Insurance Regulator Says 'No' to Playing Fast and Loose

The perennial joke about the National Association of Insurance Commissioners is that its acronym NAIC stands for "No Action Is Contemplated." But if anything can rouse these sleepy state commissioners, it's the threat of a federal insurance regulator taking over their turf and making them redundant.

And so they awoke in February to a new Chief Executive, Terri Vaughan, former Iowa insurance commissioner, whose mandate is to make the 50 state regulators look more relevant at a time when even the venerable Paul Volcker is hinting that they have outlived their usefulness.

In rapid succession NAIC started doing things like investigating the credit rating agencies and making it easier for foreign reinsurers to enter the U.S. market. It also ordered health insurers to stop telling vulnerable senior citizens to oppose Obama's health care plan.

But now some important regulators and insurance watchdogs are arguing that, under Vaughan's leadership, NAIC may be moving a bit too fast, as well as getting a bit too cozy with the people that NAIC commissioners are supposed to be regulating.

In a commentary released on October 6, Virginia Insurance Commissioner Alfred Gross criticized NAIC commissioners for rushing through a plan that would allow life insurers to keep less capital to pay policyholders. Gross said there were "no studies" to show the effect of this revision and that NAIC has "no idea" how this plan will impact policyholders whose claims may have to be paid off.

NAIC spokesman Scott Holeman defended its "Ready, Fire, Aim" approach by telling Bloomberg News that "accounting changes" were typically made this way and that such a study might be done in the future.

But that didn't sit right with consumer watchdog Birny Birnbaum, executive director of the Center for Economic Justice. He called the plan "another giveaway to insurers at the cost of consumer protection."

Life insurers are also pushing to loosen rules in another direction, by finding new and more pliant rating agencies. They would prefer a so-called "independent third party," possibly Blackstone Group, which would make insurers' $145 billion in holdings of mortgage-backed securities look shiny and new again, instead of the tired and worn out junk that drove us into this recession. This is also being endorsed by some NAIC members.

But wait a minute. Isn't "looser standards" one of the reasons we're in this mess in the first place? And aren't insurance regulators supposed to protect policyholders, not the companies they regulate?