NAIC Intends to Modernize
CHICAGO — In response to congressional pressure to more effectively regulate insurance at the state level or else face possible federalization, the National Association of Insurance Commissioners (NAIC) on Sunday unanimously passed its revised statement of intent, which calls for a broad range of modernization reforms to be implemented by the states before 2008 is through.
The document, "A Reinforced Commitment: Insurance Regulatory Modernization Action Plan," is a revised version of a similar document passed by the NAIC in 2000, and was one of a number of items voted on by the commissioners at the opening session of the group's fall meeting at the Chicago Hilton & Towers.
The statement of intent is specifically designed, NAIC President Mike Pickens (Arkansas) said at the meeting, as a "calling card to demonstrate to federal legislators that we are taking the lead in the effort to make [insurance regulation] less costly, more efficient while protecting consumers. This is not a document intended for regulators or the industry, but for federal legislators."
U.S. Rep. Michael Oxley (R-Ohio) and U.S. Sen. Ben Nelson (D-Neb.), a former insurance commissioner, had both told the NAIC to speed up implementation of rules to make state-based regulations of insurance more uniform and more friendly to competition. State governments stand to lose an estimated $12 billion in revenues from premium taxes and other fees if regulation of insurance is moved to the federal level.
The NAIC also announced Sunday that it had signed a joint resolution with the National Conference of State Legislators (NCSL) and the National Conference of Insurance Legislators (NCOIL) to promote state regulation.
"Our three groups and membership are firmly dedicated to the value of state regulation and the tremendous benefits it brings to consumers," Pickens said in a statement.
One major goal of the plan is to achieve uniform standards for market analysis, market conduct, producer and company licensing as well as providing the electronic tools necessary to improve the speed to market for new insurance products, such as the System for Electronic Rate and Form Filing (SERFF).
On producer licensing, the plan calls for the development of a single uniform application across the states, implementation of an electronic filing/appointment system and an electronic fingerprint system. To that end, the FBI gave a report to an NAIC producer licensing workgroup at the meetings on the feasibility of such a fingerprinting system.
The plan also calls for having the National Insurance Producer Registry (NIPR) fully installed across the states by the end of 2006. Eighteen states participate in the registry now.
Under the plan, information on "nationally significant insurers" — property/casualty companies with $50 million or more in premium volume licensed in five or more states, or $30 million-plus volume and licensed 17-plus states — would be shared by all the states with examinations by non-domestic states eliminated.
The plan also calls for speeding up mergers and acquisitions by designating a lead state in a multi-domestic state transaction to coordinate the regulatory oversight.
Industry representatives responded positively to the plan, though whether all of the outlined reforms will be implemented by 2008 remains very much an open question. Before voting to approve the plan, for example, a representative for the California Insurance Department asked whether a vote implied endorsement of all the policies in the statement.
Golden State regulators have expressed unwillingness to relinquish their role in market conduct and market analysis reviews of non-domestic insurers. Ultimately, California voted in favor of the plan in spite of the department's reservations.
"I don't think California was saying what everyone else is thinking," said Bob Zeman, a lobbyist for the National Association of Independent Insurers (NAII), an industry trade group. "Few commissioners here think that way. Most understand the need for reform."
Zeman did voice one objection the plan, which was its call for "states to adopt regulatory environments that place greater reliance on competition for commercial lines insurance products," seeming to leave personal lines deregulation out of the mix.
"Members of Congress have clearly recognized the need for modernization of both personal and commercial lines," Zeman said.
Move to raise capital requirements
In other news, a proposal to increase from 50 percent to 75 percent the authorized control level risk-based capital (RBC) factor earned across-the-board disapproval from industry representatives and was tabled for the time being by an ad hoc group of the NAIC's Risk Based Capital Task Force.
The RBC formula was developed in conjunction with the industry in the early 1990s to replace the static capital requirements many believed were inadequate because they didn't adjust with the volume of an insurer's business.
After the failure of Legion Insurance Co., Reliance Insurance Co. and others in recent years, some insurance regulators have proposed beefing up the RBC requirements to move more insurers into the company action level, in which regulators have wide latitude to take control of a company and steer it away from a possible insolvency.
"We need to get more companies into the company action level so we have the authority to regulate and put them back on the right track," said Steve Johnson, a regulator with the Pennsylvania Insurance Department who has spearheaded the proposal and said he believes 3.4 to 4 percent of companies at an action level is too small.
"We need something to wake up the management and the board so they have to give concrete explanations to us of what their problems are and what they're going to do fix them," Johnson said at the ad hoc group's hearing.
Insurance group representatives objected that the new requirements would go after the wrong targets and raise the cost of capital for the industry as a whole. A coalition of property/casualty insurance trade groups estimated that $43.5 billion in new capital would be needed to get all company at 250 percent above the authorized control level (ACL), considered necessary because of the possibility of catastrophic losses suddenly diminishing reserves.
A study by Wendy Germani of the Texas Insurance Department estimated that only $35 billion more in capital would need to be raised to keep insurers above the ACL.
"All of the trade associations are opposed to this proposal because it's just too broad," said Phillip Carlson, senior counsel on financial reporting for the American Insurance Association (AIA). "Eleven percent of the industry would be below these new minimum capital levels. We just don't think that's the truth about this industry."
The ad hoc subgroup commissioned the American Academy of Actuaries to develop trend tests for the P/C and life/health industries that might better do the job of targeting weak companies before they head into insolvency. Industry representatives said extremely rapid premium growth was the best indicator of trouble.
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