States maintain iron grip on insurance regulation

As summer 2020 wound down, then-Ohio Insurance Director Jillian Froment steered a sensitive rewrite of Actuarial Guideline 49 to a successful vote.

The much-debated new AG 49 made changes designed to tighten up indexed universal life illustrations.

Froment chaired the Life Insurance and Annuities Committee, her assignment as a member of the National Association of Insurance Commissioners (NAIC).

That was then.

Today, Froment is executive vice president and general counsel for the American Council of Life Insurers, a position she assumed late last year. ACLI is one of several industry groups that took an active interest in AG 49 changes, submitting several comment letters.

Froment is hardly the first regulator to go from an insurance commissioner’s office to work for an industry group or insurance company. In fact, it is very common, said Birny Birnbaum, a designated consumer representative at the NAIC.

“Commissioners and senior regulators often come from industry and then return to work for industry after their time as regulators,” he said. “We also see regulators who’ve worked their way to senior positions and then leave to work for industry.”

The revolving door of regulators in and out of industry is among the many criticisms of the state-based insurance regulatory system. But it is far from the only one.

States were essentially given regulatory control over insurance via the McCarran-Ferguson Act, passed by Congress in 1945. The Supreme Court ruled one year earlier that federal oversight was warranted, but Congress acted quickly to insulate insurance from federal antitrust laws.
Seventy-eight years later, the state system of insurance regulation is largely unchanged. But to many, time has rendered the system at times ineffectual, cumbersome and heavily political.

‘Tremendous power’

While duties vary from state to state, insurance commissioners serve as advocates for consumers, approve insurance product filings, and provide oversight of producers and insurers on issues such as licensing and reserving, among other things.

The backstory on states gaining control over insurance oversight dates nearly to the Civil War. In 1869, the Supreme Court held, in the case Paul v. Virginia, that “issuing a policy of insurance is not a transaction of commerce.”

As a result, states were left responsible for the taxation and regulation of insurance. That led to the formation in 1871 of the National Insurance Convention, which later became known as the National Association of Insurance Commissioners. The McCarran-Ferguson Act would later cement state control over insurance.

But as the business of insurance grew more complex, state insurance regulation grew more onerous in many ways. For starters, 50 states mean 50 insurance regulators, all with equal power.

“It gives tremendous power to small states,” Birnbaum said. “You could have a majority of states with less than a third of the country’s population making decisions that affect two-thirds of the people in the country.”

It is not unusual to see regulators from conservative states such as Idaho and Iowa diametrically opposed to regulators from liberal states such as New York or Massachusetts. The results are usually either gridlock or a much-watered-down regulation.

Although in a very powerful position, insurance commissioners often work out of the limelight. Media coverage is light and consumer interest nil.

The position gives commissioners substantial authority amid powerful insurers and powerful politicians. Sometimes that combination leads to bad outcomes.

In Louisiana, for example, three successive insurance commissioners were convicted and served time in federal prison for unrelated crimes. Before their convictions, the three commissioners managed to serve a combined 28 years. The embarrassing run ended when former Commissioner James H. “Jim” Brown was sent to prison in 2000 for lying to FBI agents.

More recently, North Carolina Insurance Commissioner Mike Causey turned to the FBI in 2017 and assisted their investigation of former insurance magnate Greg Lindberg. Imprisoned for trying to bribe Causey, Lindberg was freed on appeal in July 2022.

Mass resignations

In the rare instances when insurance does become a major topical issue, insurance commissioners are often overshadowed.

Florida is in a full-blown insurance crisis. Insurers are either failing or fleeing the state amid increasingly devastating storms, combined with an aggressive lawsuit culture. The average cost of homeowner insurance has more than doubled since 2019, from $1,988 to $4,231, which is about triple the national average.

While Florida lawmakers held two special sessions to deal specifically with the insurance crisis, the state’s insurance regulators maintained low visibility. Finally, Insurance Commissioner David Altmaier announced his resignation, effective Dec. 28. His top two lieutenants – John Reilly, deputy commissioner of life and health, and Susanne Murphy, deputy commissioner of property & casualty – resigned in the preceding weeks.

Then there’s the politics of trying to regulate an industry that is often a large, sought-after employer in the state. Insurance commissioners themselves are recruiters in the highly competitive captive insurance world. A captive insurer, according to the NAIC, is “a wholly owned subsidiary created to provide insurance to its non-insurance parent company (or companies). Captives are essentially a form of self-insurance whereby the insurer is owned wholly by the insured. They are typically established to meet the unique risk-management needs of the owners or members. Additionally, they provide potentially significant tax advantages, which can prove integral to longevity and company profitability.”

It all adds another layer of conflict for insurance commissioners, Birnbaum said.

“States compete with one another for insurance business,” he explained. “Probably the best example of that is with captives, where states are competing with one another to lure captive insurers to their state. And so there is pressure to compete for captives, sometimes by reducing regulatory requirements.”

Elected vs. appointed

Eleven states hold elections for insurance commissioner. Of the 39 states in which the insurance commissioner is appointed, the governor appoints in 37; in New Mexico and Virginia, the insurance commissioner is appointed by a commission.

Neither model is perfect, Birnbaum said, adding that an elected commissioner has a degree of independence not possible for appointed commissioners.

“Given the massive role insurance plays in the lives of consumers and businesses, being directly accountable to these insurance consumers is important,” he said.

Elected commissioners are answerable to the public but often take political donations from the very insurance companies they will end up overseeing.

Jim Donelon of Louisiana is one of two state insurance commissioners up for election this year. He calls campaign fundraising “the regrettable part” of running for office. Still, Donelon is a huge cheerleader for elected over appointed commissioners.

The second-longest-serving insurance commissioner in the United States, Donelon assumed office in 2006 and won five successive terms. Mike Kreidler of Washington, also elected, is the most senior insurance commissioner, having been in office since 2000.

Appointed commissioners last, on average, just three years, Donelon said, “much too short to learn what is a very complicated role as the regulator of insurance.”
Furthermore, having to face the voters keeps a commissioner accountable, he added.

“You have to get to the middle of the electorate,” he explained. “If you’re too far right, you’re going to get beat by the left. If you’re too far left, you’re going to get beat by the right. At least that’s my state’s situation.

“When you are appointed by a governor, you’re really part of that governor’s cabinet. You do what he or she wants done. Those governors tend to be not engaged in insurance and tend to be more extreme than regulators who get elected to be regulators.”

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.