An announcement by the National Association of Insurance Commissioners in March 2002 at the Reno, Nevada, Spring Meeting caught most attendees by surprise. NAIC President and Iowa Insurance Commissioner Terri Vaughan unexpectedly unveiled a state-based initiative to implement a nationwide uniform filing and approval process for life and annuity products.
What is most surprising is that the key component of this initiative is the formation of an interstate compact. The NAIC as an institution has not been supportive of compacts in the field of insurance regulation. The NAICs announcement states that this endeavor will be led by a new Interstate Compact Working Group, reporting directly to the executive committee of the NAIC.
While the goal of this NAIC initiative is to create a national system of state-based insurance regulation for life and annuity products as an "option" for companies seeking to sell products on a multi-state basis, the details are yet unclear. If developed properly, this initiative could provide a path to reform that the life insurance industry has been looking for.
I and others who support the use of compacts in regulation applaud the NAIC for taking this bold step. It is still unknown how much support the idea has within the NAIC member ranks. Keep in mind it is relatively easy to appoint a working group to study things. Yet, I am encouraged by this action since it might mean the less likelihood of a serious effort to move to federal regulation. It may also signal that the NAIC is really serious about reform and working smarter to achieve it.
Today, more than ever, there is an urgency to strengthen and reform state regulation to meet the demands of the new financial services marketplace.
In the past, inefficiencies resulting from regulation by 50 states and the District of Columbia were tolerable because all insurance companies faced the same problems. But today, life insurers provide a variety of financial products and services for their customers and are in direct competition with brokerages, mutual funds and commercial banks, non-insurance firms with far more efficient systems of product regulation, often with a single, principal regulator.
For life insurers, making regulation of product approval more efficient is an urgent priority.
The idea of using an interstate compact to improve state regulation is not new. But unlike the past when the use of compacts was suggested, today there are compelling reasons to mobilize and act quickly.
Drawing upon the prior work of others and with the groundbreaking efforts of the National Conference of Insurance Legislators, I and several others saw an opportunity to use the compact as a vehicle to not only establish the Interstate Receivership Commission to address problems with the existing receivership system, but also to address other areas of regulation.
When the NAIC commences its drafting of the new compact, certain fundamental decisions will have to be made. These will be similar to those confronted when the insurance receivership compact was drafted:
- Will existing state resources be replaced or retained and utilized in a better fashion?
- Should larger states have a greater voice in the administration of the compacts powers and authority?
- What relationship will the administrative entity created by the compact (the "Commission") have with the NAIC?
- What should be the scope and subject area of the compact?
- What are the "ills" in the current state system that the compact needs to address?
- How can the compact be constructed to achieve acceptance by all stakeholders?
I offer here several thoughts on these questions, as well as how to get the compact up and running quickly.
What the New Compact Could Look Like
The goal is obvious–create a system that will allow life insurers to bring products to market in all jurisdictions quicker. The impediments to achieving that today is not only that products have to be approved in 50 jurisdictions, but each of those states have differing rules, many of which are antiquated, and states may have disparate staff competency.
The compact legislation does not have to create a new and untested bureaucracy. To do so would be counterproductive to acceptance and passage.
To address these problems the compacting states can agree that a product approved in one jurisdiction can be sold in all compacting states. The compacting states, through the "Commission," can create the standards and rules for approval of products.
