NAIC maintains steadfast opposition, but former commissionerscut Congress some slack

Washington

The National Association of Insurance Commissioners last weekcontinued its policy of steadfast opposition to federal legislationimposing “standards” on state regulators, but five formercommissioners took a more conciliatory approach in testimony beforeCongress, with several warning that some mechanism for establishinguniformity in state regulation is imperative.

Several of the former regulators also took issue with the NAIC'sdoomsday analysis that the proposed SMART Act incorporates“unacceptable levels of federal preemption that would create bothlegal and practical problems for the insurance industry and itscustomers.” In fact, said former Ohio Insurance Commissioner LeeCovington, preemption provisions in the proposed legislation areonly a “last resort.”

Indeed, several former regulators, in their testimony before theCapital Markets Subcommittee of the House Financial ServicesCommittee last week, surprisingly voiced strong support for ratederegulation–the most controversial issue being dealt with in theState Modernization and Regulatory Transparency Act now beingdrafted by the committee.

Strong support for rate deregulation as a priority was voiced byformer Commissioner Ed Muhl, who served in both New York andMaryland, and Nat Shapo, former Illinois insurancecommissioner.

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

Despite the apparent consensus of the five former commissionersfor some form of federal action, Diane Koken, Pennsylvaniacommissioner and president of the NAIC, was firm in her oppositionto the bill.

“The states believe it is constructive to point out basicconstitutional, legal and operational problems that would underminethe SMART Act's stated purposes,” she said. She added that stateinsurance regulators are “public servants representing the samepeople who are your congressional constituents”–clearly implyingthat the regulators would seek to pressure committee members intheir own districts if they continue to proceed with the bill.

“The draft SMART Act incorporates unacceptable levels of federalpreemption that would create both legal and practical problems forthe insurance industry and its customers,” Ms. Koken testified. “Athorough analysis of the SMART Act by 117 insurance regulatoryexperts from your home states identifies concerns where the billwould preempt many important state laws that protect consumers fromunfair 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 importantstate services and protections, as has already been proven inexisting federal programs, such as [the Federal EmergencyManagement Agency] in its administration of the National FloodInsurance 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 MikePickens of Arkansas–a former NAIC president–disagreed.

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

Mr. Pickens called himself “a strong supporter of stateinsurance regulation. I also am opposed to federal preemption ofstate insurance laws.” However, he added, “preemption need neveroccur under the SMART proposal.”

He explained that “SMART does not use 'preemption'–but ratherthe 'threat of preemption'–to help state regulators overcome thepolitical and other obstacles that exist in some states so thatthey can in fact implement, enforce and continue to regulate theirpromised reforms.”

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

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

“Congress will also understand that it stands in the bestposition when it works with the states in a cooperative venture toimprove the state-based system of regulation rather thansubstituting a new federal government regulatory body for aregulatory system that already works quite well and is poised to beeven better with greater uniformity of policy and process,” headded.

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

He added that “it was not an easy transition, but once thecompetitive forces came into play, and the interests of theconsumers and the industry were in balance, the system worked verywell. I would urge a close review of the benefits of such a ratingmechanism.”

Mr. Shapo said rate deregulation should be a priority for thecommittee in establishing federal standards. “I have not been anadvocate of federal chartering of insurers,” he testified. “Mystrong preference has always been for retaining the primacy ofstate regulation, if feasible.

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

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

“The draft SMART Act incorporates unacceptable levels of federalpreemption that would create both legal and practical problems forthe insurance industry and its customers.”

Diane Koken

NAIC President

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

Greg Serio

Former N.Y. Insurance Superintendent