Newly assertive leadership of the National Conference of Insurance Legislators appears eager to confront what it views as an ongoing usurpation of authority from state legislatures.

Thomas B. Considine—now NCOIL’s chief executive, but previously commissioner of the New Jersey Department of Banking and Insurance—chose the organization’s spring meeting in New Orleans as the venue to raise public concerns about states becoming subject to the authority of the National Association of Insurance Commissioners, a private trade association composed of the nation’s insurance regulators.

Appearing at Considine’s invitation, Rutgers Law School professor Robert F. Williams—an expert on state constitutional law— detailed the process by which NAIC decisions are transmuted into state law. While the NAIC serves nominally as a private venue for insurance regulators to meet and share information and best practices for insurance industry oversight, it also promulgates standards and models for states to adopt.

Because of the group’s status as the pre-eminent body on such matters, states across the country have adopted statutes that incorporate NAIC work product into state law by reference. That is to say, changes to NAIC models and standards, in effect, serve to change state law without the explicit consent of state elected officials.

Delegation of authority between the states and the federal government, among the states themselves and between the various branches of government all have a clear constitutional basis. The circumstances under which lawmaking authority may be delegated to private organizations—Williams told this audience of legislators, regulators, industry members and academics—is considerably narrower.

While there are limited circumstances where public bodies might need to outsource highly technical matters to those with expertise, such questions should never extend to cases where policy judgment is involved. Williams raised concerns about legislative bodies’ propensity to bind themselves to such arrangements prospectively.

Williams’ sentiments were echoed by Neil Alldredge of the National Association of Mutual Insurance Companies, who expressed particular alarm that the NAIC’s recent work on corporate governance standards amounted to legislating matters of substantive policy. NCOIL’s current vice president—state Sen. Jason Rapert, R-Ark.—speculated that many lawmakers are likely unaware of the arrangement with the NAIC.

From the perspective of constitutional law, the problems with incorporation-by-reference statutes are interesting in that they largely are untested in court. No cases have ever been tried involving insurance regulation. A judicial confrontation might be avoided if the NAIC rededicated itself to focusing on nonsubstantive matters.

Alternatively, states could make it a regular practice to readopt the NAIC’s incorporation-by-reference statutes each legislative session, to ensure newly elected lawmakers are reminded of the power that they are ceding to the commissioners’ trade association. The readoption approach likely is preferable. It would eliminate the NAIC’s temptation to oversee substantive matters, while simultaneously allowing the people’s representatives to re-examine their faith in the relationship with the NAIC on a regular basis.

Another problem with the NAIC’s ongoing power to incorporate standards by reference is that, to fund its operations, the NAIC restricts access to both the information it gathers and to participation in its meetings, in a manner inconsistent with the transparency otherwise available in the public lawmaking process. In fact, members of the public face substantial obstacles should they wish to participate in the process by which standards that directly impact them are set.

Ironically, if anything, the current arrangement is a good argument for the need for the Treasury Department’s Federal Insurance Office, an agency whose very existence has actively been questioned by both NCOIL and NAIC (as well as some elements of the industry). FIO could make public the information over which the NAIC currently has an effective monopoly and thereby address the information asymmetry that members of the public currently labor under. Interestingly, though it has in the past been highly skeptical of FIO, the NCOIL body declined, on the final day of its session, to take the position that FIO should be abolished.

Under Considine’s direction, NCOIL is seeking to chart a rapid course to renewed relevance. At the summer meeting in Chicago, the group is expected to consider a model law from state Assemblyman Ken Cooley, D-Calif., that would require state insurance departments to help fund NCOIL, which would put the group at much greater parity with the NAIC.

It’s striking that it should take a former commissioner, a consummate insider, to bring attention to the worst excesses of the NAIC’s quiet empire. In doing so, he may just return power to the people that they didn’t even realize had been taken from them.

Image by Andrey_Kuzmin

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