Insurance Task Force Seventh Meeting Summary

NCSL EXECUTIVE COMMITTEE TASK FORCE TO STREAMLINE AND SIMPLIFY INSURANCE REGULATION

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SEVENTH MEETING
March 22, 2003-Omni Berkshire Place
New York City, New York

MEETING SUMMARY

Note: The meeting summary provides a brief overview of the presentations and discussion that occurred at the meeting. More detailed preliminary meeting minutes also are available.

OPENING AND INTRODUCTIONS

Senator Hannon opened the meeting. Introductions were made. He said that the plan was to discuss the interstate insurance compact in the morning and to hear a presentation on property and casualty issues in the afternoon. Representative Mautino said that he thought it was important for the task force to come out of the meeting with a plan and timetable to address the important issues and to move toward making recommendations to the NCSL Executive Committee no later than the Annual Meeting in San Francisco in July.

PANEL ON THE INTERSTATE INSURANCE COMPACT

Commissioner Terri Vaughan of Iowa said that insurance commissioners have adopted a model to establish the Interstate Insurance Product Regulation Compact, which would establish a central clearinghouse to receive, review and quickly make decisions on insurance product filings according to national uniform standards that would be created by members states. The compact would apply to life insurance, annuity, disability income and long-term care insurance products. She said that commissioners arrived at the idea of a compact after experience with other efforts to establish a national system to regulate life insurance products, which is the driving concern behind congressional interest in a federal insurance regulator. The NAIC spent most of 2002 working on the compact model, and it was adopted by the full membership on December 8, 2002, she said.

Commissioner Vaughan said that the compact creates a system whereby uniformity becomes the default. Unlike federal insurance regulation, she said that the compact allows states to decide whether to join the compact, whether to withdrawal from the compact, and whether to opt out of a uniform standard by legislative and regulation while preserving states' market regulation activity. She said that issues have been raised about the compact's legality, which she is confident are not valid. As for public policy concerns, she said that the compact is a "win-win-win" for consumers, the industry and regulators. It meets the industry's need for a regulatory system that responds to current market needs, it raises the quality of review for consumers, and it allows policymakers to better use of resources while maintaining state regulation and their ability to protect consumers locally, she said.

Professor Joseph Zimmerman of SUNY at Albany said that interstate compacts are one of six different methods to achieve uniform or harmonious regulations. He said that the compact is a flexible device that can address a wide range of subjects. The U.S. Constitution says that Congress must approve compacts but this has been interpreted to mean that only political compacts that encroach upon the national government, which the proposed insurance compact does not, need congressional consent. He said that, when Congress gives its consent, it is free to add conditions and two compacts actually limit the power of the federal government. Once a compact receives congressional consent, he said, all member states and Congress must approve amendments. He also shared the specific experiences of several compacts.

Gayle Yeomans with New York Life said that the interstate compact is a solution for a very real problem. She said that financial and retirement products sold by life insurers must be customized and approved separately in each state whereas products the sold by their competitors, such as banks and securities require only one regulatory approval or none at all. Therefore, the current system affects companies' ability to do business and, ultimately, the price at which products can be presented to the public. It also affects state government, where the state by state review demands additional staff time and resources that could be used elsewhere. She said that life insurers believe that the compact would permit them to bring products to market more quickly and less expensively while lessening the burden of maintaining different products that are tailored to unique state requirements. The industry is working to further the compact in a variety of ways, she said.

Peter Gallanis with NOLHGA said that state insurance regulation tends to do certain things very well and that it has demonstrated over the last several years that state regulation can improve -- and do so quickly. He offered the example of solvency regulation. He said that states had cooperated interstate since states begin to regulate insurance in 1851 and that considerable regulation already is performed by assignment of substantial decision-making to the NAIC, such as securities evaluation. He said that this style of interstate cooperation lends to the product approval process, which serves as a regulatory drag on the market and ultimately could lead to a depredation of consumer choice. He said that the criticisms of the compact deal with theoretical or technical shortcomings, but critics fail to offer a constructive alternative. The options are to take no action; to permit federal regulation; or to enact effective state reform that develops a working single point of filing that will bring efficiency to the system of product approval in a way that serves consumers and insurers alike, he said.

Following the prepared remarks, the task force and panelists discussed the effect of financial services integration on the marketplace and how the compact would work. Superintendent Serio on New York discussed an effort by the six largest states to work together to find a common set of product standards that may prove helpful for other states. He said that New York had made significant speed to market improvements and suggested that the industry must work with regulators in other states to achieve similar results. Commissioner Vaughan said that the NAIC has created an ad hoc group to simulate the compact process and begin to create uniform standards and commission bylaws, rules and procedures to illustrate how the compact would function. The task force further discussed the threat of federal insurance regulation and the potential loss of $11.8 billion in annual state insurance revenues. Mr. Gallanis offered a few points of constructive criticism, many of which he said the NAIC had begun to address.

PUBLIC COMMENTS ON THE INTERSTATE INSURANCE COMPACT

Birny Birnbaum with the Center for Economic Justice said that all NAIC funded consumer representatives oppose the compact model, while some -- including himself -- support the concept. He said that the compact had the potential to improve the quality of product review and reduce redundancies but encouraged the task force to make changes to the model that would emphasize the competitive advantage of state regulation, which is consumer protection, over regulatory efficiency. He said the current model removes the incentive for states to experiment with high consumer protections and recommended a requirement that would require that the compact adopt a higher consumer protection once it was enacted in three states with 20 percent of premium volume or any six states. He also argued for changes that would promote greater consumer participation within the compact structure.

Bill Fisher with Mass Mutual said that the market has changed in recent years to require life insurers to compete directly with the products of banks and securities firms, which adhere to a different regulatory structure. He said that insurers need the ability to bring responsible products to market subject to appropriate regulation, to do so according to uniform standards, and to do so in a timely and efficient manner. He said that the compact offers the greatest promise to permit this to happen.

PROPERTY AND CASUALTY INSURANCE ISSUES PRESENTATION

Philip O'Connor with PROactive Strategies described what he called the false promise of property and casualty insurance (P/C) rate regulation, which he said had not delivered its promised benefits. In fact, he said that 30 years of research confirms that insurance rates in highly regulated states are not lower; that the highest priced states have prior approval systems; and that prior approval systems have higher exit and lower entry costs, larger residual markets, more volatile loss ratios, greater cross-subsidies, and less accurate price signals than competitive states. He said that prior approval systems make less effective use of state resources and tend to have price changes that are based more on political than economic events.

Dr. O'Connor said that the market for which prior approval systems was designed has changed radically and the question for legislator is why to keep prior approval systems when states do not see the benefits and when competitive pricing works better. He said that the laws of supply and demand apply to insurance just like other sectors of the economy and that rate regulation serves to create additional risks that inhibit capital commitments. He said that the normal insurance cycle involves periodic shortages in coverage and price increases but competitive pricing allows hard markets to self-correct more quickly while rate regulation applies permanent solutions to a temporary problem.

Dr. O'Connor said that Illinois offers a valuable model for policymakers to consider. The state's rating law sunset in 1971 and Illinois has operated without a rating law ever since -- although insurers must provide informational filings to the department. He said that the results have been favorable with high levels of insurance availability, rates at the national average, prompt recovery from hard markets, and a strong competitive market all while allowing the state's regulators focus their resources to financial regulation, market conduct and consumer protection. He said that more regulatory states like Massachusetts and New Jersey tend to have much less favorable experience. He also discussed specific experiences in South Carolina and Texas.

Following Dr. O'Connor's presentation, the task force discussed the relationship between antitrust laws and insurance regulation, the ability of rate regulation to temper the insurance market cycle, and the economic consequences of political actions.

COMMENTS FROM INTERESTED PARTIEIS ON P/C ISSUES

Mr. Birnbaum read a statement from the Texas insurance commissioner that summarized the difficult condition of the Texas homeowners insurance market and said that the state's circumstances result from the most deregulated market in the country. Although he agreed that deregulation has worked in Illinois, he said that it has not worked in Texas and that rate regulation has worked very well in California following Proposition 103. However, he said that the debate over rate regulation was beside the point and that the most important insurance issues relate to underwriting and risk classification, which are not examined in many states. He added that, in insurance, distributive issues are just as important as aggregate issues and that, within a five percent aggregate, statewide rate increase, some factors like credit scoring can cause a 300 percent increase for some people, which can cause market dislocations.

ROUNDTABLE DISCUSSION AND TASK FORCE TIMETABLE

Representative Mautino said that task force is charged with making recommendations to the NCSL Executive Committee. He said that it was important to set a timetable to reach those recommendations no later than the meeting of the task force at the NCSL 2003 Annual Meeting in San Francisco on July 21.

Representative Mautino asked members to share their thoughts on the compact. A number of members said that they supported the compact while others said that they wanted more time to consider it and to discuss it with others. It was mentioned that the compact has been introduced in Alabama, Indiana and Iowa.

Senator Saland suggested that the a presentation be made on the compact to the NCSL Executive Committee at its meeting in Quebec City in early May. He said that this would help prepare them for a possible vote on the issue at the NCSL Annual Meeting in July.

The task force discussed a plan to examine the compact and other issues before the Annual Meeting. It was said that the task force will meet in Boston on Thursday, April 24 in conjunction with the NCSL 2003 Spring Forum and that a number of members who were unable to attend the New York City meeting have said that they plan to attend the Boston meeting. The task force also has plans to meet on July 21 in San Francisco at the NCSL Annual Meeting. The task force agreed that it might be necessary to hold conference calls between the Boston meeting and Annual meeting. The task force then discussed possible amendments to the compact that the task force may consider.

Commissioner Vaughan said that some possible amendments that have been discussed by the NAIC include clarifying that the compact is a public entity, expanding the open meeting requirements, and other more technical clean-up matters. She said that NAIC would provide specific language prior to Boston. Senator Hannon said that there was an issue raised in San Diego about the preservation of market regulation authority the NAIC. It was agreed that the task force would examine the details of the compact at its Boston meeting and NCSL staff would prepare a review and analysis of issues raised by various groups. NCSL staff said that the minutes of this meeting would be distributed to all task force members and made available on the Web. NCOIL staff said that it planned to distribute a CD of an expanded panel discussion that NCOIL sponsored in February.

Senator Hannon said that, before the Boston meeting, there will be produced a draft statement of principles for property and casualty issues for the task force to consider. He also said that he would like the NAIC to present on the electronic filing system.