Outgoing Texas insurance commissioner: NAIC must be accountable, responsive and transparent to assure state-based regulation survives & thrives

UPDATED with NAIC response given before publication; Commissioner Kent’s last day was Sept. 30. The governor is expected to announce a new commissioner soon.

Oct. 14 — A former insurance commissioner who has been actively involved with national insurance regulatory and modernization initiatives has penned a sharp critique of the National Association of Insurance Commissioners that questions its hefty growth over the years and the sufficiency of its oversight. 

“The NAIC is likely at a crossroads regarding its identity. It will need to decide whether it is a member services organization or primarily a monopoly service provider,” wrote former Texas Department of Insurance Commissioner Kent Sullivan in a September analysis that was prepared at the request of several state legislators. It was sent to all state commissioners, as well, a recipient noted.

Sullivan wrote the piece while he was still commissioner. His last day in office was Sept. 30, the Department informed.

Sullivan, who had been Texas insurance commissioner since October 2017 and who, in August, notified the governor he would be stepping down when a replacement has been found, has been active in many high-profile NAIC life insurance, solvency and actuarial committees and also served on an advisory committee at the Federal Insurance Office.

The former private practice litigation lawyer and appeals court justice offered his views on challenges such as organizational consistency, accountability clarity, transparency and speed of change which he thinks the NAIC must address in order to maintain the primacy of state insurance regulation.

This comes at a time when this apparatus, fixed under the 1945 federal McCarran-Ferguson Act, is “increasingly challenged domestically by the authority of the Federal Reserve and the Treasury Department, and from abroad by such groups as the International Association of Insurance Supervisors and the Financial Stability Board,” Sullivan wrote.

Issues of friction between state sovereignty over insurance oversight and NAIC positions on interstate or national matters are one of the focuses of the critique. 

Sullivan raised an instance of NAIC support for an amicus brief on behalf of the multi-state compact for insurance regulation, funded by an NAIC loan, a position the Texas Department declined to support due to a lack of details. States were just expected to just sign on without knowledge of the NAIC’s underlying legal position, Sullivan alleged. The organization then came out in support of the larger compact over a conflicting state statute in Colorado, he wrote.

Sullivan made references to other opaque areas of the $124.5 million budgeted, almost-500 person organization, from its tax filings to how its membership is sometimes kept in the dark, to the detriment of transparency and potentially states’ needs.

However, when a coordinated, multi-state approach is indeed needed, the NAIC can take precious time, though, he argued, pointing to inconsistency in state actions as contributing to the long-term care insurance solvency crisis. He noted his department had, along with others, urged a national approach, but that states continue to await final work product and recommendations from” an executive level task force made up of insurance commissioners. 

The NAIC LTC Task Force has reported making progress on its workstreams such as multi-state rate coordiantion and is scheduled to meet virtually at the organization’s fall national meeting Dec. 4th.

The commissioner, who will be returning to private practice, expressed frustration with a Texas Department initiative, too, involving a thwarted artificial intelligence solution that was at first supposed to address “immediate and serious problems” there in reviewing policy forms. He said the NAIC’s primary technology, named SERFF, is antiquated.

Yet, after spendings “hundreds of hours of time” on the project between the Department and NAIC commissioners in leadership positions within the organization, the AI project suffered an “abrupt (and unilateral) change in direction” when the NAIC delayed the modernization project, he said. The results of this project have yet to be furnished. 

The NAIC responded by stating that “we whole-heartedly share former Commissioner Sullivan’s assessment that the NAIC needs to survive and succeed.’  To that end, we will keep working collaboratively with our members and legislative colleagues to aggressively protect consumers and ensure that the U.S. remains a world-class insurance market now and into the future.”

The Texas department website notes that it regulates the second-largest insurance market in the nation and the seventh-largest globally. Sullivan’s leadership on modernization”has led to faster service in complaint resolution and agent licensing, an increase in online licensing applications, and a major organizational restructuring,” it touts.

Sullivan also included as an attachment in his critique then-Connecticut insurance commissioner Tom Leonardi’s well-publicized invective against the NAIC’s from December 2013, which famously began, “We have met the enemy and he is us!”

Sullivan noted that Leonardi’s letter referred to the NAIC officer selection process as “student council elections.” He wrote that in his experience, these “elections still lack meaningful discussion of important substantive issues.”

However, in 2020, the NAIC leadership did respond quickly to member concerns on national crises, events, and structural inequities with its CoronaVirus Resource Center, “a place where everything every state has done for bulletins, to directives, to regulations, to any alert is in one central location,” as a recent podcast conversation between NAIC CEO Michael Consedine and NAIC President and South Carolina Insurance Director Ray Farmer pointed out. In July, it then created a special committee on Race and Insurance in which “everything is on the table,” according to Farmer.