Accepting The Challenge: Redefining State Regulation Now

Accepting The Challenge: Redefining State Regulation Now


State regulation of insurance is the preferred method of governance for the majority of NAMIC member companies.  A more responsive and more responsible regulatory climate is likely under a decentralized form of oversight. Companies enjoy a level of access important to the resolution of conflict and consumers benefit by a state regulator responsive to their needs.

Large, single state and smaller regional insurers should all prefer more uniform insurance regulatory standards that create procedural efficiencies while preserving state regulation. Impediments to competition will be eased and  regulators will retain the authority to enforce the laws of their state.

State laws can be beneficial to insurers introducing a new product. Rather than be at the mercy of a single regulator with the power to reject a product or delay approval, a company has the option of going to different jurisdictions for marketplace entry. This benefits carriers of all size.

Criticism of the present state regulatory system has centered mostly on the ability to protect consumers from company insolvencies. Indeed, this was the primary justification for the scrutiny of the industry led by Congressman Dingell begun in the late 1980's. Between 1987 and 1991, seven studies of state insurance regulation were conducted by the General Accounting Office, several at the request of the House Subcommittee on Oversight and Investigation. [2]

The recent "Frankel" scandal has given new life to some of those concerns and may be enough to trigger renewed debate on federal regulation. While important, these revelations are probably less significant than how states, the NAIC and state policymakers respond to the Congressional mandate for uniform producer licensing standards by November 2002.

A different political landscape could easily have turned the GLB Act into a bill to federally regulate insurance. Instead, the legislation specifically reasserted the primacy of state regulation. Yet its authors sent a clear message that this arrangement could be altered, in this case, through the establishment of NARAB.

It would be a mistake to read this threat differently. It would also be unfortunate if regulators, the industry, and state legislators did not summon their full powers to address the substantial opportunity Congress has presented to improve state regulation.

State regulators largely addressed the federal concerns about solvency regulations through the accreditation standards passed a few years ago. Debacles like the Frankel case are sure to occur now and then no matter how many safeguards are put into place and are not precluded even under a federal system. 

And as Professor John M. Manders has drolly observed, "One needs only be reminded of the enormity of the federal savings and loan scandal that cost the American taxpayers billions of dollars and the ongoing solvency problems to understand why federal solvency regulation is no panacea." [3]


The far greater concern for pro-state regulation advocates should be the lack of cooperation between the states in ensuring an effective interdependent system of regulation. The lack thereof is the real vulnerability of state sovereignty.

When this subject is raised, fingers vigorously point to the NAIC and its ambitious, yet ponderous system. To some extent, this criticism is curious and unfair. The NAIC is not an independent regulatory body. It is a vehicle by which the various state insurance commissioners come together, pool resources, coordinate their activities and work together to address issues of mutual concern.

Any model legislation or policies developed collectively by regulators through the NAIC must be enacted, implemented and enforced by the individual states where regulatory authority resides. This is necessary in a federalist system that preserves state sovereignty, but facilitates coordinated action among states when it is necessary.

In that role, the NAIC has actually been quite effective. In the last 10 years it was the NAIC that crafted the crucial accreditation benchmarks to guide the states in improving their financial regulation and they have promoted a number of regulator-to-regulator reforms which are intended to make oversight more effective.

At the same time, the NAIC has been slower to move in other areas, including reform of its Securities Valuation Office (SV0) and with the recently adopted Codification of Statutory Accounting Principles process.

The NAIC is, however, the only entity even remotely resembling continuity in insurance regulation governance. Its operation of the SVO and the Insurance Regulatory Information System (IRIS) is influential (even though state participation is voluntary) as states require insurers to comply with these systems.   Adding to this perception are the hundreds of hours company and trade association representatives devote to attend quarterly meetings and to participate in conference calls devoted to NAIC activities.

This huge commitment of resources places the NAIC under the bright light of high expectations, yet the NAIC has no authority to enforce any decision it makes. Any influence it has stems from the individual states' adoption of its recommendations. It must rely solely on the commitment and political acumen of insurance commissioners to return to their home states and articulate the need for new insurance laws to their state legislatures. Very clearly the present system carries variables over which the NAIC, as a body, cannot control. 

This suggests that enactment of the uniform national standards detailed in this report will be very challenging.  Advocates of the nine practices can elect to go through the model law process at the NAIC (which can last quite some time) and then take initiatives, one-by-one to all 50 legislatures. Or, they can  go directly to the legislatures to seek redress. The motivation and commitment of the states to act in the mutual interests of their consumers will be a critical factor in the success of this or any similar platform of reforms.

There is always talk of creating a new scheme to compel uniform regulatory standards in the states, but such schemes encounter significant issues in balancing the benefits of coordinated state action with the preservation of state sovereignty. These issues will need to be resolved if the states are going to accept a modified system that increases their incentives to work together in regulating insurance.


About the time NAMIC staff was surveying its member companies, Kentucky Insurance Commissioner and new NAIC President George Nichols III proposed a "national charter" resolution to his peers. The proposal was refined and announced officially at the  NAIC spring national meeting in early March.

The Statement of Intent: The Future of Insurance Regulation is divided into two parts. The first section describes specific actions the NAIC must consider in implementing provisions of the GLB Act. The second section then describes a series of national regulatory priorities for the coming year. They include:

  • Developing a strategy for producer licensing to satisfy the NARAB provision;
  • Encouraging states to adopt the Accelerated Licensure Evaluation and Review Techniques (ALERT) program for companies wishing to be licensed in a state;
  • Taking steps to achieve greater uniformity and the consistent application of rate and form requirements;
  • Evaluating the progress of specific states with respect to commercial lines reform, and consider amending the new Property and Casualty Model Rate and Policy Form Law to achieve greater uniformity;
  • Identifying necessary reforms that will facilitate e-commerce while maintaining important consumer protections;
  • Reviewing financial reporting, financial analysis and examination processes in light of the GLB Act;
  • Determining the merits of voluntary uniform national standards as a basis for market conduct examinations;
  • Developing a system of deference to the state of domicile using one-stop filing of products issued on a multi-state basis; and
  • Developing more information sharing agreements among the states.

At the same time, nine new, commissioner-driven Working Groups were established to pursue the initiatives identified in the Statement of Intent.   Each Working Group held an organizational meeting at the spring meeting and was asked to have more definitive plans in place by the summer national meeting in June.

Commissioner Nichols hopes to have identified by June what actions are attainable in 2000. He also has said that an interstate compact agreement may be necessary to execute his resolution.

Seven of the nine regulatory practices that NAMIC member companies selected are included in Commissioner Nichols' proposal. This suggests that a relatively high degree of consensus may already exist between regulators and a large segment of the property/casualty industry on what regulatory practices should be redefined. 

One note of caution, however. The NAIC has had a number of good ideas over the years that were well conceived and seemed to have broad support. Problems arise when it comes time to actually implement the ideas. Special interests and political concerns make legislatures notoriously inefficient. It will be critical for the NAIC and its advocacy partners to remain focused for an extended period to and see their vision through to the bitter end.


Producer licensing uniformity must be the highest priority. Focus should also be given to other regulatory practices that warrant creation of more uniform  insurance standards. For now, strategies for their establishment should be grounded on how they can be achieved utilizing the present system.

The prospect of a more efficient regulatory climate that outlasts the urgency created by the GLB Act is critical. Continued discussion of an interstate regulatory system that preserves state sovereignty is imperative. 

With respect to specific practices, NAMIC member companies have expressed their priorities, recognizing there will be honest differences with others who are part of this debate. Nevertheless, a collective effort will be required to put any new proposal into place across the country. On this subject, industry should speak with as close to one voice as possible. This will result in a public policy effort of unprecedented magnitude.

NAMIC proposes and will pursue the following action steps: 

  1. Regulators, industry and state legislative representatives should agree on an aggressive legislative strategy to pass uniform producer licensing standards.
  2. NAIC committees working on other aspects of producer licensing, such as the uniform application and database applications, should complete their work so as not to delay implementation of uniform standards.
  3. Regulators, industry and state legislative representatives should commit to participating actively in the NAIC Statement of Intent process to reach consensus on a comprehensive program of uniform insurance regulatory standards and an interstate regulatory framework that preserves state autonomy.
  4. Building upon the cooperation necessary to enact uniform producer licensing statutes, regulatory, industry and state legislative representatives should commit to a formal systematic strategy for securing enactment in the states of a comprehensive program of uniform insurance regulatory standards and an interstate regulatory framework that preserves state sovereignty.
  5. The NAIC should convene an advisory group consisting of regulators and industry to recommend ways to streamline its processes, helping to combat negative perceptions that fuel the call for federal regulation. June 2001 should be the goal to enact these changes.

The current system of state regulation is perceived to work against establishment of more uniform insurance standards. This  does not always have to be the case. With a united purpose and a commitment to work within the existing system of regulation, regulators, industry representatives and state legislators can effect dramatic change in the conduct of insurance in the United States. It also provides the best opportunity to demonstrate to detractors of state regulation that their cure -- a new federal regulator based in Washington D.C. -- is no cure at all.

[2] Manders, John M. "Enhancing State Regulation of Insurance Through The Interstate Compact," CPCU Journal, June 1995, Volume 48, Issue 2, Page 91.

[3] Ibid.