Is U.S. Insurance Regulation Unconstitutional?
66 Pages Posted: 14 Sep 2018 Last revised: 17 Feb 2019
Date Written: August 28, 2018
Insurance regulation is ostensibly the primary domain of the states. In practice, however, the most important and powerful entity in insurance regulation is not a state at all, but a non-profit corporation known as the National Association of Insurance Commissioners, or NAIC. Much of the NAIC’s power lies in its production of various “handbooks” and “manuals” that have the force of law because they are incorporated by reference in state insurance codes. Under this statutory scheme, when the NAIC updates or changes its various manuals, handbooks, or accounting forms, it also changes state insurance regulation. Because the NAIC is a private entity, it produces these various materials that have the force of law without being bound by any safeguards that ordinarily accompany the production of regulation, whether at the state or federal level. Moreover, the NAIC uses its unique accreditation program to directly pressure state legislatures to delegate this authority to it. This Article argues that this scheme violates basic separation of powers and non-delegation principles embedded in every state Constitution. Under any reasonable version of these principles, the delegation of state regulatory authority to a private entity that directly pressures legislatures to make this delegation and whose actions are not reviewable through any formal judicial or administrative process is unconstitutional. Recognizing this conclusion has the potential to improve state insurance regulation by increasing the accountability of state regulators and the NAIC. But it also carries the risk of undermining state insurance regulation by frustrating efforts to promote uniform national standards. However, the Article suggests that state legislatures can enact reforms that simultaneously remedy the unconstitutional structure of state insurance regulation while preserving the many practical benefits that flow from delegating production of regulatory standards to a single, national entity like the NAIC. In particular, they can establish through an interstate compact an entity that is truly independent from state insurance regulators and that is empowered to review the NAIC’s production of regulatory materials that have the force of law.
Keywords: Insurance Regulation, National Association of Insurance Commissioners, NAIC, Delegation, Accredreditation
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