Treating “Like Like Like”
Any time a group of businesses or its trade association takes the lead on working with public policymakers to enact stricter regulatory guidelines on how those organizations are run, it’s bound to spur controversy. Some members of the trade group may bristle at being subjected to rules they think are unfair or discriminatory. Others may think the proposed standards don’t go far enough.
Such has been the case with state efforts to apply Risk-Based Capital (RBC) standards to fraternal life insurers; a requirement that, for the most part, fraternals have been exempt from in almost every state. In 2009, NFCA supported a measure to apply RBC standards to fraternals doing business in New York. The new law was enacted in 2010. State regulators there had expressed serious concern about the financial strength of several societies and let the NFCA leadership know that they were considering legislation to require fraternals to participate in the state guaranty fund.
NFCA opposed such a proposal because of the sanctity of the “maintenance of solvency” provision in fraternal certificates and the complexities involved in amending those contracts. We suggested that New York regulators consider applying RBC standards to fraternals as a way of providing regulators an effective “early warning system” to detect and prevent potential insolvencies and to allow financially weak fraternals to take the steps necessary to protect their members. State regulators agreed that this was a reasonable solution to the problem and worked with us to craft, introduce, and enact a bill that we believe works for regulators, for fraternals, and – most importantly – for consumers.
Since that time, other states have indicated an interest in pursuing similar legislation and the National Association of Insurance Commissioners is considering a proposal to create a fraternal RBC model law. The Minnesota legislature is moving towards final passage of a bill, which will increase the ability of the Department of Commerce to take steps in regard to fraternal insurers who do not meet certain RBC-based criteria. Like the regulators in New York, the Minnesota Department of Commerce had been expressing concern about fraternal insurers not being a part of the guaranty fund. This legislation preserves fraternals’ exemption from the guaranty fund by providing the Department with the tools to help prevent the insolvencies that could have led to the guaranty fund’s involvement. The bill has passed in both Senate and House committee hearings, and it is expected to be approved by both houses and sent to the governor.
It is worth noting that representatives of the Minnesota domestic fraternal community – which includes large, medium, and small NFCA member societies – have been intimately involved in working with state regulators on this initiative and, along with NFCA, are supportive of the measure. It is what I consider to be a great example of fraternals and regulators working toward a common goal and purpose, and should serve as a blueprint for working with regulators in other states.
And other states will surely follow the lead of New York and Minnesota. This is a train that, at least in my opinion, we should not try to derail. Instead, I think we should get ahead of it so that we can lead the effort to develop and implement effective solvency measures rather than get crushed by them. The NFCA Fraternal Capital Adequacy Task Force has been working on this issue for the past several months. Next month, the NFCA Law Committee will consider developing a policy position on support for application of RBC standards on fraternal life insurers. The Law Committee’s recommendation will be considered by the association’s Board of Directors at its meeting in June.
Based on my discussions with many member society CEOs, it appears that most agree that subjecting fraternals to RBC standards is a fair and reasonable way to address regulators’ concerns about the financial strength of some societies. However, I have also heard from CEOs who are adamant in their belief that RBC standards should not be applied to fraternals because of our unique organizational structure or because the RBC calculation is an ineffective way to determine the solvency of a life insurer.
I fully understand that fraternal life insurers are different than our commercial cousins, not only in our status as tax-exempt, not-for-profit organizations, but in our commitment to use the proceeds from our insurance operations to finance and facilitate member benefits and community service activities. Ours is an honorable and a noble charter. But when it comes to our insurance operations, I am a believer in treating “like like like.” That is, if we are collecting premiums and promising to pay claims, then we should be subject to the same (or very similar) regulations that govern other insurers. It’s one of the best ways we can be perceived as credible providers of financial services by regulators, agents and brokers, members, and prospects.
As I said, it’s a controversial issue. But it’s one that individual members and your trade association have to address – quickly. Now is the time to express your opinion on this issue, either publically by posting a comment here or privately by sending me an e-mail (email@example.com). I want to hear from you. I want to know where you stand – and why.