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F I S C A L I M P A C T R E P O R T
SPONSOR Leavell
ORIGINAL DATE
LAST UPDATED
2-2-2006
HB
SHORT TITLE Interstate Insurance Product Regulation
SB 310
ANALYST Dearing
APPROPRIATION (dollars in thousands)
Appropriation
Recurring
or Non-Rec
Fund
Affected
FY06
FY07
NFI
(Parenthesis ( ) Indicate Expenditure Decreases)
SOURCES OF INFORMATION
LFC Files
Responses Received From
Public Regulation Commission (PRC)
Attorney General’s Office (AOC)
SUMMARY
Synopsis of Bill
Senate Bill 310, enactment of this bill would result in New Mexico joining the Interstate Insur-
ance Product Regulation Compact.
The Compact, prepared and approved by the National Association of Insurance Commissioners,
creates a joint public agency known as the Interstate Insurance Product Regulation Commission.
Under the compact, the commission is empowered to pre-empt New Mexico insurance law to
develop uniform standards for certain insurance products and to approve product filings under
these standards. Insurance products covered by the compact are individual and group annuities,
life insurance, disability income and long-term care insurance. The compact does not cover
other types of health or property and casualty insurance. The stated intent of the NAIC in devel-
oping this Compact is to secure a more uniform and efficient regulatory process and to discour-
age federal pre-emptive legislation.
The chief insurance regulatory officer of each participating state is a member of the Commission.
The Commission is empowered to begin operation only after the compact has been enacted by a
majority of the states or states representing forty percent of the total premium volume for the
covered product lines.
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Senate Bill 310– Page
2
A state that joins the compact can reject a specific uniform standard adopted by the Commission
by legislation or by a specific administrative ruling.
FISCAL IMPLICATIONS
According to the Public Regulation Commission, participation in the Compact has no fiscal im-
pact on the participating states. The Compact is financed by filing fees paid by insures with
funding from the National Association of Insurance Commissioners (NAIC). House Bill 681
would be revenue neutral. Existing statutory fees associated with forms and rate filings in the
New Mexico Insurance Code would be collected by the Interstate Compact Commission and re-
mitted to the State of New Mexico.
SIGNIFICANT ISSUES
If enacted, New Mexico would cede jurisdiction to a multi-state organization where New Mexico
would have only a single vote. While the bill permits a state to withdraw from the compact, sov-
ereignty once given up is difficult to re-acquire, and must occur through a legislative enactment
to revert to status quo.
In order to opt out of an individual uniform product standard, states are allowed one of two op-
tions. Individual uniform standards would require item-specific legislation in order for New
Mexico to opt-out. Or, the insurance regulator would need to promulgate findings of fact and
conclusions of law through New Mexico’s administrative procedures act to determine that the
uniform standard does not provide reasonable protection to citizens.
It should be noted that the NAIC states that the compact must be enacted in its un-amended state,
in order to be a participant of the compact.
PERFORMANCE IMPLICATIONS
Senate Bill 310 would relieve the Superintendent of the some day-to-day review and processing
of form and rate filing review, approval and fee collection to a certain extent. Companies will
retain the choice of filing products through the compact, or directly with the Insurance Division.
Insurance Division staff resources currently performing these functions may be reassigned and
trained for other areas within the Insurance Division. The Superintendent would also be relieve
of certain rule-making authority that would be assumed by the Interstate Compact Commission,
although New Mexico could opt-out of a proposed uniform standard if it does not provide rea-
sonable protection for the citizens of New Mexico.
ADMINISTRATIVE IMPLICATIONS
According to the terms of the compact, the Insurance Division would designate one voting mem-
ber to represent New Mexico in the Compact and may serve on a management and legislative
committees. This individual, most likely the Insurance Division’s Chief Life & Health Actuary
would attend meetings. The Superintendent would continue to perform form & rate review and
fee collections for products filed directly by insurance companies.
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Senate Bill 310– Page
3
CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP
Duplicates HB 681
Conflict, duplication, companionship or relationship between rules promulgated pursuant to the
Insurance Code and rules promulgated by the Interstate Compact Commission would be duplica-
tive. However, the implication would be dependent upon the number of insurance companies
utilizing the filing system of the Compact versus filing directly with the New Mexico Insurance
Division for the life, annuity, disability and long-term care products.
OTHER SUBSTANTIVE ISSUES
The National Conference on State Legislatures recommends this proposal. Frequently asked
questions are compiled in an appendix at the end of this document provided through the NCSL’s
fact sheet on this initiative.
Proponents would argue that this legislation would prevent federal pre-emption by offering a
state-based solution that provides uniformity, speed-to-market and single-point filing, however,
these marketing issues impacting the insurance industry, with the exception of uniformity, must
be weighed against the concession of New Mexico’s sovereignty within this area.
Opponents would argue that it diminishes the local “hands-on” authority of the Superintendent to
regulate the life, annuity, disability and long-term care markets in New Mexico.
WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL
The consequences of not enacting this legislation is that those applicable policies and products
would be filed and regulated as they are currently, directly through the New Mexico Insurance
Division.
PD/yr
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Senate Bill 310– Page
4
Appendix 1
Responses to Frequently Asked Questions, as provided by the National Conference of State
Legislatures,
Frequently Asked Questions (FAQ) on the
Interstate Insurance Product Regulation Compact
In an attempt to preserve sovereign state regulation of the nation’s insurance industry, in July
2003, the Executive Committee of the National Conference of State Legislatures (NCSL) unani-
mously endorsed the Interstate Insurance Product Regulation Compact. The following FAQ of-
fers answers to frequently asked questions about the Compact—it purpose, its structure, how it
will work, and its implications for the future of state insurance regulation.
WHAT IS THE "INTERSTATE INSURANCE PRODUCT REGULATION COMPACT".
If enacted, the Compact would be a multi-state agreement to create a streamlined system of
product regulation. The new system would allow insurers to market certain types of insurance
products more quickly on a national basis and to reduce the number of variations of the same
product that a company must produce to meet state specific requirements. The Compact would
create a national multi-state public authority to receive, review and quickly make regulatory de-
cisions on insurance product filings according to national uniform standards that the member
states would create.
WHAT TYPE OF INSURANCE POLICIES WOULD THE COMPACT COVER.
The Compact would cover individual and group products for life insurance, annuities, disability
income and long-term care insurance. These products—also called "asset-based" insurance—are
long-term, investment-oriented insurance policies that compete directly with other retirement and
estate-planning instruments that are sold by banks and securities firms. The Compact would not
include property and casualty insurance or health insurance.
WHAT ARE INTERSTATE COMPACTS.
Interstates compacts are contracts between states that allows them to cooperate on multi-state or
national issues while retaining local control. Interstate compacts are mentioned specifically in the
U.S. Constitution. Although they historically have been used to address border disputes and wa-
ter rights, the use of interstate compacts has expanded significantly in recent decades to cover tax
issues, drivers' licensing and vehicle registration, environmental issues, emergency management
and other issues. Over 200 interstate compacts currently exist, and every state belongs to at least
14 compacts.
WHAT'S THE REASON FOR THE INSURANCE COMPACT.
The Compact promises to preserve the state system of insurance regulation against federal
encroachment while raising insurance product standards, improving the quality of product re-
view, and giving companies the regulatory efficiency that they need to compete in the modern
marketplace. Insurance is now part of the integrated financial marketplace, and states are under
increased pressure from Congress and others to develop a streamlined and simplified national
system of product regulation that would allow insurers to market their products nationally more
quickly and efficiently. The Compact would achieve this. At the same time, it would benefit con-
sumers by Frequently Asked Questions on the Interstate Insurance Compact 2 promoting higher
product standards and facilitating the development of new products that meet consumer needs.
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Senate Bill 310– Page
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The Compact also would allow states to pool their collective expertise to better review products
and to make more valuable use of resources.
HOW ARE THESE PRODUCTS REGULATED NOW.
Currently, insurance companies must seek individual state approval for all product filings, which
creates a complicated and timely process for insurers to bring a new product to the market.
Where banks can introduce an innovative product like a CD or money-market account in 30
days, and the Securities and Exchange Commission might take 60 days to approve a new securi-
ties product, like a mutual fund, receiving approval for a new life insurance or annuity product in
all 50 states can take up to two years. Moreover, a company may require 30 or 40 versions of the
same product to satisfy a wide-range of state-specific requirements. Driven by evermore de-
manding market forces, products have become increasingly sophisticated and their shelf life has
reduced from 7 to 8 years to 2 to 3 years. These factors have increased the workload for the ap-
proximately 200 regulators—about 2 percent of the nation's total—who are charged with review-
ing and making regulatory decisions on asset-based insurance products. By pooling state re-
sources and expertise, the Compact promises to increase the quality and efficiency of product
review.
WHY NOT JUST LET THE FEDS DO IT.
States have successfully and effectively regulated the business of insurance for over 150 years.
Although federal government could create a new bureaucracy in Washington, D.C. to serve this
function—and the industry and some in Congress advocate this—governors, state legislatures
and insurance commissioners have long maintained that this would be bad for the states and
worse for consumers. Why. First, insurance is a different kind of financial service. Where bank-
ing and securities are about access to capital and taking risks, insurance is about guarantees—
promising to pay benefits if and when certain things happens, no matter what. As a result, insur-
ance requires regulation that is accountable, accessible and responsive—traits more often associ-
ated with state government than federal bureaucracies. Second, state insurance regulation allows
state legislatures to set policies that effectively serve the economic needs and social values of
local markets. In doing so, states also serve the national economy more effectively than one-size-
fits-all federal regulation. Finally, state insurance regulation ensures $12 billion dollars a year in
state insurance revenues, which federal regulation could diminish or preempt. Of the $12.5 bil-
lion, 8 percent supports the cost of insurance regulation while the remaining 92 percent—over
$11 billion—goes to state general funds to pay for other priorities.
DOES THE COMPACT REQUIRE CONGRESSIONAL APPROVAL.
No. The U.S. Constitution says, "No State shall, without the consent of Congress, enter into any
Agreement or Compact with another State." However, the Supreme Court ruled in the 1893 case
Virginia v. Tennessee that congressional consent was mandatory only for a compact tending to
increase the political power and influence of the party states and to encroach upon federal au-
thority. Because the Compact would perform a function that currently is reserved to the states, it
does not require the consent of Congress.
HOW WOULD THE COMPACT BE GOVERNED.
The Compact would be governed by a multi-state Commission, which will include one member
from each member state. A Management Committee of 14 members would oversee the day to
day activities of the Compact. The Management Committee would include one member from
each of the six largest states, four members from mid-sized states, and four members from
smaller states by region. Rules and operating procedures would be made through a process that
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Senate Bill 310– Page
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conforms to the Model State Administrative Procedures Act.
HOW WOULD UNIFORM PRODUCT STANDARDS BE DEVELOPED.
The Management Committee would create uniform product standards through the rulemaking
process. The Compact would require uniform standards to receive the approval of two-thirds of
the Management Committee and two-thirds majority of the Commission to be adopted. A stan-
dard would be effective 90 days after promulgated or at a later date as determined by the Com-
mission.
WHAT GUIDELINES FOR PRODUCT STANDARDS WOULD THE COMPACT HAVE
TO FOLLOW.
The Compact agreement requires that uniform product standards prohibit the use any inconsis-
tent, misleading or ambiguous provisions in a product. It also requires that the form of products
made available to the public shall not be unfair, inequitable or against public policy as deter-
mined by the Commission.
COULD A STATE OPT-OUT OF PRODUCT STANDARDS AFTER IT JOINS THE
COMPACT.
Yes. States can opt-out of uniform product standards in two ways. First, it may enact legislation
opting out of any uniform standard at any time. Second, it may opt-out by regulation following
the promulgation of a uniform standard if meets certain conditions.
HOW DO STATE LEGISLATURES PARTICIPATE IN THE COMPACT.
A state legislature must enact the compact model act through legislation without amendments in
order to join the Compact. A state legislature also must designate the position or appointment
process and conditions regarding who would represent the state on the Commission. Relevant
state legislative committees would receive written notice of a uniform standard before it could be
adopted by the Commission. The Compact also establishes a legislative committee of state legis-
lators or their designees to monitor the operations of the Commission and make recommenda-
tions to the Commission. State legislatures would be able to opt-out of a uniform standard for
any product line at any time through legislation. The Commission would be required to make an
annual report, which shall include the findings of an independent audit, to the legislature and
governor of each member state.
HOW DOES A STATE OPT-OUT OF A UNIFORM STANDARD BY REGULATION.
A state may opt-out of a uniform standard by regulation that is duly promulgated by the insur-
ance department under the state's administrative procedures act. To opt-out by regulation, an
insurance commissioner, first, must give written notice of his or her intent to opt out no later than
10 days after a rule is promulgated or at the time the state joins the Compact. Second, the com-
missioner must reach a finding that the uniform standard does not provide reasonable protections
to the citizens of the state, given the conditions in the state. In opting out, the insurance commis-
sioner must detail the conditions that warrant a departure from the uniform standard and deter-
mine that the standard would not reasonably protect the citizens of the state. Once a state for-
mally initiates the process of opting out of a uniform standard by regulation, while the process is
pending, the state may to petition the Commission at least 15 days before the effective date, to
stay the standard's effectiveness in the state. The Commission may extend the effective date by
90 days if the regulatory opt out has a reasonable chance of success but for no more than one
year without extraordinary circumstances.
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Senate Bill 310– Page
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WHY IS LONG-TERM CARE INSURANCE INCLUDED IN THE COMPACT.
Long-term care (LTC) insurance is included in the Compact because it—like the other included
products—is a long-term, investment-oriented insurance product that is used in retirement
planning. It also is sold increasingly as a feature of life insurance and annuity products. How-
ever, during the drafting of the Compact, it was recognized that the LTC insurance market re-
mains relatively new and evolving, and several insurance commissioners and interested parties
expressed special concern about LTC consumer protections. To address these concerns, the
Compact includes specific provisions aimed at LTC insurance. First, the Compact allows states
to opt out of all LTC insurance uniform product standards in advance, when they enact the Com-
pact. This provision allows states to join the compact but not for LTC insurance. Second, uni-
form standards for LTC insurance products must provide the same or greater consumer protec-
tions as those set forth in the NAIC Long-Term Care Insurance Model Act and Regulation, as
adopted in 2001. This provision ensures a minimum threshold for consumer protections for LTC
insurance products, which would be higher than those currently in most states, but does not limit
the Commission's authority to enact even higher LTC insurance consumer protections.
HOW DO CONSUMERS PARTICIPATE IN THE COMPACT.
The compact model act directs the Commission to establish an advisory committee for consumer
representatives. It directs a similar advisory committee for insurance industry representatives.
These groups would participate in the process of creating uniform standards and would serve as a
formal mechanism for consumer representatives to monitor the operations of the Compact and to
make recommendations. The model act does not address whether the Compact will provide fund-
ing for the consumer advisory committee, but it is possible that financial assistance could be pro-
vided for it in the Bylaws in a manner similar to the NAIC funded-consumer representative pro-
gram.
HOW WILL THE COMPACT RAISE PRODUCT STANDARDS.
Although the Compact does not precondition what standards will be created (except for long-
term care insurance, where it sets a floor), it contains several key features designed to promote
higher product standards. The most important feature is its voluntary nature. If product standards
created by the Compact are not adequate, states will opt-out of the uniform standards and the
Compact will not work. A second feature is geographic balance. Where all member states belong
to the Commission, which must approve product standards before they're effective, the six larg-
est states, which tend to have stronger consumer protections, have permanent seats on the Man-
agement Committee, where uniform standards must originate. Finally, the Compact requires su-
permajorities of both the Management Committee and Commission to approve uniform product
standards. These features promote a consensus-based approach to decision-making, which prom-
ises to produce higher product standards to benefit consumers in exchange for an effective single
point of filing with uniform standards that will provide insurers with the "speed to market" that
they need to compete.
WHO ENFORCES DECISIONS OF THE COMPACT.
The state insurance commissioner would continue to oversee market regulation activities. How-
ever, the Commission would monitor member states for compliance with the bylaws, rules, uni-
form standards and operating procedures of the Commission. The Commission would provide
assistance to state insurance departments in determining whether a violation of a uniform stan-
dard had occurred. Additionally, the Compact expressly preserves the authority of state attorneys
general to enforce general consumer protection laws, such as unfair or deceptive trade practices
statutes, including but not limited to maintaining any actions or proceedings, as authorized by
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Senate Bill 310– Page
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law.
WOULD THE PUBLIC BE ABLE TO ACCESS COMPACT RECORDS AND
INFORMATION.
The Commission would be required to establish conditions and procedures to promote the public
inspection of its information and official records with the limited exception of information and
records related to individual privacy and trade secrets. Additional rules may apply to make
information and records available to state and federal agencies. The Commission would be di-
rected to establish procedures to mandate opening meetings. It would be allowed to meet in cam-
era for specific reasons and only when a majority of the Commission votes to close them meet-
ing. Additionally, it would be required to make public the vote to close the meeting and any
votes taken while the meeting was closed. The Compact stipulates that Commission Bylaws be
published and made available to the public.
WHEN WOULD THE COMPACT BECOME OPERATIONAL.
The Compact would come into existence when two states enact the compact model act. The
Compact would become operational when 26 states or states representing 40 percent of the
premium volume for life insurance, annuities, disability income and long-term care insurance
join the Compact.
WHAT IS THE FISCAL IMPACT OF THE COMPACT ON MEMBER STATES.
Joining the Compact would have no direct fiscal impact on states. Filing fees, i.e., user fees, paid
by insurers would finance Commission activities, and the model act authorizes the Commission
to accept appropriate donations and grants of money, which could include a grant from NAIC to
pay for start-up costs. States could realize performance efficiencies as companies file products
with the Compact rather than state insurance departments. A portion of the approximately 200
state department employees who currently review products for asset-based insurance products
could be reassigned or eliminated. Moreover, the Compact would preserve $12.5 billion a year in
state insurance revenues, which would be threatened if Congress established a federal insurance
regulator.
WHAT ADDITIONAL POWERS DOES THE MODEL ACT GIVE TO THE COMPACT.
The Commission would be able to designate products and advertisements that may be subject to
a self-certification process without the need for prior approval. It also would have the authority
to establish and maintain offices; to issue subpoenas; to purchase and maintain insurance and
bonds; to borrow, accept or contract for services of personnel; to hire employees, professionals
or specialists; and to elect or appoint officers. The Commission would be able to lease, purchase,
and accept appropriate gifts or donations of property; to establish a budget and make expendi-
tures; to borrow money; and to provide and receive information from and to cooperate with law
enforcement agencies. It also would be have the authority to perform other functions as may be
necessary or appropriate to achieve the purposes of the Compact consistent with the state regula-
tion of the business of insurance.
WOULD A MEMBER STATE BE ABLE TO WITHDRAWAL FROM THE COMPACT.
Yes. A member state could withdrawal from the Compact at any time by repealing the statute
that enacted the Compact into law. Withdrawal would be effective along with the statute, but
products that were approved by the Compact as of the effective date of the withdrawal—unless
upon the mutual agreement of the Commission and the withdrawing state—would not be af-
fected by the withdrawal. However, a state would be able to use existing procedures under state
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Senate Bill 310– Page
9
law for withdrawing approval of previously approved products.
COULD A MEMBER STATE BE KICKED OUT OF THE COMPACT.
Yes. A member state could be removed from the Compact if it defaulted in the performance of
its obligations and responsibilities. After notice and a hearing, pending a cure to the default, the
Commission could suspend it. If the defaulting state fails to cure the default within a specified
period of time set by the Commission, the defaulting state would be terminated from the Com-
pact.
HOW DOES THE COMPACT AFFECT THE PROSPECT OF FEDERAL REGUALATION.
Congress signaled an era of increased federal interest in insurance regulation with the passage of
the Gramm-Leach-Bliley Financial Modernization Act of 1999. Since that time, states have re-
spond with tremendous success to congressional pressure to streamline and simplify state sys-
tems by reevaluating and adjusting virtually every aspect of the state systems. These efforts con-
tinue. However, experience thus far has shown product regulation for asset-based insurance to be
one regulatory function that requires a national system to meet the needs of the modern financial
marketplace. By providing a national, state-based system that addresses legitimate industry con-
cerns while preserving the strengths of the state system, the Compact denies proponents of a fed-
eral regulator their best argument for federal regulation and thereby weakens their case. Al-
though congressional interest in insurance regulation is certain to continue, the successful im-
plementation of the Compact will preserve the state system by focusing the debate on ways to
further modernize the state system rather than replace or diminish it with a new federal bureauc-
racy.