Under heavy pressure from Congress and insurance industry lobbyists to pick up the pace on regulatory modernization, the National Conference of Insurance Legislators (NCOIL) accepted most of the changes to its market conduct surveillance model law suggested by the National Association of Insurance Commissioners (NAIC) at its summer meeting in Chicago.
NCOIL executive committee members voted 19-9 to approve the heavily negotiated model law largely for the sake of presenting a united front in the public-relations battle against Congressional usurpation of the states’ regulatory and tax authority over the insurance industry. Now the matter moves to the NAIC, whose leaders promised an up-or-down vote on the model at its September meeting and virtually guaranteed its passage. Insurers objected to several of the changes recommended by the NAIC but ultimately chose not to officially support or oppose the bill in hopes of moving the process along.
Insurers have complained vociferously that market conduct surveillance as practiced by the 18 states with enough resources to do it is riddled by inefficiency and a lack of consistency. State commissioners have wide discretion to order broad market conduct exams of insurers, often at the insurer’s expense. Insurer lobbyists also charge that exams are too often targeted at discovering only technical violations of the law rather than willful misconduct.
The current 50-state patchwork of market conduct surveillance, along with other issues such as producer licensing and freedoms of rate and form, have spurred Congressional interest in setting national standards for how insurance is regulated by the states. The pressure has been on both NCOIL and the NAIC to present a united front to Congress, showing that they can effect meaningful reform at the state level on their own and keep the $12 billion in estimated annual premium tax revenue rolling into state coffers.
If nothing else, the groups hope the joint model could become the starting point for Congress if it chooses to address market conduct surveillance as part of federal legislation.
“I think that this shows that regulators and legislators can work together to get something done quickly that’s effective,” said North Dakota Insurance Commissioner Jim Poolman, who is the NAIC’s vice chair and attended the meeting. “I don’t think it will encourage Congress to lay off the issue, but it could potentially be used as baseline for federal standards.”
NCOIL finished its original model at its winter meeting last February in San Antonio, then asked the NAIC not to amend the model directly but to make recommendations instead. “We realized that NCOIL has tremendous ownership of the model,” Poolman told IJ. “They were the ones who started the process, who came up with the initial model and we appreciate that, thus the reason we made recommendations. It’s been a truly collaborative process and we wanted it to continue to be so. We all have the same goal, to have an efficient market conduct process, and to make sure it’s effective.”
Regardless, most of the NAIC’s recommendations were accepted by NCOIL, leading to substantive differences from the original model that weakened its effectiveness, according to lobbyists for the insurance industry.
Life insurers wanted participation in best-practice organizations such as the Insurance Marketplace Standards Association (IMSA) to be considered a mitigating factor when regulators assess market conduct fines, but the NAIC deleted that provision. Life insurers also wanted the model to encourage states to pass NCOIL’s self-evaluative privilege model act, which would allow for groups like IMSA to help direct the course and scope of market conduct exams. That provision too was deleted.
Meanwhile, P/C insurers were upset that NCOIL accepted the NAIC’s changes to language regarding future work products produced by the group. The original NCOIL language said that states adopting the model law would use current or comparable NAIC work products to help guide how they do their jobs. The NAIC changed the language in several instances to read “successor” NAIC work product, rather than “comparable.” Industry lobbyists said this incorporated by reference any future changes the NAIC might dream up, thus shooting a dagger through the heart of reform aimed at curbing what they called administrative abuses.
The original model also called for a public hearing to be held by the commissioner when any successor work product was adopted. The new model offers state legislatures adopting the law three options: the original model language, the commissioners’ language which calls for a mere “informational hearing,” or the industry’s preferred language.
“This shows the danger of trying to do these things with 59 people at a meeting,” said Robert Zeman, a lobbyist for the Property Casualty Insurers Association of America (PCI). “For the sake of this meeting we agreed to not oppose or support, but to keep the discussion going, not oppose them here. We also did that on the condition that they go back and open other issues at a later time,” such as arbitration and domestic deference.
The substantive changes made to the model undermined the fact that the two groups finally got on the same page, insurer groups said.
“To us, success is an effective bill that gets enacted in the legislatures,” said Lenore Marema, also with PCI. “Real-time reform takes place in the state capitals, not in white papers and in models. One of the problems for PCI companies is that state regulators have discretion to do anything they want to [under the model]. We saw the original model as at least taking a step in the right direction. But with the incorporation by reference issue, they want to go back to the status quo.”
Consumer advocate Birny Birnbaum, executive director of the Austin, Texas-based Center for Economic Justice, said he was pleased with the model, and that insurers’ criticisms were unserious. “I think the industry’s playing a lot of games,” he told IJ. “After the NCOIL model was passed they went to the NAIC. Then they went back to NCOIL and said, ‘Don’t accept the changes.’ They made dozens of suggestions that were adopted and then they get up and say, ‘We can’t support it.’ I just thought it was ridiculous.”
Poolman called the joint model a success. “The bottom line is we control our own destiny,” he said. “We need to show Congress we can get some of this stuff done at a faster pace than what’s been happenning.” NCOIL began to study the matter four years ago.