State legislators have slammed a National Association of Insurance Commissioners proposal for regulatory reform, charging it would permit federal authorities to take over their insurance lawmaking function.

The draft proposal, put up for discussion during a session of the NAIC 2009 Winter National Meeting here, was criticized as something that could supplant the authority of state legislatures to regulate insurance.

As explained by Illinois Insurance Director Michael McRaith, the draft would call for an act of Congress that would authorize states to form a body called the National Insurance Supervisory Commission (NISC). According to the draft, the commission members can consist only of "the primary insurance regulator of each state or territory."

Mr. McRaith said the states would then join the commission through legislative action, and through the commission, states would develop uniform regulatory standards in certain subject matters. States would then be responsible for implementing and enforcing the standards.

However, Mr. McRaith said if a state fails to comply with the national standard, there would be federal preemption through a federal insurance office.

In that case, the draft explains, a newly created federal Office of Insurance Information or Office of National Insurance "will receive authority to promulgate rules based on the commission standards." Those rules would preempt any conflicting state laws or regulations, the draft notes.

NAIC President Roger Sevigny said his association developed this draft because it wanted to be proactive rather than reactive regarding regulatory modernization. With Congress showing interest in insurance regulation, Mr. Sevigny, who is New Hampshire's insurance commissioner, said the proposal allows the states to remain the functional regulator of insurance.

State legislators, however, said they are not happy with the proposal as it stands.

Kentucky State Rep. Bob Damron, D-Nicholasville, said there is no solid, bi-partisan commitment from Congress to regulate insurance, and that the NAIC should join with other state-based groups in opposing federal intervention altogether rather than seeking a partnership with the feds through a new NISC.

"You cannot let the federal government get involved in this process and then expect them to let you run the show," he told regulators. He also said the NAIC risks a rebellion among state legislators by advocating a plan that takes away their legislative authority.

Rhode Island State Rep. Brian Patrick Kennedy, D-Hopkinton, speaking on behalf of the National Conference of State Legislators, furthered that point by stating that the proposal asks legislatures to approve NISC standards, but then once approved, the legislatures could not exercise their "day-to-day legislative clarity" over the lines of insurance under jurisdiction of the commission.

He also criticized the federal preemption provision. "Advocating for federal preemption of sovereign states that choose not to participate is unacceptable, and NCSL will oppose it," he warned.

NAIC members are seeking an equal role for themselves with commissioners at the federal level, but they are doing it "at the direct expense of state legislators," said Mr. Kennedy.

Insurance industry representatives expressed support for the goal of regulatory modernization and uniformity but took issue with parts of the NISC proposal.

NISC should not be able to implement national standards that have not first been adopted by a certain number of states, according to Deirdre Manna, vice president of industry and regulatory affairs at the Property Casualty Insurers Association of America.

Bob Detlefsen, vice president of public policy at the National Association of Mutual Insurance Companies, echoing Rep. Damron's concerns, said the idea that the NAIC could imbed within the federal government a commission of regulators, and have the federal insurance office do the bidding of the commission, "seems a little unrealistic."

Mr. McRaith closed the session by questioning whether some of the loudest critics have read through the draft.

Earlier in the meeting, he said after reading letters received in response to the draft, "clearly there is either a factual or conceptual misunderstanding of the proposal as framed."

Special Reports /

NAIC Regulatory Reform Proposal Would Preempt States' Rights, Critics Say

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