NAIC maintains steadfast opposition, but former commissioners cut Congress some slack

Washington

The National Association of Insurance Commissioners last week continued its policy of steadfast opposition to federal legislation imposing “standards” on state regulators, but five former commissioners took a more conciliatory approach in testimony before Congress, with several warning that some mechanism for establishing uniformity in state regulation is imperative.

Several of the former regulators also took issue with the NAIC's doomsday analysis that the proposed SMART Act incorporates “unacceptable levels of federal preemption that would create both legal and practical problems for the insurance industry and its customers.” In fact, said former Ohio Insurance Commissioner Lee Covington, preemption provisions in the proposed legislation are only a “last resort.”

Indeed, several former regulators, in their testimony before the Capital Markets Subcommittee of the House Financial Services Committee last week, surprisingly voiced strong support for rate deregulation–the most controversial issue being dealt with in the State Modernization and Regulatory Transparency Act now being drafted by the committee.

Strong support for rate deregulation as a priority was voiced by former Commissioner Ed Muhl, who served in both New York and Maryland, and Nat Shapo, former Illinois insurance commissioner.

Rate deregulation–a priority of the property-casualty insurance industry–is the primary issue dividing the committee's otherwise bipartisan negotiations on the bill, with Rep. Barney Frank, D-Mass., the ranking minority member, the strongest opponent on the committee to such a move.

Despite the apparent consensus of the five former commissioners for some form of federal action, Diane Koken, Pennsylvania commissioner and president of the NAIC, was firm in her opposition to the bill.

“The states believe it is constructive to point out basic constitutional, legal and operational problems that would undermine the SMART Act's stated purposes,” she said. She added that state insurance regulators are “public servants representing the same people who are your congressional constituents”–clearly implying that the regulators would seek to pressure committee members in their own districts if they continue to proceed with the bill.

“The draft SMART Act incorporates unacceptable levels of federal preemption that would create both legal and practical problems for the insurance industry and its customers,” Ms. Koken testified. “A thorough analysis of the SMART Act by 117 insurance regulatory experts from your home states identifies concerns where the bill would preempt many important state laws that protect consumers from unfair or discriminatory marketing, inadequate or excessive rates, and unsound products.”

She added that federal preemption of state insurance regulation “denies your Congressional constituents the benefits of important state services and protections, as has already been proven in existing federal programs, such as [the Federal Emergency Management Agency] in its administration of the National Flood Insurance Program and [the Employee Retirement Income Security Act] through its taking away state authority to assist your constituents [in regulating benefit plans].”

However, former Commissioners Lee Covington of Ohio and Mike Pickens of Arkansas–a former NAIC president–disagreed.

In his comments, Mr. Covington said that SMART “provides the opportunity for states to maintain a state-based regulatory system with needed reforms.” He added that “while some may object to the preemption provisions, which should only be used as a last resort, the question exists as to what other options policymakers have if the states cannot institute the agreed upon reform initiatives.”

Mr. Pickens called himself “a strong supporter of state insurance regulation. I also am opposed to federal preemption of state insurance laws.” However, he added, “preemption need never occur under the SMART proposal.”

He explained that “SMART does not use 'preemption'–but rather the 'threat of preemption'–to help state regulators overcome the political and other obstacles that exist in some states so that they can in fact implement, enforce and continue to regulate their promised reforms.”

In his comments, Greg Serio, former New York insurance superintendent, sought to bridge the gap between the NAIC and the committee by cautioning everyone to work together.

“Maintaining the long-term perspective of preserving the state-based system of insurance regulation–not simply because it has been the historical method of regulation, but because it is the system best suited to meet the demands of a changing world–will be all the motivation that regulators need to understand and embrace the give-and-take of the SMART deliberative process,” he said.

“Congress will also understand that it stands in the best position when it works with the states in a cooperative venture to improve the state-based system of regulation rather than substituting a new federal government regulatory body for a regulatory system that already works quite well and is poised to be even better with greater uniformity of policy and process,” he added.

In his testimony, Mr. Muhl said that “going from a prior approval to an open competition forum proved to me that competition is an effective regulator of rates, which allowed me to make better use of my limited staff resources and put them to use in the area of market conduct examinations and other sensitive areas.”

He added that “it was not an easy transition, but once the competitive forces came into play, and the interests of the consumers and the industry were in balance, the system worked very well. I would urge a close review of the benefits of such a rating mechanism.”

Mr. Shapo said rate deregulation should be a priority for the committee in establishing federal standards. “I have not been an advocate of federal chartering of insurers,” he testified. “My strong preference has always been for retaining the primacy of state regulation, if feasible.

However, he added, “I believe that the presence of price controls in the personal auto and homeowners' marketplace badly undermines this goal….That is why I feel so strongly and have spoken so bluntly about price controls today.”

Mr. Shapo said he believes state rate regulation is “presumptively unnecessary. It does not produce the results for which it is used today–affordability and availability of product. Instead, it restricts supply, distorts the market and harms consumers.”

“The draft SMART Act incorporates unacceptable levels of federal preemption that would create both legal and practical problems for the insurance industry and its customers.”

Diane Koken

NAIC President

“Maintaining the long-term perspective of preserving the state-based system of insurance regulation…will be all the motivation that regulators need to understand and embrace the give-and-take of the SMART deliberative process.”

Greg Serio

Former N.Y. Insurance Superintendent

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