The National Association of Insurance Commissioners has–at least for now–put on hold its National Insurance Supervisory Committee proposal, which would have seen regulators develop uniform standards with the threat of federal intervention for states that did not comply.

An insurance commissioner who spoke to state legislators earlier this month at a meeting of the National Conference of Insurance Legislators said the NAIC will explore alternative state-based regulatory modernization efforts while reserving its right to resurrect NISC, if necessary.

Regulators initially discussed NISC internally at the NAIC's June 2009 meeting in Minneapolis.

The proposal–obtained by National Underwriter–calls for Congress to authorize a commission made up of state regulators. This commission would develop uniform regulatory standards that would be implemented and enforced by the states.

States that are not members of the proposed commission–and which fail to take independent action on the commission's uniformity standards–would be subject to preemption by a federal Office of Insurance Information or Office of National Insurance.

State legislative representatives of both NCOIL and the National Conference of State Legislators rejected the proposal, balking because it would permit federal authorities to take over state legislators' lawmaking function.

At the NAIC's December 2009 Winter Meeting in San Francisco, Kentucky State Rep. Bob Damron, D-Nicholasville, warned regulators about allowing the federal government to get its regulatory foot in the door. "You cannot let the federal government get involved in this process and then expect them to let you run the show," he said, further warning that regulators could face a rebellion by state legislators for pursuing such a plan.

Rhode Island State Rep. Brian Patrick Kennedy, D-Hopkinton, promised to start work on a draft within the NCSL to oppose the NISC proposal. That same month, the NCSL's Communications, Financial Services and Interstate Commerce Committee unanimously voted to move forward on a working draft opposing NISC, with Rep. Kennedy stating a final resolution would likely be forthcoming this spring.

NCOIL officers also wrote a letter to the NAIC opposing NISC. At NCOIL's March meeting, Oklahoma Insurance Commissioner Kim Holland told legislators the NAIC would work with them on state-based solutions to uniformity while reserving the right to revisit NISC.

"[NISC] is an important tool," Commissioner Holland said, according to a transcript provided by NCOIL Executive Director Susan Nolan. "It will remain tabled. If it is needed, it will be resurrected–with, I hope, active involvement by this body, industry and others, as was contemplated originally with the NISC, but unfortunately got away from us due to circumstances beyond our control."

Legislators reacted favorably to Commissioner Holland's comments. Rep. Kennedy said he was "glad to hear that the NAIC will be looking specifically for input from interested parties–something that didn't take place when the NISC proposal was being developed."

Both Rep. Kennedy and Ohio State Senator Keith Faber, R-Celina, commended the NAIC for "stepping back" from the NISC proposal.

But Commissioner Holland told NU she would not characterize the NAIC's actions as "stepping back" from NISC as much as just putting it on hold. "The impetus [for NISC] was pressure–as a result of the financial downfall–that we felt from the federal government in terms of various proposals discussed to preempt state authority," she said.

The thinking behind NISC, she added, was that if a federal tool was to be forthcoming, state regulators wanted to drive that federal solution.

Now, Commissioner Holland noted, there is less pressure from the federal government as Congress becomes more aware that the insurance industry is more stable than other financial services sectors.

As a result, she said, regulators feel they need to spend an equal amount of time and energy on state-based solutions, with the knowledge that NISC can be pulled out and refined if needed. "It's there, and it's important to have that tool at our fingertips if there is serious pressure or threat of preemption," she said.

For now, Commissioner Holland said regulators want to get together with the industry and state legislators to explore alternative ways to achieve uniformity while still maintaining the flexibility that state regulation allows.

The NAIC has made attempts at uniformity before–the Interstate Insurance Product Regulation Commission currently has 36 member states, for example. But states maintain the authority to decide whether or not to sign on to the IIPRC.

Asked if regulators believe it is possible to achieve uniformity without the threat of federal preemption, Commissioner Holland said "that's the question we'll be posing."

She also said the term "uniformity" needs to be defined. "I think it means different things to different people," she explained. As she sees it, efforts at uniformity should be more process-driven than policy-driven, focusing on areas such as company licensing, filing, etc. Others, she noted, interpret uniformity on policy standards as the IIPRC does.

Regulators, the industry, legislators and others, according to Ms. Holland, first must come to an understanding on what is meant when "modernization" and "uniformity" are used interchangeably.

One group that will be watching the unfolding discussions carefully will be consumer representatives. Indeed, according to Birny Birnbaum–the executive director of Consumers for Economic Justice, who up until this year was also an NAIC-funded consumer advocate–consumer representatives will not be upset if NISC, as it was proposed, falls by the wayside.

"Generally, consumers think [NISC is] a really bad idea," he observed, explaining that the proposal ultimately represents a "tyranny of the minority," in that the majority of the states, with just one-third of the population, would hold sway in a one-state, one-vote scenario.

Mr. Birnbaum further criticized the NISC proposal for containing no language regarding institutionalized consumer protection. "Uniformity," he said, does not ensure consumer protection.

"We've seen that. Federal regulators did a terrible job with banking and finance," he said, noting that in creating uniformity, Washington did nothing about consumer abuses while preempting states that were trying to take action on subprime lending.

As for the job states have done on consumer protection, Mr. Birnbaum said it varies. Larger states, he said, generally have more consumer protections in place, while smaller ones with less resources have few to no organized consumer constituents.

Mr. Birnbaum's main concern is that regulators did not have consumer protection as a primary concern when contemplating NISC. He said the explanation that NISC was developed because of the possibility of federal preemption of state regulation "smacks of turf protection rather than consumer protection."

He said if consumer protection is really regulators' top priority, and Washington develops a proposal that would ensure better consumer protections, then regulators should support that. If a federal proposal contained fewer consumer protections, then regulators should oppose it.

Commissioner Holland–who is chairing a new formal Executive Committee Task Force on Regulatory Modernization–said discussions on where to go next regarding regulatory modernization would take place during the NAIC's meeting in Denver, which began as this edition went to press.

If it is decided that uniformity should be achieved through policy rather than process, she said there will need to be a tremendous amount of involvement from and coordination with state legislators and consumer representatives.

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