There was a time when the National Association of Insurance Commissioners (NAIC) operated with little regard for what was going on in Congress. After all, the McCarran-Ferguson Act says that the states, and not Congress, will regulate insurance.
Not anymore. Most of the significant items to be discussed at the fall NAIC meeting involve issues that are being heavily debated in the Congress, and virtually nothing gets talked about at the NAIC these days without a look over the state regulatory shoulder at what the Feds are up to.
It is significant, to start with, that the meeting is being held in Washington. After many years of meeting anywhere in the U.S. except the capital city, the NAIC has made a conscious decision to hold more meetings in Washington, and at least one of its quarterly meetings each year for the next several years is scheduled to be held here. The announced purpose of this change is to give state regulators more opportunities to meet with their congressional delegations, and that is undoubtedly happening. But equally important is the desire of the NAIC to let Congress know that it is working hard to solve some of the tough insurance regulatory issues, in support of the argument that direct federal insurance regulation is not necessary. By meeting in Washington, the NAIC hopes that its work will be noticed more by Congress.
A quick look at the issues to be discussed at the fall meeting shows a federal component in virtually every one.
One of the major topics in September will be a proposal under consideration by the Financial Condition (E) Committee to change the rules that currently govern how non-admitted foreign (known in the quaint language of insurance-speak as "alien") reinsurers operate in the U.S. market. Currently, these large, mostly European reinsurers (Swiss Re, Munich Re, Hannover Re, Lloyd's, etc.) are required to post 100% collateral in a U.S. bank on all U.S. risks ceded to them by U.S. primary insurers. The debate, which has raged for years (full disclosure: we represent Hannover Re on this issue) over whether the requirement is necessary or "protectionist" and a barrier to international trade is finally close to being decided. A drafting group of the Reinsurance Task Force will propose a new system for rating reinsurers on the basis of their financial strength and market behavior and lowering or eliminating the collateral requirement for those that clearly have the resources and the reputation for meeting U.S. obligations.
But the proposal will go even further. It will recommend a system for providing reinsurers with a single regulator for doing business in the U.S. Admitted companies will be regulated by their state of domicile. Non-admitted (alien) reinsurers will be able to choose a "port of entry" state that will be their sole U.S. regulator. Note that this will be a system that provides a single regulator, but a state regulator, not a federal regulator, for reinsurers.
Obviously, this is an effort by the NAIC to head off the Optional Federal Charter concept that is embodied in bills that have now been introduced in both chambers of the Congress. But it is also a way to try to demonstrate that the state-based regulatory system has the ability to deal with the growing globalization of insurance products, especially reinsurance, in an effective and responsible manner.
It is likely that the E Committee will adopt the proposal at the fall meeting in Washington and that the full NAIC will approve it as a model law at the winter meeting in Houston.
Of course, adopting a model law does not mean that all, or even any, of the states will enact it, and the NAIC has limited ability on its own to insist that they do so. But one of the options for implementation in the proposal is to ask Congress for help in getting the states to adopt the model law through some kind of federal pre-emption statute, along the lines of the Non-Admitted Insurance and Reinsurance Reform bill currently being considered by Congress. Such an idea coming from the NAIC would have been unthinkable just a few years ago.
Natural Disasters and the All-Perils Policy
There will be more discussion at the fall meeting of an "all perils" homeowner's policy, something that Congress is also looking at. In testimony on July 17 before the federal House of Representatives Subcommittee on Housing and Community Opportunity, Kansas Insurance Commissioner, Sandy Praeger, speaking for the NAIC, endorsed the idea of a private market all-perils policy, perhaps with a federal backstop. Commissioner Praeger is the president-elect of the NAIC, and she will become president in January.
In her testimony, Commissioner Praeger praised Rep. Gene Taylor of Mississippi for his proposal to add wind peril to the National Flood Insurance Program but said this proposal does not go far enough. The next large disaster might be earthquake or fire, and consumers would have to buy multiple policies to protect themselves, which "still leaves problems with consistency of coverage where the line of dispute has been moved, not eliminated." Consumers don't care what the cause of their loss is, or the mechanism of payment, she said. "They simply want to be made whole."
Commissioner Praeger recommended that the NFIP become a federal reinsurer that would provide a backstop in the case of a catastrophic natural disaster, similar to the way TRIA would function in the case of a disastrous terrorist attack. To obtain the benefit of the federal backstop, the private market would have to offer all-perils homeowner's policies. Consumers would be able to decline coverages, but only knowingly and specifically, by checking a "decline" box on a checklist of coverage.
Terrorism Risk Insurance and TRIA Extension
And, of course, there will be talk about TRIA. The NAIC, which has always supported the idea of a federal backstop for terrorism risk, has endorsed an extension of the Terrorism Risk Insurance Act, due to sunset at the end of this year, along the lines of the bill recently adopted by the House Financial Services Committee. Whether the extension should be for 15 years, as in the Financial Services Committee bill, or a shorter time, and whether the attachment point for federal government involvement should be raised, lowered or kept the same, it is clear that there is little support within the NAIC for the position of the Bush administration that the terrorism backstop should be eliminated, now or in the near future. Rep. Barney Frank (D-MA), the chairman of the House Financial Services Committee, has said that TRIA cannot be a temporary measure because the risk of terrorism is not temporary. The NAIC apparently agrees.
Criticism of how the insurance industry handled the unprecedented losses from Katrina, whether deserved or not, has led to calls in Congress to repeal the McCarran-Ferguson provision that exempts insurers from certain aspects of federal antitrust laws. Based more on frustration arising from Congress's limited authority over the insurance industry than on any logical connection between the antitrust exemption and industry behavior in the wake of Katrina, it seems unlikely that the repeal effort will be successful. The NAIC, however, has not opposed the idea of eliminating the antitrust exemption, as long as the basic premise of the McCarran-Ferguson law—that the states, and not the federal government, should regulate insurance—is left intact.
It's a New Day in Insurance Regulation
Whether the pending Optional Federal Charter legislation or some other form of federal regulation becomes law, insurance regulation is not what it used to be. The ability of the NAIC to ignore, and sometimes even to disdain, congressional interest in insurance regulation is over. Nor is Congress likely to punt difficult insurance regulatory issues to the states, as in the past. The industry has become too global, too large and too essential for the Congress to ignore. Is the imposition of collateral requirements on alien reinsurers an international trade barrier? Why does so much of the insurance industry's money, mostly from premiums paid by Americans, end up in offshore locations like Bermuda and the Cayman Islands? Is there enough money in the insurance industry to cover a truly devastating terrorist attack, a colossal natural disaster or both at the same time? Should the capital market play a larger role in risk financing? These are all issues of high interest and importance, and the NAIC has come to recognize that it cannot deal with them without federal involvement. Just how the state-based insurance regulatory system and the federal government will relate to each other in the future is the subtext of virtually every issue now before the NAIC.