Reinsurance, the NAIC and the Feds
The NAIC Reinsurance Task Force held an interim meeting May 6 and 7 in New York. The subject of that meeting was the drafting of a bill to be presented to Congress that would provide recognition of the NAIC’s reinsurance regulatory modernization framework. Yes, you read that correctly; the NAIC needs to ask for Congress’s blessing to make the reinsurance modernization concept work.
Under the adopted framework, the NAIC is proposing two new additional categories of reinsurers: National Reinsurers (U.S. domestics) and Port of Entry Reinsurers (non-U.S. entities). The framework allows for a state with the appropriate regulatory credentials to be the U.S. regulator of a reinsurer assuming business from a U.S. insurer and where the insurers falls into one of the two above categories. In order to develop this concept, one of the objectives of the NAIC is to form a new Reinsurance Supervision Review Board (RSRB). (Formerly the concept was for a RSRD, Reinsurance Supervision Review Department; that has changed.)
The discussion time during the meeting was divided into two main issues: administrative policy and constitutional issues (or unconstitutional issues, depending upon your point of view). Many of the general comments had been heard before, but with the first viewing of the draft bill more specifics were added to the list of concerns.
Administrative comments
Administrative comments ranged from too much specific information contained in the draft bill (would make it harder to implement changes in the future), the improbability of getting all states and territories to adopt the exact same new set of rules (viewed as absolutely necessary for implementation), to the fact the NAIC apparently will have direct control of the RSRB (an slight change from the adopted framework). There is still a large constituency of insurers that say the present system isn’t broken, so leave it alone. Most of the non-U.S. reinsurers are still hoping to get a “level playing field” with the U.S. insurers which, so far, has not happened. And just who will be paying the fees for conducting evaluations by the RSRB that are supposed to cover all costs of the “establishment and operation of the Board?”
Constitutionality issues covered a myriad of ideas including, but certainly not limited to:
1. The U.S. government is being asked to give the NAIC, a private, non-profit trade organization, governmental powers without any oversight.
2. The draft states the RSRB will be administered by the NAIC and composed of state insurance regulators. Challengers argue that the constitution gives the right of appointment to only the U.S. President.
3. Preemption of state laws, regulations, provisions, or other actions where they are inconsistent with the proposed act.
4. Do foreign nation’s laws allow them to deal with non-governmental entities?
While all of this discussion is quite interesting and provides a lot of food for thought, what I find troubling is the idea that the NAIC is knowingly and willingly asking for the involvement of the federal government. I understand that for their modernization framework to succeed in its current format, there really is no choice. But considering all of the energy that the NAIC has spent trying to keep the federal government out of insurance regulation, this seems like dangerous water to be treading.
Currently, Congress is again hot on the idea of federal regulation for the insurance industry; or, at the very least, providing an option for federal oversight of the industry. Their example, of course, is “one of the world’s largest insurers” needing financial help from the U.S. government. Of course most of us realize the assistance was needed by the holding company, which is a separate entity from its related insurers; a fact that Congress (and others) are having trouble grasping (or maybe they don’t want to grasp that idea). The industry is also dealing with the SEC declaring that equity indexed annuities and “certain other insurance contracts” are now under their jurisdiction.
So in this environment, the NAIC needs to approach Congress and ask for powers not normally granted to private organizations. Of course there is absolutely no chance (tongue in cheek) that the federal government might view this as a perfect opportunity to get a foot in the door of insurance. Bills always pass as introduced, right? There are seldom revisions to bills, let alone material revisions, correct? There is no way that Congress would change the introduced bill to organize the RSRB as a U.S. governmental agency and then proceed to give that agency some (or all) of the powers that the NAIC envisioned for the Port of Entry state or Home state.
The NAIC ended their interim meeting by asking industry representatives for suggested wording changes to eliminate the constitutionality issues. Whether or not this can be done is yet to be seen, but I have no doubt the NAIC will try. I also have no doubt that Congress will also try to use this opportunity to their best advantage.