On August 25 I wrote about a dilemma facing the National Association of Insurance Commissioners (NAIC): How could it become a national insurance regulator while remaining a private association of state insurance regulators? I described a draft of federal legislation the NAIC was circulating that would provide it with Congressional authority to develop a program under which reinsurers, including non-U.S. reinsurers, would be able to operate nationally with the authority of a single state.

Significant constitutional issues were raised about the NAIC proposal, by me and many others. In its first draft, circulated March 24, 2009, the legislation called for the creation of a National Association of Insurance Commissioners Reinsurance Supervision Review Board (Board) as a nonprofit corporation owned by the NAIC that would “not be an agency or establishment of the United States or any State Government” but would have authority under federal law to qualify states to approve reinsurers to operate nationwide; other state regulators would be preempted from regulating reinsurers approved by the states designated by the NAIC Board.

Questions about the constitutionality of a private organization of state officials empowered by federal law to regulate reinsurers, including the power to preempt inconsistent state laws, led the NAIC to circulate a revised version of the legislation on July 27. In this second draft the Board would not be owned by the NAIC but would be appointed by the President of the United States, who would pick 10 state regulators selected by the NAIC plus five federal officials. The language about the Board not being an agency of the United States or any state government was dropped but not replaced, leaving open exactly what kind of entity it would be. Would it be required to follow the federal Administrative Procedures Act, Freedom of Information Act and other federal laws designed to protect the public against the arbitrary exercise of government power? The third draft, circulated on September 3, resolves that issue by declaring, flat out, that the Board is to be “an instrumentality of the United States” and therefore subject to the APA and other laws governing the operation of federal agencies. The role of the NAIC is to be advisory only.

So the dilemma has been resolved. The entity responsible for designating states as qualified to regulate reinsurers nationally, and to preempt other states from exercising regulatory authority over reinsurers approved by those states, will be a new federal agency. The NAIC will stay in its role as a private association of state officials.

Case closed? Not quite. The new revised version of the legislation still would require the President to appoint to the Board (with the advice and consent of the Senate) “Ten directors from the State insurance regulatory authorities in their respective States” whose names would be submitted by the NAIC, along with five federal officials from the Department of Treasury, Department of Commerce and Office of the United States Trade Representative. So the Board would be dominated, by a margin of two to one, by state officials nominated by the NAIC. Does that mean that a federal agency would be controlled by state officials? And, if so, doesn’t that still raise constitutional issues?

In a long conference call of the NAIC’s Reinsurance Task Force on September 15, at which interested parties were invited to make comments, a series of questions were asked about the nature of the NAIC’s role in the process. The answers were somewhat less than enlightening.

When asked whether the President would be required to appoint those persons—and only those persons—nominated by the NAIC, the answer provided by outside counsel for the NAIC was no, that the President could choose persons nominated by other organizations, or pick anyone he wanted, so long as 10 of the Board members were state insurance regulators. When asked if the 10 state regulator members served only in their official capacities, so that their term on the Board would end automatically if they were no longer employed as state insurance regulators, the answer was that legally the President has the power to remove Board members for any reason or no reason, and presumably he would want to remove persons who no longer served as state regulators (unless such persons did the right thing and resigned). When asked if there was any precedent for the President being required to appoint to a federal agency persons nominated by a private organization, the reply was that the Uniform Carrier Regulation Board is structured that way, although in that instance the persons nominated by a private organization form a minority, not a majority, of the governing board.

A vote of the members of the Reinsurance Task Force of the NAIC was taken during the conference call on September 15. By a large margin the latest draft was approved. Delaware voted “no” and Wisconsin voted present. It will go next to the NAIC’s Government Relations Leadership Council, which meets on September 23 during the NAIC fall meeting at National Harbor, Maryland.