Kansas City: The Eye of Insurance Regulation Storm

A states-rights battle stretching back to the Civil War has heated up, catching one of Kansas City's largest businesses in the brewing storm. The clash is over insurance regulation, which ultimately determines what consumers pay to insure everything from their homes and autos to their lives and financial security.

Source: Source: Kansas City Star | Published on September 10, 2008

And while this regulatory thunderclap is largely being played out behind the scenes, the debate isn't likely to just blow over.

This summer, the National Association of Insurance Commissioners, a professional association of state insurance regulators based in a Crown Center office building in Kansas City, waded deeper into the fray by appearing to soften its century-old opposition to federal regulation. Catherine Weatherford, the longest-serving executive in the association's 137-year history, resigned soon after that -- and after trade publications printed parts of an internal association memo indicating at least part of the Kansas City staff might be moved to Washington.

Weatherford, who has since become chief executive of NAVA Inc., a trade association of variable annuity and related insurance product companies, did not return phone calls or e-mails for this story. The often tight-lipped commissioner's organization, which has yet to name a successor to Weatherford, declined to comment.

"We can speculate that perhaps the staff got a bit ahead of the members in order to be sure of having a role in a federal information office that is being considered," said Kevin Hennosy, a longtime Kansas City insurance and consumer affairs writer who has followed the association for more than two decades.

Following the internal machinations at the organization, which has a combined Kansas City, New York and Washington staff of 420 and a $70 million operating budget, "is a little like watching the Kremlin in the 1950s to see who is standing closest to whom," Hennosy said.

Big money is riding on the state vs. federal debate. About 3,900 insurance companies in the U.S. collect $1.03 trillion in premiums annually from consumers and plow $6.2 trillion back into Wall Street, real estate markets and other investments, according to Insurance Information Institute statistics.

Insurers have been fighting since the Civil War era over whether regulators should impose uniform sets of federal rules -- which would be advantageous for big companies crossing many state lines -- or stick with traditional state-by-state regulation favored by smaller players who think they will fare better in state capitals than they would in Washington.

Federal regulation advocates such as the American Council of Life Insurers argue that streamlining regulatory rules so that one single charter would apply to policies sold in all 50 states potentially would save consumers billions of dollars in premiums annually because insurers would not need to make the same costly and time-consuming request for approval 50 times.

Also, in places such as Kansas City, residents on one side of a state line would not be denied coverage their neighbors have just because their state regulators might not have acted yet.

Supporters of the current state-by-state approach, including the National Association of Mutual Insurance Companies and the National Association of Insurance Agents, contend consumers buying insurance under federal charter could lose some regulatory protection and wind up paying higher premiums.

NAIC, as the association is known, is an organization of state and U.S. territorial insurance regulators formed to build broad frameworks for proposed laws, regulations and other supervisory practices that individual members such as Missouri or Kansas are free to follow or not.

Known as the National Convention of Insurance Commissioners at its first meeting in 1871, the organization is a creation of the regulatory controversy. Insurance companies and regulators of that era cobbled it together to coordinate regulation after the U.S. Supreme Court in 1868 shot down what would have amounted to a federal charter.

NAIC still opposes the idea of federal charters, even optional ones that Congress proposes from time to time that would allow insurers to choose which rules they want to follow, said Sandy Praeger, Kansas insurance commissioner and NAIC president.

"I can't imagine anyone arguing that the federal government could do it (regulate insurance companies and assist consumers) better than states do already," Praeger said. "After Hurricane Katrina, for example, we had people on the ground and call centers up long before FEMA."

NAIC is considering moving at least part of its Kansas City staff -- notably the chief executive's office -- to Washington, partly to deal with growing federal interest in insurance matters, she said.

The country's oldest organization of state executives has become one of the country's largest collectors and clearinghouses of statistics the insurance industry needs to fuel its actuarial engines.

Sales of that information to insurance underwriters, industry analysts and other interested number crunchers are the largest contributors to NAIC operating budgets that are projected to approach $70 million this year.

Even the federal government does not collect as much insurance information as the NAIC. Some lawmakers, notably U.S. Rep. Paul Kanjorski, a Pennsylvania Democrat, think the feds should collect more information, if for no other reason than to help provide more effective federal response to calamities such as the Sept. 11, 2001, terrorist attacks or Hurricanes Katrina and Rita.

Kanjorski, the chairman of a House financial services subcommittee dealing with insurance legislation, is sponsoring legislation that would create a federal Office of Insurance Information within the U.S. Treasury Department. This department would collect the information needed to advise the White House and Congress about potential insurance regulation.

The proposed bill would give NAIC a major role in helping set up and run the federal office, and presumably require moving part of NAIC's Kansas City operations to Washington for that.

In June, NAIC said it would support the bill if backers strengthened some safeguards against a potential federal incursion on state regulation. The organization's position on this bill set off the latest federal vs. state storm alert.

But Praeger insists NAIC's openness to the idea of a central federal information office in no way relaxes its opposition to federal chartering.

Critics, including the National Council of Insurance Legislators, or NCOIL, disagree.

"We believe this would be the first step to the creation of the optional federal charter," said Brian Kennedy, a Rhode Island state representative and NCOIL's president.

Even some NAIC members have expressed concern that the proposed federal information office could erode state regulatory powers and, by extension, some protection for consumers, Kennedy said.

NCOIL has resisted federal chartering in any form, both on philosophical grounds and because, by the organization's calculations, it threatens $14 billion in insurance taxes collected by the states and perhaps 11,000 jobs in state insurance departments.

Kennedy and others also say they worry because it is difficult to tell who in the insurance commissioners' organization voted to make tentative acceptance of the federal information office official NAIC policy or how that decision was arrived at. They estimate that least a fourth of NAIC's announced meetings at quarterly national conferences are closed to outsiders. As semi-public bodies go, "it's a very dysfunctional organization," Kennedy said.

It's also a very unusual one where public disclosure is concerned. NAIC is formally chartered, in Delaware, as a nonprofit organization. But since 1999, it also has been exempted by the Internal Revenue Service from filing Form 990 tax returns, attesting to details about how much money it makes and how it spends it. IRS and the association say financial information in the association's annual report is sufficient disclosure.

The NAIC also does many things that government bodies normally do, such as proposing regulations and coordinating regulatory matters among state and federal agencies. But the organization insists it is not bound by public record rules, open meeting requirements and other disclosure laws because it is an association of government officials, rather than a formal governmental association or body that those laws cover.

This dual identity can be frustrating for anyone on the outside who tries to work for insurance reform, said Birny Birnbaum, executive director of the Center for Economic Justice, an Austin, Texas, advocate of regulatory reform to make insurance, utilities and other services more affordable for the poor.

"If NAIC is going to act like a quasi-public entity, it should follow public disclosure rules," Birnbaum said. "But when it suits them, they say, 'We're a nonprofit from Delaware.' "

Like many former insurance regulators, Kansas City's Catherine Weatherford seems to have had little trouble finding a new job this summer.

Weatherford, who was Oklahoma's insurance commissioner before joining the NAIC 12 years ago, last week became chairman and chief executive of NAVA Inc., a Washington, D.C., area trade association. NAVA members sell fixed and variable annuities and similar products to investors in retirement plans.

She landed her new job less than two months after resigning as the NAIC's chief executive.

Seven of the last nine state commissioners and NAIC presidents for whom Weatherford served as the association's executive vice president also now work directly or indirectly for the industry. The exceptions are the current Kansas insurance commissioner, Sandy Praeger, and Praeger's predecessor, Gov. Kathleen Sebelius.

Critics such as J. Robert Hunter of the Consumer Federation of America contend this relationship is troubling because of NAIC's central role in industry oversight. Association executives and the commissioners deny any impropriety.

Even so, "instituting a strong conflict-of-interest policy with revolving-door safeguards would help erase" a perception that NAIC leadership is a stepping-stone to industry employment, consumer group representatives wrote the NAIC recently.