State Legislators Have Questions On NAIC Compact Proposal

Premium tax revenue in some states is quite large and with states facing a 15%-20% budget shortfall, that revenue will be increasingly important, said New York State Sen. Kemp Hannon, R-C-I, 6^th District.

In addition to premium taxes, assessments on insurers to run the departments would also be impacted if a federal system were put in place, Serio said. Insurers would ask for relief from those assessments, he said. "You could see a significant change for state insurance departments themselves."

New York State Sen. William Larkin, R-C, 39^th District, also noted "what a tremendous beauracracy would be created" if a federal system of insurance regulation were put in place.

The arguments for the compact are "compelling," according to Vaughan, who said it will improve state regulation. In presenting the case for the compact to state legislators, Vaughan said departments will be able to better allocate resources.

For instance, she says the Iowa department has a staff of 90 with one employee reviewing life insurance product filings. Efficient product review will only become more important given the complexity of products such as equity index annuities and features such as nonforfeiture and other guarantee provisions, Vaughan continued. The compact can provide that efficiency, she said.

What will help states in the interim, said Serio, are setting minimum product filing standards and technology. Those two factors have made it possible for the New York department to reassign staff from product filing to other regulatory tasks within the department, he added.

A good deal of work on the compact already has been done and the National Conference of Insurance Legislators will be taking a more formal position on it later this year, said Tim Tucker, director of state-federal affairs, for NCOIL, Albany, N.Y.

But Birny Birnbaum, executive director of the Center for Economic Justice, Austin, Texas, said more work needs to be done to create a compact that protects consumers.

A compact format offers potential for improving consumer protection, but not the compact currently being advocated to legislators, Birnbaum said. The proposal helps achieve efficiency but not consumer protection, he explained.

Instead of product standards being decided by the compact, Birnbaum suggested that when a certain number of legislatures representing a certain percentage of the total U.S. population adopted a product standard, then the compact would be required to adopt that same standard.

Birnbaum also suggested that a public comment procedure should be established. "There is nothing inherent in consumer involvement that would slow down the model," he added.

North Dakota Insurance Commissioner Jim Poolman said arguments made by consumer groups that the compact would create a race to the bottom for regulation are not true. "If you go down [to the legislature] and say this is onerous to the industry, I think you will be absolutely kicked out of the chamber you go into."

But Birnbaum countered by saying it is not necessarily a race to the bottom, but rather "a race to mediocrity."

Serio said individual state departments can better use resources by more proactively looking for market conduct problems rather than focusing on product filings. Companies have filed "beautiful products" and then altered the product filing once approval was received, he says. The "greatest bang for the buck" is achieved by concentrating on proactive regulation," he said.

Reproduced from National Underwriter Edition, March 31, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.