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Public Policy Analysis & Opinion

Tramp a perpetual journey

Preferred vendor NAIC bestows millions in travel gifts upon state officials

By Kevin P. Hennosy

For the last century, American insurance regulators have looked askance at incentive travel awarded to insurance producers by insurance carriers. Regulators allege that incentive travel diverts the focus of sales representatives from serving the consumer's needs in order to earn travel awards, which companies establish in order to encourage sales of profitable products.

In this column, we will turn the tables on the Delaware-chartered corporation doing business as the National Association of Insurance Commissioners (NAIC), which uses incentive travel to train and motivate its national sales force: the nation's insurance commissioners.

It could be said that the corporation doing business today as the "NAIC" has assumed the name of an unincorporated association which ceased operations in 1999. In order to differentiate between the two distinct entities, this column refers to the 14-year-old corporation as "NAIC-Newco."

NAIC-Newco has developed an aggressive, lucrative, and fee-generating service program. The company contracts with state insurance departments to provide a range of regulatory IT products and privatized regulatory services.

The key to executing commercial transactions usually rests with the chief insurance regulator in the local jurisdiction, who can enter into licensing contracts with NAIC-Newco, or order the insurance sector to do business with or through the corporation. Commissioners become agents of NAIC-Newco.

To this end, NAIC-Newco asserts that all commissioners owe a fiduciary duty to NAIC-Newco, creating a private interest separate, distinct, and potentially in conflict with the interests of the regulators' home states, which this column examined in the May 2013 edition of this magazine.

Half the states have signed vendor contracts with NAIC-Newco for State Based Systems, from which the company is projected to derive more than $5 million in fees from the regulated entities whose transactions the states funnel through the product. At least 30 states mandate the use of the System for Electronic Rate and Form Filing (SERFF), bringing in another $5 million a year in revenue to NAIC-Newco from the licensees of its members/distribution network.

Every jurisdiction does business with the company's affiliate, the National Insurance Producer Registry (NIPR), from which NAIC-Newco extracts another $8 million in fees annually in an interesting arrangement discussed in this column in the April 2013 edition of this magazine.

In the last 13 years, the NAIC-Newco appears to have transformed the nation's insurance regulatory system into a sales network, dependent upon state officials to use their official capacity to generate fee revenue for the company.

This arrangement begs the question: Do NAIC-Newco's gifts of travel place state officials in legal jeopardy under ethics codes in their home jurisdictions?

Unseemly seduction

NAIC-Newco is first and foremost a commercial contractor, a business, which privatizes regulatory functions and collects tribute payments compelled by its member public officials. The convocations of the NAIC-Newco are not "educational" or "career development activities," which some insurance commissioners have claimed on ethics filings.

There is no doubt that NAIC-Newco's gifting strategy is closely linked to its voracious marketing of its vendor services to the recipients of its largesse. Administration and marketing of revenue-generating products and services repeatedly appear on NAIC-Newco meeting agendas, and NAIC-model laws, regulations and guidelines often promote the use of the corporation's commercial products and services.

NAIC-Newco uses the meeting to employ old-school marketing activities, such as hospitality suites. At a recent national meeting, NAIC-Newco urged public officials to attend "SBS/NIPR open houses:" "Join us for appetizers & drinks.… in celebrating the 10-year anniversary of State Based Systems—Regulators Only."

The 2013 NAIC-Newco budget sets aside $165,306 for an annual indoctrination and marketing session aimed at public sector information technology personnel. The NAIC E-Reg Conference, which is self-described as the "premier regulatory business and technology event" is a four-day long showcase for corporation's commercial vendor services.

Incentive travel

The proffer of travel has become a central tenet of NAIC-Newco's business model and marketing plan. The company plans to give state officials $902,262 in domestic travel-related tickets, lodging, etc., in 2013, generally at business class and resort hospitality properties.

In addition, NAIC-Newco, plans to give select insurance regulators $1,388,087 for international travel, a 57.12% increase over similar gifts given in 2012.

NAIC-Newco's frequent tender of travel to state officials can easily be understood as a powerful means to seduce those state officials whom the company needs to act in their official capacity to sate its commercial interests as a vendor.

Perhaps these efforts to influence state officials would be justifiable if NAIC-Newco acted with legal cover as a public entity subject to public oversight. But NAIC-Newco is a private corporation chartered under the notoriously unfettered laws of Delaware, and it refuses to file annual financial disclosures with the Internal Revenue Service (IRS).

Operating in its unaccountable and self-supervised netherworld, NAIC-Newco's private gift of travel to public officials is imbued with an unseemly appearance. To paraphrase Walt Whitman, it is possible for insurance commissioners to use NAIC-Newco money to "tramp a perpetual journey"—and some do.

Rank and file NAIC-Newco members can count on weeks of free travel and luxury accommodations every year.

For instance, the Arkansas commissioner's filings with the Arkansas Ethics Commission show him spending a total of 25 days in one year traveling for the NAIC-Newco, on the corporation's dime. NAIC-Newco's business took the commissioner to Bonita Springs, Florida, for the commissioners conference in February 2009; to San Diego in March and San Francisco in December for national meetings; to New Castle, New Hampshire in August for the summer all commissioner fly-in; and St. Thomas, Virgin Islands, for a Southeastern Zone (regional) meeting (not including other meetings in more pedestrian locales).

According to the NAIC-Newco's 2012 budget, the corporation made "important investments in NAIC membership … [including] continued travel subsidies to support each Commissioner's involvement in NAIC national meetings."

Furthermore, the NAIC-Newco sponsors "commissioners only" getaways. The 2013 budget allocated "$180,258 to fund Commissioners' travel to the annual Commissioners Conference." This year, NAIC-Newco conducted the private conference February 1-4 at the Marriott Frenchman's Reef & Morning Star Hotel, in St. Thomas, U.S. Virgin Islands.

Not bad duty at all in the dead of winter while mere voters are shoveling snow or dodging raindrops.

And the trip to St. Thomas is not a statistical oddity. In recent Februarys, NAIC-Newco has hosted its sales force of state officials in San Juan, Puerto Rico; Bonita Springs Florida; Indian Wells, California; and Miami.

Those meetings are just for the rank and file. NAIC-Newco bestows even more gifts on its most pliant members. The 2013 budget allots "$30,495 for the annual committee assignment meeting of the NAIC leadership team." The NAIC-Newco conducts these meetings for "officers" to divide patronage in warm climates in the dead of winter. In 2011, according to public records, that took the elect to the South Beach in Miami for three days in mid-January.


NAIC-Newco sponsors a relatively new travel opportunity with its annual "all commissioner fly-ins" to preferred summer destinations—usually in New England.

Of course, NAIC-Newco wants to portray these gatherings as working sessions; however, journalists and voters have no way of knowing whether that is true because the NAIC-Newco hides what goes on at the "fly-ins" behind a wall of secrecy. So we have to look at state officials' ethics filings to learn more about the festivities.

For instance, the Louisiana commissioner filed a gift disclosure report with the Louisiana Board of Ethics which denotes a gift from the NAIC-Newco of $1,075.83 for lodging in New Castle, New Hampshire, August 23-25, 2009. The Wikipedia entry for New Castle describes the community as "the smallest town in New Hampshire, and the only one located entirely on islands."

The Arkansas commissioner disclosed to the Arkansas Ethics Commission a gift from NAIC-Newco of six days in Burlington, Vermont. The travel dates coincide with the July 2012 commissioners' fly-in. According to the Arkansan's ethics filing, "NAIC paid $631.20 for airfare, baggage, and parking. NAIC also paid meals and hotel, amount unknown."

For their 2010 summer fling, NAIC-Newco members didn't make it to New England—they settled for four days at "the only Forbes Five-Star mineral spa in the world"! In July 2010, NAIC-Newco gifted the nation's insurance commissioners with a trip to the famous Greenbrier resort in West Virginia, where they had access to golf, spa-living and fine cuisine.

The journeys truly are perpetual. NAIC-Newco's 2013 budget projects spending of $1,125,000 on zone (regional) travel and supplemental travel grant funds, a 28% increase over 2011.

The Arkansas commissioner reported two trips last year on the NAIC Newco zone grant dime to Southeastern zone retreats—one for four days in beatific Savannah, Georgia, in early fall with $836.90 for transportation costs and "hotel, amount unknown."

However, we know one thing for certain: Two months after the zone retreat following the gift of a great deal of travel, on November 30, 2012, NAIC-Newco issued a news release titled, "Arkansas becomes 26th member to choose SBS [State Based Systems]." The SBS lays the technical framework for NAIC-Newco fee income—and lobbying aims which we will examine in a future edition.

Select commissioners enjoy business class travel to leading overseas destinations. NAIC leaders have reserved such plums for "team players." A single 2011 newsletter placed the NAIC president in Brussels, Frankfurt, Mexico City, and San Juan; and other commissioners with her in these and other locations.

Gift bans

Many states place bans on state officials and other employees from receiving things of value from interested parties in order to prevent corrupt transactions and to ensure that officials use the power granted to them through their office to serve the public interest and only the public interest.

Rough Notes is not a legal journal, but it is clear from this columnist's review of relevant laws and an interview with an attorney that there is a serious basis for concern based on the information available to the public. Space limitations will limit the discussion to two examples.

The New York Insurance Department issued Circular Letter No. 7 in 2011, explaining that it "will implement … OPTins, a product of the [NAIC-Newco].…The Department strongly encourages your participation.…Currently, the NAIC charges a nominal fee to use OPTins."

Nationally, those "nominal fees" were $76,145 in 2011 and are projected to be $525,242 in 2013—a 590% increase in two years. OPTins's exponential growth is closely tracking the history of State Based Systems and SERFF, the NAIC services, which have grown to more than $5 million each in annual revenue to NAIC-Newco.

New York's controlling ethics opinions explain that doing business with the state makes NAIC-Newco a "disqualified source" which cannot provide gifts of more than nominal value," and that the law "is applicable both to a donor and a donee." (Ethics Commission Advisory Opinions 94-16 and 08.01.)

Connecticut is engaged in activities with NAIC-Newco which appear to meet the definition of "doing business with" the state in three ways: 1) making annual assessment payments to the corporation, 2) contracting for online tax payments through OPTins, 3) serving as NAIC-Newco's agent by mandating the use of SERFF. And it is "seeking to do business with" the insurance department as a vendor through SBS.

NAIC-Newco boasts that it provides "travel subsidies to support each Commissioner's involvement in NAIC national meetings." This might be interesting to ethics commissions.

If the corporation is paying travel, lodging, etc., for regulators in New York, Connecticut, and states with similar laws, then in the eyes of a reasonable person there is a problem. Since their laws prohibit the giving and receiving of improper gifts, NAIC-Newco is placing its members and itself in legal jeopardy.

While next enjoying Caribbean winters and New England summers on the dime of a state vendor to whom they swear a fiduciary duty, members of the NAIC-Newco sales network of state insurance regulators may want to ask whether their benefactor has been looking out for their interests as carefully as it has its own. In the eyes of a reasonable person, the opinion appears to place both state officials and NAIC-Newco in legal jeopardy.

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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