NCSL Insurance Regulation Task Force Overview

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Executive Committee Task Force to Streamline and Simplify Insurance Regulation

(Active from August 2001 to July 2003)

Scope

Historical Background

NCSL Task Force

Pre-Annual Meeting Conference Calls

Meeting Information and Documents

NCSL Staff Contact

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The NCSL Executive Committee established the Task Force to Streamline and Simplify Insurance Regulation in August 2001 to examine the future of state insurance regulation. The Task Force -- chaired by Senator Kemp Hannon of New York and Representative Frank Mautino of Illiniois -- is directed to undertake four primary objectives:

Explore the issues that confront state insurance regulation and the business of insurance in the changing financial marketplace, including integration, consolidation, electronic commerce and globalization;
Coordinate with the National Association of Insurance Commissioners (NAIC) and the National Conference of Insurance Legislators (NCOIL);
Formulate an NCSL statement of principles with regard to preserving the primacy of state insurance regulation against congressional and industry efforts to establish a federal insurance regulator and to preempt state insurance and consumer protection laws; and,
Consider reforms that would allow insurance companies to compete more effectively in the financial marketplace and to respond with innovation and flexibility to market forces while maintaining and improving strong consumer protections.

The Task Force was reauthorized for one year on July 23, 2002, at the NCSL Annual Meeting in Denver, Colorado.

HISTORICAL BACKGROUND

For over 150 years, states have held the sole authority to regulate the business of insurance. The McCarran-Ferguson Act in 1945 established the states' exclusive role as regulators of insurance as a matter of federal law. States insurance regulation has been successful and effective. However, there have been a number of occasions within the last two decades when either some within the insurance industry or Congress have tried to repeal McCarran-Ferguson or to set up a dual system of insurance regulation, similar to the present system for state and federally chartered banks. States have successfully withstood massive preemption of state authority to regulate insurance, but there has been some leakage through such federal laws as the Employee Retirement Income Security Act of 1974 (ERISA) and the Financial Modernization Act of 1999.

In the early 1990s, states faced the last great push to preempt state regulatory authority for insurance. Running parallel to the federal savings and loans crash were a number of major insurer insolvencies, which were tied to some of the same people enmeshed in the S & L debacle. Unfortunately, the insolvencies occurred in states where insurance regulation was weak and at a time when there was little coordination among state departments of insurance. The Commerce Committee of the United States House of Representatives, then chaired by Representative John Dingell of Michigan, held numerous hearings on the problems of state insurance regulation and Rep. Dingell introduced legislation to establish a federal insurance administration.

At that same time, the NCSL Executive Committee established a special task force to review the status of state insurance regulation and to make recommendations. The task force working with the National Association of Insurance Commissioners drafted and recommended 11 model bills for state legislative consideration to strengthen state regulation, to reduce some of the filing burdens on multi-state insurers and to allow for greater coordination among state insurance departments. The NCSL Executive Committee unanimously accepted the recommendations. This was the first time in the history of NCSL that it endorsed state legislation, and it was successful. Within two years of the NCSL endorsement of the model bills, virtually all states had enacted model legislation. This swift action by NCSL, NAIC, and the state legislatures was successful in stemming the tide of insolvencies and averting congressional action to establish a federal insurance regulator.

States today do not face a catastrophe of major insolvencies as the primary threat to the future of state insurance regulation. Instead, the challenges come from financial modernization, electronic commerce, market consolidation and globalization. The Financial Modernization Act of 1999-also called Gramm-Leach-Bliley-ushered in the new financial marketplace by establishing a comprehensive framework that permits affiliations among banks, securities firms and insurance companies. These reforms instituted direct competition among insurers and the other financial services industries. Yet, state insurance laws and regulations present obstacles that can keep insurers from competing on a level playing field against banks and securities firms and that limit the ability of insurers to respond with innovation and flexibility to evermore demanding market forces. Of particular concern are inefficient and redundant regulations that prolong the time it takes for insurers to market their products nationally and increase the cost of capital for insurance ventures.

The Internet and electronic commerce also have changed the business of insurance. However, in many cases, insurance regulation remains bound by many state laws enacted in the paper age that stifle the application of e-commerce to insurance transactions. The insurance industry worked hard to preempt state law in this particular area during the deliberations on the federal electronic signatures and records legislation.

Finally, market consolidation and globalization increasingly define the modern economy, which requires companies to operate nationally and globally. As a result, state insurance regulation faces pressure from domestic companies who contend that the current system limits their access to capital and from multinational companies and overseas trading partners who believe it raises practical barriers to market entry.

These factors have moved some strong supporters of state regulation, including the American Council of Life Insurance and the American Insurance Association, to advocate federal insurance regulation.

Although Gramm-Leach-Bliley explicitly reaffirmed McCarran-Ferguson, it also curtailed state authority and signaled intensified federal interest in insurance regulation. Congress since has held numerous public hearings on the states' effectiveness in regulating insurance in the modern financial marketplace. Legislation to establish a federal insurance regulator and to preempt state insurance and consumer protection laws has been introduced in both chambers of Congress. The U.S. House Financial Services Committee-chaired by Rep. Michael Oxley of Ohio has indicated its intention in the 108th Congress to move beyond the information gathering stage to the policy formulation process. It is anticipated that the prospect of a federal insurance regulator will increase substantially in the months ahead unless states begin to enact major reforms to streamline, simplify and modernize state regulation of the business of insurance.

NCSL TASK FORCE

At the NCSL Annual Meeting in San Antonio, Texas in August 2001, the NCSL Executive Committee voted unanimously to establish a special task force to streamline and simplify insurance regulation for the modern economy. Then-NCSL President Senator Stephen Saland of New York formally appointed the Executive Committee Task Force to Streamline and Simplify Insurance Regulation. The Task Force is charged with four primary objectives:

Review the correlation between state regulation of the business of insurance and financial services modernization and competition, electronic commerce and globalization;
Coordinate efforts to streamline and simplify state insurance regulation with the National Association of Insurance Commissioners and the National Conference of Insurance Legislators;
Formulate an NCSL statement of principles with regard to streamlining and simplifying state insurance regulation and on state-federal relations with regard to the future on insurance regulation; and
If necessary, develop and review draft legislation for state legislative consideration.

The First Year

The Task Force held its first meeting in October 2001 and, in all, met five times during the 2001-2002 year. It includes a diverse roster of state legislators from across the country. The Task Force during its first year has focused on broad policy issues and worked with the NAIC on its proposal for an interstate insurance compact.

In July 2002, the NCSL Executive Committee reauthorized the Task Force for a second year at the NCSL Annual Meeting in Denver, Colorado. During its second year, the Task Force began to consider possible legislative reforms to recommend to the Executive Committee to simplify and streamline insurance regulation between the states. The Task Force agreed that these reforms should achieve the following criteria:

To preserve the primacy of state insurance regulation,

To allow insurance companies to compete more effectively in the integrated financial marketplace and to respond with innovation and flexibility to evermore demanding market forces, and

To maintain and improve strong consumer protections, which are the hallmarks of the state regulatory system.

The Sixth Meeting

In its sixth meeting on Wednesday, December 11, 2002, in Washington, D.C., the Task Force heard a testimony from Robert Gordon, senior counsel to the U.S. House Financial Services Committee. Mr. Gordon said that the committee in the 107th Congress concluded its information gathering on insurance regulation and will be moving in the 108th Congress to formulate policy. He outlined five options for federal action: 1) optional federal chartering; 2) optional federal chartering for certain lines, like life insurance; 3) targeted preemption; 4) NARAB-style action where states must act within a period of time or face preemption; and 5) continued pressure.

Next, the Task Force heard a presentation by Iowa Insurance Commissioner Terri Vaughan, the immediate past president of the NAIC, on the Interstate Insurance Product Regulation Compact. The compact was adopted by insurance commissioners on Dec. 8 at the NAIC Winter Meeting in San Diego, California. The compact would set uniform national standards for asset-based insurance products-including annuities, life insurance, disability income, and long-term care insurance-and would receive, review and approve product filings that meet the standards. Commissioner Vaughan said that the NAIC believes that the interstate compact is the best approach to streamline state product regulation systems for these long-term, investment-oriented insurance products while preserving state authority and strengthening consumer protections.

Finally, the Task Force considered property and casualty reform. The Task Force heard a presentation by Cheye Calvo with NCSL on P/C product regulation. Mr. Calvo discussed history and scope of P/C product regulation, reviewed of current state laws, and discussed NAIC "Speed-to-Market" efforts and existing models for legislative reform, specifically the NAIC commercial lines model act, the NCOIL model act and the state models of Illinois, South Carolina and California. Tim Tucker with NCOIL discussed the NCOIL model. Then, following a general discussion, Neil Alldredge with NAMIC and JoAnne Kron with Allstate presented to the Task Force a model bill prepared by the four P/C industry trade groups and State Farm and Allstate insurance companies.

The Seventh Meeting (Meeting Summary and Minutes)

At its seventh meeting on Saturday, March 22, 2003, in New York City, New York, the Task Force heard testimony from a panel on the Interstate Insurance Product Regulation Compact. Iowa Insurance Commissioner Terri Vaughan, the immediate past president of the NAIC, discussed the process and reasons that led the NAIC to adopt the compact model in December 2002. Professor Joseph Zimmerman from the State University of New York at Albany discussed the history and experiences of interstate compacts in the United States. Gayle Yeomans with New York Life, the chair of the ACLI Task Force on Product Regulation, discussed the challenges to the life insurance industry posed by financial modernization and the potential of the compact to address very real regulatory problems. Peter Gallanis with NOLHGA -- but speaking as an individual -- shared his experiences with the interstate receivership compact, observations about current reform efforts, and constructive criticism on the proposed compact model. The Task Force discussed the compact proposal and heard from other interested parties, including Birny Birnbaum with the Center for Economic Justice and Bill Fisher with Mass Mutual.

In the afternoon, the Task Force received a presentation by Philip O'Connor with PROactive Strategies and the former Illinois insurance commissioner on property and casualty insurance (P/C) rate regulation. Dr. O'Connor described what he called the "false promise of rate regulation" for P/C. He said that the market for which P/C rate regulation has not produced its promised results and encouraged legislators to consider market-based solutions to address periodic shortages in coverage and price increases, which are inherent in the insurance market cycle. He promoted the Illinois system a valuable model for other states to consider. Mr. Birnbaum also addressed to Task Force to say that, while Illinois suggests one thing, experiences in California and Texas show that prior approval systems can work and deregulation can fail. He encouraged legislators to focus on underwriting and risk classification issues, which he said was more important than P/C rate regulation.

The Task Force agreed that, at its eighth meeting in Boston, it would review the compact proposal in greater detail -- including possible amendments -- and would begin to discuss a statement of principles related to property and casualty issues.

The Eighth Meeting (Meeting Minutes)

At its eighth meeting on Thursday, April 24, 2003, in Boston, Massachusetts, the Task Force considered proposed amendments to the Interstate Insurance Product Regulation Compact and reviewed and heard comments on a discussion draft of a Statement of Principles for the Regulation of Property and Casualty Insurance. The meeting served as a work session for the Task Force to move forward with proposals to recommend to the NCSL Executive Committee when its meets at the 2003 Annual Meeting in San Francisco on July 22.

The Task Force discussed the process for amending the Compact and agreed that recommended changes should be reached prior to the next NAIC meeting on June 21-24. The Task Force then considered seven proposed amendments, including several introduced by Professor Joseph Zimmerman in the Zimmerman Report. The Task Force supported amendments on the Compact as a public entity (PA1), a code of ethics and publication of bylaws (PA2 parts two and three), enforcement (PA4), and the review of Commission decisions (PA5). It agreed that further work was need on amendments related to open meetings (PA2 part one), commission records (PA3), rulemaking procedure (PA6), and financial audits. Commissioner Vaughan also shared with the Task Force another proposed amendment drafted by an assistant attorney general in Iowa. The Task Force agreed to send letters to the National Association of Attorneys General and state legislative leaders and committee chairs to solicit input on the Compact.

In the afternoon, the Task Force received a summary of a recent congressional hearing on state regulation of P/C insurance and reviewed the draft Statement of Principles. It discussed changes to the second paragraph that would clarify that the states perform insurance regulation well, that they regulate with greater flexibility and speed than the federal government could and that, by serving local economic needs, state regulation also benefits the national economy. Regarding the third paragraph, the Task Force discussed whether it could be changed to better make the case against centralized, federal control. Finally, the Task Force considered proposed changes by representatives of the insurance industry and agents to insert language in the first bullet item to address form regulation and delete the second bullet item, among others.

The Task Force agreed to continue its work by conference call in June and July with the goal of completing its work prior to the NCSL Annual Meeting.

The Ninth Meeting

The ninth and final meeting of the Task Force was held on Monday, July 21, 2003, from 1:00pm to 5:00pm at the San Francisco Marriott -- in conjunction with the NCSL 2003 Annual Meeting.

PRE-ANNUAL MEETING CONFERENCE CALLS

The Task Force decided to hold a series of one-hour conference calls in June and July prior to its meeting on July 21, 2002 -- in conjunction with the NCSL Annual Meeting in San Francisco. The final call was scheduled for Tuesday, July 8th at 2:00pm Eastern Daylight Time (EDT).

June 3rd Call

Co-Chair Sen. Hannon of New York reviewed the work of the Task Force over the last year, discussed the reasons for the Interstate Insurance Compact and requested input from state attorneys generals. Assistant Attorneys General Herschel Elkins of California, Prentiss Cox of Minnesota and Don Trigg of New Mexico expressed concern regarding the adequacy of consumer protections in the Compact. Assistant Attorney General Debby Hagan from Illinois expressed concern that language in Article XVI of the Compact could be used to restrict the authority of state attorneys general. Assistant Attorney General Esther Chavez of Texas raised questions about freedom of information act protections for the Compact. Several attorneys general representatives said that they had not have the opportunity to review the Compact and proposed amendments. The Task Force agreed to hold another call the following week to discuss the Compact with attorneys general representatives to give them additional time to review the material.

June 11th Call

Co-Chair Rep. Mautino from Illinois said that the purpose of the call was to hold a public hearing for AG representatives on the Compact. Assistant Attorney General Bill Brauch from Iowa discussed Proposed Amendment (PA) 8 related to Article XVI of the Compact that said that the Compact shall not abrogate or restrict "general consumer protection laws or regulation that apply to the sale or advertisement of the Product." He said that assistant attorneys general from several states were holding a call later that day to consider an alternative proposed amendment submitted to them by the NAIC. Assistant Attorney General Prentiss Cox of Minnesota highlighted five concerns that were raised in the Four Attorneys General Report. He said the Compact preemption should be narrowed. Second, he said that the enforcement provision should be removed. Three, he said that it was inconsistent to allow insurers to file products either with the state or with the Compact. Fourth, he said that the regulatory opt-out standard should be clarified. Finally, he said that the Compact should have a consumer voice incorporated into its structure. Responding to questions, Mr. Cox said that language was submitted in the Four Attorneys General Report to clarify the preemption issue, which is the same issue that PA8 is intended to address, and that he believes that PA5 on "enforcement" improves the document. The Task Force requested that representatives from the attorneys general, insurance commissioners, and life insurers work with NCSL staff to draft consensus language to address the preemption issue.

June 17th Call

Co-Chair Rep. Mautino of Illinois said that the purpose of the meeting was to hear reports from representatives of attorneys general, insurance commissioners, and life insurers, and to consider proposed amendments to the Compact. The Task Force heard that the three groups met with NCSL staff on Friday, June 13th and drafted new Article XVI language (PA8) that read that, notwithstanding its binding effect, the Compact shall not abrogate or restrict "(iv) the authority of the attorney general of the state." Mr. Brauch with the Iowa Attorney General Office said that a larger group of assistant attorneys general from several states, however, would like language added to this provision to read, "including but not limited to maintaining any actions or proceeding that could be brought in absence of the Compact." Life insurer representatives said that they met to accept the language from Friday but had not examined the new language.

The Task Force then considered the revised proposed amendments. It unanimously recommended adoption of Proposed Amendment (PA) 2a on "open meetings," PA3 on "commission records," and PA6 on "rulemaking procedure." It held PA7 on "finance" to review the varied use of the phases "insurers' proprietary information," "commercial secrets," and "trade secrets" in different amendments. Co-Chair Senator Hannon of New York suggested that a drafting note could explain the different uses. The Task Force requested that representatives from the three groups continue to work with NCSL staff to reach consensus on the Article XVI language. Senator Owen of Colorado said that the Compact should include definitions for the various product lines; Delegate Morgan of Virginia supported the suggestion, and staff was directed to work with NAIC to draft an amendment.

July 8th Call Documents
Compact Proposed Amendments (revised June 30, 2003)
Interstate Insurance Product Regulation Compact Model Act and Preamble
P/C Statement of Principles Discussion Draft (revised June 30, 2003)

July 25th Call

Co-Chair Rep. Mautino of Illinois said the purpose of the call was to consider the revised Statement of Principles for the Regulation of P/C Insurance and to take input from interested parties. Cheye Calvo with NCSL said that changes had been made to the previous draft following Task Force discussion at Boston meeting in April. Specifically, Cheye Calvo said that a number of changes were made to the first paragraph in response to comments by Co-Chair Sen. Hannon of New York. He said that the third paragraph was changed to read "that states must vary their systems to address local markets and that a uniform approach... is not needed" to address a concern raised by Sen. Robinson of Oklahoma. Third, he said that changes were made to clarify bullet items one and six in response to suggestions offered by interested parties. Finally, Cheye Calvo told the Task Force that the NAIC Property and Casualty Committee placed the Statement of Principles on its P/C Committee agenda for its meeting the previous day in New York. He said that Committee Co-chair Commissioner Montemayor of Texas said that he would like the NAIC to offer comments to the Task Force on the Statement prior to its meeting in San Francisco on July 21.

Co-Chair Sen. Hannon of New York said that he wanted to review suggested changes submitted jointly by Allstate, State Farm, NAMIC and NAII. First, he said the industry wanted the statement to direct legislative action rather than encourage consideration, but he said that NCSL protocol only permitted the organization to recommend action for consideration and that it would be inappropriate for NCSL to direct legislative action. Second, he said that the industry wanted to delete the second bullet item, which specifically refers to market-based approaches to commercial lines. He said that he supported the specific reference to commercial lines in order to acknowledge the NAIC commercial lines model but that he was willing to insert an "also" following "State legislatures" in the second bullet to clarify that commercial lines reforms are not exclusive of broader reforms discussed in bullet item one. Representatives of Allstate and NAMIC said that they would prefer that the bullet be stricken but thought that the "also" was an improvement. The Task Force agreed to the change. Sen. Owen of Colorado said he wanted a definition of "market-based approaches," and NCSL staff was directed to clarify the term. NCSL staff shared four stylistic changes submitted by Ms. Hasenauer of Michigan. Mr. Wilson of Maryland said the changes clarified the Statement, and they were accepted.

NCSL staff then updated the Task Force on the three outstanding issues related to the Compact. Cheye Calvo said that the working group of attorneys general representatives, insurance regulators and life insurers held a conference call on Friday, June 20 to draft another tentative agreement on the Article XVI amendment (PA8) and that the larger groups were meeting to consider it. He said that NAIC staff had prepared 1) a drafting note to explain the varied use of "insurers' proprietary information" and "trade secrets," and 2) product line definitions, as Sen. Owen had suggested. He said that these amendments were under review. The Task Force agreed to meet on Tuesday, July 8, at 2:00pm EDT to consider the three remaining Compact amendments (Article XVI, proprietary information, and definitions) and the revised Statement of Principles.