State Regulators Report Raises Doubts On Federal Role In Insurance Oversight

March 25, 2005

OLDWICK, N.J. (BestWire) - An overhaul of insurance regulation proposed last year in the U.S. Congress would harm rather than help the marketplace, according to a synopsis of a new report issued by state regulators.

Seven teams made up of state insurance commissioners, state regulatory experts and senior staff of the National Association of Insurance Commissioners -- 117 people in all -- reviewed elements of a discussion draft of the State Modernization and Regulatory Transparency Act, which was introduced but made no headway in the House of Representatives last year.

The report, "Framework for a National System of State-Based Regulation," was unveiled in a closed, executive session meeting of the NAIC's Government Affairs Task Force earlier this month at the NAIC's Winter National Meeting in Salt Lake City, following a directive put forth by the task force in December.

The focus of study was to evaluate specific provisions in the SMART Act, which was authored by House Financial Services Committee Chairman Mike Oxley, R-Ohio, and Richard Baker, R-La., chairman of that committee's Capital Markets Subcommittee. The proposed legislation, which has yet to be reintroduced in the current session of Congress, would implement broad changes to the way insurance is regulated. Among its 17 main provisions, the bill would end state-based regulation of rates, streamline agent and company licensing, and rein in states' authority to carry out market-conduct examinations.

In studying the draft bill, the NAIC's teams also sought to evaluate how the SMART Act's provisions would affect state implementation of the NAIC's modernization plan and state supervision authority if the measure were to become law.

Their conclusions:

-- The SMART Act would negatively impact state regulatory authority to supervise property/casualty, life, and health insurance, as well as reinsurance, by establishing federally mandated standards and pre-empting state laws that differ from them.

-- The SMART Act would create unhealthy regulatory confusion in insurance markets by subjecting state regulations and orders to second-guessing and possible interference by a new federal entity called the State-National Insurance Coordination Partnership. In addition to raising serious legal and practical concerns regarding its composition, powers, and administration, this partnership would encourage time-consuming and expensive litigation by those who disagree with state regulatory actions, during which the legitimacy of state actions would hang under a cloud of doubt until a final resolution is reached in federal courts.

-- The SMART Act would remove the ability for independent judgment and action by state regulators to protect consumers under state laws and regulations in such important areas as supervising rates and performing market-conduct exams. Even though Illinois often has been cited by SMART Act proponents as the model rate system for all states, the act would undercut or negate important provisions of Illinois law that make its rate system work.

-- In general, the time limits for states to implement the SMART Act's requirements are too short, and many of its provisions seem impractical, unworkable or detrimental to states' consumer-protection efforts.

-- Federal legislation generally isn't needed to implement the various provisions of the NAIC's regulatory modernization road map. However, federal legislation would be welcome to enable access by all state insurance regulators to the FBI criminal database, to enable sharing of confidential regulatory information among federal and state regulatory agencies, to grant liability protection to the NAIC as the central data exchange for states, and to grant states equal receivership powers with the federal government.

The synopsis of the NAIC teams' report was released March 24 and was included in a letter dated March 18 from Pennsylvania Insurance Commissioner and NAIC President Diane Koken to Oxley and Baker. She wrote the letter in response to the congressmen's March 9 letter in which they expressed concern over a "lack of communication."

"State-based insurance regulation is at a crossroads. The financial services marketplace, including insurance, is competing for consumers and capital on a global scale. The current system of overlapping regulation has not kept pace with the evolution of the marketplace," the congressmen stated in the letter. "Restructuring and change is inevitable, and we can only hope to guide changes toward the most constructive ends."

Koken countered by noting continued cooperation, including her scheduling an April 28 meeting with Oxley and Baker to discuss the matter, and she pointed to the changed landscape surrounding the SMART Act since its framework initially was presented to the NAIC at the group's Spring National Meeting in New York last year.

Originally, Oxley's presentation on statutory federal insurance regulatory standards didn't indicate a pre-emption of state laws and regulations, as the draft now suggests.

One major sticking point between the two groups appears to be the question of who can regulate better.

Koken stated in her letter to the congressmen that "local control and understanding of market conditions is a strength of state regulation for supervising rates, policy forms, and market conduct."

Oxley and Baker, however, have made it clear they don't agree.

"While the NAIC has done a good, if often unappreciated, job in developing model laws and working towards uniformity and transparency, reforms to promote uniformity, transparency and competition have not been adopted by most States -- ultimately resulting in less competition, inefficient regulation and higher costs for consumers and businesses," the congressmen wrote in their March 9 letter.

The House committee schedule lists the SMART Act for review from April 6 to June 7.

By Eleanor Barrett, senior associate editor, BestWeek

Copyright 2005 A.M. Best Company, Inc.



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