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March 4, 1998
Need for Independent Funding of
National Association of Insurance Commissioners
Dear Governor :
On behalf of consumers of insurance products, we are writing to sound an alarm about a breakdown in the regulation of this industry. Due to the overwhelming and pervasive influence of the insurance industry in the activities of the National Association of Insurance Commissioners (NAIC), consumers and the public are not being properly served in the current system of state regulation. We call upon you, as the leader of your state, to inject some balance into a system where the insurance industry is setting its own rules, dictating policy and dominating the weak oversight structure. Reform should begin with developing a funding structure for the NAIC that promotes independence and freedom from insurance industry control.
This issue has been percolating for decades and is in need of your vigorous leadership. In a report, Issues and Needed Improvements in State Regulation of the Insurance Business, issued 19 years ago, the U.S. General Accounting Office GAO found that insurance regulation is not characterized by an arms length relationship between the regulators and the regulated...about half of the State insurance commissioners were previously employed by the insurance industry and roughly the same proportion joined the industry after leaving office. The meetings of the National Association of Insurance Commissioners are numerically dominated by insurance industry representatives. Its model laws and regulations were drafted with advisory committees composed entirely of insurance company representatives (Page vii).
We watched, with great hope and expectation as the states began, in the late 1980s and early 1990's, to gain independence from insurer domination. The states moved with deliberate steps to change the industry domination of the NAIC by eliminating the aptly named industry advisory groups, by introducing a funded consumer participation program, by taking the unprecedented step of setting a floor of acceptable solvency regulation and by beginning to collect meaningful data for analysis of consumer problems such as redlining and consumer complaints.
But members of an industry historically in control feared this progress would expose their unfair dealings with consumers. What seemed to incense the industry most was a draft report prepared by the NAIC based on statistical data that indicated that minority communities were less likely to have adequate insurance and more likely to pay higher prices for their insurance. While earlier studies had shown similar redlining problems, the industry would have to take more seriously a report issued by the NAIC.
Unable to fight fairly because the facts were not on their side, members of the industry resorted to what they know best money, their most powerful trusted weapon. Members of the industry began to boycott the NAIC by refusing to pay database fees. As reported in the Wall Street Journal, industry members took NAIC leaders to Nick's Fishmarket, a Chicago restaurant, to hold their ex parte meeting which was part of a coordinated industry effort to shatter the progress of the past decade.
As consumer advocates watching this process, we at first found the blatancy of this approach almost comical. But, as the NAIC began to respond to the industry by backing off of some of their initiatives, we became outraged and dismayed.
Can state regulation and the NAIC be made free from control by the regulated? It must be. State regulation is at a crossroads. Monumental trends require coordinated responses by the states. These trends include insurance mergers with banks and securities firms, Internet sales being made from anywhere in the world, insurance fast becoming a global business, mergers creating giant insurance entities, sharp growth of alternative insurance markets including securitization of risk, captive insurers and risk retention groups and the threat to move to a weaker state to do anti consumer activities such as demutualization or bad bank good bank type restructuring. How can state regulation cope without solid national coordination, research, analysis and action? State regulation as a viable alternative to federal regulation depends upon an effective, independent NAIC.
As we move toward the millennium, it is clear to the consumer advocacy community that NAIC cannot be an effective or trustworthy organization without independent funding. Control of the NAIC nominally rests with the 50 state insurance commissioners but the recent developments show that control has been subverted by the industry boycotters. The NAIC should never be put into the position of having to go, hat in hand, to the regulated to beg for money and to shave the agenda to meet the demands of the regulated.
It is time for individual governors and the National Governors Association to make independent funding of the NAIC a priority issue. Suggestions include:
This collapse of state responsibility is a low point in state regulation of insurance. You can remedy this by assuring that regulation is not captive to financial influence of the regulated. If you do not remedy it, the calls for federal regulation of insurance will grow louder.
Yours truly,
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Ralph Nader |
Mary Griffin |
E. Mierzwinski |
J. Robert Hunter |
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Consumers Union |
U.S. PIRG |
CFA |
cc:
State Insurance Commissioner
NAIC
Chair and Ranking Minority Member of U.S. House and Senate Commerce Committees.
