NCSL LegisBrief: The Life Insurance Regulation Compact

NCSL LegisBrief
January 2004, Vol. 12, No. 3

The Life Insurance Regulation Compact

By Cheye Calvo

Congress has told the states to modernize state insurance regulation or face federal action. In response, NCSL and the nation's insurance commissioners have endorsed model legislation to create an interstate compact to regulate life insurance products. The compact promises to improve the efficiency and effectiveness of product regulation while preserving the state system from federal intervention.

Federal Action

The Gramm-Leach-Bliley Financial Modernization Act of 1999 affirmed the creation of an integrated financial services marketplace that permits affiliations and competition among banks, securities firms and insurance companies. The law also signaled increased federal interest in insurance regulation, which is regulated by the states.

Of particular interest to Congress are life insurance products. These products compete directly against the products of banks and securities firms, such as money-market accounts, CDs and mutual funds. Life insurance products include long-term, investment-oriented insurance products such as annuities, life insurance, disability income, and long-term care insurance. Currently, insurance companies must seek approval in each state before they bring new products to market. This process can be slow and inefficient, placing insurers at a competitive disadvantage and delaying new products that are more affordable and beneficial for consumers.

The U.S. Senate is considering legislation that would completely federalize insurance regulation and eliminate the state system. Legislation to preempt state authority and impose federal standards is expected in the House in 2004. Federal lawmakers have told the states to address the situation themselves or Congress will act. Federal legislation would undermine effective state regulation, threaten the creation of a vast new federal bureaucracy and endanger $12.5 billion a year in state revenues from insurance taxes, fees and fines.

State Action

Although states recognize the need to keep up with the forces of financial modernization, they believe that insurance is a different kind of product that requires a brand of regulation that states are best suited to provide. Where banking and securities are about access to capital and risk-taking, insurance is a guarantee -- a promise to pay benefits if and when something occurs. For more than 150 years, states have successfully and effectively protected consumers and ensured that promises made by insurers are kept.

To lead efforts to modernize state insurance regulation, NCSL created the Task Force to Streamline and Simplify Insurance Regulation with the charge to examine state systems and propose changes to meet the needs of the modern economy. Insurance commissioners -- working through the National Association of Insurance Commissioners (NAIC) -- already have overseen substantial regulatory reforms. However, legislative reforms are needed to create a national, state-based system for life insurance.

Interstate Insurance Product Regulation Compact. The task force worked with insurance commissioners to develop model legislation for the Interstate Insurance Product Regulation Compact. It would create a multistate system to quickly make regulatory decisions on life insurance product filings according to national uniform standards created by member states. Members would pool their resources and expertise to approve new products, but would retain authority over market regulation, financial solvency, claims settlement, and consumer inquiries and protections. The compact also protects the authority of state attorneys general to enforce general consumer protection laws.

Where federal regulation would allows insurers to bypass state laws, the Compact would preserve state authority to decide whether to accept a national standard. If a uniform standard for a specific product line failed to measure up, a state could opt out through legislation or regulation. The compact also allows states to opt out of long-term care insurance (LTC) product standards when it joins and includes minimum LTC consumer protections. Moreover, a state could withdraw from the compact at any time if it concluded that it was not working.

The compact includes many key features to ensure broad decision making participation among all states, promote strong consumer protections and encourage decisions through consensus. A commission with one member from each member state would govern the compact. A management committee of 14 states would oversee day-to-day operations. The management committee would include the six largest states and 11 mid-size states would take turns among four seats. The remaining states and the District of Columbia would rotate by region among four seats. The committee and full commission would require two-third supermajorities to adopt uniform product standards. A legislative committee would oversee compact activities and make recommendations. The compact would become effective once enacted by 26 states or states representing 40 percent of the nation's premiums for life insurance products.

The compact promises to promote consistent safeguards when holders of these long-term insurance policies move from state to state. It also has the potential to promote and guide new products to make them more affordable and available to consumers across the country.

The NCSL Executive Committee in July unanimously endorsed the compact. This is only the third time in its 28-year history that NCSL has endorsed model legislation. NCSL and insurance commissioners believe that the compact is the best way to preserve state insurance regulation while raising insurance consumer protections, improving the quality of product review, and providing insurance companies the regulatory efficiency that they need to compete in the modern financial services marketplace.

Selected References

Calvo, Cheye. "Insurance Regulation: A Time For Change." State Legislatures 29, no. 3 (March 2003): pp. 12-16.

NCSL Interstate Insurance Product Regulation Compact Menu Page
http://www.ncsl.org/programs/insur/compact.htm

Contacts for More Information

Cheye Calvo
NCSL-Washington, D.C.
(202) 624-8661

Andrew J. Beal
NAIC
(816) 783-8025