Monday, January 20, 2014

No. 23: The Nasty War over Governance at the NAIC

The late Robert E. Dineen was born in Syracuse, New York (where I was born), received his law degree at Syracuse University (my alma mater), and practiced in a Syracuse law firm. Later he served as Superintendent of the New York State Department of Insurance for seven years. He became a vice president of Northwestern Mutual in 1950, and its president in 1965. When he retired in 1968, he became a consultant to the National Association of Insurance Commissioners (NAIC). He created the first central office of the NAIC, in Milwaukee. After his departure, the central office began a huge expansion, and later moved to Kansas City, Missouri. Dineen was a giant in the history of insurance in the U.S., and I think he would have been appalled by the nasty governance war now engulfing the NAIC.

A Little History
State regulation of insurance in the U.S. is the result of an historical accident. Elizur Wright lived in Boston. Therefore, when he began his push for an insurance regulatory agency, he did so in Massachusetts. Once Massachusetts created an agency, New York State followed suit, and state regulation of insurance was off and running.

Each state created its own financial statement blanks for insurance companies to complete, and the differences among the statements were a headache for companies operating nationally. They pushed for federal regulation, but lost the battle in 1868 when the U.S. Supreme Court handed down its famously absurd decision in Paul v. Virginia that insurance was not commerce. The companies then pushed for creation of the National Convention of Insurance Commissioners (NCIC) to develop uniform statement blanks. The NCIC began operations in 1871, and the blanks it developed were called "convention blanks." In 1939 the NCIC changed its name to the NAIC. The Paul decision was finally reversed in 1944, in U.S. v. Southeastern Underwriters. The latter decision promptly led to the 1945 passage of the McCarran-Ferguson Act, which preserved state regulation.

Problems with the NAIC
To say that the post-Dineen NAIC has had major problems is a serious understatement. Here I mention four in which I was involved.

In 1978, the NAIC created an advisory committee on manipulation (I call it "actuarial manipulation" or "actuarial hanky panky"). The committee was created because of articles I wrote, but I was not invited to serve on the committee. Later, at my insistence, the committee was reconstituted and I became a member. The committee was dominated by its industry members, and nothing significant was accomplished. See the January 1985 issue of The Insurance Forum.

In 1980, the life insurance cost disclosure task force of the NAIC released a proposed new life insurance cost disclosure model regulation. The proposal and accompanying report were excellent. However, the industry attacked the proposal viciously, arranged for the two authors of the proposal to be fired by the NAIC, arranged for the commissioner who chaired the task force to be fired by his governor, and arranged for the report to be shelved. See the January 1981 issue of The Insurance Forum.

In 1985, I began a long struggle to obtain access to the secret results of the NAIC's Insurance Regulatory Information System (IRIS). It required several lawsuits, but eventually I obtained access to the data. Part of IRIS thereafter became available to the public. See the December 1987 issue of The Insurance Forum.

In 2002, the NAIC took action to end free and unrestricted public access to the financial statements of insurance companies. Prior to that time, the public always had access to the statements in the state insurance departments. The NAIC asked the states to allow it to take over the handling of the statements. Most states, led to believe that the NAIC would continue to make the statements freely available to the public, agreed to the change. Now I cannot get the statements without agreeing to restrictions imposed by the NAIC on use of the data. Because I refuse to sign any such agreement, I must obtain statements I need from confidential sources. See the October 2003 issue of The Insurance Forum.

The Leonardi Letter
On December 11, 2013, Connecticut Insurance Commissioner Thomas B. Leonardi wrote a blistering three-page letter to his fellow commissioners about NAIC governance issues. Here is the first paragraph:
"We have met the enemy and he is us!" This famous line from the comic strip Pogo aptly describes the current state of governance at the National Association of Insurance Commissioners. And it comes at a time when our national state-based system of regulation is under perhaps its most critical set of threats and challenges at home (with the ascent of the Federal Insurance Office and the growing regulatory authority of the Federal Reserve) and abroad (at the International Association of Insurance Supervisors and the Financial Stability Board). The recent decision by some of our leadership to decline an invitation to meet with the President of the United States on critical insurance matters was bad enough. But to immediately provide a copy to the national press of a misguided and irresponsible letter criticizing the decision to accept President Obama's invitation makes clear that, in spite of these external threats, the biggest challenge we face is the dysfunction in our own organization. To quote Commissioner Chaney [Mississippi]: "I am shocked and appalled to put it mildly at the reaction" and Commissioner Kreidler [Washington State]: "I am appalled and embarrassed for the NAIC. This could be so bad that it might be the pivotal point we later recognize that doomed state based regulation. Talk about a self inflicted wound!" If we cannot fix these governance issues, then others, including industry and the Federal Government, would be right to question whether we are up to the task of regulating the largest insurance market in the world.
Commissioner Leonardi discussed seven examples of the governance issues. They are under these subtitles: (1) the cult of the "imperial presidency," (2) the myth of the "officers' leadership" role, (3) elections, (4) leadership, (5) ultra vires actions, (6) cronyism, and (7) the lack of understanding of the role and responsibilities of a fiduciary.

A few days later, at a meeting of the NAIC's executive committee during the NAIC's December meeting, Commissioner Leonardi made a motion to hire an outside consulting firm to conduct a governance review of the NAIC. The executive committee rejected the motion and shut down debate on the issue. Many commissioners believe that a review is needed, but think the idea should first be considered by the NAIC's governance committee. To put it mildly, the NAIC is facing a mess.

General Observations
I think the NAIC does not have a governance problem. Rather, I think the NAIC lacks competent leadership. As partial evidence, consider the stupidity of rejecting an invitation to meet with the President of the United States. That action ranks up there with the decision to engage in political retaliation by creating massive traffic jams with a four-day closure of two traffic lanes at the New Jersey approach to the George Washington Bridge, the world's busiest bridge.

I am making Commissioner Leonardi's letter available as a complimentary PDF. Send an e-mail to and ask for the Leonardi letter.