The National Association of Insurance Commissioners has–at leastfor now–put on hold its National Insurance Supervisory Committeeproposal, which would have seen regulators develop uniformstandards with the threat of federal intervention for states thatdid not comply.

An insurance commissioner who spoke to state legislators earlierthis month at a meeting of the National Conference of InsuranceLegislators said the NAIC will explore alternative state-basedregulatory modernization efforts while reserving its right toresurrect NISC, if necessary.

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

The proposal–obtained byNational Underwriter–calls for Congress to authorize acommission made up of state regulators. This commission woulddevelop uniform regulatory standards that would be implemented andenforced by the states.

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

State legislative representatives of both NCOIL and the NationalConference of State Legislators rejected the proposal, balkingbecause it would permit federal authorities to take over statelegislators' lawmaking function.

At the NAIC's December 2009 Winter Meeting in San Francisco,Kentucky State Rep. Bob Damron, D-Nicholasville, warned regulatorsabout allowing the federal government to get its regulatory foot inthe door. "You cannot let the federal government get involved inthis process and then expect them to let you run the show," hesaid, further warning that regulators could face a rebellion bystate 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 theNISC proposal. That same month, the NCSL's Communications,Financial Services and Interstate Commerce Committee unanimouslyvoted to move forward on a working draft opposing NISC, with Rep.Kennedy stating a final resolution would likely be forthcoming thisspring.

NCOIL officers also wrote a letter to the NAIC opposing NISC. AtNCOIL's March meeting, Oklahoma Insurance Commissioner Kim Hollandtold legislators the NAIC would work with them on state-basedsolutions to uniformity while reserving the right to revisitNISC.

"[NISC] is an important tool," Commissioner Holland said,according to a transcript provided by NCOIL Executive DirectorSusan Nolan. "It will remain tabled. If it is needed, it will beresurrected–with, I hope, active involvement by this body, industryand others, as was contemplated originally with the NISC, butunfortunately got away from us due to circumstances beyond ourcontrol."

Legislators reacted favorably to Commissioner Holland'scomments. Rep. Kennedy said he was "glad to hear that the NAIC willbe looking specifically for input from interested parties–somethingthat didn't take place when the NISC proposal was beingdeveloped."

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 notcharacterize the NAIC's actions as "stepping back" from NISC asmuch as just putting it on hold. "The impetus [for NISC] waspressure–as a result of the financial downfall–that we felt fromthe federal government in terms of various proposals discussed topreempt state authority," she said.

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

Now, Commissioner Holland noted, there is less pressure from thefederal government as Congress becomes more aware that theinsurance industry is more stable than other financial servicessectors.

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

For now, Commissioner Holland said regulators want to gettogether with the industry and state legislators to explorealternative ways to achieve uniformity while still maintaining theflexibility that state regulation allows.

The NAIC has made attempts at uniformity before–the InterstateInsurance Product Regulation Commission currently has 36 memberstates, for example. But states maintain the authority to decidewhether or not to sign on to the IIPRC.

Asked if regulators believe it is possible to achieve uniformitywithout 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. "Ithink it means different things to different people," sheexplained. As she sees it, efforts at uniformity should be moreprocess-driven than policy-driven, focusing on areas such ascompany licensing, filing, etc. Others, she noted, interpretuniformity on policy standards as the IIPRC does.

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

One group that will be watching the unfolding discussionscarefully will be consumer representatives. Indeed, according toBirny Birnbaum–the executive director of Consumers for EconomicJustice, who up until this year was also an NAIC-funded consumeradvocate–consumer representatives will not be upset if NISC, as itwas proposed, falls by the wayside.

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

Mr. Birnbaum further criticized the NISC proposal for containingno language regarding institutionalized consumer protection."Uniformity," he said, does not ensure consumer protection.

"We've seen that. Federal regulators did a terrible job withbanking and finance," he said, noting that in creating uniformity,Washington did nothing about consumer abuses while preemptingstates 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 havemore consumer protections in place, while smaller ones with lessresources have few to no organized consumer constituents.

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

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

Commissioner Holland–who is chairing a new formal ExecutiveCommittee Task Force on Regulatory Modernization–said discussionson where to go next regarding regulatory modernization would takeplace during the NAIC's meeting in Denver, which began as thisedition went to press.

If it is decided that uniformity should be achieved throughpolicy rather than process, she said there will need to be atremendous amount of involvement from and coordination with statelegislators and consumer representatives.