance subcommittee has posted a video recording of the hearing, and copies of written versions of the witnesses’ testimony, here.


The NAIC is a Kansas City-based group for state insurance regulators that brings state regulators together in efforts to develop models for insurance laws and regulations. It also develops models for handbooks and other documents that can help insurance regulators do their jobs, and it compiles insurance sector data.

The federal McCarran-Ferguson Act, a 1945 law, gives states jurisdiction over the business of insurance, except in cases in which Congress has actively decided to give the federal government over those matters.

A 2010 law, the Dodd-Frank Act, created the Federal Insurance Office, an arm of the U.S. Treasury Department that’s supposed to advise the federal government on the state of U.S. insurance markets and insurance regulation, warn the federal government of possible sources of insurance-related threats to the stability of the financial system, and represent the U.S. insurance sector in international negotiations.

Two Federal Insurance Office Bills

The House Financial Services housing and insurance subcommittee set up the hearing mainly to promote two federal insurance bills: H.R. 3762, the “International Insurance Standards Act of 2017″ bill, and H.R. 3861, the “Federal Insurance Office Reform Act of 2017″ bill.

Both bills were introduced by Rep. Sean Duffy, R-Wis., in September.

Both bills have a Democratic cosponsor: Rep. Denny Heck, D-Wash.

Katharine Wade (Photo: House Financial Services)

Katharine Wade (Photo: House Financial Services)

H.R. 3762 would require the Federal Insurance Office to coordinate with state insurance regulators when conducting international negotiations, and to consult with state insurance regulators and Congress before entering into any international insurance agreements.

H.R. 3861 would move the Federal Insurance Office into the Office of International Affairs at the Treasury Department, limit the office to having just five employees, and require the office to “achieve consensus with the states” when negotiating international agreements.

Katharine Wade, the Connecticut insurance commissioner, said the bills are necessary because, during the administration of former President Barack Obama, the Federal Insurance Office almost completely shut out state insurance regulators when it was negotiating a “covered agreement” between the United States and European Union insurance regulators.

The agreement deals with how regulators oversee multinational insurance groups and reinsurers.

U.S. life insurers, U.S. life insurance groups, and U.S. insurers of all kinds that do business overseas have generally supported the agreement, arguing that it will help them continue to do business in the European Union roughly as if they were EU-based insurers, without having to meet expensive new requirements.

The NAIC, state insurance regulators at the National Conference of Insurance Legislators, and the National Association of Mutual Insurance Companies, have blasted the agreement, arguing that it reduces a state insurance regulator’s ability to monitor, or shut out, high-risk EU insurance groups and reinsurers.

President Donald Trump signed the agreement in September. His administration has tried to respond to criticisms of the agreement by adding interpretations addressing the criticisms.

Cold Shoulder

Wade said the NAIC is supporting H.R. 3762 and H.R. 3861 partly because, under Obama, the Federal Insurance Office made no effort at all to let state regulators play a meaningful role in shape the covered agreement negotiations with the European Union.

On a few state insurance regulators were allowed to participate, they were not allowed to share information with or get feedback from colleagues, Wade said.

Rick Means, president of Shelter Insurance Company, a property-casualty insurer, said the Federal Insurance Office has sometimes acted in ways that oppose the interests of U.S. state insurance regulators, and of the public.

The office, for example, voted to close most meetings of the International Association of Insurance Supervisors to the public, Means side. International Role

Daniel Schwarcz, a University of Minnesota law professor, said he believes that the state-based insurance regulatory system does an excellent job on many issues.

“But, if we’re dealing with the health of the financial system, that needs to be regulated at the federal level,” Schwarcz said. “It doesn’t make sense to have states protecting our broader financial system.”

Schwarcz said Congress also has to make sure the Federal Insurance Office has the people and flexibility to do a good job of representing the United States in international negotiations.

He suggested that one concern about H.R. 3861, the Federal Insurance Office Reform Act bill, is the possibility that the requirement that the office obtain a “consensus view” from state insurance regulators might mean that the office could act only when states were in unanimous support of a particular position.

Schwarcz also warned against any efforts to wall off the U.S. system from international insurance regulatory efforts.

“It’s arrogant for us to say, ‘Look, this is the way it’s going to be, and we’re just to ignore you if you want to do it differently,’” Schwarcz said.

Eventually, Schwarcz said, if the United States stays out of international standards negotiations, it may find itself having no practical choice but to adopt standards that it played no role in crafting.

—-Read Royce Defends FIO, Questions NAIC’s Credibility on ThinkAdvisor.

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