In the U.S., insurance regulation is primarily crafted at the local level by state regulators, lawmakers, and courts. While the federal government also plays a small role in monitoring the insurance sector, this role is fairly limited. However, a little-known non-profit organization, the National Association of Insurance Commissioners (NAIC), increasingly plays a large role in influencing insurance regulation by helping set national insurance standards and provide regulatory guidance to state governments. This is concerning because the NAIC continues to operate with minimal transparency and accountability, raising serious questions about its ability to protect consumer interests. Reform is needed.
At the heart of the problem is that the NAIC receives special treatment from the government. The NAIC freely enjoys all the benefits of a 501(c)3 charitable organization, like not paying taxes, and that of a quasi-governmental organization, such as developing insurance standards that states frequently adopt out of necessity. Meanwhile, the NAIC is exempt from standard disclosure and reporting requirements ordinarily expected of non-profit organizations and government agencies. For instance, the NAIC does not have to file an annual Form 990 with the Internal Revenue Service (IRS) because an obscure 1955 ruling determined that it is a “wholly owned instrumentality” of the states. The NAIC is also not subject to transparency requirements like the Administrative Procedure Act and Freedom of Information Act since it is not officially a government agency. These exemptions give the NAIC the best of both worlds and allow it to operate with minimal accountability. This has important implications for how it conducts itself in terms of its operational practices, spending habits, and more.
For example, despite the IRS generally prohibiting 501(c)3 organizations from participating in substantial lobbying efforts, the NAIC regularly drafts model laws and dedicates significant time and energy to supporting the uniform adoption of them by member states. In many cases, the NAIC’s publications have been incorporated by reference in state insurance codes, giving them the force of law. Many states also adopt laws requiring insurance companies file documents with the NAIC and then pay fees associated with those filings. The NAIC plays a large role in setting these fees, which it collects and uses to fund operations. This raises questions about the NAIC tax exempt status, and why a non-profit organization should have the power to tax private businesses. Even if there weren’t serious concerns about whether it is lawful for states to delegate their taxing authority to an unelected private organization, it’s not at all clear that the NAIC spends the money it collects appropriately.
That’s because the NAIC appears to spend money on unrelated items and activities, many indirectly subsidized by the money collected from various filing fees. These range from spending on salaries, taxes, and benefits—the amount of which is undisclosed for certain senior executives—to spending on travel for state insurance department member staff and other event participants. Some of this travel even appears to be international, which is strange since the NAIC is a U.S. based standard-setting organization primarily focused on state insurance regulation. It’s hard to understand what public benefit—if any—can be derived from excessive foreign travel. Combined with concerns about the influence international organizations appear to have over the NAIC, it is clear that actions are needed to rein in the organization and establish true accountability.
First, the NAIC should be required to file a Form 990 with the IRS like other nonprofits. The NAIC’s current exemption from this requirement is unusual and enables the organization to operate in the shadows, free to engage in activities ordinarily off limits to tax-exempt organizations. Equally important is requiring the NAIC to be subject to the same transparency laws, such as the Freedom of Information Act, that apply to government agencies, if it claims quasi-governmental status. The NAIC should not simultaneously be treated as a tax-exempt non-profit and semi-public institution that’s entitled to special privileges.
Last, to help restore public trust in the NAIC, an independent audit should be conducted into the organization’s operations. This audit should examine the inherent conflict of interest in generating revenue from obligatory fees imposed on private insurance companies. It should also include steps for allowing states to override NAIC policies. Making these changes would go a long way toward improving transparency and ensuring that the NAIC acts in the public’s best interest.
Nate Scherer is the Director of Finance Policy at the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, follow us on X @ConsumerPal.