The national organization for state insurance regulators, which has been telling federal and international regulators how they should govern the industry, has decided to engage a consultant to audit its own governance and policy-making practices.

The National Association of Insurance Commissioners (NAIC) said it would issue a request for proposal for a consultant this week, with the work beginning in early September.

In a post on its website, the group said its Executive Committee voted unanimously to accept the recommendation from its Governance Review Task Force to retain a consultant to conduct a “comprehensive review of NAIC governance.”

In addition to the recommendation, the Executive Committee adopted a scope of work that calls for a broad review of the NAIC’s organizational structure, committee processes and external engagements.

“As in past reviews of NAIC governance, we hope the consultant can assist us in facilitating a thorough evaluation and identifying best practices for us to consider,” said Adam Hamm, current NAIC president and North Dakota insurance commissioner.

The NAIC represents the country’s state insurance commissioners.

Scott Holeman, communications director for the NAIC, said the organization “regularly reviews its governance practices and regularly uses consultants to assist in that review.”

Internal concerns over governance issues at NAIC became public last December, 2013, when Connecticut Insurance Commissioner Thomas Leonardi, who is a member of the Governance Review Task Force, issued a letter (embedded below) blasting the organization for how it makes decisions and called for an audit.

“If the companies we regulate had the same governance issues we have here at the NAIC, we would be outraged and ‘heads would roll,'” Leonardi wrote in his letter.

He alleged that the NAIC suffered from a “cult of the Imperial Presidency,” in which he said most decisions are at the discretion of one person with little real input from officers or other members. His biggest criticism was over a decision he said was made by former NAIC President Kevin McCarty, who is Florida insurance chief, in 2012 to give the Federal Insurance Office one of the NAIC’s three seats on the International Association of Insurance Supervisors (IAIS) Executive Committee without, Leonardi claims, any debate, vote or even staff support.

He said the IAIS decision “illustrates how one person’s personal wishes were allowed to trump fiduciary duty to the organization (in this case, to catastrophic proportions). Informal discussions made clear that not a single commissioner (other than the president at the time) and not one staff member agreed with giving FIO an Exco seat.”

He also criticized how the NAIC handled an invitation to meet with President Obama to discuss insurance matters.

But Leonardi’s letter went well beyond these two incidents to describe an organizational culture where officer elections resemble those of a “junior high school,” the president is allowed to make unilateral decisions and “cronyism” in the form of undue influence of former commissioners undermines the organization.

He also suggested that a “cabal” of former commissioners whom he did not name is not happy with the hiring of former Nebraska Sen. Ben Nelson as the CEO in January, 2013 and is undermining the executive. He suggested that former commissioners did the same to Nelson’s predecessor, Dr. Therese M. Vaughan, who left the post in November, 2013.

Leonardi was appointed insurance commissioner by Conn. Gov. Dannel P. Malloy in February, 2011. Before being named commissioner, Leonardi was chairman and CEO of Northington Partners Inc., an insurance venture capital firm. Prior to founding Northington, he was the head of mergers and acquisitions and venture capital at Conning & Co.

Leonardi – and the NAIC under Nelson — have been advocates for the national system of state-based regulation of insurance and critical of attempts to introduce federal, European or bank-like rules into the state-based system. Leonardi has clashed with Michael McRaith, Federal Insurance Office director, over the role of federal government in insurance regulation. Leonardi is on the executive committee of the IAIS.

In a statement to Insurance Journal on the NAIC’s hiring of a consultant, Leonardi said he hopes for a “fair and open process” that will ultimately strengthen the NAIC and state-based industry oversight. “Good governance is extremely important to the constituents we serve. It is my hope that the consultant vetted and eventually recommended by President Hamm’s subcommittee is one who will deliver world-class expertise to this task and who will be afforded unfettered access to our organization in order to conduct an independent and unbiased review,” Leonardi said.

Scope of Review

According to a draft of the scope of the audit, the consultant will be asked to review the NAIC’s governing documents including bylaws, organizational structure, management and decision-making processes and “recommend revisions or improvements to comply with best practices for non-profit corporations and standard-setting organizations and to enhance the NAIC’s ability to support and improve state regulation of insurance.”

The review will look at the roles of the Executive Committee and the Internal Administration Subcommittee, the officers, the CEO and management, the standing committees, and individual members.

It will analyze how NAIC elects officers, the committee assignment process, organizational priority-setting.

The consultant will also be asked to perform an analysis of interactions with federal bodies including Congress, the Federal Reserve, and the Department of Treasury’s Financial Stability Oversight Council (FSOC) and the Federal Insurance Office (FIO), including “how NAIC strategy and message are developed” and how members are selected to represent the NAIC and the role of officers and staff related to federal activities.

– This story previously appeared in our sister publication Insurance Journal.