NAIC Drops SMART Bomb On Congress

National Underwriter News
National Underwriter, Property & Casualty/Risk & Benefits Management Edition
March 28, 2005

The National Association of Insurance Commissioners sent shock waves through the leadership of the House Financial Services Committee with a letter taking a hard line against a proposed federal regulatory modernization bill.

"The State Modernization and Regulatory Transparency Act (SMART) is not a concept that NAIC would suggest to Congress," the letter said.

"Our concerns are deeply rooted in the basic structure of the SMART Act that mandates federal preemption of state laws and regulations, federal supervision of state regulation, and complete rate de-regulation for all states," the NAIC added. "We do not believe that tweaking the language of the SMART Act discussion draft can resolve these basic conflicts." An industry official one of the few given access to the letter said the committee leadership and staff is concerned because "it negatively critiques SMART. It doesn't seem they want to engage in this process in a positive way."

House leaders are also voicing deep concern, according to several sources, about a summary paragraph which said a committee of state regulatory agency staffers and commissioners had conducted an intense analysis of drafts of the legislation provided by the House committee's Republican staff.

"Although the NAIC's SMART Act review teams were not tasked with reaching policy decisions, their factual findings reveal fundamental problems for preserving essential state regulatory authority if the basic elements of the draft SMART Act bill become federal law," the letter said.

Several copies of the letter were acquired by National Underwriter from industry sources representing both the life and property-casualty sides of the business. With Congress in recess, no members of the panel's leadership were available for an interview, and a committee staffer did not return phone calls seeking comment as this story went to press.

Still, three of the people contacted who were familiar with the letter's comments said the committee's leadership and staff regarded the NAIC letter as "negative."

An industry official whose comments represented a consensus of those from whom the document was obtained voiced equal concern that the response could result in the NAIC playing a smaller role in the drafting of the bill than envisioned by Rep. Mike Oxley, R-Ohio, chairman of the committee, when he first unveiled plans for such legislation last April.

"I think the NAIC is making a huge mistake," this official said. "They are under the misapprehension that reform in the state capitals is an option that federal legislators are looking at, and it isn't. They seem to think that there are three options on the table: reform state-by-state in state capitals; targeted federal legislation to improve the state-based system [under] the SMART proposal; and an optional federal charter, or mandatory federal regulation."

However, this official added, "the first option is not an option right now there will be federal legislation on this topic, and Congress is just beyond conducting oversight. The NAIC misses that point."

The NAIC letter was in response to a letter sent several weeks ago by Rep. Oxley to the NAIC asking the commissioners to become more involved in the process of drafting SMART.

The NAIC starts out by saying that regulators would be available to help with the drafting of SMART, but most of the letter effectively says the draft bill is fundamentally flawed if its goal is sustaining state regulation of insurance (see sidebar).

The letter adds, however, that "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, granting liability protection to NAIC as the central data exchange for states, and to grant states equal receivership powers with the federal government."

Copyright 2005 by The National Underwriter Company.

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