Do NAIC Accreditation Standards Violate Anti-Trust Law?

At stake here are wider implications. When promulgated as accreditation standards, laws like risk-based capital, fronting, credit for reinsurance, and the NAIC’s Non-Admitted Insurers Act can determine who and under what conditions insurers and reinsurers will do business in the U.S. The standards are promulgated by a private association operating without the public accountability or due process standards to which state legislatures and Congress are subject, and with seemingly no restriction on potentially illegal collusive activity.

Moreover, the NAIC accreditation program profoundly affects state legislative processes; the staffing and regulatory conduct of insurance departments; the costs and commercial conduct of domestic insurers; access of insurance consumers to alternative insurance facilities and alien insurers; and ultimately the cost and availability of insurance products. Yet this tremendous influence is exercised by a private trade association composed of commissioners whose average tenure in office is less than three years and whose operation is often dominated by staff and a few officials who remain in office longer than other commissioners.

The sanction component of the NAIC accreditation program mandating the non-acceptance by accredited states of examinations performed by non-accredited domiciles, places intended hardship on all of a non-accredited state’s insurers, who are subject to duplicative and expensive examinations. Such a refusal to accept an unaccredited state’s examinations may have nothing to do with the integrity of a non-domiciliary state examination of that insurer; thus for example if a captive domicile loses its NAIC accreditation because of how it regulates risk retention groups, all that state’s licensed insurers, whether or not RRG’s, would face the concerted refusal of accredited members to accept that state’s examinations, even if the non-accredited state used accreditation standards to examine traditional insurers. This undoubtedly constitutes a boycott as defined in the U.S. Supreme Court decision of Hartford Fire Insurance Company vs. California. That the NAIC is not an entity with anti-trust immunity was established in Preferred Mutual Risk Retention Group vs. Cuomo.

Thus, you have the NAIC, a private trade association, leading a boycott sanctioned accreditation program based on required enactment of model laws and procedures with none of the procedural safeguards imposed on state or federal legislatures or agencies, and whose members act as exclusive judge and jury as to which states become accredited and which do not. This is not a sound basis for public regulation.

All this was summarized by then-Assistant New York State Senate Majority Leader, Guy Velella in a letter stating that the NAIC “is a private association of state insurance commissioners which has an independent staff of over 300 individuals who develop model legislation to regulate all aspects of the insurance market. Once model legislation is developed and approved by the NAIC Board behind closed doors, this organization then requires each state to adopt a law to implement the ‘suggested’ change. Should a state refuse to adopt a ‘suggested’ change, the NAIC and its member states can impose sanctions to adversely affect that state’s domestic insurance industry and market until the ‘suggested’ change is implemented. As a New York State Senator, I resent the fact that important policies concerning the regulation of the insurance industry are being set by a private board that is not open to the public, elected by no one, and not subject to public disclosure.”

“The NAIC is a private organization that has, in my opinion, operated in a collusive manner, restrained trade and commerce among states in the insurance industry. Further, by its activities, it has apparently substantially lessened competition and by its directives to state governments and insurance companies tended to create a controlled market or monopoly situation in the insurance market. I believe the NAIC’s actions to establish a controlled and cohesive market are in direct violation of the Sherman Anti-Trust Act and Clayton Anti-Trust Act.”

“Members of the insurance industry and general public should not have their ability to communicate to regulators compromised by vulnerability to anti-trust prosecution should the NAIC accreditation program be found to be not to be anti-trust compliant, nor should state legislators be frozen out of a process whereby a private trade association essentially preempts a legislator’s freedom of choice lest refusal to enact accreditation-based standards could severely disadvantage the licensed insurers of the legislator’s state.”

An accreditation program can promulgate quality regulation without engaging in anti-trust violation or freezing out state legislators. It is vital that the Federal Office of Insurance Regulation forcefully engage the NAIC to undertake much needed structural reform of its accreditation program to comply, at a minimum, with state and federal anti-trust law.

Jon Harkavy is vice president & general counsel of Risk Services, LLC. The views expressed in this article are those of the author and not necessarily those of Risk Services.