Issue One: How strict will the standards be?

If the issue is uniformity, then the standards cannot be “minimum” standards. They must be absolute.

Simply reducing the variations among state insurance laws and regulations will not be enough, since that would still force insurance companies and agents to comply with multiple means of accomplishing the same end.

Minimum standards simply would not solve the problem, since the problem is not the degrees of variations, but the variations themselves.

Issue Two: Who will write the standards?

There are two possibilities.

One is that Congress will enact into law an entire insurance code that will be imposed on the states. The other is that someone will be appointed to do it.

The more likely scenario is the latter, since it is asking a lot for Congress to enact legislation that has that amount of detail and requires substantial technical expertise.

The betting is that the National Association of Insurance Commissioners will be named to develop the standards. But that gives rise to the following issue:

Issue Three: Who will oversee the NAIC?

This is a very tricky Constitutional question. It is doubtful whether Congress has the authority to delegate the enforcement of a federal law to a trade association that does not answer to any recognized federal regulatory agency.

(Let me mention as an aside that the NAIC has taken it upon itself to certify that states are in compliance with the reciprocity requirements of the Gramm-Leach-Bliley Act provisions on a National Association of Registered Agents and Brokers. No one has challenged the NAICs authority to do so, nor whether its determinations are correct. However, my understanding is that the reason for this is simply that the cost of litigation would not justify the benefit. But no one should believe that the issue is decided.)

The model people are looking at is the National Association of Securities Dealers, which is a private, self-regulatory trade association that operates subject to the approval of the U.S. Securities and Exchange Commission.

If that is the model, then someone at the federal government level, akin to the SEC, will have to be empowered to approve or disapprove whatever the NAIC does. (It might be going too far to call this federal regulation, but I am frankly at a loss to figure out what else to call it.)

The point is that there will have to be some type of federal bureaucracy with a permanent staff of experts to perform this function.

Issue Four: Who will determine whether individual state regulations and enforcement activities are in keeping with the federal standards?

Creating standards is one thing, but assuring that they are enforced on a consistent basis in all jurisdictions is something else.

Someone will have to determine whether the decisions made by states regarding allocation of scarce resources for enforcement activities meets the federal standards. Someone will have to determine just how much flexibility states will have in how they enforce the standards.

It might be the NAIC. But again, the NAIC would have to answer to someone at the federal level.

Will the federal government agency have the authority to mandate that states invest a certain amount of resources in specified enforcement activities? Will any enforcement decisions by the NAIC or the states be open to challenge by affected parties–namely, insurance consumers, companies and agents?

The point of this commentary is not to oppose federal standards for state regulation. There is little debate, at least within the industry, that insurance regulation needs to be reformed and that federal standards might be the most politically viable means of achieving reform.

However, the more I think about it, the more I believe that even though one of the objectives of federal standards is to keep direct regulation in the hands of the states, there will have to be a significant federal role that includes the establishment of a federal insurance office and federal preemption of state laws and regulations. I just dont see how the industry can avoid this.

Whether this system is actually more efficient and effective than optional federal chartering will make for an interesting debate in the coming months.

Steven Brostoff is NU's Washington editor. He may be reached at [email protected].

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, June 2, 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.