Insurance Regulatory Reform Is Urgently Needed: How to Keep the NAIC Accountable

The McCarran-Ferguson Act clearly states that Congress intended insurance companies and products to be regulated at the state level. In 1999, the Gramm-Leach-Bliley Act “reaffirmed that states should regulate insurance activities by declaring that the McCarran-Ferguson Act remains in force.” Even the Dodd-Frank Act kept intact “basic state insurance regulatory functions.” In 2014, Congress passed bipartisan legislation expressly protecting insurance companies from being subject to federal banking regulations and capital requirements.

There has been a recent misguided attempt to uniformly apply banking regulations to insurance companies operating in the US. U.S. state insurance regulation has largely been delegated to a non-governmental standards organization known as the National Association of Insurance Commissioners (NAIC). The Biden administration and intergovernmental organizations composed of foreign regulators, such as the International Monetary Fund (IMF) and the International Association of Insurance Supervisors (IAIS), have exerted influence on the NAIC — pressuring it to single out certain insurance companies.

The Financial Stability Oversight Council (FSOC), the Federal Insurance Administration (FIO), and the IMF are pressuring the NAIC to implement stringent regulations. Both the FSOC and the IMF have issued reports highlighting their concerns about private equity exposure to life insurance. The FIO, which is housed in the U.S. Treasury, works with the NAIC to collect data on climate risks from insurers. The FSOC is headed by President Biden’s Treasury Secretary and is composed of financial regulators guided by President Biden’s agenda. Additionally, the U.S. representative to the IMF Board is Biden’s nominee.

Biden’s liberal officials, such as FIO Director Steven Seitz, are working with global regulators to promote his policy agenda. Insurance commissioners should not use left-wing arguments to tighten burdensome regulations when there is no evidence to justify some of the proposed regulations.

The Biden administration is also using agencies such as the Department of Labor to weaken some life insurance companies and discourage them from investing in certain tranches of asset-backed securities and collateralized loan obligations (CLOs). Using regulation to restrict competition and pick winners and losers is pure rent-seeking and anathema to free market policy. That makes life insurance and annuities less affordable and weakens the 200,000 middle-market U.S. companies that rely on secondary market liquidity for financing. Collectively, these companies “represent one-third of private sector GDP, employing approximately 48 million people.” Credit cards, auto loans, mortgages, student loans and artificial intelligence also rely on securitization investments to increase financing – increasing affordability and access for consumers. Deterring some insurance companies from investing in securitizations will likely limit or eliminate credit lines and consumer financial products. Government-mandated intervention should not be tolerated.

The Federal Reserve (Fed), NAIC, FIO, and state insurance departments are members of the IAIS. The IAIS not only actively promotes DEI/ESG principles, but also encourages insurers to incorporate DEI and ESG standards into the way they “do business.” DEI is one of the IAIS’s top strategic priorities. Similarly, the NAIC promotes DEI as its own priority. A new regulatory framework is needed to ensure that the NAIC does not impose arbitrary DEI/ESG regulations on U.S. insurers.

Also disturbing is that the chairman of the IAIS policy development committee works at the Fed. It is clear that this Fed employee may be leading the IAIS to recommend policies to regulate insurance companies such as banks. IAIS and other intergovernmental organizations should not be in the business of pressuring U.S. regulators while bypassing the will of elected officials in Congress and state legislatures. Therefore, ATR is proposing legislation to hold the NAIC accountable and limit its excessive powers.

ATR is proposing legislation to hold the NAIC accountable for its arbitrary regulatory proposals. These proposals limit insurance innovation across the United States. The purpose is to apply the principles of the Administrative Procedure Act to the NAIC. This will eliminate the adoption of arbitrary and capricious proposals that lack data and empirical evidence.

The bill would provide that in order to adopt a proposal created by or on behalf of the NAIC, the insurance commissioners would have to receive a thorough cost-benefit analysis and a quantitative impact study. The analysis and study would have to be submitted to the legislature and appropriate committees. Both the analysis and the study must be produced. If either is missing, the insurance commissioners may not adopt the NAIC proposal. Legislative committees may call for hearings to discuss the NAIC proposal.

The analysis and study must be conducted by an accredited, independent third-party entity. Once the analysis and study is published, interested parties have at least 90 days (excluding holidays) to submit comments. The NAIC may issue a final proposal, which will be submitted to the appropriate legislative body. If the third-party analysis and study shows that the proposal does not provide significant financial benefits to consumers and the broader economy, it will be invalidated.