MR. EXCITEMENT GOES TO NEW ORLEANS

Rough Notes, Feb 2005 by Hennosy, Kevin P

NAIC tries to play it smart in response to Spitzer's investigation

On December 2, 2004, my wife and I were traveling from Kansas City to New Orleans to attend the quarterly meeting of the National Association of Insurance Commissioners (NAIC). As I continually remind her family and friends, I take my wife to all the best places.

I do not mean to brag, but I went so far as to secure a "spouse badge" for my wife so that she could attend the convention's many interesting sessions. Unfortunately, all matters of misfortune kept her from taking advantage of these highly prized credentials-except for the opening cocktail reception.

As we proceeded through airport security in Kansas City, I looked ahead and recognized NAIC Executive Vice President Catherine J. Weatherford. To be sure, in the exciting world of insurance public policy, this is a celebrity sighting, with or without shoes.

By the time we boarded the plane, Weatherford was nowhere to be seen. My wife and I found our seats in coach and Weatherford still had not boarded the plane. Just as I was about to express concern for the missing NAIC administrator, Weatherford boarded the plane and ensconced herself into a first-class seat. The woman looked worried. She avoided eye contact.

A cynical commentator would speculate that Weatherford's discomfort arose from the concern that a trade magazine writer spotted her flying first class. After all, the NAIC does not pay for first-class airfare for its members to attend the quarterly meetings, and no association administrator would want to foster the wrong perception, even if there was, in fact, no violation of policy.

However, a seasoned observer of the NAIC knows that Weatherford had more than any perceived accusation of elitism on her mind. She has plenty to worry about.

Nightmare

The Spitzer investigation is a nightmare for the NAIC, but the regulators refuse to wake up to reality. They seem to think that accepting reality is a sign of weakness. So the nightmare goes on and on and on.

The Empire State attorney general continues to uncover wrongdoing that went undetected by a 60-year old state-based system of supervision. This regulatory form of retinal degeneration has worsened on Weatherford's watch, which has focused on blind deregulation of commercial lines.

Much of the deregulation offered up by Weatherford and the NAIC leadership was intended to persuade insurance sectors to reject optional federal charter legislation in Congress. Weatherford and her officers used deregulation as a political carrot.

The scheme almost worked. Insurance lobbyists looked at the weak federal regulation promised under the optional federal charter legislation and compared it to the deregulation offered by the states. The rush toward deregulation by the industry's political leadership smothered the optional federal charter bill.

To aid the process along, Mrs. Weatherford spent a lot of money to hire former U.S. Oklahoma Congressman J.C. Watts to represent the NAIC on the Hill. With Mr. Watts came an affiliated Atlanta law firm named McKenna, Long and Aldridge, which just hired former Senator Zell Miller. A partner in the firm also represents House Speaker Dennis Hastert and former Speaker Newt Gingrich.

Mr. Spitzer's findings breathed new life into the campaign for federal insurance supervision that had suffered a near-death experience in 2004. In addition, several members of Congress have asked whether the insurance sector's limited and contingent exemption from antitrust law serves the public interest.

Defenders of the state-based system have had the wind knocked out of them by the Spitzer investigation. In the House of Representatives, the insurance sector's most powerful defenders, Representatives Michael Oxley (R-Ohio) and Robert Baker (R-La.) were prepared to offer legislation in 2005 that would have encouraged states to deregulate insurance.

With Spitzer garnering national, above-the-fold headlines by uncovering cartel behavior, it is much harder to find members of Congress willing to advocate "open competition" based on deregulation.

The Spitzer investigation's populist attack on an unpopular business sector (insurance) has proved popular with voters-at least in New York. A review of poll results from surveys taken just prior to the announcement of Spitzer's insurance investigation on October 14 showed the attorney general tied or slightly ahead of Governor George Pataki. By the first week of December when Spitzer announced his long-expected candidacy for governor, his lead had grown to double-digits.

At a time when it is not uncommon for a handful of votes to decide a statewide election, political consultants will not look past poll numbers like Spitzer's. With a large number of state governorships and elected insurance commissioners on the ballot in 2006, insurance regulation is likely to become an issue in many campaigns in many jurisdictions.

Limo ride

As I watched Weatherford enter a hotel-provided limo at the New Orleans Airport, I wondered just what the NAIC would do to respond to its mounting problems. After four days of meetings, I still wonder what the NAIC will do. She probably does too.