Compact: Frequently Asked Questions

Compact Summary Document [PDF]

Generally, what is an interstate compact?
An interstate compact is a contract between states that allows states to cooperate on multi-state or national issues while retaining state control. They are specifically mentioned in the U.S. Constitution. Although they historically have been used to address border disputes and water 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 is the Interstate Insurance Product Regulation Compact (the "Compact")?
The Compact will be an agreement among member states to create a streamlined system of product regulation. The new system would allow insurers to more quickly market certain types of insurance products nationally and to reduce the number of variations of the same product that a company must produce to meet state specific product standards. The Compact would create a multi-state commission to receive, review and quickly make regulatory decisions on insurance product filings according to national uniform standards. The member states would create uniform product standards for products to be filed with the compact.

What are the main reasons for developing this Compact?
State insurance regulators are committed to pursuing modernization of state insurance regulation. The modernization efforts, as outlined in the NAIC's Statement of Intent adopted in March of 2000, include a "speed to market" initiative which focuses on making more efficient the process by which insurance products are reviewed and approved by state insurance regulators. Most recently, this effort was reaffirmed by state insurance regulators in a new document entitled "A Reinforced Commitment: Insurance Regulatory Modernization Action Plan" which they adopted in September 2003. As distinguishable from health and property/casualty insurance products, many products sold by life insurers have evolved to become primarily investment products. These long-term, investment oriented insurance policies - sometimes referred to as "asset-based" insurance - compete directly with other retirement and estate-planning instruments that are sold by banks and securities firms. Whereas insurers must currently seek approval of their products on a state-by-state basis, banks and securities firms can make use of a more streamlined products approval process. This amounts to a competitive advantage for banks and securities firms, thus creating an "un-level playing field" for insurers in the financial products market place. Rather than pursuing uniform product standards on a state-by-state basis, which is generally recognized as a very time-consuming and difficult process, the Compact is viewed as the most effective means of getting national uniform product standards in place in a reasonable amount of time. Additionally, in this case the Compact would allow insurers competing on a regional or national scale to file their products in one central filing place (i.e., the multi-state commission) rather than requiring them to file in numerous individual states. Products filed under the Compact would be subject to a high-quality review process. Ultimately, insurers will be able to get their products to market more quickly - and consumers will have quicker access to more competitive products that have been subjected to a thorough regulatory review process.

What type of insurance policies would the Compact cover?
The Compact would have jurisdiction over four product lines: life insurance, annuities, disability income, and long-term care insurance. In an increasingly mobile society, these are products that have a long life and will travel with people as they move across state lines. As such, they are not as sensitive to local costs and conditions as are products such as automobile, homeowners and health insurance. Also, the chosen products have a common theme of accumulating wealth for people or helping to protect wealth that has been accumulated.

How would this Compact be governed?
The Compact would create a multi-state commission, which will include one member from each member state. The commission would adopt a set of bylaws to govern its activities. 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 one member from smaller states from four regional zones. This distribution of management committee membership will assure a diversity of views. Rules and operating procedures would be made through a process that conforms to the Model State Administrative Procedures Act of 1981.

How would uniform product standards be developed?
States participating in the Compact would create uniform product standards through a rulemaking process. In order to be adopted, a uniform standard must receive approval by two-thirds of the Management Committee and two-thirds majority of the states participating in the Compact. A standard would be effective 90 days after its promulgation or at a later date as determined by the Commission.

What guidelines for product standards are included in the Compact?
The Compact requires that product standards be construed to prohibit the use any inconsistent, misleading or ambiguous provisions in a product. It also requires that the form of the product made available to the public shall not be unfair, inequitable or against public policy as determined by the Commission.

May a state opt-out of uniform product standards once 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 also opt-out by regulation. For an opt-out by regulation, the regulator must promulgate specific findings of fact and conclusions of law through the state’s administrative procedures act to determine that the uniform standards does not provide reasonable protections to the citizens of the state, given the conditions of the state. This finding would occur by a preponderance of the evidence detailing the conditions in the state that warrant a rejection of the uniform standards due to inadequate protections. As a part of this process, the regulator must consider and balance two factors to reach this finding: (1) that the conditions of the state and the needs of the citizens outweigh the legislature’s intent to establish national uniform consumer protections for the products overseen by the commission; and (2) the compact’s presumption that uniform standards adopted by the commission provide reasonable protections to consumers of the product in question.

How do state legislatures participate in the Compact?
A state legislature must enact the model compact act through legislation without amendments to initiate its participation in the Compact. A state legislature also must designate the position or appointment process and conditions regarding who would represent the state on the Commission. Written notice to the relevant state legislative committees is required before the Commission adopts a uniform product standard. The Compact also establishes a legislative committee of state legislators and their designees to monitor the operations of the Commission and make recommendations to the Commission. State legislatures would be able to opt-out of a uniform standard for any product line at any time through legislation, and 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 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. This group would participate in the process of creating uniform standards and 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 funding for the consumer advisory committee, but it is possible that financial assistance could be provided for in the Bylaws in a manner similar to the NAIC funded-consumer representative program.

Who enforces decisions of the Compact?
The state insurance commissioner would continue to oversee market regulation activities. However, the Commission would monitor member states for compliance with the bylaws, rules, uniform standards and operating procedures of the Commission. The Commission would provide assistance to state insurance departments in determining whether a violation of a uniform standard had occurred.

Would the public be able to access Compact records and information?
The Commission would be required to establish conditions and procedures to make its information and official records available to the public. Additional rules may apply to make information and records available to state and federal agencies.

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 fiscal impact on states. The Compact will be financed by filing fees, i.e., user fees, paid by insurers. The Compact authorizes the Commission to accept any and all appropriate donations and grants of money, which could include a grant from NAIC to pay for start-up costs. The states currently receive $11.8 billion in insurance revenues—including premium taxes, fees and fines. This revenue source could be diminished or preempted if the federal government established a federal insurance regulator.

Would participation with the Compact be mandatory for insurance companies?
No. Companies will have the choice of filing products through the commission or filing products directly with a state. If a company chooses the latter course, then the regulator will apply the existing product standard laws and procedures of the state. If a company files with the commission, then the commission standards and review process will apply. Companies operating in multiple states probably will choose to file their products through the commission. On the other hand, companies that are single state writers, or which offer products in a very few states, may file directly with the state.

Will the commission have a full-time professional staff?
Yes. It is envisioned that the commission will have a staff of highly skilled professionals to create proposed national standards for commission member consideration, review the filings made by companies pursuant to the standards, and administer the commission. Although the number of staff necessary is uncertain, the insurance companies will fund them along with the other costs of the commission’s activities. Individual states will not be expected to contribute direct funding for the commission and may possibly recognize a budget savings by redirecting staff resources to other important needs.

How will insurance companies file policy forms with the commission?
As planned, insurers would be able to use the SERFF electronic filing process. Regulators and companies have expended a great deal of effort and expense over the past several years to develop SERFF (the System for Electronic Rate and Forms Filing). SERFF is operable in all 51 jurisdictions and is used by a growing number of companies. SERFF will permit the electronic submission by companies of products for review by commission personnel.

What additional powers does the model act give to the Compact?
The Commission would be able to designate products and advertisement 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, accept appropriate gifts or donations of property; to establish a budget and make expenditures; 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 regulation 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 affected by the withdrawal. However, a state would be able to use existing procedures under state law for withdrawing approval of previously approved products.