Rep. Royce Confronts NAIC: Are You a Regulator or Not?

Congressman takes on the NAIC for allegedly having it both ways as the organization attempts to insert itself in the Federal Insurance Office's oversight of the industry while enjoying the privileges of a private corporation.

Yesterday morning Congressman Ed Royce (R-Calif.), a member of the House Committee on Financial Services, sent a letter addressed to Kevin McCarty, president of the National Association of Insurance Commissioners (NAIC) demanding that the organization formally clarify its nature and status. Framing his comments within the implications of Federal Insurance Office's (FIO) pending modernization report, Royce essentially accused the NAIC of having it both ways as circumstances suit the organization -- either justifying its lack of accountability by saying it was a private corporation, or seeking to influence the activities of the FIO as an authoritative national insurance regulatory-related organization. Royce didn't mince words:

It appears, when it suits its purposes, the NAIC fends off questions about its accountability and transparency by arguing that it is a "private group" that "does not have any regulatory authority." … but it would now appear this "traditional" position is politically inconvenient given its attempts to posture itself in the new Dodd-Frank/FIO regime. Present circumstances call for an opposite spin, emphasizing NAIC's key role in "form[ing] the national system of state-based insurance regulation in the U.S."

It's tempting to call this a "shot across the bow" of the NAIC, but since it is no mere warning, a more apt metaphor might be that Representative Royce has launched a torpedo: he has not simply tried to make the NAIC back down but has set in motion a process that strikes at the very nature of the NAIC. Furthermore, Congressman Royce's letter necessitates a reaction from FIO Director Michael McRaith with regard to the federal body's posture on the NAIC and its role in any federal regulatory or quasi-regulatory influence over the insurance industry.

The effect of Royce's letter, if it has any effect at all, will be either to force the NAIC out of a position of influence, or into a position of diminished autonomy. Why does this matter? My sources are reluctant to draw very specific conclusions at this point, but there are a couple of things to bear in mind. Royce is a long-time proponent of Optional Federal Charter (OFC) and as such, a long-time adversary of the NAIC. There is no reason to think that OFC, with all of its implications for insurers' compliance burdens, is a dead letter. Also, the NAIC is a major purveyor of data within the insurance industry a theme that veteran industry commentator R.J. Lehmann elaborates:

The [NAIC] also leverages the regulatory powers of its members to require the companies they regulate to make filings and submit database filing fees, product filing fees and producer licensing fees that the NAIC then uses to fund its own operations. Moreover… it takes the additional step of claiming privilege over the data that insurers file, and enjoys additional lucrative streams of revenue by selling that data to third parties. Unlike either a nonprofit or a regulator, the NAIC is a pretty big player in the data business.

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio