NAIC Seeks Route Through Legal, Political Roadblocks for Reinsurance Framework

Less than a year after adopting a new framework for regulating reinsurance, the National Association of Insurance Commissioners is seeking to put the finishing touches on draft federal enabling legislation.

The framework plans for the reduction or elimination of collateral requirements for non-U.S. reinsurers and the establishment of "port-of-entry" designation for U.S. states. Federal legislation is needed to allow states to act as reinsurance jurisdictions.

The draft bill would establish a Reinsurance Supervision Review Board as a nonprofit corporation owned by or affiliated with the NAIC. The board would be appointed by the president of the United States, with the advice and consent of the Senate. Members would consist of 10 directors representing state insurance regulatory jurisdictions and five members representing the U.S. Department of Commerce, the U.S. Department of the Treasury and the Office of the United States Trade Representative. The chair must be a state regulator.

Massachusetts Insurance Commissioner Nonnie Burnes, chairwoman of the NAIC's Reinsurance Task Force, said the board structure is "not the slickest, neatest organizational structure you ever saw." But it is, she said, a way of establishing a national -- not necessarily federal -- framework.

"It may not be beautiful, but it's effective," she said.

Many in the insurance industry continue to have questions about the proposed legislation, including, "Is this legal?" Article I, Section 10 of the U.S. Constitution prohibits states from entering into "any treaty, alliance or confederation" with other nations.

"It is, at best, of dubious constitutionality," said Steve Broadie, vice president of financial legislation and regulation for the Property Casualty Insurers Association of America.

In a letter to the task force, Reinsurance Association of America General Counsel Tracey Laws voiced doubts about a structure that has presidentially appointed members accountable to another entity with executive and congressional authority -- but having no connection back to the executive branch. "Without proper executive branch oversight, a grant of authority by Congress to the RSRB to exercise governmental authority is likely to be deemed unconstitutional," Laws wrote.

Burnes defended the proposal, calling it a "nuanced balance" between including the expertise of state insurance regulators and the authority of federal officials.

"We think it's legal," she said. ""My view is that this is consistent with the framework."

As planned by the framework the NAIC adopted in December 2008, the board would determine which non-U.S. jurisdictions are entitled to enter into mutual recognition agreements; allow single-state regulators for U.S. reinsurers to adopt uniform minimum standards; and authorize single-state port-of-entry regulators for non-U.S. reinsurers. The framework also reduces collateral obligations for non-U.S. reinsurers on a sliding scale that could reach 0% for highly rated companies (BestWire, Dec. 8, 2008).

PCI opposed the regulatory framework, fearing it would disadvantage U.S. companies, while the RAA supported it.

Political concerns are another potential roadblock. First the NAIC has to find a member of the Senate and the House of Representatives willing to sponsor the legislation. Then, the association and its allies have to convince members of Congress to grant another entity some of its powers.

"I'm concerned that Congress isn't going to delegate the authority to enter into these agreements without direct oversight," Laws said in an interview. "I don't see it as politically likely."

As currently drafted, the bill would create a system with less oversight and accountability than exists now, Broadie wrote in a letter to the task force. "This legislation is not nearly ready for Capitol Hill," he said.

Burnes said there is room for adjusting key elements of the proposed bill. Task force members will review all industry comments that arrived by an Aug. 17 deadline, then meet via conference call or in person to make any changes, preferably before the NAIC's fall meeting in National Harbor, Md.