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RIMS spars with NAIC over federal regulation.

FOR ONE WEEK in October, holding a debate in Virginia proved to be quite popular. In Williamsburg, Arkansas Governor Bill Clinton was preparing for a presidential debate to be held just days later in nearby Richmond. But also in Williamsburg, a smaller, less publicized discussion on state vs. federal regulation of the insurance industry - a topic whose final outcome has perhaps as much importance to the insurance buying community as does the outcome of the national presidential election - was in full swing.

The debate took place on the final day of the RIMS Virginia Chapter's 1992 Educational Conference. RIMS Past President Robert Esenberg, risk manager for the City of Virginia Beach, acting as moderator, stressed that what RIMS had endorsed at its annual conference this past March was the concept - not any particular proposal - of federal solvency regulation of large commercial insurers writing policies for large commercial policyholders. He conceded, as RIMS Director of Government and Public Affairs and General Counsel Paul Brown later would, that "we still do not like the proposals that are on the table; there are problems with them; but there are some parts that we do like."

Questioning the wisdom of having a federal regulatory system, Steven Foster, insurance commissioner for the commonwealth of Virginia, stated "I don't know why RIMS thinks that if you put regulation in the hands of federal employees who are subject to 535 elected officials, that the results would be better. There's plenty of evidence of the influence of senators and congressmen who have stopped regulators from taking action." He related how federal authorities had preempted the Virginia state banking commissioner's authority to shut down two undercapitalized state-chartered savings and loan banks by granting them federal charters. The banks eventually folded, amassing tens of millions of dollars more in liabilities than they had prior to federal intervention.

Making the states' case, Commissioner Foster reported that the National Association of Insurance Commissioners (NAIC) had embarked on an accreditation program that would derive its power from those state insurance departments not honoring non-accredited state examinations of its domestic insurer's ability to write on an interstate basis. Responding to a charge levelled by Mr. Brown that a state's non-accreditation status could hurt consumers in that state by driving out its insurers to accredited states, Commissioner Foster asserted that the non-accredited state would probably be willing to license a redomesticated insurer as a foreign insurer.

Commissioner Foster readily admits that there are certain areas, such as the regulation of alien direct writers and reinsurers, that still need to be addressed: "This isn't a perfect system. There are still receiverships; there are still cases of states waiting too long. And even in a near-perfect system, given the competitive nature of the marketplace, there will still be receiverships. So our goal is to minimize those; our goal is to get better control of it." One method both RIMS and the NAIC favor would be the federal government's enacting anti-fraud legislation.

Firing another salvo at federal regulation, Commissioner Foster specifically believes that there is nothing in H.R.4900 - the Dingell Bill - for consumers, "only for large insurer and broker special interests, to have one license to operate in 50 states and be self-regulated." But Mr. Brown disagrees, having found that complex multistate-multinational transactions "have become sophisticated to the point where state regulators do not have a good handle on regulating those transactions." On the other hand, both agree that a dual system will not work, but unlike the NAIC, RIMS contemplates two separate systems regulating different areas of the industry as opposed to splitting the rate and solvency responsibilities. Mr. Brown hopes and expects that H.R.4900 will be reintroduced next year in a much better form.

Lack of Interest

WHY DID RIMS COME out with its statement when it did? Mr. Brown notes that RIMS had been studying several proposals for some time and knew that Rep. Dingell was soon coming out with one of his own. As such, RIMS sought to have its interests taken into account by Rep. Dingell before that bill was formally proposed by coming out publicly with its own statement. "And quite frankly," Mr. Brown adds, "the move paid off. We have been involved in shaping the bill and believe that RIMS members' interests are addressed in the bill." He acknowledges that there still is work to be done and that "the bill is not perfect by any means."

Mr. Brown further noted that "it was becoming dear that the NAIC as a group did not have RIMS members' interests at heart when it was coming up with the new regulations that it has." He cites as an example the NAIC's apparent desire, with direction from the New York State Insurance Department, "to regulate the captive insurance market out of existence." And after two years of discussion between RIMS and the NAIC, little has changed overall on the proposal.

According to Mr. Brown, Rep. Dingell's staff has properly treated captives in H.R.4900 by not regulating them the same as they regulated traditional insurers and reinsurers-the very point RIMS has been trying to get across to the NAIC over the past two years to no avail. "They [Rep. Dingell's staff] understood what we meant, took it and wrote the bill accordingly" after just a half dozen meetings, Mr. Brown stated, adding that "it is encouraging that they are willing to listen and learn. After 120 years, there still are some state regulators who are not willing to listen."

Buyers or Sellers?

ONE ISSUE THAT received a good deal of attention was the NAIC's decision this past August to no longer recognize RIMS as a consumer organization but rather as a member of the insurance industry. Considering that the NAIC's mission is to protect the consumers of insurance, Mr. Brown finds it ironic that "here is the single largest group of insurance consumers that the NAIC is making a conscious decision, in effect, to ignore."

In actuality, both concluded that RIMS' ability to participate at the NAIC meetings probably won't be affected. However, Mr. Brown points out that RIMS' identity is affected by the NAIC not recognizing one group of consumers, which is another "compelling reason why federal regulation would be a better way to go." Commissioner Foster contends that as far as he is concerned, this recognition only has to do with meeting registration, no larger symbolic issue. But he also counters that "RIMS has been actively involved on behalf of captive insurers on the fronting bill." No conclusions were arrived at regarding the status of RIMS where its captive members are concerned.

Mr. Brown hopes that even if it is discovered somewhere down the road that federal regulation is not the way to go, perhaps this process at least will have helped the states to improve the way they go about regulating insurance and reduce the inefficiencies caused by having some 55 separate jurisdictions. Mr. Brown concluded that "the federal government will give access to uniformity that I don't think the NAIC will ever achieve. At this point, the federal alternative seems to be the way to go."

In one of the more heated exchanges, Commissioner Foster stated, "I didn't hear a single word today about what the federal government can do better. I heard the ultimate destruction of state regulation here today, and if that's what RIMS' position is, then I'm finally glad to hear it." This comment came despite Mr. Brown's previous assertion that "there still is a very important role for state regulators and that is the regulation of personal lines companies and small commercial companies."
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Title Annotation:Risk and Insurance Management Society, National Association of Insurance Commissioners
Author:Kurland, Orin M.
Publication:Risk Management
Date:Dec 1, 1992
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