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Executive Committee Task Force to Streamline and Simplify Insurance Regulation(Active from August 2001 to July 2003)
Pre-Annual Meeting Conference Calls Meeting Information and Documents
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SCOPEThe 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:
The Task Force was reauthorized for one year on July 23, 2002, at the NCSL Annual Meeting in Denver, Colorado. HISTORICAL BACKGROUNDFor 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 FORCEAt 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:
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:
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 and last Task Force meeting occurred in San Francisco at the 2003 NCSL Annual Meeting on Monday, July 21.
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