The debate over insurance regulation reform is, predictably,
following this model. The proponents of federal insurance regulation are
asserting that only the federal government can provide adequate solvency
regulation. The advocates of state regulation are countering by
contending that state solvency regulation is not only adequate, but is
also being enhanced through the efforts of the National Association of
Insurance Commissioners' (NAIC) accreditation program.
There are several unstated, but relatively apparent, considerations
that make this debate so interesting. The first is that the debate,
although characterized as one regarding solvency, is really about who
should regulate. Both Chairman of the House Energy and Commerce
Committee John Dingell (through his proposal - H.R. 1290) and the NAIC
(through its accreditation program) address issues that go far beyond
the scope of solvency regulation.
A second consideration is that the federal effort has become the
vehicle for various segments of the insurance industry to propose a
federal solution to specific problems that they are presently facing
under the state regulatory regime. For example, "highly capitalized
insurers" would benefit from a "carve-out" from state
regulation, "market withdrawal" would be permitted even over
the objection of state regulators, "professional reinsurers"
would benefit from the preemption of all state regulation, and so forth.
Despite the often conflicting and inconsistent aims and desires of
the parties concerned, there is one conclusion that can be agreed upon
by everyone: "dual" federal and state regulation would be
onerous and destructive to the insurance industry. This is probably the
only matter upon which the proponents and opponents of federal
regulation can agree.
The regulation of insurance, unlike the regulation of banking and
securities, has remained for the most part where it began - at the state
level. While the debate is ostensibly over the merits of state versus
federal regulation, the underlying issue that makes the problem so
thorny is how could the transition from state to federal regulation
occur without unbearable costs being loisted upon the industry and
consumers by dual regulation, litigation, fraud and uncertainty.
Therefore, as the debate rages on and "gridlock"
continues, it would be useful to consider a third alternative to either
state or federal insurance regulation. That alternative is the
enhancement of state regulation by way of interstate agreements known as
"compacts"- binding contracts between two or more states. This
effort, which could occur over the course of the next several years,
perhaps would put an end to the federal versus state debate because if
the compacts do enhance state regulation sufficiently, federal
intervention will not be necessary. C@n the other hand, if they fail,
federal intervention may be required.
What Is a Compact? Generally, compacts are created to address
problems that transcend state boundaries. Examples would include land
and water resources, corrections, juvenile delinquency, taxation,
vehicle safety, nuclear energy, parks and recreation, regional planning
and development, disaster assistance, mass transit, flood control and
economic growth research. In the past 50 years, the number and coverage
of interstate compacts has grown dramatically: today, almost every state
participates in interstate compacts.
Although insurance regulation is not yet the subject of an
interstate compact, a number of compacts address issues that are
similarly complicated and that require comprehensive national attention.
Many compacts establish for administrative purposes a commission or
authority that may be empowered to promulgate rules and regulations. And
many compacts have established formal procedures for rule-making and
decision-making, similar in numerous instances to those procedures that
would be adopted by a state government. A compact can also establish the
jurisdiction of courts for purposes of enforcing or contesting the terms
of the compact.
The Washington Metropolitan Transit Regulation Compact is a good
example of a compact that establishes an agency with substantial
administrative and procedural authority. The Washington Metropolitan
Area Transit Authority created by this compact is charged with the
responsibility of planning, developing, financing and operating improved
transit facilities and coordinating the operation of publicly and
privately owned transit facilities in Maryland, Virginia and the
District of Columbia. This is a complicated task that requires fact
finding, the utilization of experts, the application of expertise to
complicated issues, the balancing of competing interests, determining
and upholding the public interest, and the exercise of good judgment on
the basis of experience and expertise. These are the same kinds of
qualities that would be necessary for the purpose of developing and
operating an insurance regulation compact.
Despite their numbers, compacts often are not readily identifiable
as such. For example, the Port Authority of New York and New Jersey,
which recently was the focus of public attention due to the bombing of
the World Trade Center in New York, affects the lives of millions who do
not realize that it is the result of an interstate compact. The Port
Authority was established in 1921 to develop and construct comprehensive
transportation, terminal and other facilities, and to promote commerce
and trade. It also regulates and promotes transportation into and out of
New York. Even though the Port Authority is an agency established by a
compact between only two states, it acts with remarkable independence.
The Port Authority is governed by 12 commissioners (six appointed by
each state) and has over 8,200 employees, with its subsidiary, the Port
Authority Trans Hudson (which operates the interstate PATH train
system), employing an additional 1,100 workers.
In some ways, the NAIC presently acts as if it were an interstate
compact. It operates the Securities Valuation Office in New York and the
Insurance Regulatory Information Service (IRIS); it establishes IRIS
ratios and adopts and amends the instructions for the preparation of
insurer financial statements that will be operative in all 50 states.
However, the NAIC is a voluntary organization without enforcement
authority, a fact that is repeatedly alluded to by Chairman Dingell and
the proponents of federal regulation. No matter how efficient the NAIC
should become, the proponents of federal intervention will always be
able to employ this criticism.
However, the adoption of an interstate compact or compacts to
address various issues could strengthen insurance regulation and thus
dilute this criticism and further ward off the prospects of federal
regulation. Certain aspects of state regulation are immediately suitable
for interstate compacts. Among them are agent licensing, accreditation,
advisory committees, rulemaking, liquidation and rehabilitation,
solvency and regulation of alien companies.
Insurance agents and brokers have often complained about the
expense of becoming licensed in more than one state. H.R. 1290 offers to
these disenchanted agents the establishment of a national regulatory
body - the National Association of Registered Agents and Brokers to
facilitate their ability to operate in all 50 states. Interstate
compacts for the purpose of regulating the activities of agents and
brokers and facilitating their licensing would address this problem.
Such a compact could impose uniformity among state laws and their
enforcement and minimize the administrative burden of applying for
licenses in a large number of states. While the NAIC accreditation
program has made great progress, it continues to be criticized by
Chairman Dingell and others as being inadequate because the NAIC has no
institutional ability to enforce it. At present, the NAIC accreditation
program contemplates enforcement by accredited states not being required
to accept the solvency examinations of companies domiciled in
non-accredited states. An interstate compact among the states for the
purpose of supporting accreditation would put legal teeth into the
program and enable it to achieve its intended purpose.
At its spring 1993 meeting in Nashville, Tennessee, the NAIC
decided to eliminate formal industry advisory committees, although
industry expertise will still be utilized via less formal and more
sporadic communications. The NAIC is restricted in its ability to
utilize advisory committees because it is a voluntary organization. The
NAIC would not be so constrained, however, if, by way of an interstate
compact, it were to establish the authority for utilizing advisory
committees and the rules under which they would operate.
It is ironic that the proponents of federal regulation should
criticize the NAIC's utilization of advisory committees because, in
fact, advisory committees are commonly used by federal regulators.
According to the General Services Administration, there were 1,141
federal advisory committees in 1992. These committees were active in the
areas of agriculture, commerce, energy, health, science, labor, interior
affairs and transportation.
Advisory committees have traditionally been an integral part of the
NAIC rule-making process, which, of course, produces the model acts and
regulations that are then adopted by the various states. The NAIC
terminated formal industry advisory committees at least partially in
response to criticism that advisory committees are not sensitive to
consumer interests and operate for the benefit of the insurance industry
without appropriate regulatory controls.
Interstate compacts could respond to this criticism by adopting
the type of regulatory structure imposed by the Federal Advisory
Committee Act. The act establishes procedures for advisory committees
relating to notice of matters to be considered, the nature of meetings,
reporting requirements, open meeting requirements and the designation of
a governmental official to attend each advisory committee meeting. In
other words, the act establishes the rules under which an advisory
committee can operate, and establishes a body of law that can be relied
upon to require that the committees are operating subject to public
scrutiny and with due process.
The same considerations can be applied to the operation of the
committees and task forces of the NAIC. An interstate compact would
permit the establishment of an administrative agency that would have the
authority to adopt rules of practice and procedure, similar to those
that are contained in the various state administrative procedure acts,
to govern the rule-making process.
The NAIC rule-making process has been the subject of some
dissatisfaction precisely because it is not subject to the kinds of
notice, rules of evidence, and decision-making criteria that are
generally addressed by state administrative procedure laws. Moreover, to
the extent that an interested party may wish to contest a decision,
there is no mechanism for appeal, other than appealing to the NAIC
plenary session or lobbying against an NAIC model act or regulation when
it is introduced in the various states.
An interstate compact on procedural matters could address these
concerns and also provide recourse to courts of law. Numerous existing
interstate compacts provide this kind of regulatory structure. This
would benefit not only regulators, who would be protected from criticism
by reliance upon the rules, but also insurers and consumer advocates,
who would now be regulated by rules known to all and permitted to
contest those decisions that they consider inadequate.
Aliens and Insalvencies
The current system of liquidation and rehabilitation has been the
source of substantial criticism by the proponents of federal regulation.
Even though state laws are generally based upon model laws and
regulations, the interpretations of different state courts and different
state regulatory environments have resulted in a system that is
criticized as being unpredictable, occasionally unfair, and
unnecessarily expensive due to high administrative costs. An interstate
compact among some or all states could help to impose uniformity of law
and its application.
At the recent NAIC Summer National Meeting held in Chicago, the
insurance commissioners of the Midwestern Zone voted to develop a
compact for the purpose of guaranty fund administration. This marks the
first time that a powerful segment of the NAIC has embraced the concept
that an interstate compact can be utilized for the purpose of enhancing
the states' regulatory capabilities. The initial draft of the
proposed compact should be available in the fall.
Regarding insurer solvency, the NAIC already provides oversight of
this through the NAIC data base and IRIS. An interstate compact among
the states for solvency enhancement could result in increased uniformity
among the states in the application of solvency oversight.
But the source of much of the most dramatic criticism of state
regulation concerns the regulation of alien insurance companies. Even
the NAIC has indicated its willingness to have the Congress delegate
authority to the NAIC to act as a "gatekeeper" regarding alien
How would an interstate compact work here? It should be noted that
an interstate compact need not necessarily be limited to the states of
the United States, but can also include foreign states. The
"compact clause" of the U.S. Constitution specifically makes
reference to a compact between a state and a "foreign power."
In this case, an interstate compact could allow the states to develop
the funding and the administrative facilities necessary to regulate
alien companies operating in the United States. It could also create the
intelligence-gathering ability that is necessary for this purpose.
Moreover, it could create regulatory and enforcement authority, the lack
of which is so frequently criticized by Chairman Dingell and others.
Why Not Try a Compact?
The state versus federal debate continues to generate a great deal
of heat but only a small amount of light. But in trying to answer the
question of insurance regulation, the solution should not be perceived
as a choice between state and federal regulation, but rather as an
inquiry into how, within the parameters of the system of federalism
created by the U.S. Constitution, the insurance industry can best be
regulated. There are several hundred compacts that are presently
enhancing the ability of the states to perform their governmental
functions. That should serve as some guidance to a more imaginative
approach to break the impasse in the state versus federal debate.
Utilization of the interstate compact for purposes of enhancing
state insurance regulation offers a variety of benefits. First, it would
provide a vehicle to enhance state regulation without the destructive
effect of "dual regulation"- preempting state regulation
through federal intervention will diminish the ability of the states to
perform their regulatory functions.
Second, interstate compacts can take a variety of forms and address
numerous issues. This will allow the states to perform their role as
"laboratories of change" by experimenting with different
solutions to different problems. A compact need not be adopted by all
states to be effective. In fact, a variety of different compacts could
be adopted expressly for the purpose of determining which solutions were
This is a principal advantage of compacts over regulation by the
federal government. The bail-out of the savings and loan industry, which
will cost the taxpayers billions of dollars, is a model of federal
regulatory ineptirude that needs to be avoided. Experimenting with a
variety of interstate insurance regulatory compacts could arguably avoid
the possibility that a single regulatory error could affect the entire
Third, the adoption of interstate compacts would not eliminate the
federal oversight of insurance regulation. Congressional probing and
examination of insurance regulation has been a great motivator for state
regulators. Chairman Dingell and his colleagues have played an important
role in stimulating state regulators to higher levels of achievement.
Finally, an interstate compact adopted for the purpose of
establishing and formalizing administrative procedure would provide the
ability to enhance uniformity and provide a mechanism for the adoption
of industry standards, laws and regulations in a more open and organized
manner. This would benefit both the regulators and the regulated,
While interstate compacts have been criticized as being potentially
cumbersome and time consuming to adopt, there are hundreds of examples
of compacts currently in effect that can be reviewed to determine their
efficacy. On the other hand, there are predictably a multitude of
problems with a transition from state to federal regulation and no model
to follow that would minimize the potential expense and danger to both
consumers and the insurance industry.
Why not spend a couple of years experimenting with interstate
compacts? At the end of the experiment, at least all parties will know
where they stand.