Walsh now presides over a changed NAIC. Freebies are. out. So is industry funding for the happy hours and other events at the NAIC’s quarterly business meetings. So sensitive to appearances have the commissioners become that at a meeting in Minneapolis last week the NAIC banned NEWSWEEK from photographing an after-dinner dance. The media message: when industry lobbyists are around, state insurance regulators don’t boogie.
But they do, they do. As things now stand, no law or regulation is likely to pass in all the states unless the industry agrees. That’s why, for example, you can’t find out the true cost of your cash-value life insurance. Reformers have sought truth in pricing for upwards of 25 years, but the industry always snuffs it out.
Insurance is normally regulated by the states. But because it’s a national industry, the states try to harmonize their laws. For that reason, the NAIC convenes a permanent, floating debate society, which gathers once a quarter to hash out the scope and wording of proposed new rules. All the states are in attendance. So are some 1,000 representatives of the nation’s insurance companies. The industry reps supply helpful technical expertise. They also critique the regulators’ work and propose their own versions of how insurance regs should read. As the group struggles for consensus, many years can sputter by.
Consensus matters because the NAIC cannot do anything alone. It adopts model laws, but they have no effect unless they’re passed by individual states. This two-step process gives the insurers a powerful say over the results. If the NAIC approves a paragraph that key insurance companies hate, they’ll turn loose their lobbyists in the state capitals to excise the offending words. “I’ll be dead before 50 states pass anything the industry opposes,” says actuary James Hunt, a director of the National Insurance Consumer Organization. Some eases in point:
The worst of these depredations began in the early 1980s, but not until 1992 did the NAIC even look at the issue. After much discussion, the regulators proposed that insurers quit predicting what a policy might earn (which is unknowable anyway), But the industry screamed that it can’t sell insurance without showing buyers the mountaintop. Last week the regulators tabled their own plan and will take up the industry’s more accommodating proposal. James Hunt sees no point in lobbying for anything else. “The only chance of reining in policy illustrations,” he sighs, “is to go along with whatever reforms the industry will accept.”
That’s little comfort to consumers, who buy the misleading illustrations and learn too late that they shouldn’t have. To its credit, the NAIC has given consumer interests a greater voice. Since 1992 it has covered all expenses for anywhere from 12 to 18 consumer advocates who attend the meetings and sometimes wedge minor recommendations into model laws. But on the whole, the advocates feel they don’t count for much. “The NAIC is as progressive as the pressures brought to bear,” says Mary Griffin of Consumers Union. “I’d like to see a big national group get interested in insurance problems and make them a legislative priority.”
In the meantime, the NAIC’s old agenda is being challenged from within. There’s a new and powerful fifth column of consumer-aware commissioners-from Texas, Missouri, Georgia, Hawaii, Florida, Montana, Washington state, California and Oregon. They’re talking up such issues as how to speed up reimbursements to policyholders when their insurance companies fail; how to get more insurers to sell to good prospects in minority neighborhoods; how to make better judgments about whether rate increases are justified. But the pressures to desist are fierce, says Robert Hunter, former president of the National Insurance Consumer Organization and now commissioner in Texas. The biggest surprise of his new job, he says, are “state legislators who also make a living as insurance agents, and who keep trying to tell me what to do.” They vote on hills that affect their livelihoods, unrestrained by conflict of interest.
State regulation came under serious attack after the failure of such big insurers as Mutual Benefit and Executive Life. There was talk of federal solvency rules and other forms of oversight. That sent the NAIC into a frenzy of creation, from which emerged (with industry backing) a program called accreditation. A state becomes accredited when it adopts a matrix of NAIC-proposed reforms, designed to spot potential insolvencies well in advance. To enforce its will, the NAIC prepared sanctions, not against unaccredited states but against the insurers headquartered there. The insurers couldn’t sell policies in accredited states unless one of those states sent an auditor to inspect the books. For a toothless organization like NAIC, this “big tooth” was heady stuff. After just four years, 37 states and Washington, D.C., have been accredited, with eight more states ready for review. The new laws have beefed up the budgets of state insurance departments, which are doing more audits and hand ling more complaints.
Yet the NAIC’s structural weakness haunts this project, too. New York lost its accreditation, because one state senator won’t have outsiders telling him what laws to pass. Vermont put up a separate fight. An organization of state legislators toyed at fomenting revolt. “This is the ultimate confrontation,” says insurance professor emeritus Joseph Belth of Indiana University. “It will determine whether state regulation is viable.” So far, the game goes to diplomat Walsh. who says he’s allowing for differences while keeping the basic rules in place.
Long term, however, the regulatory structure tips too far toward industry. On deceptive sales, consumers aren’t being heard at all. Walsh says that improving the marketplace will be the NAIC’s next big job, but he won’t get the industry backing that he did when he tackled solvency rules. An alternative approach would be federal standards for price disclosure and policy access, with the NAIC hashing out the rules and enforcement handed to the states. Either way, alas, it may take a crisis of loss and fraud before industry accepts reform.
