The National Association of Insurance Commissioners (NAIC) testified on Thursday before the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises regarding the impact of the SMART proposal on state insurance regulation.
The NAIC stressed the importance of regulation that balances vigorous consumer protection with dynamic business competition to provide a healthy insurance marketplace for consumers.
“The NAIC is an organization of state government officials who are sworn to faithfully administer the laws enacted by state legislatures and governors on behalf of citizens,” said Diane Koken, NAIC president and Pennsylvania insurance commissioner. “Protecting American consumers is our top priority. Responsive and effective consumer protection is the hallmark of state insurance regulation, a system that has worked well for 125 years.”
During the hearing, Koken testified to the progress that system is making to modernize state regulation where improvements are needed, while also preserving the benefits of consumer protection.
“The states and the NAIC are implementing a state-based action plan to achieve many of the regulatory modernization goals embodied in the draft SMART proposal. We are on-time and on-target to meet those goals and achieve legitimate changes sought by the
insurance industry,” Koken remarked.
Koken provided an update on where the states and the NAIC stand on meeting those goals, including these highlights:
* Life Insurance: Where appropriate, NAIC and the states are working to achieve full regulatory uniformity to benefit both consumers and insurance providers. To accomplish this, the NAIC negotiated development of an interstate compact. The compact, adopted by 15
states so far with two others soon to follow, creates an interstate commission that will develop national product standards for several
types of life insurance products.
* Speed to Market: Much progress has been made since 1999 to improve speed to market, including the success of the NAIC’s System for Electronic Rate and Forum Filings and the development and implementation of filing review standards checklists.
* Company Licensing: Efforts to improve standardization and consistency in the licensing of insurers has been a priority. This year the NAIC adopted a best-practices handbook that provides for states to rely on the domiciliary state regulator when assessing the financial condition and executive management of an applicant insurer.
* Market Conduct: “The NAIC is implementing a more effective and
efficient market regulatory system,” Koken testified. “It is based on
five primary elements: 1) centralized data collection; 2) structured
and uniform market analysis; 3) uniform examination procedures; 4)
interstate collaboration; and 5) broader regulatory responses to
address general business practices.” Koken mentioned progress has been made in each area.
* Producer Licensing: Currently 42 states have satisfied producer
licensing reciprocity mandates in the NARAB section of the Gramm-Leach-Bliley Act. “The NAIC is also moving well beyond the Gramm-Leach-Bliley mandates in several other areas.”
“It’s clear we are making progress across the board,” Koken added. “The states are committed to a continuing process of modernizing our nation’s regulatory system as the marketplace continues to evolve, and to do so without sacrificing important consumer protections,” Koken asked Congress to work with
the NAIC to implement the modernization initiatives through the state
Koken concluded the testimony by addressing concerns with the draft SMART proposal. “It incorporates unacceptable levels of federal preemption that would create both legal and practical problems for the insurance industry and its customers,” she testified.
Those concerns were identified in December 2004, when the NAIC undertook a thorough review and analysis of the draft SMART proposal using seven teams of insurance commissioners and senior state staff totaling 117 regulatory experts. The analysis showed how the bill would preempt many important state laws that protect consumers from unfair or discriminatory marketing, inadequate or excessive rates, and unsound products.
It resulted in five key findings:
1. The SMART proposal would negatively impact state regulatory authority to supervise property/casualty, life, and health insurance, as well as reinsurance, which means insurance consumers would be denied the benefits of important state consumer protection laws and regulations.
2. The SMART proposal would create regulatory confusion in insurance markets by subjecting state regulatory authority to second-guessing and possible interference by a new federal entity called the State-National Insurance Coordination Partnership.
3. The SMART proposal 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 conducting market conduct exams.
4. Most specified time limits for states to implement the SMART
proposal’s requirements are unrealistically short and many of the
provisions seem unworkable.
5. Federal legislation is generally not needed to implement the various
provisions of the NAIC’s Roadmap for regulatory modernization.
“Local and regional state regulation of insurance is the best way to meet the demands of consumers for this unique financial product,” concluded Koken. “We will continue to work with Congress and within state government to improve the national efficiency of state regulation while preserving its longstanding dedication to protecting American consumers. Because protecting consumers is our first responsibility. That’s why we’re here.”
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