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Public Policy Analysis & Opinion

Innocents amuck

The NAIC and state regulators test constitutional bounds with Memorandums of Understanding

By Kevin P. Hennosy

"In Paris they just simply opened their eyes and stared when we spoke to them in French! We never did succeed in making those idiots understand their own language."--Mark Twain, Innocents Abroad

American insurance regulators, acting alone and as a confederacy of dunces, have decided to establish a foreign policy and conduct forays into international affairs. This dystopian initiative continues to grow without the benefit of constitutional authority or public accountability.

In most school districts, high school students must complete a basic course on American government. These courses carry many assorted names; from the traditional "Civics" to the angst-loaded "Problems of Democracy."

These courses tend to keep it pretty simple. In America, we prefer to use paid advertising in 15- and 30-second increments to impart knowledge about our government.

While a student might learn that there are three branches of government, or they might draw pictures of fighter jets in their notebook, they are not likely to hear the term "Memorandum of Understanding." The term Memorandum of Understanding is not used in the Constitution, and one should understand it as a pretense for the word "treaty" or phrase "international agreement."

Nevertheless, one cannot understand modern insurance regulation without considering the use of uncounted, secret arrangements between American states and foreign countries and international organizations colloquially known as Memorandums of Understanding, or MOUs.

Of course, when discussion turns to the shadowy nooks and crannies of insurance regulation, there is a role for the National Association of Insurance Commissioners (NAIC). In addition to individual states, the NAIC has joined MOUs with at least 12 foreign agencies or entities "acting on behalf of its members, who are the chief insurance regulatory officers in each of the fifty States, the District of Columbia and the U.S. territories."

At the NAIC meeting conducted March 3-6 in New Orleans, the International Insurance Relations (G) Committee heard discussion of the use of MOUs. NAIC staff made clear that there is no definitive accounting of these international agreements.

Encouraged and often fostered by the NAIC, individual states and possibly groups of states have entered into international agreements, which for all intents and purposes serve as treaties governing international trade in insurance.


The states do not have the constitutional authority to enter into "treaties, alliances or confederations."

Contrary to folklore, when the Constitutional Convention of 1787 adopted this prohibition, the concern was focused on commercial exchange more than military alliances.

During the debates on the Constitution, Alexander Hamilton defined treaties as "CONTRACTS with foreign nations, which have the force of law, but derive it from the obligations of good faith." In order to assure the exercise of good faith and eschew local parochial interests, Hamilton argued that the power to bind international agreements must rest in the federal executive branch.

The Federalist victors at the Constitutional Convention were responding to the states' inability to act in the national interest. Under the failed 1777 Articles of Confederation, states did hold the power to enter into international agreements, with the approval of the "united states in congress assembled." In most cases, obtaining the consensus necessary to garner approval by the congress of states proved elusive, as each state was driven by parochial economic interests.

This tendency toward parochialism from the states is the reason the Federalist framers created a national executive and prohibited a role for the states in international affairs. Article I, Section 10 of the Constitution prohibits the states from engaging in international relations, a power explicitly reserved to the national government.

Shadowy realm

It is difficult to write authoritatively about the scope and gravity of the use of MOUs in insurance regulation because so much of the activity is conducted in secret. One can assume that the agreements remain secret because it is unconstitutional for American state officials to enter into treaties, compacts or confederations with foreign governments.

Unlike international agreements engaged in by the executive branch of the federal government, these agreements are not reported to the U.S. Senate or subject to "advice and consent" proceedings. Unlike agreements made by the federal executive agencies, these treaties, compacts or confederations do not have basis in the Constitution. Agreements entered into by federal officials must be reported to the U.S. Department of State.

States may or may not report MOUs to the NAIC or other state jurisdictions. Information received by the NAIC may or may not be reported to the public. In addition to the NAIC's Burka of Secrecy draped over the existence of these international agreements, regulators and the NAIC will not disclose the content of many, if not most, MOUs.

We know more about the MOUs signed by the NAIC than we know about those MOUs that involve individual states. Yet, when considering the activities of the NAIC, one can never be sure how much activity might take place that the Delaware chartered corporation does not choose to disclose to the public.

The NAIC currently admits to being bound through MOUs to regulatory cooperation with Iraq, Egypt (Mubarak government), Russia, Brazil and ASSAL (Association of Latin American Insurance Supervisors), Thailand, the China Insurance Regulatory Commission (CIRC), the Office of the Commissioner of Insurance of Hong Kong, Korea's Financial Supervisory Commission and Financial Supervisory Service, Taiwan and Vietnam's Department of Insurance. The NAIC also has agreed to a model MOU on information exchange between EU supervisors and U.S.-led supervisors of insurance group members with transatlantic operations.

The NAIC tries to present these activities in terms of extending training to foreign officials and providing advice in United States regulatory practices. These descriptions of international cooperation sound very nice and pretty, but let us remember that the Vietnam War began with the deployment of trainers and advisors; however, at least those advisors and trainers were sent by the United States government.

The stated scope of the NAIC MOUs is actually much more expansive than training and advising. Several of the MOUs contain the following description of the scope of the international agreement as applying to: "the provisions of the laws, regulations and requirements enacted in [NAME OF COUNTRY] and the fifty states, the District of Columbia and the US Territories."

Each of the NAIC MOUs acknowledged to the public contain a clause which explains that "no provision herein shall be interpreted as superseding, amending, revoking or otherwise changing any law relating to the [FOREIGN AGENCY] or any US jurisdiction."

Nevertheless when the NAIC signed its agreement with China, then Iowa Insurance Commissioner Therese Vaughan said: "Ongoing dialogue, technical assistance and training will help us better coordinate regulatory functions under our respective laws." The MOUs are international agreements, or treaties, and they influence how regulatory policy is implemented.

Even with regard to the training and advising functions of the MOUs, the agreements include descriptions of activities that seem to fall under the Foreign Agents Registration Act (FARA), which requires purveyors of foreign political propaganda activities to register with the Department of Justice. The MOUs describe the activities as "mutual," which implies that American officials participate in:

a. training held in the host country;

b. participation in internships with specific educational focus;

c. educational seminars held in the host country;

d. provision of training manuals/material.

If these activities were not in practice mutual, and the propaganda activities were directed from the NAIC to only officials from foreign countries, there is a still a concern that the activities could fall under the jurisdiction of the Foreign Corrupt Practices Act (FCPA).

The FCPA applies to any individual who is a citizen, national, or resident of the United States and any corporation and other business entity organized under the laws of the United States or having its principal place of business in the United States. The act prohibits an offer or payment of anything of value to a foreign official, foreign political party, or candidate for political office, for the purpose of influencing any act of that foreign official in violation of the duty of that official, or to secure any improper advantage in order to obtain or retain business.

An extended trip to the United States might easily be seen as "anything of value" that would influence how a foreign regulatory official conducts his or her duties. An insurance company might not risk offering such a trip, but the NAIC might stand in their shoes to evade the law.

The question is whether the NAIC actually selects countries in response to the needs of particular insurance firms that are seeking to enter those countries. Former Insurance Superintendent Larry Mirel of the District of Columbia used to chair the NAIC International Cooperation Working Group, and he made open statements at NAIC meetings concerning companies helping the NAIC to select jurisdictions for training programs.

Where the funding for these programs came from remains sketchy. In the agreement with the China Insurance Regulatory Commission (CIRC) and a subsequent Amendment to that MOU, there is a provision for the CIRC to reimburse the NAIC for the cost of its personnel participating in the MOU programs. No such provision appears in the MOU with Thailand.

This brings to mind the NAIC practice of laundering travel funds for state insurance commissioners' international travel by having the commissioner bill the NAIC, and then the NAIC billing a particular company that had an interest in the trip. State ethics laws generally would not allow for companies to directly fund state officials' travel.

The question of whether the NAIC is always acting on behalf of its membership is also worth asking. On May 24, 2002, the NAIC announced a MOU with the CIRC, and the Insurance Journal also reported "an announcement that AIG has been granted a first ever insurance license for China's capital, Beijing, and a visit to the U.S. by the head of the country's largest P-C insurer, who's looking for investors."

In addition, New York Life Insurance Company had reimbursed the NAIC for its representative's travel to China. This travel led up to China's final admission into the World Trade Organization (WTO), which was contingent upon China opening its markets to foreign financial institutions.

It is not an "a priori" concern if American officials are working with foreign officials to facilitate efficient regulation of international business in insurance, but those officials should not be state officials.

State officials who might be influenced by a domestic insurer, or an insurer that employs a large number of people in its jurisdiction are subject to local/parochial influences that have no place in international commerce, just as Hamilton observed.

Certainly, such international agreements should not be subject to the Delaware chartered corporation that does not file a financial disclosure statement with the IRS. Insurance is interstate commerce, and the international trade in such commerce should be a matter of federal jurisdiction.

A 2001 Congressional Research Service report on the use of international agreements and the necessity of Senate advice and consent cited U.S. State Department criteria for when an agreement should be constructed as a treaty. First among these criteria is: "The degree of commitment or risk for the entire Nation..."

As we learned in September 2008, an action that inflates the importance of AIG can be a very expensive proposition for the nation.

The author

Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide Insurance Cos. and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.


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