Former Washington D.C. insurance commissioner Lawrence H. Mirel says the National Association of Insurance Commissioners is at a crossroads because it must clarify first what it is, and then work out a system for collaborating with federal regulators in overseeing large, multi-faceted insurance companies with international operations.

"NAIC said it is not a trade association, but it really is a trade association of state insurance regulators," Mirel, now a partner in the Washington, D.C. office of Nelson Levine de Luca & Hamilton, tells PC360.

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

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

Additionally, Mirel says the recent international economic crisis pointed out the NAIC lacked the authority to regulate complex insurance companies with international operations, especially those with operations outside of insurance.

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

He says the G-20, the group of large industrialized nations, is going to the U.S. government as representatives of the U.S., not the NAIC, as it tries to set standards to prevent future economic crises.

"That is because there is a gap in regulation [of insurance companies]," Mirel adds. "The gap is what happens when financial institutions operate around the world, and operate in more than one market, in more than an one industry."

Mirel asks, "Who can look at the overall activities of these giant institutions and make sure they are meeting the standards that will deal with potential economic problems? Insurance institutions operating worldwide handle billions of dollars every day. It is not going to be the South Dakota insurance regulator, or the New York insurance regulators to whom international regulators contact when there is a crisis. That is the problem the NAIC faces."

Mirel says "something has to give." The U.S. can regulate banks but it doesn't regulate insurance companies. If the NAIC is not a regulatory authority and each state's insurance regulator only has authority in that state, who will deal with international standards?

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

States can deal with this by establishing the domiciliary state as the U.S. domestic regulator, and coordinate with the federal government on international issues, Mirel suggests.

Mirel acknowledges the state insurance regulatory system is expensive. "Elections are also expensive but we pay for it because we like democracy, we like a decentralized system," he says. "Americans prefer a decentralized system, because they are helpful and healthy."

Special Reports /

Former D.C. Insurance Head: NAIC Must Define Itself and Realize Limits

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