California Congressman Calls NAIC ‘$80 Million Trade Association’
October 3, 2013 by Jeff Jeffrey
WASHINGTON – U.S. Rep. Ed Royce, R-Calif., said he intends to hold a hearing to investigate the National Association of Insurance Commissioners and its role in the insurance marketplace, which he said has gone far beyond what the NAIC has the legal authority to do.
Royce told attendees of the National Risk Retention Association’s annual conference in Washington the NAIC has become a “de facto regulator” of insurance companies that exercises control over state insurance departments through its accreditation process.
Royce, a top Republican on the House Financial Services Committee, said the NAIC has acted beyond its self-described role as a standard-setting organization and taken on a regulatory role both in the United States and on the international stage.
“I don’t think it’s too much to ask that the $80 million trade association define who it is and what it can do,” Royce said, referring to the NAIC’s $78.5 million budget in 2013.
He said NAIC representatives have told the House Financial Services Committee the organization is not a regulatory body, it is a “trade association made up of regulators.”
However, Royce said the organization “imposes its will on companies and states through its accreditation standards, while representing the U.S. on an international basis on rules it has no authority to enforce on a universal basis.”
According to the NAIC’s website, state insurance departments become accredited once they demonstrate that they have met a series of legal, financial and organizational standards as determined by a committee of NAIC members. The goal of the accreditation program is to ensure state insurance departments are meeting minimum solvency regulation standards, the website says.
Currently, all 50 states, the District of Columbia and Puerto Rico have received accreditation certificates.
The NAIC has also been involved in discussions with international regulators regarding the creation of a Common Framework for the Supervision of Internationally Active Insurance Groups.
Royce said since the financial crisis, U.S. insurers have had to worry about three different regulatory systems: state regulators, which traditionally oversee insurance activities; the federal government, which was granted a regulatory role under the Dodd-Frank financial reform act; and the NAIC.
“It will be no surprise when this layering of regulation results in higher costs for consumers,” Royce said. “That should be a concern for all of us.”
So far, Royce said risk retention groups have been able to avoid most the problems associated with what he referred to as “layered regulation” because of the Liability Risk Retention Act, which makes it clear RRGs are to be governed by federal law. But he said RRGs should not “sit on their laurels” in an increasingly dynamic regulatory dynamic.
Royce went on to say the long-overdue report from the Federal Insurance Office on the state of the U.S. insurance marketplace could serve as a watershed moment for insurance regulation. “I am hopeful that it will point to areas where we can improve the uniformity and licensing of regulation and complete that other objective we have — lower the cost to consumers,” Royce said.
Royce has been a vocal critic of the NAIC in the past.
In June, Royce said during a hearing of the House Financial Services Committee’s subcommittee on insurance and housing that the NAIC lacks the legal standing to negotiate with international regulators on rules affecting the industry. Royce said one of the primary reasons for creating the FIO was to serve as a single voice for the U.S. regulatory system and that Congress should take steps to empower the agency to fulfill that role (Best’s News Service, June 19, 2013).
Royce’s most recent critique of the NAIC came one day after three former insurance commissioners told NRRA members that the NAIC is in danger of “falling apart” under mounting pressure from international regulators for the U.S. to better coordinate the regulation of insurance
One of the former regulators, Charles Cohen, an attorney at Low & Cohen in Phoenix, said the NAIC is “fighting a losing battle to stay relevant” as the federal government begins to play a larger role in the regulation of insurance and European regulators move toward a continent-wide regulatory system.
Cohen, a former insurance director in Arizona, cited the Financial Stability Oversight Council’s recent decisions to designate American International Group Inc. and Prudential Financial Inc. as systemically important non-bank financial institutions that will be subject to additional regulatory oversight from the Federal Reserve Board because they could pose a threat to the U.S. financial system. As non-bank SIFIs, AIG and Prudential became the first insurance companies to face federal regulation in more than a century (Best’s News Service, Oct. 2, 2013).
(By Jeff Jeffrey, Washington Bureau manager: jeff.jeffrey@ambest.com)
