Wiley Rein LLP on the Showdown Looming Over NAIC's Authority


For much of its 137-year history, the National Association of Insurance Commissioners served as a forum for state insurance commissioners to meet, share experiences and discuss common problems. However, that started to change when the NAIC began to serve as a standard-setting and information-sharing public voice for the regulatory community. Since the early 1990s, when the NAIC began to accredit state insurance departments, the growth and increasing power of the NAIC has been “phenomenal, and it continues to increase dramatically each year,” according to Lawrence H. Mirel, a partner at Wiley Rein LLP and the former Commissioner of Insurance, Securities and Banking for the District of Columbia. He notes, for example, that NAIC’s annual budget now dwarfs that of all but a handful of the largest state insurance departments. Moreover, the NAIC has been seeking to function as a kind of regulatory body. Mr. Mirel sees two main factors as the reasons for this drive for increased influence.

First, the concept of state insurance regulation is under attack. There is a bill pending in Congress that would allow insurers the choice of being regulated by the federal government rather than by the individual states. In response, the NAIC is seeking to make the prospect of a federal regulator unnecessary by demonstrating that state regulation can achieve a high degree of uniformity, can maintain a central data bank of information about the insurance industry and can enforce the rules that it sets.

Second, according to Mr. Mirel, technological innovation has enabled the NAIC to wield unprecedented power. He observes, “What was only a few years ago an impossible dream – to be able to gather vast quantities of data from multiple sources and collate those materials into easily accessible national information – is now an everyday occurrence. The NAIC has the money, the machinery, and – most importantly – the highly trained people who can do far more with insurance industry data than any single state can. Moreover, by collecting such information, aggregating it, and selling it back to the industry that provided it in the first place, the NAIC has found an endless source of revenue. Using its unique position as the central repository of insurance information gathered from the states, the NAIC can maintain a virtual monopoly on highly valuable and much sought after data on the detailed operation of private insurance companies.”

Mr. Mirel finds this problematic from the standpoint of many in the insurance industry as the NAIC is not a governmental agency and thus is not limited to the rules that apply to government bodies, including those that provide confidentiality of insurance company information that is provided to state regulators. His commentary analyzes the extent of this many-faceted problem from the perspective of the insurance industry. For instance, the NAIC is not subject to any federal or state Administrative Procedure Act which provides due process to persons who disagree with the activities of a government agency. Nor is it subject to a Freedom of Information Act whose provisions would set forth what information is private or confidential and therefore exempt from public disclosure.

Most states have statutes enabling the state insurance regulators to share with the NAIC information obtained in the course of examining an insurance company. While the NAIC avers that it has signed confidentiality agreements with each of the states under which the information will be protected from disclosure according to state law, Mr. Mirel asks in this commentary, “Does that mean that the NAIC provides the same degree of confidentiality as that required under state law?” He asserts, “That is not an easy question to answer because state laws vary.”

Mr. Mirel points to three NAIC proposed actions in recent months “which suggest a desire to make all, or most, insurance company data in its possession public, causing a shudder of anxiety throughout the industry”:

• Require that all market conduct information on insurance companies currently gathered by the individual states be submitted to the NAIC as a supplement to the Annual Statement Blank ─ a public document
• Remove the insurance industry representatives from the System for Electronic Rate and Form Filing (“SERFF”)
• Make public product proposals filed by insurance companies that have been withdrawn or have been disapproved by the Interstate Product Regulation Commission (“IIPRC”)

Mr. Mirel argues, “What should not be on the table … are proposals for a private trade association to ignore valid and enforceable state laws in its rush to prove itself capable of becoming a national regulatory agency.”

Editor’s Note: The Insurance Law Center is now featuring Lawrence Mirel’s blog about the NAIC’s scheduled July 8 vote on its proposal to require states to report insurance company market conduct information in a public forum. Readers may access Mr. Mirel's blog by clicking here. Post a comment and let us know where you stand on this controversial topic.

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