Congress, apparently under the impression that it is reforming healthcare, has undertaken the reform of health insurance regulation with a vengeance. The more logical repository for “insurance reform” – financial services oversight and reform – has taken a back seat in Congress to “healthcare” reform.
In both of these debates, the demand for national action involving insurance has accelerated. The mandate for uniformity of laws and regulations among the states is implicit. Of course, this produces a massive collision with our state based regulatory system, which enables, and even fosters, differences among the states in the laws and regulations affecting insurance and their implementation by state regulators.
While Congress would like to establish uniform rules for the regulation of insurance, there is a firm understanding that the federal government does not have the manpower (or willpower) to regulate the insurance industry. As a result, the existing insurance regulatory structure (state insurance departments and the NAIC) are being conscripted (and/or even volunteering) to fill the void.
Prior to the crash of 2008 and the continuing financial troubles, the debate over insurance reform was between federal regulation and state regulation. Federal chartering and regulation of insurers was the focus of the debate. The principal concern was “dual regulation,” i.e., regulation by both the state and the federal government at the same time.
The demand for national action on insurance reform has refocused the debate. Current proposals and legislation before Congress are moving from the federal/state dichotomy to insurance regulation mandated by the federal government but implemented by the states. This is really a new variant on the old theme.
The result is likely to be some sort of “hybrid” regulation that roughly follows the model of the Terrorism Risk Insurance Act (“TRIA”). TRIA was passed by Congress in 2002 to provide reinsurance capacity for the terrorism risk market. TRIA is a federal law that preempts conflicting states laws and mandates that qualifying property casualty insurance companies offer terrorism risk coverage. Rulemaking and oversight by the U.S. Department of the Treasury is specifically authorized, and the federal Administrative Procedure Act applies.
This federal/state insurance legislation has worked well (although, thankfully, there has been no incident of terrorism to test the system). The demand for national action has produced other examples of this “hybrid” form of regulation. Congress is now considering:
NARAB II. The National Association of Registered Agents and Brokers Act of 2009 (NARAB II) (H.R. 2554) passed the House of Representatives. If enacted into law, this Act would result in the creation of a commission that would establish criteria for membership by insurance agents. An agent who gained membership would be able to do business in any state so long as he or she paid the appropriate fees. In other words, the time consuming and expensive process of multi-state licensing would be preempted. The Commissioners of NARAB II would be state regulators and industry representatives appointed by the President and the Federal Administrative Procedure Act would apply.
Surplus Lines and Reinsurance. The Nonadmitted and Reinsurance Reform Act of 2009 (H.R. 2571) passed the House earlier this session. It has been incorporated into the Restoring American Financial Stability Act of 2009 sponsored by the Chairman of the Senate Banking Committee, Senator Chris Dodd, under Subtitle B – State Based Insurance Reform. “Lead state” regulation is the concept behind this bill. Specifically, this legislation would facilitate the multi-state placement of surplus lines coverage by establishing that only the home state of the primary risk would be entitled to demand premium tax and that any other states in which risk is located would have to look to the primary state to obtain their proportionate share of the tax. It is envisioned that these states would create an interstate compact for this purpose. Similarly, in the area of reinsurance, only the state of domicile of the reinsurer would have the ability to financially regulate the reinsurer. This would preempt non-domiciliary states from imposing “commercial domicile” or other requirements.
Health Insurance. Several of the proposed federal bills have created a substantial role for the NAIC to perform its current rulemaking function regarding the development of health insurance model laws and regulations. However, those NAIC-generated models would have the effect of federal law and would be, by one mechanism or another, imposed upon the states. This story continues to evolve as we go to press.
Reinsurance. The NAIC itself has taken steps towards promoting the “hybrid” model. The NAIC’s Reinsurance Regulatory Modernization Act would require federal legislation which would authorize the President to appoint a board of state insurance commissioners and federal regulators. The board would have the authority to certify and regulate states which would seek to qualify either as a “home state” or a “port-of-entry” state. This status would enable these states to regulate reinsurance on a national basis. “Inconsistent” state law would be federally preempted. The board would have authority to enter into agreements with non-US jurisdictions (which is an authority reserved to the federal government). Federal law would apply and judicial review would occur in a federal court, although an appeal would have to be made first to the board.
National Rulemaking. The NAIC is also deliberating the “National Insurance Supervisory Commission” (“NISC”), which also would require an act of Congress. The NISC would have the authority to develop model laws on specified areas of insurance. These laws, once adopted by the NISC would create national uniformity because each state member of the NISC would be bound by such laws. States that elected not to become members of the NISC also could be bound by such laws if a new federal regulatory authority – the Office of National Insurance within the Treasury – ruled that inconsistent state laws should be preempted.
Are we stumbling into national regulation? The financial crisis and the pent up demand for national uniformity is creating a new regulatory paradigm – federally mandated uniformity implemented by the states. Is this a better model than state versus federal regulation? Will the commissions created by legislation work more efficiently than the current system and still be politically accountable? Is this just a stepping stone to federal regulation? There are a lot of questions that need to be answered.
Robert “Skip” Myers is Co-Chairman of the firm’s Insurance and Reinsurance Practice and focuses in the areas of insurance regulation, antitrust, and trade association law. Skip received his bachelor’s degree from Princeton University and his law degree from the University of Virginia.