Thousands of insurance executives and regulators converged on Orlando, Fla., in March to attend the spring meeting of the National Association of Insurance Commissioners (NAIC). Dozens of committees, task forces, and “working groups” convened during the five-day affair, offering a revealing glimpse of this unusual organization.
Though little known outside of professional insurance circles, the NAIC exerts enormous influence over the scope and direction of insurance regulation in the United States. Established 125 years ago to help state insurance regulators ensure the solvency of insurers doing business within their borders, the NAIC also pledged to “preserve to the several states the regulation of the business of insurance.”
Its ability to fulfill both objectives was sorely tested in the early 1990s, when a series of major life insurer insolvencies led Congress to threaten a federal takeover of insurance regulation. In response, the NAIC developed a nationwide accreditation program that helped restore public confidence in the insurance industry, and ended talk of a federal usurpation of state regulatory functions.
The solvency crises of the early 1990s also served as the impetus for spectacular increases in the NAIC's budget and staff. After growing steadily from $4.4 million in 1981 to $14 million in 1990, the organization's budget ballooned to $40 million in 1995 – a 186 percent increase in five years. Staff more than doubled between 1991 and 1994, from 142 employees to 290.
As often happens when bureaucracies experience rapid growth in response to perceived emergencies, the NAIC greatly expanded the range of its regulatory activities during this period. While it had already moved beyond its original preoccupation with solvency issues prior to the 1990s, the current decade has seen the NAIC focus increasingly on what it terms “market conduct” – a catch-all designation that includes nearly everything pertaining to the underwriting, marketing, and pricing of insurance products. And to help it ferret out market conduct in need of regulation, the NAIC enlisted a dozen “consumer representatives” – culled from a melange of liberal advocacy groups – whom it pays to participate at its quarterly meetings.
With the active assistance of these “funded consumer representatives” (as they are known in NAIC parlance), the NAIC has drafted scores of “model acts,” which are then routinely brought before the various state legislatures by their respective insurance commissioners. Generally speaking, state legislators are not well versed in the arcana of insurance regulation, and are thus often content to pass any legislation that bears the imprimatur of the NAIC.
This deference has led to the enactment of NAIC model laws that, among other things, establish maximum allowable rates for various kinds of insurance, limit the ability of health insurers to share and act upon patient information, and prohibit insurers from engaging in forms of “unfair discrimination.” Unfortunately, the NAIC's penchant for regulating “market conduct” is frequently in conflict with fundamental principles of modern insurance underwriting.
Consider the organization's concern with “unfair discrimination.” Discrimination is a central and unavoidable component of insurance underwriting, inasmuch as the underwriter's job is to select and classify risk. Presumably “unfair discrimination” bears no logical relationship to risk, but is based instead on uninformed prejudice – the classic example being race discrimination.
But the NAIC dealt long ago with race discrimination, so today it targets forms of discrimination in underwriting that are based more on valid assessments of risk than on mindless prejudice. For example, the Orlando meeting featured the latest deliberations of an NAIC working group that is drafting a model law prohibiting discrimination against “victims of abuse.” The law's purpose is to prevent property insurers from denying a claim where the loss occurred because of “abuse.” Nor would insurers be allowed to make any adverse insurance decision, such as canceling a policy or raising a premium, based on “information that the insurer knows or has reason to know is abuse-related.”
It is a terrible thing for someone to be a victim of abuse, and as society has become more cognizant of the dimensions of this problem, it has deployed increasing numbers of police and social workers to combat it. At the same time, it seems fairly obvious that being chronically subjected to violent abuse is, from an insurer's perspective, a factor related to risk.
Moreover, there would seem to be no reliable way to verify a policyholder's claim that a particular loss was “abuse-related.” Yet the working group, admonished by one of the NAIC's funded activists against allowing “victims of domestic violence to be penalized for something they're not responsible for,” seemed blissfully detached from these considerations.
The central conceit of the NAIC's Funded Consumer Representatives Program is that it accurately reflects the interests of insurance consumers. Because this group is so large and heterogeneous that no one organization could presume to speak for all of its members, the NAIC has invited a dozen discrete groups into its council.
But this has simply had the effect of privileging certain viewpoints by giving their proponents a subsidized, participatory role at NAIC forums. The funded groups invariably use their influence to press for policies that shift costs from the consumers they favor to other groups of consumers who lack representation before the NAIC.
This tendency was observed repeatedly in Orlando. NAIC officials were informed by a funded activist that the use of credit reports as an underwriting tool is a form of “redlining,” while hearing not a word in behalf of those consumers who would benefit from the use of an objective standard that rewards their effort to maintain favorable credit ratings. When Oregon's insurance commissioner speculated that the use of credit reports might be “unfair” (after conceding that there may well be a valid correlation between an individual's credit condition and the level of risk he presents to an insurer), none of the consumer representatives that the NAIC had paid to come to Orlando dissented.
The congruence between the interests represented by the NAIC's consumer representatives and the policy predilections of many insurance regulators makes it is easy to see why the National Association of Insurance Commissioners poses a continuing threat to market-oriented, risk-based insurance practices.
Robert R. Detlefsen is Director of CEI's Insurance Reform Program.