NU Online News Service, By Arthur D. Postal, March 24, 2005 - The National Association of Insurance Commissioners has sent shock waves by writing Congress that its proposed measure to modernize and standardize the insurance industry has unfixable flaws, it was learned.

The comments in a March 18 letter said the structure of the State Modernization and Regulatory Transparency Act (SMART), creates a conflict by encroaching on state regulators' powers that can't be remedied by “tweaking the language” of the bill.

The letter was sent by the NAIC to Reps. Mike Oxley, R-Ohio, chairman of the House Financial Services Committee, and Richard Baker, R-La., chairman of the key Capitals Markets Subcommittee of the panel developing SMART.

It is not being received well by the Republican leadership and staff of the committee, which believes the letter takes a hard line against the bill. The letter has raised staff and committee concerns that an NAIC decision to distance itself from its drafting could backfire on state regulators.

The letter said, “The State Modernization and Regulatory Transparency Act (SMART) is not a concept that NAIC would suggest to Congress.

“Our concerns are deeply rooted in the basic structure of the SMART Act that mandates federal preemption of state laws and regulations, federal supervision of state regulation, and complete rate de-regulation for all states. We do not believe that tweaking the language of the SMART Act discussion draft can resolve these basic conflicts.”

An industry official, one of the few given access to the letter, said the committee leadership and staff is concerned because “it negatively critiques SMART. It doesn't seem they want to engage in this process in a positive way.”

The committee is also voicing deep concern, according to several sources, about a summary paragraph which said a committee of state regulatory agency staffers and commissioners had conducted an intense analysis of drafts of the legislation provided by the committee's Republican staff.

“Although the NAIC's SMART Act review teams were not tasked with reaching policy decisions, their factual findings reveal fundamental problems for preserving essential state regulatory authority if the basic elements of the draft SMART Act bill become federal law,” the letter said.

The letter was signed by NAIC president and Pennsylvania commissioner Diane Koken. The NAIC did not immediately respond to a request for comment.

Several copies of the letter were acquired by National Underwriter from industry sources representing both the life and property-casualty sides of the business. With Congress in recess, no member of the panel's leadership was available for comment, and a committee staffer did not return phone calls seeking comment.

But three of the people contacted who were familiar with the letter's comments said the committee's leadership and staff regarded the letter as “negative.”

An industry official whose comments represented a consensus of those from whom the document was obtained voiced equal concern that the response could result in the NAIC playing a smaller role in the drafting of the bill than envisioned by Rep. Oxley when he first unveiled plans for such legislation last April.

“I think the NAIC is making a huge mistake,” this official said. “They are under the misapprehension that reform in the state capitals is an option that federal legislators are looking at, and it isn't. There will be federal legislation on this topic, and Congress is just beyond conducting oversight. The NAIC misses that point.”

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