Former Washington D.C. insurance commissioner Lawrence H. Mirelsays the National Association of Insurance Commissionersis at a crossroads because it must clarify first what it is, andthen work out a system for collaborating with federal regulators inoverseeing large, multi-faceted insurance companies withinternational operations.

"NAIC said it is not a trade association, butit really is a trade association of state insuranceregulators," Mirel, now a partner in the Washington, D.C.office of Nelson Levine de Luca & Hamilton, tellsPC360. 

Mirel says NAIC has no regulatory authorityand claims it is an organization registered with the IRSas a 501(c)(3) charitable organization but, he adds, "I amnot sure it is a charity, and it has said it is not subject to anystate laws or Freedom of Information Act requests because it is nota public body."

Mirel, who served as insurance commissioner of Washington, D.C.for six years, notes that Rep. Ed Royce, R-Calif., has raised thesame question, and has asked the House Financial Services Committeeto hold hearings on the issue. "[This] is a very importantquestion," Mirel says.

Additionally, Mirel says the recent internationaleconomic crisis pointed out the NAIC lacked the authorityto regulate complex insurance companies with internationaloperations, especially those with operations outside ofinsurance.

"The states are making a claim that they can be the regulator ofall insurance companies, including those who operate on a worldwidebasis, but I think less and less that is going to be the case,"Mirel says. "A state insurance regulator has authorityonly within its own, and has no authority to regulate insurancecompanies that are doing business outside the state and outside thecountry."

He says the G-20, the group of large industrialized nations, isgoing to the U.S. government as representatives of the U.S., notthe NAIC, as it tries to set standards to prevent future economiccrises.

"That is because there is a gap in regulation [of insurancecompanies]," Mirel adds. "The gap is what happens when financialinstitutions operate around the world, and operate in more than onemarket, in more than an one industry."

Mirel asks, "Who can look at the overall activities of thesegiant institutions and make sure they are meeting the standardsthat will deal with potential economic problems? Insuranceinstitutions operating worldwide handle billions of dollars everyday. It is not going to be the South Dakota insurance regulator, orthe New York insurance regulators to whom international regulatorscontact when there is a crisis. That is the problem the NAICfaces."

Mirel says "something has to give." The U.S. can regulate banksbut it doesn't regulate insurance companies. If the NAIC is not aregulatory authority and each state's insurance regulator only hasauthority in that state, who will deal with internationalstandards? 

"It has to be the federal government with or without the NAIC,"Mirel answers. "The NAIC can play an constructive role, but it hasto be the U.S government that deals with these large cross-borderinsurance companies."

States can deal with this by establishing the domiciliary stateas the U.S. domestic regulator, and coordinate with the federalgovernment on international issues, Mirel suggests.

Mirel acknowledges the state insurance regulatorysystem is expensive. "Elections are also expensive but we pay forit because we like democracy, we like a decentralized system," hesays. "Americans prefer a decentralized system, becausethey are helpful and healthy."