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Compact holds promise of standardized regulation


Insurers' long-sought goal of modernizing the regulatory system overseeing rates and form filings is poised to become a reality for certain product lines in the majority of states later this year.

Company representatives are offering suggestions to the regulators crafting operating standards and procedures for the Insurance Product Regulation Compact, which establishes a multistate commission and creates a central point of electronic filing for life, annuity, disability income and long-term care products.

Supporters of the Interstate Insurance Product Regulation Commission hope that the framework they have created will prove resilient in coping with problems and attract additional states as members, so the commission's standards can truly be national ones.

For insurers, the advantages of the interstate compact approach stem from a uniform set of product standards and a single point of filing, said Miriam Krol, vp of the Washington-based American Council of Life Insurers.

Essentially, there will be "one playbook" for regulators and industry product filers, which eliminates guesswork, she said.

In addition, the single point of filing would expedite regulators' reviews of products and is anticipated to result in a 60-day approval process, Ms. Krol said. Since state approvals now range from seven days to two years, a 60-day decision period would make insurers "very happy," she said. It also would allow them to get a head start on setting up administrative systems for handling new products once they are approved, she said.

"We are very positive about this process," Ms. Krol said. "I'm just sorry that someone didn't think of this 30 years ago."

The project is important to regulators, too.

"By signing the compact, all members of the commission have affirmed their dedication to modernizing state-based insurance supervision and keeping pace with the always-evolving insurance marketplace," Diane Koken chair of the commission's Management Committee and Pennsylvania's insurance commissioner, said in a statement.

The compact's roots go back to 2000, when members of the National Assn. of Insurance Commissioners adopted a statement of intent as a blueprint for reforms to modernize state regulation and subsequently established a Speed-to-Market Working Group. That group recommended establishing an efficient, state-based procedure to process filings as well as a single point to file and review such products and be a repository for national standards, according to a commission statement.

In early 2001, state insurance regulators established a voluntary pilot program called CARFRA—the Coordinated Advertising, Rate and Form Review Authority—as a single point for filing some insurance products such as life insurance and annuities.

According to the commission, "CARFRA made progress in developing product standards but was not successful because there was a general consensus that in order to overcome the state deviations in filing requirements, state laws and regulations would need to be changed. Because of these uncertainties, companies were not comfortable filing with CARFRA."

"The states were just not ready to do the uniform-standard piece," Ms. Krol said. Individual states still wanted to impose their respective standards in addition to the CARFRA ones, she said. "It defeated the purpose of uniformity."

Yet, "it was a good first step to getting to the compact," she said.

Terri Vaughan, the former Iowa insurance commissioner and former NAIC president, proposed using an interstate compact as the vehicle for the project and worked closely with ACLI to make it a reality, Ms. Krol said.

There were some hurdles to overcome, she said. For example, after Iowa adopted the compact legislation, several attorneys general raised questions about states' ability to delegate their authority. That resulted in eight amendments to the model that clarify that "states delegate their authority over filing, review and the approval process but retain their enforcement powers," Ms. Krol said.

Iowa readopted the model and the adoption process was under way. It benefited from the support of the National Conference of State Legislators and the National Conference of Insurance Legislators.

The compact came into existence in March 2004, when Colorado and Utah enacted the legislation. It did not become operational for purposes of adopting uniform product standards and operating guidelines until 26 jurisdictions, or alternatively, states representing more than 40% of the premium volume for the four covered product lines, enacted the measure.

The compact reached both goals to become operational in May 2006.

"I think it cranked up faster than we hoped it would," said Jim Long, a commission member and the insurance commissioner of North Carolina.

A proposal pending before Congress to allow insurers to be licensed through an optional federal charter is "one of the driving forces" behind the compact's success, but there are many other reasons, said Jane Cline, vice chair of the commission's Management Committee and West Virginia insurance commissioner.

Currently 28 states—including Puerto Rico, which is considered a state for compact purposes—have approved the compact. Pending the governor's signature, Michigan will join the commission. Members then would represent 48% of the U.S. premium volume for the four covered lines.

Since its introductory gathering in June, the commission has established a management committee, adopted bylaws, elected officers, approved national standards for five adjustable life products and hired an executive director. The organizational process included regulators, industry representatives, legislators and consumers.

The process included several weeks of six- to eight-hour conference calls during which "you could feel the vibes" as regulators and industry reps were "jelling" in their efforts to develop a workable program, Ms. Krol said.

As a result, the compact's operating guidelines contain an opt-out provision "that was done to appease the legislatures," Ms. Krol said. Many legislators said "they felt they were abdicating their regulatory responsibility."

Under the compact's rules, a state can opt-out of product standards by enacting legislation or adopting a regulation that includes a finding that the uniform standards do not provide reasonable protections to its citizens.

Everyone is sensitive to the issue of opt-outs because "if we have a patchwork quilt of in and out, it destroys the value of the compact," Ms. Krol said.

"We hope it (opt outs) won't happen," said commission Executive Director Frances Arricale, who is based in Washington.

"We are hopeful that insurance legislators and regulators will see the big picture and show restraint," said Dennis S. Herchel, assistant vp and counsel for MassMutual Financial Group in Springfield, Mass. He is participating on the industry advisory board.

One significant element of the compact's bylaws is the use of proportional representation to determine which member states serve on the 14-member Management Committee.

Under the bylaws, states are ranked based on their previous year's premium volume for individual and group annuities, life, disability income and long-term care insurance products.

The six largest states have a permanent seat on the committee. The remaining states are placed into one of two categories based on their market share: Those with at least 2% market share and those with less than 2%. Each category has four seats, and membership rotates annually through the ranked states.

"A lot of care and caution went into developing that formula, and it seems to be working," Ms. Krol said.

Also, "there is a checks-and-balance system" because a two-thirds vote of the whole commission is required to pass many types of measures, Ms. Krol said.

The compact "is set for greater growth in 2007," Ms. Koken said. The commission plans to consider more than 30 additional proposed standards in the areas of life insurance and annuities. Draft uniform standards, which have been developed through the work of the Interstate Compact National Standards Working Group of the NAIC's Speed-to-Market Task Force, are available for the commission to use in developing uniform national product standards, the commission said in a statement.

The NAIC also plays an important role in supporting the compact's operations through loans and a gift, although the details of the organization's 2007 budget are not yet available.

Several issues have emerged during compact discussions.

The commission recently resolved an issue about the confidentiality of product filings by adopting a public access rule. "The public access rule doesn't allow public access to a filing while it is being reviewed or if it is disapproved or withdrawn," Ms. Krol said.

Another issue—known as "mix and match"—concerns whether insurers can use elements of the policy portfolio, such as application forms or product descriptions, that have been previously approved by states side-by-side with product elements that have been approved by the commission.

"It's really a practical issue," Mr. Herchel said. "We need to use some of these complimentary forms."

For 2007 though, "one of the biggest challenges will be to get more states on board," he said. "That's going to be a continuing struggle."

"We hope for a performance similar to our growth over the past three years, with eight to 10 states adopting legislation to join the compact," Ms. Koken said in a statement.

The NAIC and the insurance industry currently are considering using such a compact approach to update surplus lines regulation and tax allocation.

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