NCOIL Accepts NAIC Changes to Market Conduct Model

By | August 23, 2004

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 last month.

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.

“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 all have the same goal—to have an efficient market conduct process, and to make sure it’s effective. Thus we have collaborated together to make sure the model is one everyone can live with.”

However, 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.

Insurers were very 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, as finally hammered out after intense negotiations in the hours leading up to the vote, 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. “The NAIC and NCOIL agreeing on a common model is not progress. 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.”

“What happens in the future?” Marema told IJ. “Our position is when those work products are changed in material ways and affect the whole state, they need to be promulgated state by state just like commisioners would have to do for any other industrywide rule. Any commissioner who thinks we won’t fight for that in state legislatures is wrong. That’s why we’re doing this NCOIL model in the first place. That’s really what the abuse is. States have got to be willing to fix this.”

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.”

NCOIL began to study the matter four years ago. “If we were going any slower,” said NCOIL President Steve Geller (a Florida state senator), “we’d be going in reverse.”

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