By the time you read this article, the Gramm-Leach-Bliley Act (GLB) will be soon approaching its first anniversary, and what a year it has been, especially for state insurance regulators.
Signed into law on 12 November 1999, GLB repealed the Depression-era Glass-Steagall Act that previously prohibited banks, insurance companies and securities firms from engaging in each other's business. GLB now allows for affiliations among banks, insurance companies and securities firms and a new financial services holding company structure that can offer a full range of financial products under the umbrella supervision of the Federal Reserve Board.
Even though GLB appears to recognize the growing convergence of financial service organizations taking place globally, Congress nevertheless chose to preserve existing regulatory entities for the time being, but urged regulators to become more “functional.”
For the National Association of Insurance Commissioners (NAIC), a non-profit corporation of 55 state and territorial insurance jurisdictions, the notion of “functional regulation” has become the association's mantra this year.
In examining the “Statement of Intent” document the state insurance regulators signed in March and the nine, commissioner-driven working groups they created, one could argue that this NAIC “roadmap” has three major arteries to help define functional regulation. This paper assesses the progress made so far in constructing each artery.
Perhaps the least discussed NAIC initiatives are those provisions that, once in place, should promote smoother relationships between federal and state regulators. Four of the nine working groups fall into this category and include such issues as finding a common definition for insurance, developing a common set of consumer protections, sharing confidential information and designing protocols for entities that come under the new financial holding company organizational structure.
This work appears to be proceeding, although most of the discussions among regulators so far have been in private, so an industry assessment is highly speculative at best. However, judging from the formal information-sharing agreements being signed, federal and state regulators appear to be attempting to define the parameters for working with each other in the future.
The first interstate “tests”
GLB requirements for producer licensing and privacy have been the first real tests for state regulators this year. These “tests” really have called into question the ability of regulators to work with each other, and in some cases, whether the regulators can persuade their respective state legislatures to support the requirements as well.
As for producer licensing, the National Association of Registered Agents and Brokers (NARAB) provision requires at least 29 states to create a more uniform licensing system for non-resident producers, either through reciprocity agreements or more uniform laws, by 13 November 2002, or the independent NARAB licensing entity is established.
Last December, state regulators unanimously agreed to pursue the “reciprocity option.” At the same time, the regulators adopted a new producer licensing model act that also contains provisions to create greater licensing uniformity. So far, four states have either adopted the new model or at least the reciprocity language in it.
This push for greater licensing uniformity has not been without its opponents, and at time of writing, regulators were considering whether to “re-open” the model to more clearly describe what functions are needed for a customer service representative to be licensed. Most NAIC observers believe this issue must be resolved before state legislators can consider adopting the model next year.
The privacy provisions in Title V of GLB require financial institutions to develop privacy policies and disclosure notices for their customers. The provisions also let the customers opt out of situations where non-public, personal financial information is shared with non-affiliated third parties.
State regulators waited until June before releasing their first privacy regulation draft, even though federal regulators completed their own regulation in May and extended the compliance deadline to 1 July 2001.
Part of the delay was based on the belief by state regulators that they were not bound by the federal deadlines and the states could “expand” the privacy requirements in Title V.
This touched off a controversy among insurance trade groups and state regulators that was beginning to subside in September. Both sides appeared to be settling on a compromise to limit “health information” privacy provisions to marketing situations only. What was less certain was how quickly states could promulgate their privacy regulations and when insurers had to be in compliance.
Progress on the producer licensing and privacy issues has been slow, and state regulators will need to step up their efforts next year if they are to persuade their detractors that they are capable of being functional regulators.
Interstate functional regulation
The imminent passage of GLB touched off calls for more a uniform state-based insurance regulatory system early last fall. The American Council of Life Insurers (ACLI), for example, undertook an extensive, member-driven examination of all aspects of state insurance regulation and offered a series of specific recommendations for improving certain regulatory practices. Other organizations, such as the American Insurance Association (AIA) and the National Association of Mutual Insurance Companies (NAMIC), also released advocacy papers focusing on regulatory issues important to their respective members.
As part of its “Statement of Intent” initiative last March, the NAIC agreed to examine three regulatory reform issues, and, over the next six months, the new working groups worked diligently at developing proposals to make state insurance regulation more efficient and uniform.
The National Treatment of Companies working group, for example, focused on more uniform company licensing processes and then using that model to provide “national treatment” for issues such as corporate governance, holding company transactions, solvency monitoring and market conduct exams.
The Speed to Market working group looked at finding ways to help bring products to market more quickly. In late August, they unveiled the Coordinated Advertising, Rate and Form Review Authority (CARFRA), a voluntary organization of state insurance departments that would draw from its ranks a pool of “experts” to help the domiciliary state review and make recommendations on certain nationally standardized products that could then be approved by member states.
A third working group focused on improving market conduct surveillance activities and by September they had developed recommendations for more uniform processes and had settled on a “state deference with enhancements” model to help reduce duplicative exams.
At time of writing, the three working groups seem to be moving quickly toward a future “model” for state-based regulation. The National Treatment of Companies working group envisions an independent task force composed of nine insurance commissioners who would oversee the national standards for company licensing and other forms of corporate governance. The Speed to Market working group contemplates a similar structure, although its proposal is less defined at this point. The Market Conduct Issues working group is also proposing a model that assigns the responsibility for market conduct exams to the state of domicile with help from other states. Implicit in the three proposals is the notion that individual states, acting alone, may not have the expertise to oversee today's more sophisticated insurers, although all three working groups contemplate that final decisions are left to each state.
This may be a bitter pill for some regulators, but if regulators can come to realize that greater interstate cooperation on “review” regulation may allow them to spend more time on “enforcement” regulation, the regulators may be more willing to embrace the changes. For this paradigm shift to work, though, state regulators will have to become more comfortable with, for example, the notion of letting insurance companies set their own rates and forms, and more conscious of developing new techniques to ensure that companies do not abuse that trust and act fairly toward consumers.
Two legal frameworks have been proposed so far to achieve this new regulatory model. One proposal calls for an interstate compact where individual states would agree to follow the task force guidelines being proposed. Insurance regulators tried an interstate compact in the past for receivership programs, but only three states joined. While it could be argued that a similar fate awaits the pending proposal, it could also be equally argued that receivership regulation is more specialized, often employing outside legal counsel, where the regulatory processes under review are activities now routinely handled by state regulators.
The second legal framework calls for specific federal legislation to mandate that states follow the task force proposal. While this approach logically would achieve the ultimate goal of more uniform state regulation sooner than an interstate compact, it is fraught with the prospect that the proposed legislation could be changed at the last moment to bring insurance regulation more under federal control.
Whatever the outcome of these discussions next year, one thing has become certain: functional regulation is now “the norm” for judging insurance regulation, whether it continues to operate as a state-based regulatory system or it is “federalized” and becomes a dual regulatory system in the future.
David B. Reddick is the government affairs advocate for the National Association of Mutual Insurance Companies (NAMIC). He is a former chief deputy commissioner with the Indiana Department of Insurance.