The financial crisis of 2008 and the changing global insurance market place is stressing the regulatory structure that has been in place since the passage of the McCarran-Ferguson Act in 1945. For decades, the U.S. insurance industry had to contend with state regulators and the federal government only in regard to securities (SEC), tax (IRS) and healthcare (HHS). The National Association of Insurance Commissioners (“NAIC”) was the agent of the states, a forum where the states could get together to discuss common problems, try to find common solutions, and then develop model laws and regulations to be adopted by the states.
The adoption by the NAIC of the state accreditation program was the first step toward a more uniform system of regulation on a national scale. In order to be accredited, a state must adopt all of the laws, regulations and staffing requirements established by the NAIC (as developed and voted on by the states). The precipitating force was a series of hearings held in the early 90’s by the House Energy and Commerce Committee, which exposed the lack of coordination among many of the states on various issues, but particularly solvency regulation. While the accreditation program is entirely voluntary for the states, there is a penalty for failure to comply with all the accreditation standards, namely loss of accreditation, which no state wants and no state has yet suffered.
The power to grant and revoke accreditation resides with the NAIC. This raises the question of whether the NAIC is merely facilitating state regulation or whether it is either directly or indirectly regulating.
This issue has been acknowledged by the industry, but has remained relatively dormant until recently. The emergence of insurance as an issue of such importance to the financial well-being of the U.S. has pushed the NAIC to take an ever more visible role on the national stage.
There are numerous examples. The most obvious is the role played by the NAIC in the legislative debate surrounding the Patient Protection and Affordable Care Act (“PPACA”). The NAIC has been a vigorous advocate of state regulation and has had a substantial impact on PPACA and its interpretation by regulation. The NAIC’s involvement in PPACA is substantially greater than it was, for example, in the Health Insurance Portability and Accountability Act (“HIPAA”) and the Terrorism Risk Insurance Act (“TRIA”). In both those cases, the NAIC served only as an instrumentality of the states to work with the federal government in the development and adoption of laws and regulations implementing federal law.
Another example is the passage of the Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which was almost exclusively a banking bill, but did include one title (Title V) addressing insurance issues. Title V established the Federal Insurance Office (“FIO”) within the Department of the Treasury. The FIO was created to be a repository of information about the insurance industry within the federal government, the lack of which had always limited Congress’s ability to enact well-crafted legislation. Title V grants to the FIO the ability to collect information about the insurance industry, publish a study on insurance regulationand represent the federal government in international negotiations affecting insurance. It has no other authority, and the NAIC was a key participant in the legislative haggling that resulted in this legislative constraint on FIO’s authority.
The second part of Title V, the Nonadmitted Insurance and Reinsurance Act (“NRRA”), drew the attention of the NAIC, as well. NRRA was designed to streamline the administration of the surplus lines market. While the legislation could not mandate that the states implement a system (e.g. interstate compact) to allocate the surplus lines tax paid to a single state to all the relevant states, it did encourage the states to do so. The NAIC developed a plan for the states to do so but has not succeeded in generating a critical mass of support.
Another example would be the Government Accountability Office’s (“GAO”) recent report on risk retention groups (“RRGs”) (GAO-12-16), which addressed the financial and regulatory health of the RRG market and the extent to which non-domiciliary states exceeded their authority in regulating RRGs. Interestingly, the GAO treated the NAIC (not the states) as if it were the relevant regulating agency and allowed the NAIC to present the regulator’s perspective in the final report.
The common thread in all of the above is that the NAIC was able to act (and some would say was required to act) because there is no other actor. The NAIC is the only entity that has the information and capability to opine on insurance regulation on a national basis. Because insurance always has been regulated by the states, there is no federal agency with oversight authority and no committee in Congress with the experience and information to play a regulatory role.
However, the recent visibility of the NAIC has attracted the attention of Rep. Edward Royce, a supporter of a greater role for the federal government in the regulation of insurance. Rep. Royce first wrote to the NAIC in February asking some pointed questions about the NAIC’s status as a private entity and whether it was a “standard setting organization.” Rep. Royce followed up with a letter in July to the FIO in which he asked the FIO to review the “nature and scope of NAIC operations” to determine, among others things, whether the NAIC is engaging in “regulatory activity.”
This will be one of the more interesting insurance stories in the coming year. The NAIC stepped up to fill the regulatory void. What will be the consequence? Will the FIO respond to Rep. Royce’s request? Will Congress and federal agencies continue to rely on the NAIC as a source of information about the insurance industry? Will the FIO emerge as an alternative source of insurance information for Congress and federal agencies? Will any of the above affect the way insurance will be regulated? Or, will everything revert to the status quo ante when the financial crisis subsides?