PUBLIC POLICY ANALYSIS & OPINION

WAIST DEEP IN THE BIG MUDDY

Terri Vaughan commits NAIC to an expensive
crusade for her interstate compact

By Kevin P. Hennosy

Manufactured "happy talk" quotes and reassuring PR shows aside, the proposed compact faces serious political opposition.

On December 8, 2002, in San Diego, the National Association of Insurance Commissioners (NAIC) adopted a proposal for an interstate compact to govern life insurance, annuity, disability and long term care insurance. A small number of states expect to introduce enabling legislation to form the compact in 2003, but observers believe that most states will not join the compact. On the whole, the compact proposal has all the markings of a political quagmire that future NAIC leaders will regret was willed on to their agenda.

The proposal

To form a compact, the state legislatures must pass, and governors must sign, identical enabling legislation in participating states. Once enacted, a private commission assumes responsibility for regulating the covered lines of insurance. The commission, a private corporation, will assume cartel powers unfettered by direct public accountability.

Iowa Insurance Commissioner Terri Vaughan proposed the compact in March 2002. The proposal's initial purpose was to build a state-based framework to provide uniform regulation to products of concern to life insurers. The initiative has always had more to do with federal politics than public good.

The NAIC leadership offered the compact proposal to life insurers as a political bone. The leadership hoped that the proposal would win support back from insurers that support a proposal for uniform national regulatory framework in the form of an optional federal charter.

The follies

Commission Vaughan touted the proposal in a statement to the press: "The creation of an interstate insurance compact is a 'win-win-win' situation for consumers, industry and regulators. Most important, it maintains and enhances the state-based regulatory system that's been protecting American consumers for more than 150 years."

The NAIC leadership worked to build support for the compact before the national meeting. A "symposium" was conducted on December 7, 2002. The term symposium was used loosely. The event was really a public relations program. One presenter after another used the forum to sing the praises of compact federalism--a system of government that the framers of the Constitution rejected.

The opposition

Manufactured "happy talk" quotes and reassuring PR shows aside, the proposed compact faces serious political opposition. Despite the best efforts of NAIC officers, not one consumer organization endorsed the compact. In addition, support for the compact has shown signs of weakness among state officials.

A coalition of consumer groups worked hard in opposition to the compact. The consumer groups challenged the constitutionality and legality of the compact framework before the NAIC and the nation's governors. The consumer coalition will continue to work with governors now that the NAIC has approved the proposal.

The NAIC officers tried to peel away the support of several large corporate-oriented consumer organizations like the Consumer Federation of America, Consumers Union and the American Association of Retired Persons (AARP) but were not able to cut a deal for an endorsement. The officers had a half-measure of victory by convincing the AARP not to actively oppose the compact, which most regulatory observers believe would have meant defeat for the proposal.

Another group that withheld its endorsement from the compact is known collectively as "the insurance industry." The property/casualty industry rejected the idea of a compact at its inception; therefore, no provision was made for property/casualty products in the proposal. Life insurance advocates have offered only tepid support for the compact proposal. Speaking on condition of anonymity, two representatives of American Council of Life Insurance member companies told Rough Notes that, in their opinion, the trade association is only working the NAIC for concessions. These observers believe that concessions at the state level will result in concessions at the federal level in future negotiations over national (corporate) charter legislation.

The compact proposal suffered a late attack from states' attorneys general. The NAIC received a letter from the National Association of Attorneys General (NAAG) that raised questions about the compact's constitutionality. The letter asked the NAIC to forestall final consideration of the compact until it could be considered by other groups of state officials. The letter expressed grave doubts about the constitutionality and legality of the compact:

"The proposed Compact purports to assign 'exclusive' powers to a private Commission to regulate false advertising and other matters of interest to Attorneys General. More generally, the proposed compact is structured such that it poses serious state and federal constitutional issues."

The NAAG was not alone in asking for delay. Two weeks prior to the NAIC national meeting, the National Conference of Insurance Legislators (NCOIL), a conservative group that represents insurers' perspectives in state legislatures, met and the compact proposal was discussed. Repeatedly, according to industry attendees at the NCOIL meeting, Commissioner Vaughan was urged to delay the NAIC vote until the proposal could receive more vetting. Commissioner Vaughan had other plans.

Say anything

In response to the NAAG letter, the NCOIL comments and growing doubts within the NAIC membership, Commissioner Vaughan used a two-pronged strategy to get what she wanted while giving the appearance of deference to the concerns of others. The strategy was effective in the short-term because it gave Commissioner Vaughan final approval for her compact proposal before the end of her term as president; however, it was a strategy that opponents will remember for a very long time as a deceptive act.

The leadership brought two resolutions on the compact before the membership at the national meeting that resulted in contradictory outcomes. The first resolution adopted the compact as what Commissioner Vaughan called a "work in progress." She promised that comment would be solicited from other groups and interested parties. Immediately following the first resolution's adoption, a second resolution was introduced that conferred "final approval" upon the compact proposal.

During debate on final approval, Michigan Insurance Commissioner Frank Fitzgerald announced he would have the current proposal introduced in the Michigan legislature next year. So much for a "work in progress." Once a single state adopts the compact, making changes will be very difficult because every compacting state must adopt exactly the same legislation. Thus, passage in any state means that proponents will argue that it is unwise to vary from that language. In short, the compact proponents used the second resolution to thumb their noses at input from other state officials or interest groups.

Final approval was granted, but 13 states voted against the resolution. The NAIC leadership was denied the ability to credibly claim that the there was consensus support for the compact proposal. A substantial number of states voted against the compact and a great number more have said they will not support it in their legislatures. The consensus opinion put forward by regulators who voted for the compact was, "This is going nowhere in the states."

The NAIC proposed a compact for interstate receiverships in the mid-1990s that was trumpeted as a national framework, which was adopted by six states. Only three states participate in the compact today.

The treatment

The adoption of the compact by the NAIC was a personal victory for Commissioner Terri Vaughan who staked her credibility on her ability to get the proposal approved by the NAIC. Commissioner Vaughan was a popular and persuasive president of the NAIC. She used those political assets to buy approval of her interstate compact proposal with a single-minded expression of personal will.

Commissioner Vaughan approached the passage of the NAIC compact proposal with all the deal-making fervor of Lyndon Baines Johnson. Commissioner Vaughan's lobbying was both personal and generous. In the tradition of LBJ, the commissioner lavished upon supporters, and subjected opponents, to "The Treatment." She addressed every concern with special interest provisions and promises of future action by the private commission.

What proponents of state regulation of insurance must worry about is whether the parallels with LBJ will extend beyond the creation of the proposal. The same talents that made LBJ a master of domestic legislation led to his demise in foreign policy. Horse-trading worked for LBJ with the Republican Everett Dirksen, but failed with the nationalist Ho Chi Minh.

When all is said and done, the compact does not and cannot address the "nationalist" aims of the life insurance lobby. A compact among states cannot constitutionally or legally deliver national uniform regulatory treatment. It cannot do so constitutionally. The U.S. Constitution reserves such power for the federal government. It cannot do so legally, because the McCarran-Ferguson Act requires the states to regulate insurance--not a private corporation.

Terri's legacy

The overreaching nature of the proposal, the inherent opposition of consumer organizations and the remote feeling that most insurers feel toward the interstate compact could spell danger for state officials. The interstate compact campaign could easily become "the NAIC's Vietnam": a long and costly struggle that devours the association's budget surplus, political prestige and public credibility.

The compact has already been cited as a major financial drain on the NAIC. The association has paid for outside legal counsel to deal with the compact issue for the past year. On November 14, 2002, the NAIC issued a low-key warning that the association budget would take a hit as the compact was implemented. "With regard to net assets, the NAIC is facing the possible cost of implementation and early maintenance of the interstate compact," said Arkansas Commissioner Mike Pickens. NAIC members are only now starting to ask what this adventure will cost in terms of dollars and cents.

Even under the most rosy scenarios offered by the NAIC leadership, it will take at least three to five years to implement the proposed compact. As the political battles begin in the states, the association will need a string of victories in major states. Proponents of the compact believe that the NAIC cannot afford to lose a battle, because the association's prestige is on the line.

The compact proposal has already attracted the attention of the American Trial Lawyers Association, which sent a representative to the NAIC meeting for the first time in over a decade. (A long-time NAIC attendee from the property/casualty industry said on background, "Now that ATLA is here, who knows what they will get into!") The proposal has agitated the Attorneys General to pay a level of attention to insurance public policy that they have not given since the liability crisis of the 1980s.

It is only a matter of time before Congressional members and the General Accounting Office begin to apply oversight attention to the compact. In fact, members of the NAIC leadership will tell advocates privately that they fully expect Congress to step in at some point and "fix the compact." In short, the compact proponents who swore that the proposal would forestall congressional action have actually invited congressional action. The compact vote was a political bait-and-switch that will, in the long term, diminish the credibility of state officials. What a legacy. *

The author

Kevin Hennosy, an insurance writer specializing in the history and politics of insurance regulation, covers the proceedings of the NAIC (National Association of Insurance Commissioners) for Rough Notes readers. Hennosy began his career with Nationwide Insurance Companies and then served as
public affairs manager for the NAIC. He has written extensively on insurance regulation and testified before the NAIC as a consumer advocate. He is currently writing a history of insurance and its regulation in the United States.