While the plenary body of the National Association of Insurance Commissioners (NAIC) gave its final approval to the proposed interstate compact at its Winter meeting in San Diego, opposition and questions raised in the debate bode for the process taking years rather than months.The proposal now goes before numerous organizations representing state lawmakers and policymakers before a final package to create a single national filing system for life products will be presented to state legislatures.

When state regulators first raised the idea of an interstate compact last spring, the hope was to gain approval from the Kansas City, Mo.-based NAIC, the National Conference of Insurance Legislators and the National Conference of State Legislatures by the end of 2002 for placement on 2003 state legislative calendars.

The regulators passed the proposal over the strong opposition from consumer groups that felt the program represented an unconstitutional granting of regulatory authority to a body that would end up beholden to industry.

In addition, the National Association of Attorneys Generals urged putting off approval of the package until questions could be answered about whether or not it would inhibit their authority to prosecute carriers for false and misleading advertising of life products.

Delicate balancing game

For the past nine months, compact advocates have played a delicate balancing game, weighing the interests of the life industry against those of the larger states that maintain strict regulatory procedures over life insurance, variable annuities and long-term care insurance.

The vote represented a triumph for outgoing NAIC president Terri Vaughan, who vowed to stay active, taking lead roles in the compact's passage, as well as in implementation issues regarding the federal backstop legislation recently passed by Congress (see "Insurers Scramble To Offer Terror Coverage, page 1).

But the victory may be short-lived, if some of the "aye" votes cast by commissioners were merely for Vaughan, rather than representing the kind of enthusiasm that will be needed to push the proposal through state legislatures.

The fight over advertising regulation represented the balancing act in play. The wording that raised a stir in the NAAG was included to alleviate concerns of the American Council of Life Insurers that the compact created a whole new prior approval process for life-product advertising where none existed before.

ACLI support was assured when language was added reiterating that insurance commissioners always retain the right to review advertising when they deem it necessary. The issue was particularly relevant to long-term care insurance, which is the only life product generally subject to prior approval requirements for advertising.

Because long-term care is a relatively new field with few standards, regulators and consumer groups fought hard for it to receive special attention in the compact legislation. As a result, it became the only product subject to a so-called front-end, opt-out procedure, which permits states to join the compact with the option of establishing their own regulatory requirements for long-term care.

States that join the compact retain the right to opt out of enforcing standards they deem inadequate, but they must undergo a relatively rigorous process to do so, in order to protect the goal of national uniformity. That goal was lost for the compact's ill-fated predecessor, the Coordinated Advertising Rate and Form Review Authority.

Success of the compact will ultimately hinge on how serious state law makers view the threat of federal regulation. Although they may cling dearly to their insurance regulatory authority, even closer to their hearts are the premium tax dollars collected under state regulation. Current proposals for federal insurance regulation stress that it is optional and revenue-neutral, but in the words of former NCOIL president David Counts, "You really got to be smoking something if you believe that." Industry support also remains critical. In the end, carriers still will be able to choose the 50-state filing option if they view the compact process as too flawed.

Steven Tuckey is a New York-based editor for Insurance Chronicle, a Thomson Financial Insurance Solutions publication.

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