The National Association of Insurance Commissioners is at a crossroads because it must clarify first what it is, and then work out a system for collaborating with federal regulators in overseeing large, multifaceted insurance companies with international operations, according to a former insurance commissioner.
Larry Mirel, a partner in the Washington, D.C., office of Nelson Levine de Luca & Hamilton, said that first, the NAIC is going to have to clarify what it is.
“NAIC said it is not a trade association, but it is really a trade association of state insurance regulators,” Mirel said.
He explained that it has no regulatory authority and claims it is an organization registered with the IRS as a 501(c)(3) charitable organization by the Internal Revenue Service, “but I am not sure it is a charity, and it has said it is not subject to any state laws or Freedom of Information Act requests because it is a public body.”
Mirel, who served as insurance commissioner of Washington, D.C., for six years, notes that Rep. Ed Royce, R-Calif., has raised the same question, and has asked the House Financial Services Committee to hold hearings on the issue. “That is a very important question,” Mirel said.
He said the recent international economic crisis pointed out that the NAIC lacked the authority to regulate complex insurance companies with international operations, especially those whose operations run outside of insurance.
“The states are making a claim that they can be the regulator of all insurance companies, including those who operate on a worldwide basis, but I think less and less that is going to be the case,” Mirel said. “A state insurance regulator has authority only within its own, and has no authority to regulate insurance companies that are doing business outside the state and outside the country,” he said.
He said the G-20, the group of large industrialized nations, is going to the U.S. government as representatives of the U.S., not the NAIC, as it tries to set standards to prevent future economic crises.
“That is because there is a gap in regulation [of insurance companies],” Mirel said. “The gap is what happens when financial institutions operate around the world, and operate in more than one market, in more than one industry.”
Mirel asked, “Who can look at the overall activities of these giant institutions and make sure they are meeting the standards that will deal with potential economic problems? Insurance institutions operating worldwide handle billions of dollars every day. It is not going to be the South Dakota insurance regulator, or the New York insurance regulators to whom international regulators contact when there is a crisis. That is the problem the NAIC faces.”
In fact, he said, they are looking to the U.S. government to represent the U.S. institutions in the international financial markets.
The U.S. can now do it for banks, but it doesn’t regulate insurance companies, Mirel said. “So something has to give here. “The NAIC is not a regulatory agency, states have only authority in their own states, so who is going to create international standards to deal with international issues?” Mirel asks. “It has to be the federal government with or without the NAIC. The NAIC can play a constructive role, but it has to be the U.S government that deals with these large cross-border insurance companies,” he said.
States can deal with this by establishing the domiciliary state as the U.S. domestic regulator, and coordinate with the federal government on international issues, Mirel said.
Mirel acknowledges that the state insurance regulatory system is expensive. “Elections are also expensive but we pay or it because we like democracy, we like a decentralized system,” Mirel said. “Americans prefer a decentralized system, because they are helpful and healthy.”