[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
REFORMING INSURANCE REGULATION:
MAKING THE MARKETPLACE MORE
COMPETITIVE FOR CONSUMERS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE AND
GOVERNMENT SPONSORED ENTEREPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
NOVEMBER 5, 2003
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-63
U.S. GOVERNMENT PRINTING OFFICE
93-423 WASHINGTON : 2004
_____________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North CHARLES A. GONZALEZ, Texas
Carolina MICHAEL E. CAPUANO, Massachusetts
DOUG OSE, California HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois RUBEN HINOJOSA, Texas
MARK GREEN, Wisconsin KEN LUCAS, Kentucky
PATRICK J. TOOMEY, Pennsylvania JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut WM. LACY CLAY, Missouri
JOHN B. SHADEGG, Arizona STEVE ISRAEL, New York
VITO FOSSELLA, New York MIKE ROSS, Arkansas
GARY G. MILLER, California CAROLYN McCARTHY, New York
MELISSA A. HART, Pennsylvania JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota ARTUR DAVIS, Alabama
TOM FEENEY, Florida RAHM EMANUEL, Illinois
JEB HENSARLING, Texas BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey DAVID SCOTT, Georgia
TIM MURPHY, Pennsylvania
GINNY BROWN-WAITE, Florida BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
Subcommittee on Capital Markets, Insurance and Government Sponsored
Enterprises
RICHARD H. BAKER, Louisiana, Chairman
DOUG OSE, California, Vice Chairman PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware GREGORY W. MEEKS, New York
PETER T. KING, New York JAY INSLEE, Washington
FRANK D. LUCAS, Oklahoma DENNIS MOORE, Kansas
EDWARD R. ROYCE, California CHARLES A. GONZALEZ, Texas
DONALD A. MANZULLO, Illinois MICHAEL E. CAPUANO, Massachusetts
SUE W. KELLY, New York HAROLD E. FORD, Jr., Tennessee
ROBERT W. NEY, Ohio RUBEN HINOJOSA, Texas
JOHN B. SHADEGG, Arizona KEN LUCAS, Kentucky
JIM RYUN, Kansas JOSEPH CROWLEY, New York
VITO FOSSELLA, New York, STEVE ISRAEL, New York
JUDY BIGGERT, Illinois MIKE ROSS, Arkansas
MARK GREEN, Wisconsin WM. LACY CLAY, Missouri
GARY G. MILLER, California CAROLYN McCARTHY, New York
PATRICK J. TOOMEY, Pennsylvania JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia JIM MATHESON, Utah
MELISSA A. HART, Pennsylvania STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota BRAD MILLER, North Carolina
PATRICK J. TIBERI, Ohio RAHM EMANUEL, Illinois
GINNY BROWN-WAITE, Florida DAVID SCOTT, Georgia
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
C O N T E N T S
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Page
Hearing held on:
November 5, 2003............................................. 1
Appendix:
November 5, 2003............................................. 57
WITNESSES
Wednesday, November 5, 2003
Ahart, Tom, President, Ahart, Frinzi & Smith Insurance Agency.... 44
Breslin, Hon. Neil, Senator, New York State, on behalf of the
National Conference of Insurance Legislators................... 9
Fisher, William B., Vice President and Associate General Counsel,
Massachusetts Mutual Life Insurance Company.................... 43
Fitts, John T., Deputy General Counsel, Progressive Insurance
Company........................................................ 40
Hannon, Hon. Kemp, Senator, New York State, on behalf of the
National Conference of State Legislatures...................... 12
McKnight, Markham, President and CEO, Wright and Percy Insurance. 47
Pickens, Hon. Mike, Commissioner of Insurance, Arkansas;
President, National Association of Insurance Commissioners
accompanied by the Hon. Gregory Serio, Superintendent of
Insurance, New York............................................ 7
White, Jaxon A., Chairman & CEO, Medmarc Insurance Group......... 41
Wolin, Neal S., Executive Vice President & General Counsel, The
Hartford Financial Services Group, Inc......................... 46
APPENDIX
Prepared statements:
Gillmor, Hon. Paul E......................................... 58
Kanjorski, Hon. Paul E....................................... 59
Breslin, Hon. Neil........................................... 61
Fisher, William B............................................ 68
Fitts, John T................................................ 79
Hannon, Hon. Kemp............................................ 86
McKnight, Markham............................................ 99
Pickens, Hon. Mike........................................... 110
Tubertini, Ronnie............................................ 148
White, Jaxon A............................................... 159
Wolin, Neal S................................................ 164
Additional Material Submitted for the Record
American Land Title Association, prepared statement.............. 167
American Academy of Actuaries, Public Policy Monograph, Role of
the Actuary Under Federal Insurance Regulation................. 169
National Association of Mutual Insurance Companies, prepared
statement...................................................... 184
REFORMING INSURANCE REGULATION:
MAKING THE MARKETPLACE MORE
COMPETITIVE FOR CONSUMERS
----------
Wednesday, November 5, 2003
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance
and Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 2:30 p.m., in
Room 2127, Rayburn House Office Building, Hon. Richard H. Baker
[chairman of the subcommittee] presiding.
Present: Representatives Baker, Shays, Bachus, Royce,
Kelly, Miller, Tiberi, Kanjorski, Sherman, Inslee, Moore, Lucas
of Kentucky, Israel, Ross, Emanuel, and Scott.
Also Present: Representative McNulty.
Chairman Baker. I am informed that Mr. Kanjorski is on his
way. With that understanding, I am going to proceed to call our
meeting of the Capital Markets Subcommittee to order for the
purpose of receiving testimony today on the advisability and
need for reform of our current national insurance regulatory
marketplace.
I am looking forward to hearing the perspectives of the
members of our distinguished panels today as to the need for,
and the nature of, proposed regulatory reform. Over the past
years, the subcommittee has examined this subject matter and
received various recommendations and stated plans of action. We
certainly hope to hear encouraging reports on the status of
those reform efforts.
I feel it is very important to state that reform is
essential, because delivery of product to consumers, where
limited, now results in unnecessarily high premium rates. The
lack of competitive product in the marketplace only further
sustains those non-responsive rate structures.
I do think it appropriate for the committee to move only
after careful analysis and understanding. But we should seek
the broadest possible scope of reform while recognizing the
importance of the State structure in the protection of consumer
interests. I do not think those goals are mutually exclusive.
While we seek the broadest scope of possible reform, I also
understand there are limiting factors for proposals that may
not ultimately gain Congressional approval. Other than no
reform, dead reform is equally unacceptable. I appreciate the
efforts made to date by all of the parties who have exhibited
interest in seeing national uniformity in various perspectives,
but I don't think that we frankly have made sufficient progress
through the current hearing date that would not in fact cause
the Congress to take further actions on its own initiative.
It is my hope that we receive from each perspective, from
all market stakeholders, recommendations that can be weaved
together into some sort of policy platform that could possibly
lead to congressional action next year. Short of that, it would
be my hope we could at least reach agreement on a time line by
which meaningful reforms could be attained through State and
local initiatives, and, absent attaining that goal, suggesting
automatic congressional action after waiting a few more years.
I am not encouraged, because the Graham-Leach-Bliley effort
only took about 75 years. Sarbanes-Oxley, fueled by a national
crisis, took a few months. Somewhere between a few months and
75 years, I think the insurance regulatory structure is
probably solvable. Seeing how we are closing out the first real
decade of discussion on this matter, maybe we are further down
the road of progress than some may expect.
Given those perspectives, I certainly welcome each of you
to the hearing today and look forward to receiving your
comments.
Chairman Baker. Let me turn to this side. Is there any
member on this side who has an opening statement that would--
Mr. Israel.
Mr. Israel. Mr. Chairman, I had planned to introduce one of
our experts, if it is appropriate to do that now.
Chairman Baker. Since we have a number of requests for
members to introduce, particularly members of this panel, and
while we are waiting Mr. Kanjorski, why don't we proceed with
those specific introductions.
Please proceed, Mr. Israel.
Mr. Israel. Thank you very much, Mr. Chairman. I appreciate
your convening this very important hearing on insurance
regulation. And while there is a diversity of opinion on this
issue, and while I continue to study it, I am very pleased that
one of our experts today is a distinguished elected official on
Long Island, which I represent, and it is my privilege to
introduce him to the committee.
He is a fellow Long Islander, Senator Kemp Hannon, of New
York. He is Co-chair on the National Conference of State
Legislatures Task Force on the Federalization of Insurance
Regulation. Senator Hannon is uniquely qualified to provide us
with insight into the ongoing debate of the role of the Federal
Government in insurance regulation.
Senator Hannon also serves as the chairman of the New York
State Senate Health Committee, and has previously served as
chair of the Council for State Governments Committee on
suggested State legislation.
I am very eager to hear his insights. I look forward to
working with him and enjoy the relationship, the bipartisan
relationship that we have on Long Island. I am so pleased to
welcome him to this committee today.
I yield back my time, Mr. Chairman.
Chairman Baker. Thank you, Mr. Israel.
I believe Mr. Ross has an introduction that he would like
to make at this time.
Mr. Ross. Thank you, Mr. Chairman.
One of our panelists today, an expert witness, comes from
my home State and actually grew up in my district and is
someone I think is doing an outstanding job on behalf of our
state.
And I am pleased to introduce Mike Pickens, the
Commissioner of Insurance for the State of Arkansas. And Mike
was appointed Insurance Commissioner in 1997, back when I was
still in the State senate, and was reappointed for a second 4-
year term in 2001. He is a graduate of Pine Bluff High School,
which has an exceptional football team this year.
He has attended the University of Mississippi, or Old Miss
as we call it, in Arkansas, and he returned to the University
of Arkansas at Little Rock where he attended the school of law,
and received his juris doctorate degree.
And prior to his post as the Insurance Commissioner, Mike
was a partner in the Little Rock law firm of Friday, Eldridge,
and Clark where he practiced in the areas of insurance defense,
representing policyholders in personal injury and workers'
compensation litigation.
In Arkansas, the Commissioner is responsible for protecting
insurance consumers through insurer solvency and market conduct
regulation. And, as a licensed independent insurance agent
myself, I can speak firsthand to the efforts of this agency in
ensuring that companies conduct their businesses fairly and in
a manner that puts the consumers first.
The Arkansas Insurance Department has been identified as
one of the Nation's most progressive insurance regulatory
agencies by the A.M. Best Company, one of the country's oldest
and most highly respected insurer rating organizations.
Mike was elected President of the National Association of
Insurance Commissioners back in 2002, which is composed of the
chief insurance regulatory officials from the 50 States, the
District of Columbia, and four of the five U.S. Territories.
I am pleased to hear that the National Association of
Insurance Commissioners is making progress in its efforts to
modernize State regulation with implementation of the insurance
regulatory modernization action plan that was adopted back in
September of this year.
I look forward to Mike's testimony and the other witnesses'
that have joined us today, and I appreciate this committee's
commitment to examining this industry that is essential to all
Americans. Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Ross.
Mr. McNulty, would you care to make an introduction?
Mr. McNulty. I thank the Chairman and the Ranking Member
for allowing a nonmember of the committee into the room today
for the purpose of making an introduction.
I also want to welcome Commissioner Pickens, whom we have
surrounded by New Yorkers. I also want to extend greetings to
my very dear friend, Senator Kemp Hannon, with whom I served in
the assembly many, many years ago, and Greg Serio, the
Superintendent of Insurance from New York, who will be
introduced a bit later by another member of the panel, but who
I want to greet because he is a friend and he is a constituent.
And, finally, I want to introduce my longtime friend,
Senator Neil Breslin. Senator Breslin is not just an
outstanding lawyer and a great Senator, and considered an
expert on insurance issues, but, more importantly to me, he and
the members of his family have been friends to me and the
members of my family for a very, very long period of time. And
it is always great to be with him, to work with him, and to
welcome him to Washington, and I look forward to being with him
soon back home in the district.
So I welcome all of the panelists, especially my State
Senator. Thank you, Mr. Chairman, and I thank the Ranking
Member.
Chairman Baker. Thank you, Mr. McNulty.
Mrs. Kelly, did you wish to make an introduction at this
time?
Mrs. Kelly. I do. And thank you very much, Mr. Chairman. I
really appreciate your holding this hearing on improving
insurance regulation, which is an issue of great concern not
only to me and the members of the committee, but to people
across the country who are consumers of the products.
Today we are going to have a lot of diverse witnesses with
distinct interests, backgrounds, and experiences. And despite
all of these unique perspectives, I think we all agree that
protecting consumers and providing the best service possible
are really the goals that we are focused on here today.
I think we also all agree that a lack of consistency and
regulation from State to State hurts Americans by undermining
protections and driving up costs. And the solution is a more
efficient and systematic approach to regulation.
As we continue our work on these issues, I am really
honored to have the opportunity to introduce--we have a couple
of witnesses from the State of New York. I understand that some
have been introduced, but I would like to introduce the
Superintendent of Insurance, Greg Serio. He has been wonderful
for our offices to work with.
And, Greg, we are very happy to have you here today. There
is a lot of important issues that we are going to discuss here
today. But I don't think there is anything that is more
important than doing what we have to do to make sure that not
only are we protecting our consumers, but that they understand
the products that they are purchasing.
And, I believe that Mr. Serio has prided himself, and I am
happy, too, because I applaud him in what he has been doing,
because while carrying out his duties as a Superintendent of
Insurance in New York, he has undertaken many successful
programs and initiatives at the New York Insurance Department,
including a successful effort to adopt the model producer
licensing statute.
I also would like to welcome Senator Breslin. I understand
someone has also introduced you. It is a pleasure to have you
all here today. I am hopeful that we are able to wrap our arms
around this and come to some conclusions on it. We tried a long
time ago, several years ago, to address this issue, and tried
to get passed a bill that the insurance industry had been
interested in trying to get passed for self-regulation since
18--it was pending in Congress since 1847. We got part of it
done; we just have to get the rest of the job done. I am
hopeful that some of the testimony today is going to finish
that up.
It is really a pleasure to have you here. I look forward to
your testimony and to your initiatives that you are offering to
modernize insurance regulation in a way that is going to better
serve all of us.
Thank you, Mr. Chairman. Yield back.
Chairman Baker. I thank the gentlelady.
Mr. Kanjorski for an opening statement.
Mr. Kanjorski. Thank you, Mr. Chairman. We meet today for
the second time in the 108th Congress to consider insurance
issues.
Today's hearing will focus on the latest modernization
efforts announced by the National Association of Insurance
Commissioners, and the prospects for achieving State-based
regulatory reform.
Before we hear from our experts, I believe it is important
to review some observations about the insurance industry that I
have raised at our previous hearings on this matter.
Insurance, as my colleagues already know, is a product that
transfers risk from an individual or business to an insurance
company. Every single American family has a need for some form
of insurance, especially products like auto, renters' or
homeowners' insurance. The vast majority of these families also
has or wants other insurance products, like life, health and
long-term care policies.
The McCarran-Ferguson Act authorized the States to regulate
the insurance business. And 4 years ago this month, the
Congress reaffirmed this system in approving the law to
modernize the financial industry. As a result, each State
currently has its own set of statutes and rules governing the
insurance marketplace. Traditionally the States have highly
regulated the insurance industry. Many States, however, have
begun to experiment with their regulatory models in recent
years. In the last several sessions of Congress, our committee
has held regular hearings about the need for regulatory reform
in the insurance industry.
During these debates, we have heard from a variety of
viewpoints on the need for reform and the options for achieving
it. These hearings have also helped to educate us generally
about the mechanics of the insurance industry and the latest
regulatory developments in it. As a whole, however, the Federal
Government continues to lag behind in its knowledge of
insurance issues.
As our witnesses from Mass Mutual will point out later
today, the insurance business is the only portion of the
financial services industry that does not have a regulatory
presence in Washington.
At times, this lack of expertise has caused difficulties
for us. For example, although many Members of Congress had
concerns about the insurance industry's ability to respond to
the 2001 terrorist attacks, they had difficulty in immediately
identifying Federal experts to advise them in these matters.
The deficiency of Federal knowledge about the insurance
industry might have also impeded our efforts to adopt
expeditiously the terrorism reinsurance backstop law. Everyone
involved in the debate on future insurance regulation agrees on
the need for reform.
From my perspective, promoting competition through fair and
effective regulation should ultimately result in better and
more affordable insurance products for consumers. While I am
pleased that the National Association of Insurance
Commissioners recently released an action plan for pursuing
further modernization efforts for regulating the insurance
marketplace, this proposal was developed 3-1/2 years after the
release of its paper calling for the efficient market
regulation of the insurance business.
Absent demonstrated advances in these State insurance
regulatory efforts going forward, the Congress may need to
consider altering the statutory arrangements through the
creation of an optional Federal chartering system or the
adoption of other reforms.
In closing, Mr. Chairman, I want to commend you for
bringing these matters to our attention. I believe it is
important that we learn more about the views of the parties
testifying before us today, and, if necessary, work to further
refine and improve the legal structures governing our Nation's
insurance system. I yield back.
[The prepared statement of Hon. Paul E. Kanjorski can be
found on page 59 in the appendix.]
Chairman Baker. Thank the gentlemen. Mr. Lucas.
Mr. Lucas. Mr. Chairman, I am not big on formal opening
statements, but I would like to say that this is of a
particular interest to me, since I spent, in my prior life, 32
years in the insurance business and I had a lot of frustrations
about the speed to market of products and so forth, working in
many States.
And I look forward to the testimony here. And I am hoping
that we can move forward and get some very meaningful reform.
Thank you.
Chairman Baker. Thank you, Mr. Lucas.
Mr. Bachus, did you have an opening statement?
Mr. Bachus. Mr. Chairman, I will make it brief. I want to
thank you, first of all, for holding this hearing. Since the
jurisdictional change in 2001 to include insurance as a part of
the House Financial Services Committee, I have heard from
numerous regulators in various sectors of the insurance
industry on this very important issue.
While I applaud the life insurance industry for attempting
to make their case of the need for a dual system of insurance
regulation in their bid to compete with federally regulated
security products, I still have many concerns regarding various
proposals for an optional Federal insurance charter. In
particular, proposals which include the property and casualty
line of insurance as a part of the Federal charter.
As you may know, Alabama has a $1.3 billion per year
insurance business, resulting in $240 million of insurance
premium taxes every year. A proposed optional Federal insurance
charter not only could reduce this important source of State
revenue in an era of tight State budgets and dwindling State
income taxes but will also threaten the ability for States to
adequately fund their State insurance departments.
Issues such as state insurance premium taxes must be
addressed as part of any optional Federal insurance charter.
Currently our Alabama Insurance Commissioner, Walter Bell, is
working with the National Association of Insurance
Commissioners on an insurance regulatory modernization plan,
which will include a streamlined uniform regulatory process for
product approval and additional consumer protections.
I look forward to hearing about this proposal today from
the NAIC, and comments from the independent insurance agents on
this new proposal.
In addition, I look forward to listening to representatives
of Mass Mutual, Hartford, and the Council of Insurance Agents
and Brokers on their innovative proposals for modernizing our
insurance regulatory system.
And again, I thank you for holding this hearing.
Chairman Baker. Thank you, Mr. Bachus.
Any member desiring to make an additional opening
statement? Mr. Scott.
Mr. Scott. Thank you very much, Chairman Baker and Ranking
Member Kanjorski. I want to thank you for holding this hearing
today. And I just want to also just mention how important the
insurance industry is.
Several of my constituents have expressed opposition to a
national approach, but nevertheless I will listen today to the
testimony with an open mind. Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Scott.
Any further opening statements? If not, at this time I
would like to proceed to recognize the members of our first
panel.
The first to be recognized would be the Honorable Mike
Pickens, Commissioner of Insurance for the great State of
Arkansas, who appears here today as the President of the
National Association of Insurance Commissioners, and is
accompanied by the Honorable Gregory Serio, Superintendent of
Insurance from the State of New York.
Chairman Baker. Mr. Pickens, you are certainly warmly
welcomed here today.
STATEMENT OF HON. MIKE PICKENS, COMMISSIONER OF INSURANCE,
ARKANSAS, AND PRESIDENT, NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS; ACCOMPANIED BY HON. GREGORY SERIO,
SUPERINTENDENT OF INSURANCE, NEW YORK
Mr. Pickens. Mr. Chairman and members of the subcommittee,
thank you very much for allowing us the opportunity to be here
today. It truly is a privilege to have a chance to advise you
of the progress State regulators have made in our consumer
protection and market-oriented regulatory reform efforts.
I particularly appreciate my Representative, Mr. Mike Ross,
or one of our Representatives in Arkansas, and his kind
introduction.
First, though, Mr. Chairman, I would like to take this
opportunity to thank you for your interest in and your support
of our important work. Your oversight of State insurance
regulation truly has been a positive force for necessary
change. And we recognize that.
I commend Financial Services Committee Chairman Mike Oxley.
I commend you, Mr. Chairman, and I commend all of the members
of the Financial Services Committee for what I believe is your
highly progressive leadership on these issues.
Mr. Chairman, let there be no doubt, State insurance
regulators are committed to creating a regulatory system for
the 21st century, one that both protects our fellow insurance
consumers but also one that facilitates growth and stability in
the financial services marketplace.
Our goal is very simple: It is to make regulation more
effective and more efficient; but also, at the same time, to
make it less costly and less burdensome. I believe we have
demonstrated commitment by our expeditious compliance with the
Graham-Leach-Bliley Act of November of 1999.
The NAIC has to date certified 41 States as being GLB-
compliant in producer licensing. That constitutes 67 percent of
the premium volume in the country. We expect very soon to
certify New York, who just passed a bill this summer as being
GLB-compliant. And when that happens, we will have 75 percent,
75 percent of the marketplace GLB-compliant.
All 50 States and the District of Columbia have passed
privacy laws or regulations to protect consumers' personal
financial and health information. And as has already been
mentioned today here, Mr. Chairman, in September State
regulators unanimously passed a reinforced commitment insurance
regulatory modernization action plan.
This action plans sets out our goals in the areas of
consumer protection, market regulation, speed to market for
insurance products, producer licensing, insurance company
licensing, solvency regulation, and change in insurance company
control. The action plan also allows the NAIC to use our highly
successful financial solvency accreditation program to enforce
compliance where it is necessary and appropriate to do so. This
action plan sets deadlines by which States should accomplish
these goals.
And, Mr. Chairman, I am here today, first and foremost, to
commit to you that the NAIC and State regulators will reach
these goals, but also to tell you that we can't do it alone. I
believe, significantly, we are not alone in our efforts. Over
the last several years we have enjoyed some very important
allies in our work, all of whom--or many of whom, I should say,
are at the table with me here today: the National Conference of
Insurance Legislators, a group that Chairman Oxley helped
found, and the National Conference of State Legislators have
endorsed the NAIC's interstate compact for life insurance,
annuity, disability and long-term care products. We received
that endorsement just this summer.
Both NCOIL and the NCSL have signed joint resolutions with
the NAIC, clearly stating their support of State regulation of
our modernization work, and also their strong opposition to a
Federal regulator of the business of insurance.
In October, the Council of State Governments passed a
similar resolution that was sponsored by the CSG chair and my
Governor, Mike Huckaby, in Arkansas.
Mr. Chairman and Members, State regulators want and need
your help and support, too. You each are very influential
political leaders in your respective States. Please help us
keep the pressure, help us keep the pressure on the insurance
industry and encourage them to support our modernization
efforts, not to undermine them in the States.
Mr. Chairman, we also believe that it is important to note
that the vocal minority of the industry out there calling for a
Federal regulator for insurance consists of the very largest
banks and life insurance companies that operate in the country
today. The insurance business is significantly different from
the banking and securities business. It touches every man,
every woman, every child, every family in this country,
including your families and my family. And the only people
standing between all of us consumers and what far too often
becomes these huge corporate bureaucracies are home-State,
home-grown insurance regulators.
Is it the real consumers our States, the grassroot
consumers that are in Washington asking for a Federal regulator
of the insurance business, or is it just the lobbyists for
these huge insurance companies? Ask your constituents if they
want to call some far-away government bureaucracy to help them
with a consumer complaint about their roof or their car or
their home or a life insurance or health insurance policy.
If you ask your constituents--who I assure you don't always
understand the legalese and the small print that are in ever-
increasingly complex insurance policies. When a consumer needs
to call 911, they want that call and they expect that call to
be a local call, not a long distance call.
And as taxpayers, I think all of us would agree that none
of us can afford the creation of yet another huge new costly
bureaucracy in Washington, D.C., one that most certainly,
ultimately, will be less accountable and less responsive than
home-State regulators.
Finally, the insurers and the agents in our States don't
want the increased costs and the multiple layers of regulation
a Federal regulator ultimately would create. And our State
governments and our consumer protection guarantee funds can't
afford what would inevitably be the loss of premium tax and
other revenues that must ultimately go to fund a Federal
regulator. And Mr. Bachus has already alluded to that. That is
a serious concern for our governors and legislators.
So in closing, Mr. Chairman and subcommittee members, let
me just again ask that you please continue to support our
State-based, market-oriented regulatory modernization efforts.
All of us that are grassroots consumers in our States want and
need you to do so.
Again, thank you for your leadership. Thank you for the
opportunity to visit with you here today. And we look forward
to answering your questions.
Chairman Baker. Thank you, Commissioner.
[The prepared statement of Hon. Mike Pikens can be found on
page 110 in the appendix.]
Chairman Baker. Our next witness this afternoon is the
Honorable Neil Breslin, State Senator from the State of New
York, who appears here today on behalf of the National
Conference of Insurance Legislators. Welcome, Senator.
STATEMENT OF HON. NEIL BRESLIN, SENATOR, NEW YORK STATE, ON
BEHALF OF THE NATIONAL CONFERENCE OF INSURANCE LEGISLATORS
Mr. Breslin. Chairman Baker, members of the subcommittee,
thank you for inviting the National Conference of Insurance
Legislators, or as we refer to NCOIL, to testify before you
here today.
I am a New York State Senator, representing the city and
county of Albany, which amounts to some 300,000-plus people.
NCOIL is a nonpartisan organization of State legislators
whose primary purpose is to develop and promote legislation
that protects consumers and fosters a vibrant insurance
industry.
As I stated in testimony before Chairman Oxley and the
members of the Subcommittee on Commerce in the year 2000, NCOIL
welcomes the oversight of Congress on insurance regulation. We
are grateful for the ongoing dialogue with the committee and
efforts to improve the State-based insurance regulation.
Under State regulation, insurance markets have grown and
become increasingly competitive. There are more than 3,300
property and casualty insurance companies and over 1,800 life
and health insurance companies now in competition throughout
the U.S. Markets.
At the outset, I would like to commend the NAIC for their
work to improve insurance regulation. Their recently adopted
action plan clearly demonstrates their understanding of the
challenges facing insurance regulations in the 21st industry.
While such pronouncements are laudable, they demand follow-up
with real measurable results, and, more important, such
regulatory improvements need to happen without delay.
And I might parenthetically add, the NAIC, NCOIL, and the
NCSL are working together in a way that they never did before.
In my testimony today, I will report to you on the progress
NCOIL has made to improve regulation of the insurance
marketplace and our vision for continued modernization.
The key areas of reform. I am here to say that insurance
regulatory modernization is well on its way. By the end of the
year, NCOIL will have adopted model laws or passed resolutions
in support of NAIC model laws addressing four areas of
insurance regulation, requiring immediate improvement.
I would like to take a moment to provide you with a brief
overview of what NCOIL has done in each of those areas. First,
as Commissioner Pickens pointed out, insurance producer
licensing. The States rose to the challenge to reform producer
licensing laws, albeit on the threat from the Federal takeover
of the multi-state licensing function as proposed by NARAB and
GLBA. The number of States was 29. We far surpassed that. Today
the NIC has certified 41 States as meeting the requirements for
producer licensing reciprocity under GLBA. I am happy to report
that the last State last month was New York, and I can assure
you that the bill will pass the muster of the GLBA
requirements.
Secondly, speed to market for insurance products. Critics
of State regulation point to a State-by-State regulatory
approval process as too slow and too cumbersome, putting
insurance carriers on an unlevel playing field with other
financial service providers.
NCOIL has taken a two-pronged approach to improving the
insurance product approval process. First, for the approval of
property casualty products, NCOIL has adopted the Property
Casualty Insurance Modernization Act. The NCOIL model is a step
towards the competitive rating system which is found in
Illinois.
The NCOIL model offers States an alternative to prior
approval mechanisms that can stifle innovation and force higher
prices upon all consumers. To date, several States have based
their insurance rate modernization initiatives on the concepts
found in the NCOIL model law.
Second, for the approval process for life insurance and
related products, NCOIL worked closely with the NAIC and the
NCSL with the development of the Interstate Insurance Product
Regulation Compact. It was my privilege to recommend the
compact approach and testimony at a hearing here in Congress in
the year 2000. NCOIL earlier this year adopted a resolution
supporting the compact and is encouraging the States to
consider it during the 2004 legislative session.
Thirdly, company licensing. NCOIL adopted in July of 2000
the Company Licensing Modernization Act. The model act can
promote consistency among the 50 States in licensing insurance
companies, using procedures in the NAIC uniform certificate of
authority application.
The NAIC has made good progress streamlining and
simplifying company licensure through its ALERT program.
However, State-specific deviations still remain. State
enactment of the NCOIL company licensing model will bring
greater uniformity to company licensing.
And, finally, market conduct regulation. As NCOIL past
President Terry Park testified in May of this year before the
Oversight and Investigations Subcommittee, problems with the
current market conduct regulatory system are
glaring.Representative Park based his statement on a 4-year
study made by the research arm of NCOIL. Those findings of the
NCOIL study are consistent with State market conduct
regulations found in the recent GAO report on market conduct.
As Representative Park testified in May, NCOIL planned to
begin developing a model law addressing the problems with
market conduct. I am happy to report to you that NCOIL will
consider a market conduct surveillance model act when it
convenes its annual meeting later this month. That model act
would provide a statutory framework for market conduct
regulation currently not found in most States. Once the model
law is adopted by NCOIL, and enacted by the States, market
conduct regulations will provide consumers with a greater level
of protection than they have today.
In conclusion, it is no coincidence that over the past 3
years, NCOIL has doubled its efforts to bring about real and
measurable improvements to the insurance regulation. State
legislators are acutely aware of the forces at work to create
an optional Federal charter for insurance companies.
Our heads are not in the sand. We understand that political
and marketplace realities demand that we improve State
regulation. We understand that the status quo is not an option.
In previous testimony before this subcommittee, NCOIL
articulated its unwavering opposition to any encroachment on
State insurance regulation. Our position has not changed. NCOIL
strongly believes the creation of a new Federal bureaucracy
would be unwise and most likely harmful and counterproductive
to insurance buyers.
NCOIL welcomes the attention that you, Chairman Oxley, and
other members have given to the issue of insurance regulation.
There is no question that your focus has expedited the pace of
reform.
I would be happy to answer questions after the panel. Thank
you very much, Chairman.
Chairman Baker. Thank you very much, Senator. We appreciate
your participation here today.
[The prepared statement of Hon. Neil Breslin can be found
on page 61 in the appendix.]
Chairman Baker. Our next witness is the Honorable Kemp
Hannon, Senator for the State of New York, appearing today on
behalf of the National Conference of State Legislatures. Thank
you, Senator.
STATEMENT OF HON. KEMP HANNON, SENATOR, NEW YORK STATE, ON
BEHALF OF THE NATIONAL CONFERENCE OF STATE LEGISLATURES
Mr. Hannon. Thank you very much, Mr. Chairman, members of
the subcommittee. Thank you, Mr. Israel, for your kind remarks
in introducing me. Thank you for the opportunity to testify on
behalf of the NCSL. I have submitted some written remarks and
just will make some highlights from there.
As was said, I am Kemp Hannon. I am a New York State
Senator, where in that body I serve as chair of the Health
Committee.
Since 2001 I have served as co-chair of NCSL's Task Force
to Streamline and Simplify Insurance Regulation. Currently my
co-chair is Representative Frank Martino of Illinois.
NCSL is a national bipartisan organization. And for the
last 3 years we have worked hand in hand with NCOIL and with
NAIC to work on a coordinated effort to streamline and simplify
insurance regulation while preserving the advantages of the
State system. I want to thank all of the members of this
subcommittee and the staff for the interest they have had,
especially since Graham-Leach-Bliley, in financial services and
insurance regulation.
Our position is that we strongly support the State
regulation of the business of insurance, because we believe it
is a different kind of product, one best suited for State
regulation. Whereas banking and securities and mutual funds are
about access to capital and risk-taking, insurance is a
guarantee, a legal promise to pay benefits if and when someone
loses their home, their health, their income, or a loved one.
For over 150 years, we have effectively protected
consumers, ensured that the promises made by insurers are kept,
and we think it is a system that is worth preserving. State
legislators accept the responsibility for creating a system
meeting the challenges of the modern financial marketplace.
The legislators and Commissioners have developed a shared
vision for modernizing insurance regulation. We already have
made significant progress in critical areas, and expect to
continue widespread reform in the future.
So for 2 years we have had a Task Force to Streamline and
Simplify Insurance Regulation, working with the NAIC and NCOIL,
open meetings, sitting, negotiating the proposed model compact
for life insurance, annuities, disability and long-term care
insurance, having that compact first adopted by NAIC, and then
further hearings where we reached out to all interested
consumers, parties, Attorney Generals in order to get comments.
We identified speed-to-market issues as the issues greatest
in need of attention. The compact for life insurance, et
cetera, came about with a balance, geographical balance, large
State/small State balance, in terms of the amount of insurance
premium regulated, as well as the geographic balance.
And the NCSL this summer endorsed a model statute, only the
third time in its history endorsing a model statute. And in
recognition of the significance of what this Congress has done
in passing Graham-Leach-Bliley and starting a new era in regard
to financial service regulation, we also endorsed this summer a
statement of principles to guide State legislative efforts to
modernize property and casualty insurance rate and form
requirements, an area where States continue to make significant
progress.
State legislators will play an important role in other
areas of reform, and we endorse the NAIC's modernization action
plan.
We ourselves, on an ongoing basis, have just established a
Financial Services Standing Committee, so that the task force
efforts can be continued as well as we can address the other
issues raised by GLB.
We believe that any Federal legislation in the area of
insurance regulation would be a tremendous mistake. We believe
that the Federal legislation would endanger effective State
regulation, undermine consumer protection, and threaten the
creation of a vast new costly Federal bureaucracy.
It also risks introducing a host of unforeseen and
unintended consequences. While it is easy to theorize what you
would want to do in a model world for new insurance regulation,
I think it is far more difficult, if not impossible, to
establish and operate one. As chair of the Health Committee in
New York, I deal daily with the unforeseen consequences of the
1974 ERISA Act, the first Federal effort in the area of
insurance.
ERISA effectively transferred authority for employer-
sponsored benefit plans, the self-insured plans, from the
States to the Department of Labor and Federal judiciary. It
basically created a nonsystem for dealing with health insurance
and gave pretty much the regulation of that nonsystem a bad
name. It would be very easy to see how Federal action in the
areas of life and property and casualty insurance could bring
about similar unforeseen circumstances.
And under the umbrella of my criticism of Federal
regulation, I direct my attention also to the concept known as
the optional Federal charter.
We encourage you to continue on the ongoing dialogue with
the States as we work to modernize insurance regulation, while
preserving the advantages of the State system. We think that
State reform, rather than Federal legislation, offers the best
promise for a regulatory system meeting the needs of both
consumers and industry in the 21st century.
I thank you very much for your attention and would be very
willing to answer any questions you may have.
Chairman Baker. Thank you very much, sir.
[The prepared statement of Hon. Kemp Hannon can be found on
page 86 in the appendix.]
Chairman Baker. I will start questions with Mr. Breslin. I
appreciate the observations you have made with regard to the
progress by the organization in setting model reforms in place,
and certainly agree that the four targeted areas that the
organization has outlined are certainly critical to the reform
effort we are attempting to facilitate.
You also indicated that, at least with regard to the
licensing reform, that the Graham-Leach-Bliley trigger did have
some operable consequence in obtaining the reforms achieved to
date. Give me a reason for or reasons why, if we were to take
the view in some period of time, a year, 2 years--and we will
negotiate the terms--why we couldn't take the models adopted by
the organization, and say that those have to be in place within
a time certain.
From the perspective that Graham-Leach-Bliley mandates
triggered necessary reforms at the State level, what is wrong
with taking--for example, the Illinois model, which I happen to
think is a very good model, your company licensing reform--I
understand you are soon to adopt your market conduct regulation
reform model--take your work, and, as we often do in politics,
make it our own and put a trigger date on it? Respond to it, if
you would.
Mr. Breslin. I think that ultimately may be something to be
considered. But as you said in your initial remarks, we have
kind of compressed 150 years into a couple of years. Graham-
Leach-Bliley is 4 years old. So there was an education process
after GLBA, and the education process including those States
representing over 75 percent of the industry, of complying with
the NARAB provisions.
So it worked there. The idea that we--if you told me 5
years ago with market conduct, that we could put together a
model bill in several months and interact with the NAIC and
NCSL, and interact with the industry, and be prepared to come
up with that model act--which we think, because we are now
educating the whole industry, that the Federal Government is
going to do things unless we do them ourselves.
So I have a much more optimistic view now than I did when
GLBA was passed for us to make our own repairs.
Chairman Baker. Well, I am not arguing that the experts at
the State level ought not be the contributors to the end
product. What I am suggesting is we take the product you have
developed and make it the model nationally, with a certain time
by which the States can voluntarily implement, at the
legislative level, or failing to do so in a certain period of
time, ala Graham-Leach-Bliley, the Feds come in and do it for
you.
Mr. Pickens, would you want to respond to that, or give me
your observations about the advisability or ill-advisability of
that?
Mr. Pickens. Yes, sir, sure. I must agree with Senator
Breslin. I really believe that the NAIC now has a plan. We are
on time. We are on target. It has only been 3 to 4 years since
Graham-Leach-Bliley was passed. We were busy passing the
privacy protection regulations required by GLBA. We were busy
solving the producer licensing issue.
We have made again a great deal of progress there. But I
just don't believe at this point we need to consider a Federal
option. There may be some point in the future when we should,
all together, get together and talk about that. But at this
time we have got a plan. We are on time. We are on target.
If we can get the NAIC reforms enacted in the States
working with our legislative partners here, I think we will be
in good shape and we will satisfy the expectations of this
subcommittee and the committee in general.
Chairman Baker. Well, does the NAIC view the NCOIL models
as products which are supportable? Are you all together on the
direction of reform?
Mr. Pickens. That is a good question. I think--we have had
a great deal of input, as Senator Breslin mentioned, with NCSL
and NCOIL. Our relationship has become very close over the last
3 to 4 years.
In fact, we--NCOIL allowed us to work with them in
passing--I am sorry, in drafting their market conduct model
that they expect to vote on in Santa Fe. I think it depends on
what model you are talking about, to be honest with you,
whether or not the NAIC would fully support implementation of
all of those models.
Obviously we prefer the action plan that we put on the
table, and feel like that is what we would like legislators
back in the States to help us with.
Chairman Baker. Let me take the final piece then, because I
am getting to near the end of my time. How long do you think it
reasonable for Congress to wait? If I had to ask each of you
for a clock, and given the fact that you have slightly
different perspectives on what the marketplace ought to look
like, marketplace regulation ought to look like at some point,
what is that point?
Do we wait another 2 years? Is it another 20? Can you set
your own self-imposed clock? We have the responsibility, I
think, to make sure consumers get access to product in a
responsible manner with State consumer protections. If we agree
on that principle, how do we get there, and how long do we wait
on the sideline until we say, look, guys, we have given it our
best effort, we need to act?
Mr. Pickens. That is an excellent and fair question. We
have tried to do that in our action plan. I think if you will
take a close look at attachment A, Mr. Chairman, we give you an
updated status as of November 2003, number one, what our plan
is, and, number two, where we are in achieving the plan.
The plan does set deadlines. For certain deadlines those
reach out as far as 2008. That is the farthest deadline in the
plan. The closest deadlines are December of this year. And many
of the things that we have committed to in this action plan we
have already done over the course of the last couple of years.
Chairman Baker. I will probably come back on the next
round. My time has expired. Mr. Kanjorski.
Mr. Kanjorski. I know you all represent a special
disposition as to the insurance industry, in terms of its State
regulatory authority. Now, as a Commissioner you want to keep
authority, and as legislators you like to keep it. But do you
see any product or insurance activity that really does warrant
national licensing or national enforcement?
Mr. Hannon. What NAIC, NCSL, and NCOIL have done is
proposed a compact so that there would be a national plan to
deal with the approval of products for life, long-term care,
disability and annuities. The thought on that was there was
something especially needed, especially after Graham-Leach-
Bliley, so that insurance companies could have a speedy time to
market for their products, when they would be competing with
products from companies that either had a 30- or 60-day
approval or no approval required.
Now, that does not necessarily mean Federal, but it means
national. But we have come up with a compact which would be
allowable as an agreement among the States, so that there could
be a filing with that compact entity, and once approved by that
compact entity, that product could be sold in the participating
States to the compact.
That would be an answer affirmatively to your question, and
I believe that is a viable way to go. It preserves the State
regulatory authority. It gives them an ability to compete in
the marketplace.
Mr. Kanjorski. But are you guaranteeing all 50 States will
be in compliance with that one standard?
Mr. Hannon. No, but you are not guaranteed anything. In
this case----
Mr. Kanjorski. Well, if we do it by Federal law, it sure
will be.
Mr. Hannon. Well, even the last Federal law in regard to
insurance, as I recall, was HIPAA in 1996. And it still doesn't
have 50 States in compliance with that. We still have a couple
on the east coast and the west coast that haven't opted in.
So there are different ways of going about it. I think the
best way of lawmaking is to get people to go about
participating and buying in, whether it is by a Federal
statute, whether it is by a compact, whether it is by mutual
State statutes. Unless they buy in, you are going to find
yourself with a statute that just is not as effective as it
might otherwise could be.
Mr. Kanjorski. Wouldn't really a compact operation just be
a substitute national legislature? All you are doing is
creating another arm out there representing the 50 States in
the nature of a compact. Isn't that what the Congress is all
about, that we are supposed to be the legislature for all of
the States?
Mr. Serio. There is a significant difference between the
compact notion and a national legislator, or national
legislation. And it comes down to this, and this has been
proved many times in the use of compacts previously. That has
been what we have been trying to do as the three groups here,
and that is, take in the local environmental factors that you
find in an insurance marketplace, in each of the individual
States, and bring that into the policy being made.
What we are trying to establish here is a baseline, and a
baseline that can then be used and has the versatility to deal
with the local features, local environmental factors, that are
unique to the individual States that cannot be wrapped up in
one uniform standard.
Mr. Kanjorski. Commissioner, you put your hand on the very
point that I had a hesitancy as to what to do here. I think
there is an absolute need to have community touch in the
situation, that it shouldn't be removed completely from the
average community.
But I can tell you that I am starting to get the impression
that the States want to maintain jurisdiction and authority
over all insurance areas that are easy. You know, just think of
what has gone into the Federal responsibility over the years.
Mr. Kanjorski. Nuclear destruction insurance, flood
insurance, catastrophic insurance, terrorism insurance or
reinsurance. And now, if you really look at the California
wildfires, we are being called upon in the Federal Government
to be a very, very large player, not in necessarily writing the
policies, but picking up the cost of the losses, the
inadequacies of State regulation, that action in California. At
some point we might as well take jurisdiction of the insurance
industry because we are in it, and we are in it in a very big
way. Unfortunately, the Federal Government and the taxpayers
are in insurance where we are not getting adequately
compensated through premium payments; we are underwriters, if
you will, where no one else will tread to bear. Wouldn't it be
better if we had catastrophe insurance or casualty insurance
that was national in scope, that they would get together and
say, gee, we have got to come up with a policy to handle
floods? And how they work that, instead of the Federal
Government being an underwriter at a tremendous loss of poor
planning, poor organization on the part of States and
communities--because they are not bearing the responsibility
and yet our constituents are, your constituents.
Mr. Serio. I think the easy stuff hasn't been left to the
States. And trust us when we say we take on any of the
challenges that the insurance marketplace may throw at us. I
have had this conversation with Mrs. Kelly and members of the
full committee on a number of occasions where it has been the
daily challenge of, whether it is the commercial liability
marketplace, the market conduct in the life insurance
marketplace, that the States have taken on and have taken on
aggressively and directly.
The impression that may have left, and I think you
characterized it correctly, isn't so much the hard stuff but it
is the unique risk. But that risk is not limited to a Federal
intervention and, as a result, the consequence being why don't
we just simply regulate everything from the Federal level. The
examples you described are extremely unique and hopefully very
rare in their occurrences. In those cases where flood insurance
or where the urban insurance was necessary in years past, it
has always been done in a framework where the State or the
local regulatory operation was largely in control of the
management of that program, whether it was the urban crime
insurance or even the flood insurance program, which actually
turned out to be largely a market-driven program that the
carriers wrote under State regulation, under the overall
guidance of the Federal Government, but where there wasn't a
lot of Federal intervention even in the flood insurance
program. But those are unique instances. And I think if we are
looking for anything where the Federal Government said, well,
this is a place we really need to step in, maybe the question
isn't let us find that item; rather, let us look at what the
States have done across the spectrum that--is it really speed
to market and auto insurance that you want to be involved in?
Is it really market conduct that you want to be involved in?
They are both very--well, they are all very local issues when
you really come down to their impacts.
Mr. Kanjorski. We don't have much choice if States decide
to lay down conditions that if you don't have auto insurance
written in that State. There are still millions of constituents
in that State that say they need that coverage, and they come
down here for a remedy.
As I first described myself in the beginning--I know my
time is going, Mr. Chairman--I am a person that sort of, I
define myself as a Burkean; I don't change for change's sake, I
usually only change when it appears that there is no other
opportunity to correct the problem or I know what the results,
that they will be more positive.
When I hear the national organization coming forth with an
idea that we are going to have to wait until 2008 for a program
to be implemented, I think that is just several years too long
and too late. I would suggest to you, and honestly coming from
a moderate to conservative person for States rights and other
protections here, if we can't get something moved along on the
State level within the next year to 18 months, I would suggest
we are going to have Federal legislation.
Mr. Pickens. Mr. Chairman, could I just add something here?
Chairman Baker. Certainly.
Mr. Pickens. When you talk about the flood insurance
program or the crop insurance program or the cap programs that
are in place at the Federal level, I think we can all agree
that those programs are not without their problems, one of
which is they really become where they are not insurance
because there is no contingency. We know certain areas are
going to flood, we know there will be wildfires periodically,
we know a hurricane will hit the coastline periodically. And I
would just respectfully submit to all of the committee members
here today that if government becomes--it is appropriate for
government to become the insurer of last resort in certain
places. In other words, if the private market can't handle it,
you need a safety net there where the government can step in.
But the government should never--I think it is very bad for the
government to become the insurer of first resort. And I think
if you let them in the door a little bit, they will end up
taking it over. And I would ask the committee staff maybe to
look at what has happened in Japan with the CAMPO program and
other places where the government really is squeezing out the
private marketplace because there is never--you never have fair
competition between a government entity and private entities;
the government will always win.
Mr. Kanjorski. If I may just respond, Mr. Chairman.
That would be on your part a very good argument and I would
be very sympathetic to it, except there is something here other
than just having fire insurance and writing protection. To a
large extent, the States and the localities control, for
instance, where people build homes, in flood plains or not
flood plains, whether or not they build on sides of mountains
that periodically burn, whether they are building buildings and
factories on faults. You could be lenient or fail to administer
good, smart planning out there. What ultimately ends up is the
risk, is an insurable risk that lands in the hands of all the
taxpayers for the whole country for generally the
irresponsibility of a limited number of taxpayers, and I think
that is what is getting us involved.
We would know how to encourage better planning, better
social policy in this country if we were aware of the
inadequacies of some of the protections that are out there and
the losses that will occur because of unintelligent planning on
the State or municipal bases.
Chairman Baker. I need to go to Mrs. Kelly now, if I might.
Mrs. Kelly.
Mrs. Kelly. As you can see, we have some bugs in our
systems, too.
I would be remiss if I didn't first thank you, Senator
Hannon, for all you have done for the medical safety of the
citizens of New York. I am so delighted that you are here
testifying on this topic, but also I just wanted to acknowledge
the wonderful work that you have done for all of us in New York
with regard to our medical problems and our safety.
I want to just say that it must be obvious to all of you on
this panel that we are somewhat concerned that this process has
dragged out as long as it has. When they wrote the NARAB bill,
we thought 3 years would be a good time, and we were hoping we
would get 29 States. Well, we got lots more than 29; we wound
up with over 40 who are now involved. But I think it is also
very clear, and this is one of the reasons I am glad to see you
New Yorkers here today, New York has joined this program. But
we still have a few more to go. We have got to have the big 5
in there. We have got to have Texas and we have got to have
Florida and we need California. We need those States in. It has
to be a 50-State self-regulatory system. If it is not, it will
not succeed.
So toward that end, I would like to ask you if you feel--
and anyone on this panel can answer that--that there might be a
need for us to come back with some legislation that looks as
though that we expect a full 50-State reciprocity and
uniformity in licensing. Anyone of you can answer that.
Mr. Serio. To have a 50-State requirement, I think--I guess
the bottom line is that I don't think we are going to have to
or that the committee or subcommittee is going to have to feel
compelled to act. I think--and the action that has been taken
already, and frankly getting New York over the hurdle was a
very big effort, but it was done without doing any violence to
the basic model act. And getting the other big States and the
large markets involved, I think we are now on the other side of
that hill. And it has been, I know it has been a focus of the
committee to focus on the large market share States, and
appropriately so. But now with New York and getting the other
States involved, I think we are now getting there. But I think
the perspective really had to be broadened out a bit to
include, what are the other things that we are looking for in
terms of benchmarks, producer licensing being one. I don't
think we are going to be having that discussion again. But on
speed to market and other issues like that, I think a critical
element with any of these discussions is, what the other side
brings to the table with respect to their contributions to
these modernization efforts.
On the producer licensing, the agent community was
extremely helpful not only in getting the bill passed in New
York but in other States, but in having the legislatures who
are asked to pass on this to understand what this really does
in the marketplace.
Now, compare that or contrast that with speed to market. We
have been talking to the legislators from the NCOIL and from
the NCSL for a long time on speed to market. New York has spent
a lot of time as with Pennsylvania, Ohio, former Director Lee
Covington very--a major presence in the improvement to State-
based systems, yet I cannot get the property casualty industry
in New York to go beyond--my numbers are somewhere in the
neighborhood of 10 to 12 percent of the filings to be done on a
speed to market basis. Can't get them. Don't know why. Tried
it, hasn't worked.
The life insurance industry on the other hand--and it is
curious that they would be asking for Federal intervention on
speed to market. They are using the New York system for 50
percent of all of their filings right now; yet the property and
casualty industry can't get passed 10 percent in terms of their
products being filed on a speed to market basis. I think what
will happen, we will be back before this subcommittee, but it
is going to be a question of who has brought what to the table
and how have they executed on that. That has been part of the
process. When we talk about 2008, we are talking about this
being done, but it really is a constant work in progress. It is
a process non-event, as my predecessor liked to say. And the
fact of the matter is that we may be talking about speed to
market, we may be talking about market conduct, but it has to
be in context of what all the various parties are bringing to
the table. Because right now some of those modernizations are
done, and speed to market has largely been accomplished except
for the fact of the buy-in, whether it is to serve the
individual States' speed to market systems or any other
process, and the leveraging of technology that I think the
government side has done extraordinarily well. When government
has a past reputation of being stingy on technology, it
actually--this modernization has actually been driven through
the leveraging of technology from the government side where our
customers in the industry are trying to figure out how can they
match that leveraging so that they can get into these
modernization systems that we have already been.
Mrs. Kelly. Mr. Pickens, you wanted to say something?
Mr. Pickens. Yes, ma'am. I just wanted to place the comment
Superintendent Serio made in a national context.
What Greg is talking about is our system for electronic
write and form filing, a nationwide filing system. 50 States
and the District of Columbia and Puerto Rico are on board with
this.
Last month, or as of last month we had accepted nationwide
nearly 45,000 forms; we expect 75,000 forms through that
nationwide filing system by the end of December. The average
turnaround time on those filings is 17 days. 17 days. That is
speed to market. And on the producer licensing side, we have a
technological initiative called NIPR, NIPR, the National
Insurance Producers Registry. Anybody can participate in that,
companies can appoint their agents, they can terminate their
agents, they can do everything they need to do. They can file
forms electronically, do the whole shooting match. And one
thing that is holding us up there is that we don't have access
with the big States, Mrs. Kelly. One of the things that is
holding us up is the fact that we don't have access to the FBI
fingerprint database, and New York and California and Florida
and other States really believe that we need that access so
that we make sure we are not licensing felons out in the State.
So H.R. 1408 was on the table a couple of years ago. I am
not sure where it is in the process now, but that is one thing
Congress could affirmatively do to help us, is give us access
to that fingerprint database, and I think you would see 100
speed to market for--or not speed to market, but producer
licensing ASAP.
Mrs. Kelly. Anybody else want to address that?
Thank you very much.
Chairman Baker. Thank you, Mrs. Kelly.
Mr. Pickens, just for the record, to make sure, you
referred me to your addendum in your testimony, which is the
compact. And the 2008 deadline you referred to, does that
include uniformity with regard to property and casualty? Or is
the 2008 date only the life insurance piece?
Mr. Pickens. Yes, sir. That is only the piece by which we
have committed to get the compact passed in 30 States, or
States comprising 60 percent of the premium volume for the
products involving the compact.
Chairman Baker. But that is life insurance?
Mr. Pickens. Yes, sir. That is life insurance.
Chairman Baker. Mr. Kanjorski departed before we got that
piece of news. I think he was thinking it was 2008 to do the
whole thing. So I just want to make the record clear.
Mr. Lucas.
Mr. Lucas of Kentucky. Thank you, Mr. Chairman.
One of the things that has been brought to my attention
recently is that we have some States where insurance companies
have pulled out because their auto insurance--because the State
set the rates and they quit writing automobile insurance. But
they also, if they couldn't write auto insurance, they
couldn't--there are other lines they couldn't, life, health,
and other things, they were not allowed to sell those.
It seems to me that, you know, we have such as
sophisticated society population today, people get on the
Internet and they check out air fares, hotel rates, and they
obviously would do that on the insurance as well. Why would we
not let competition set rates versus the States and politicians
setting the rates? Who wants to answer that?
Mr. Pickens. I will be happy to take a shot at it.
Representative, you are singing our song at the NAIC. We
are a pro-competitive marketplace. The key is there. In order
for rates to be a prime or to be self-regulating, you have to
have a competitive marketplace. And at times you can have
certain market conditions arise where you don't have a
competitive marketplace in individual locales. Arkansas'
homeowners market, even throughout a very hard market the last
4 to 5 years has been highly competitive, remains highly
competitive. But some States have had trouble in that regard.
So that is another area where you really need that local
touch, that local control that Representative Kanjorski was
talking about, because one size does not fit all when it comes
to auto rates. What goes into the price of an automobile
insurance product has happened in Massachusetts and New Jersey,
and I commend the committee for throwing the spotlight on the
market problems that were caused really by too much State
governmental interference into the private marketplace.
So we are all for a balance, looking at just the right
amount of government intervention into the private market, but
we agree with you that prices can and should be self-regulating
in a competitive market.
Mr. Serio. Let me add to that, if I may. I think your
characterization about the auto market and the way the
regulators kind of approached it in terms of threatening to
stop someone's homeowner writings if they want to get out of
auto, things like that. The Northeast was the poster child for
that philosophy for a long time. And I think as Commissioner
Pickens said, Massachusetts, New Jersey, and New York included,
and some other States in the Northeast used to adhere to that
philosophy pretty ardently and they used to use that as their
leverage when companies decided they weren't making money in
the auto insurance business.
Now, in New York we had a very successful competitive
rating or quasi-competitive rating called flex rating in our
market which allowed rates to go up or down. But the one
cautionary note I would say about any competitive rating
system, and in fact any company would have to come before this
subcommittee and acknowledge this. Sometimes the marketplace
gets overheated and it gets too competitive and they start
charging rates they can't sustain over the long term. A lot of
the rate increases you saw in the markets that were not being
allowed, and as a consequence of it being that companies were
leaving certain States, was the result of overheated
competition where the rates went too far down, they could not
sustain the type of risks that they were taking on for those
rates.
If you balance that out--and we are all for competitive
rating of automobile insurance and using the competitive market
pressures to their best and highest use. You just have to be
careful that to allow a completely open and competitive market
without some responsibility on the other side where they don't
drill it down to a rate inadequacy situation and suddenly the
regulator, whether a State regulator or a Federal regulator, is
being asked the question the following year: I need a 30
percent rate increase. It is an untenable situation to put any
regulator in if that is now the price of admission for a
company to stay in that marketplace, because those kinds of
rate swings don't do you any good, don't do us any good, and
certainly don't do our constituents any good. So you need to
balance that out.
But competitive rating, we have had great success in the
Northeast by having a competitive or quasi-competitive rating
system that has worked for the benefit of the consumers.
Mr. Lucas of Kentucky. Thank you.
Mr. Pickens. May I add something very quickly? The
competitive rating model that the chairman referred to allows
for the market to set rates when it is competitive, but it also
takes care of the problem that Mr. Serio talked about, because
it says the regulator still has to monitor the rates to make
sure that they are not excessive, too high, inadequate, too
low, or unfairly discriminatory against similar risks. And this
is the Illinois model, Mr. Emanuel. It is a very successful
model, and if we could get that enacted across the entire
country our rating problems would be taken care of, I believe.
Mr. Lucas of Kentucky. Thank you.
Chairman Baker. Thank you, Mr. Lucas. I just want to jump
in right there and say I think we could do that.
Mr. Lucas of Kentucky. Okay. Going to a little different
subject, the banking system has a dual system where banks can
have a State or Federal charter. That looks like a great
business model for insurance companies. What is wrong with
having an optional--let us don't call it a Federal charter, let
us call it a national charter, if that Federal bothers
somebody. Who would like to take a whack at that? If the
business model suits you better as a company, you go to the
Federal.
Mr. Hannon. May I take a whack at that, Representative?
Mr. Lucas of Kentucky. Sure.
Mr. Hannon. A couple different things in regard to a,
quote, optional national charter. First of all, it is not
totally optional because the Federal Government isn't an equal
partner. You have, rightfully so, the power of preemption for
your statutes so that when you come in you totally exclude. So
it is really not an option.
The second, as we have watched the optional charter for
banks, we have watched the virtual disappearance of State
chartered banks compared to what they were 20 years ago. The
charters, it has been very attractive. The regulatory scheme
has been made by the Office of the Controller of the Currency
very attractive for banks to opt for the national charter;
consequently, we do not have many left at the State.
If you are going to go to a national charter, you might as
well say, wait a minute, we want that as a proposal. Veiling it
with the thought of it being optional I think is just masking
what really is the intent.
Mr. Lucas of Kentucky. Somebody correct me if I am wrong. I
thought we had a lot more State chartered banks than Federal
nationwide.
Mr. Hannon. I used compared to 20 years ago, where most of
the major banks have now moved to Federal charter. And coming
from New York, believe me, we have seen a lot of our banks opt
for Federal charter.
Mr. Lucas of Kentucky. That could be in New York, but I
think there is 70 percent State charters versus about 30
percent national charters.
My time is probably up, but I would like to discuss this
further with the next panel.
Chairman Baker. Thank you, Mr. Lucas.
Mr. Shays.
Mr. Shays. Thank you, Mr. Chairman. Thank you for your
interest in this issue.
I am going through thinking as we try to compete on an
international basis, the EU is trying to find ways to have
uniformity, and we are asking our corporations to compete in 50
marketplaces and then compete with the rest of the world. I am
having a hard time understanding why it is in our best
interests, the United States, to wait until 2009, 6 years from
now and 9 years after this process began, to try to bring some
uniformity to it on the State level. And I want someone to give
me their best argument. Why should we wait until 2009?
Mr. Pickens. Mr. Shays, I will start with a very practical
argument. If you passed an optional Federal charter bill
tomorrow, it would take the Federal Government a long, long
time to get up to speed. I would venture to say probably, if
not 2008, beyond 2008 to regulate 3.5 million insurance agents,
producers out there and the 5,000 or so companies, many of whom
don't even do business in every State. In fact, I will defer to
Mr. Serio on those numbers in just a second. But that is a very
practical reason. The Federal Government could not get up and
running that quickly on such a complex issue as insurance.
The second practical reason is the insurance industry is
entirely divided over what an optional Federal charter looks
like. Three of the four P&C trades are in favor of State
regulation. The sole property and casualty trade that is in
favor of Federal regulation can't agree with the life and
health industry what a Federal charter bill looks like, and the
life and health industry is divided somewhat. Life and health
is more aligned with bankers, but then you have got all these
other divisions out there. So the primary interest groups and
the consumer groups--I must throw them in there, Mr. Hunter,
others that you have heard from--they have a totally different
idea about what the Federal regulator should look like. So I
just don't think as a practical matter, number one, you could
do it from a technical standpoint, number two, from a political
standpoint you could get everybody on the same page.
Mr. Shays. Anybody else?
Mr. Serio. Thank you. Let me just jump in with this
observation. I suppose that this always just becomes the grass
is always greener on the other side type of observation.
Judging from my experience as the chairman of the Holocaust
Task Force for the NAIC, and having interacted with a number of
European companies who have had to navigate through their own
multi-leveled regulatory systems in Europe, not just the EU but
the individual countries and the individual States within those
countries all regulate certain portions of the insurance
business over there as well. So while there may be a unified EU
market, when you drill down to some of those local companies
and some of that local impact, they are dealing with a lot of
the same issues that we are dealing with here.
Number two, when you have almost half of all the companies
that are licensed in the U.S. operating in a single State, that
State suddenly becomes more important as a focal point for
those companies in terms of a regulatory objective.
Mr. Shays. But the EU is working to come find more common
ground in uniformity. I am having a hard time understanding why
I would want my American businesses to have to compete and have
different rules and regulations and, you know, so many
different entities. I honestly don't see the logic of why I
want to do that.
Mr. Serio. The second observation on this was that as the
EU tries to sort through their own regulatory constructs, that
is happening at the EU level, in the U.K. With the FSA and in
Japan and in other major countries, are all sorting through
what their regulatory structure should look like and we are all
talking to one another.
So going back to your original question of why should we
wait that long, is it really prudent to wait that long, it is
happening right now. And I think what you are going to find is
a certain amount of synergy between the EU's ultimate construct
and the U.K.'s ultimate construct and the U.S.'s ultimate
construct, between the uniformity that we can achieve on a
nationalized or a federalized basis while retaining the
jurisdiction at the local level, so that half of the companies
that just write in a single State can continue to operate on a
State regulatory structure.
One of the challenging questions--and this goes back, I
think, to the Chair's question originally--what is it that the
Federal Government should be focused on then? You know, is it
speed to market, is it global reinsurance, or something in
between that really is the proper venue or proper subject for
the Federal venue? And that is still an open question. And so
it may not be so much a question of will there ever be or not
be Federal regulation or Federal policy with respect to
insurance, but it is really other things we are talking about
today, talking about the day in and day out business of
regulating insurance that we have done at the State level that
the individual countries of the EU have done on their levels
and in their own States over the years. What we are really
talking about is another set of issues: How do we deal with
international trade and international reinsurance as opposed to
speed to market products and agent licensing?
Mr. Shays. Thank you.
I would just close, Mr. Chairman, by saying I find the
answers of both of you helpful and certainly giving me a
perspective. But I have a tough hurdle, and that is I don't
want my American businesses to have to compete so much within
the United States, to have so many different rules and
regulations, and then have to compete worldwide. And so we need
to find a solution to that, and this appears to be the best but
with some limits, and it may in fact take longer than I would
like. And I thank you both.
Chairman Baker. I thank the gentleman.
Mr. Emanuel.
Mr. Emanuel. Thank you, and I would like to thank the
Chairman for holding this hearing.
The whole concept of going to a national or optional
Federal charter, and using Illinois, which I think is a good
competitive system as a model, I want to make sure that we are
not actually deregulating in the process.
Because when you get down to it, looking today at what has
happened after the repeal of Glass-Steagall and what's
occurring in the commercial banking area, you have really got
three major banks that are lending and they are holding
corporations over the head here in a way that nobody previously
envisioned. So, I want to be sure that if we end up legislating
rules, we aren't really just national deregulating under the
rubric of modernization. It is what some mean by modernization
that worries me. And if we do address national charter issues,
in my view we have to include, property and casualty, not just
life insurance.
So, we need to avoid deregulation in the name of
modernization, and any solution must strongly consider the
interests of consumers and ``mom and pop'' insurance firms.
Mr. Pickens. Mr. Emanuel, that is an excellent question. It
is one that we have struggled with----
It is one that we have struggled with at the NAIC, frankly.
You have got some sectors of the industry that I think many of
us believe their ultimate goal is total deregulation, and that
is something that causes Commissioners concern. Then you have
got other sectors of interested parties. For example, the
consumer groups. Mr. Hunter I know has testified here before.
He wants something totally different than deregulation; he
wants something on the other far extreme, which is total
regulation and strict price controls at the Federal level and
things of that nature. And I think many of us are concerned
that both of those things would be bad.
What you are looking for is something like the chairman
talked about, I believe, competitive rating in the marketplace.
In my State we have a competitive rating law, as Illinois does.
It works well. I promise you if every State in the country
could have as competitive an insurance marketplace as Illinois
has, every consumer in the country would be much better off,
and you all are not deregulated.
Mr. Emanuel. In Illinois, we have a number of insurance
companies competing in the marketplace. How do we do that at
the national level, so we don't end up like the situation in
commercial banking, where only three major banks are really
doing the lending? How do you find the combination that unlocks
the marketplace so you get competition without----
Mr. Pickens. Yes, sir. A quick comment, and then I will
defer. I don't think you do. I think you are exactly right.
That is what could happen. And it could be worse, I think, in
the insurance industry. Insurance is a different business than
banking in many, many ways. And I think if you end up with
three or four companies, what you end up with is what we had
prior to the passage of McCarran-Ferguson in the 1940s, where
you had large insurance trusts that were effectively setting
rates and violating antitrust laws, and that is why you ended
up with State regulation that you have now.
Mr. Breslin. I think, too, your statement was essentially
the reason that we sit here and talk about State regulation,
because one size doesn't fit all, and it is what has happened
in Illinois because of the competitive structures there, the
companies that are there, it has fit well. But translate that
to another State under the same set of circumstances, and you
could have what you don't want, one or two companies
controlling the marketplace.
Mr. Emanuel. The only thing I will say again is the
observation that about 10 or 15 years ago on this subject all
those who are now calling for a national charter of some
capacity all wanted only state regulation. And sometimes I feel
in these hearings lately, on this and a number of other
subjects, it is like an out of body experience, because
everybody that used to be for States are now for national
standards, and everybody who used to be for national standards
is now for State rules. So I am properly confused.
Thank you very much for being here.
Chairman Baker. Thank you, Mr. Emanuel.
Mr. Bachus.
Mr. Bachus. I thank you, Mr. Chairman.
Let me--I will do like some of the other members and start
out just with a statement.
I see an optional Federal charter is almost undoable from a
practical and a political standpoint. I guess it is helpful to
continue to discuss it. And I am not making any judgments as to
what we ought to do, but I think as opposed to that, a much
more practical approach is to identify some areas where we can
have Federal uniform standards similar to what we have done on
other legislation. And whether we pick those off, maybe speed
to market, but I am not sure that we can do more than one at a
time even, you know, market conduct, examinations licensing,
and gradually take that approach.
But to me--and I read Mr. Fitts' testimony from Progressive
on the second panel, and I would like--I mean, at least my
impression is the same as his impression, that the idea of
going to dual charter or creating a Federal insurance
commission and assimilating all this is more than this Congress
with other issues facing us is going to want to do. And from a
State standpoint, I think that as a realistic matter it is just
not something that is a burning issue.
Having said that, I am going to switch gears totally and
just ask, Mr. Pickens, ask you about something quite different.
Up here we have certain issues that people sometimes try to
characterize as a trade issue. And one of those in the
reinsurance business is your foreign reinsurers have argued to
the U.S. Trade Representatives they weren't successful, that
the collateral requirements that they had to put up, that that
was a trade issue and not a solvency issue. And my concern is
that I think it is definitely a solvency issue, and that they
should have to--I know right now 100 percent collateral or
either a State license.
And I would just like your comments on that. And I know
that at this time the U.S. Trade Representative has ruled
against Prudential, and which I think obviously is a correct
ruling. But would you like to comment on that?
Mr. Pickens. Sure, Mr. Bachus. I would be happy to. And
first I commend you on really knowing about a fairly esoteric
issue. You almost sound like an insurance regulator, and I mean
that as a compliment, not a criticism.
Mr. Bachus. A State or Federal insurance regulator?
Mr. Pickens. No. State. State all the way, sir. But that is
an important issue to us. It may be esoteric, but it is
important. And what the Europeans are asking in essence is that
they be allowed to create a special list that would have--I
mean, it would be based supposedly on reinsurers that had the
strongest financial stability, and they want to be able then to
give Commissioners in the States the discretion to say, okay,
Mister European Reinsurer, you don't have to have 100 percent
collateral, you can have less than that.
There are some problems with that that we are working
through at the NAIC even though we are under a lot of pressure
from the Europeans to make a decision quickly, and we have
resisted that because we think it would be wrong to do so.
Number one, this is a solvency issue primarily; it is not a
trade issue. Could it impact trade and have ramifications?
Ultimately, it could, but it is certainly more a consumer
protection and solvency issue than it is a trade issue.
Number two, the three significant concerns we really have
are, number one, the lack of international accounting
standards. It is difficult to look at the balance sheet on this
side of the ocean and compare it with that side of the ocean
and determine the financial stability of a European reinsurer.
We also have a problem in many European countries with
enforcing United States' judgments against European reinsurers
in those foreign courts. We get a judgment in a U.S. court,
take it to some jurisdictions, you can't get it enforced. And
the biggest concern really we have, Mr. Bachus, is A.M. Best
and other rating agencies already have told the regulators that
this will result in a greatly increased credit risk for our
American insurance companies and American reinsurers, all of
whom, by the way, are opposed. This is one thing they all agree
on, they are opposed to reducing the collateral requirements
right now. They think--the rating agencies say if we increase
the credit risk that they will have to downgrade some of these
insurers probably. At least that is something that would be
taken into consideration.
So it is a major concern for us, and we can't make a
decision prematurely. We really need to look at all these
issues.
Mr. Bachus. Thank you.
I thank the Chairman.
Mr. Breslin. I might also add, Congressman, that that has
been--many of the issues that Commissioner Pickens discussed we
have been discussing on an ongoing basis at NCOIL. And it isn't
an either/or issue; as Mike Pickens said, it is one country
might be very good in enforcing judgments and another might be
a country that will never enforce a judgment of the accounting
standards of the company. And it is just one that although we
can pick out--we could all sit here and pick out a company in a
country where it should be different, but it can't be an
either/or situation.
Mr. Bachus. I thank you.
Chairman Baker. Thank you, Mr. Bachus.
Mr. Scott?
Mr. Scott. Thank you very much, Mr. Chairman.
While I agree that there are problems with the current
regulatory system, I must say that, to each of you dealing at
the State level, that there is one area in which I believe that
the States have done an excellent job, and that is in consumer
protection. I think at the end of the day that, to me, is the
number one top priority.
State insurance Commissioners have done an excellent job in
insuring that disputed claims are paid to policyholders. I
worry that a distant regulator here in Washington, a Federal
regulator here would not be as sensitive to consumers' needs as
would a State or local insurance Commissioner. I have a fear
that a Federal regulator who is dependent on the fees that
carriers pay into the system would be more sensitive to the
needs of the carriers than they would be to the consumers.
Similar to the OCC, I could see an insurance regulator taking
the side of companies over the consumers.
While I say all of that, this problem still remains:
Largely as a result of September 11th, our tax cross-sector
competition, increased loss costs, dwindling investments have
indeed put the insurance companies in a bind. Issues still
remain, albeit the protections that you give at the State
level, which I support. But these issues still remain of the
concerns of the insurance companies, because clearly the
consumer wouldn't--there would be no need for the protections
if the insurance companies weren't there to provide the
products and the services and the coverage.
But how do we modernize the insurance regulation? How do we
secure your State-based reform? And the fundamental question:
How do we increase the efficiency and uniformity of regulation
and market conduct and oversight product approval and all of
those things with 50 different States?
That is the sort of the bind that I am in here. While you
do an extraordinary job of consumer protection, we still have
these other issues of uniformity and regulatory efficiency that
calls for us taking a look at this Federal regulator. How do
you address those other concerns that would keep us away from
the Federal regulator?
Mr. Breslin. I think we would first of all say that we are
working on those concerns, producer licensing, speed to market,
market conduct. And I think you are correct. We were chatting
before that in our offices in the States, and we frequently ask
this question, what kinds of calls do we get from our
constituents--because we represent people in local areas--our
constituents about problems with their insurance, whether it be
homeowners or life, renter's insurance, car insurance. We don't
get the calls, which is evidence that they are okay and they
are being treated well, and that the insurance department in
our State, represented by Superintendent Serio, does a great
job. I don't think the Federal Government would be able do that
kind of a job. And we are working on the other side to make
sure that we satisfy the needs of the insurers.
Mr. Pickens. Mr. Scott, in Georgia you really do have a
very active consumer protector in Commissioner John Oxendine.
We all know John, and he works with us.
Mr. Scott. Let John know I spoke highly of him and I called
his name.
Mr. Pickens. I will do that.
Mr. Scott. Because he is doing an extraordinary job. And as
you can imagine, we did have a conversation beforehand. But I
really think you are doing a great job on protecting.
You do not think that, to answer these other things on
uniformity of efficiency and those things that we are asking
for the Federal regulator to take a look at, that consumer
protections would go down with the Federal regulator?
Mr. Pickens. I think there is a danger they could go down
if it was not handled correctly, and that is what we have been
struggling with at the NAIC, and exactly how the chairman
framed the committee hearing today, and that is that it is
important to have strong consumer protection but you also have
to facilitate business development and commerce in the
marketplace. And I agree that the two notions are not mutually
exclusive, and I believe all our members agree.
And just to answer your question though, Mr. Scott, I would
point to the document that is attachment A. We have got a plan.
This is our plan. We believe this plan takes care of consumers
and also takes care of the legitimate concerns that the
industry has raised.
Mr. Scott. What plan is that?
Mr. Pickens. This is our reinforced commitment regulatory
modernization action plan, attachment A. And it goes through
all the five or six primary areas that I mentioned in my
opening remarks and lets you know exactly what we are doing,
what our deadlines are, where we are in accomplishing those
deadlines. And, again, I would go back, Mr. Chairman. We
appreciate the oversight, the attention you all are giving us,
we appreciate the pressure. I think it is a positive thing; you
have heard me say that before.
But one thing you could really help us with is putting some
pressure on the industry to come play ball. We have built this
surf stadium. Everybody hasn't come to play in it yet. We have
got the National Insurance Producer Registry. Everybody is not
willing to play. I wonder why that is. Maybe it is because they
think they can get a better deal somewhere else. But if you
help us hold their feet to the fire, I think we can make
progress even quicker than we have made it so far.
Mr. Scott. Can you give us some examples of how you feel
consumer protections would go down if we went to the Federal
regulator?
Mr. Pickens. Sure. For example, and all of our States have
laws that say you have to have certain provisions in an
insurance policy. We have got a law in my State that says you
can't cancel or non-renew somebody based solely upon the
occurrence of a natural catastrophe or natural event like a
tornado or hurricane. We passed that because we had a series of
tornadoes sweep from the southwest part of the State through
the central part of the State all the way up to the Northeast,
and the next thing we knew we had insurance companies saying,
hey, it is time to cancel these policies. They pay that claim,
and then the next thing the consumer got was a non-renewal
notice. That is an individual problem we had in my little State
that our legislature had to address. And if we had a Federal
regulator, I don't think they would have been as attentive to
passing a law like that that deals with such a specific
concern. That is a legitimate concern. This law doesn't hurt
the companies, they can operate just fine with it. But now they
have to find legitimate reasons to cancel or non-renew a
policyholder rather than just saying, sorry, you had a big
claim we had to pay and now we are going to cancel you. So I
think that is a concrete example.
Mr. Scott. Do you think timeliness is another, the timing
of the responses?
Chairman Baker. And that will be the gentleman's last
question, his time has expired. But please respond.
Mr. Pickens. Yes, sir, I do. I think it is very important.
And we all have laws, prompt payment laws with health insurance
that relate to all lines of insurance that say a company has to
pay claims within a certain period of time. And also the
regulators are there to help work out any differences between
the consumer and the insurance company, which I think is--you
can't put a dollar value on that, which I think--that is that
personal touch again.
Mr. Serio. If I could finish a comment on this. There is
almost a good analogy on this, and it actually would go back to
Mr. Kanjorski's question earlier, and that analogy is how we
respond to disasters or after a disaster, the FEMA and local
emergency managers, how they coordinate. We don't leave it to
FEMA to do the work on the ground even though the Federal
Government provides a lot of the money in the aftermath of a
disaster. But the way that the emergency structure is set up,
it is still left to the local emergency manager down to the
local government or State government to really deal with those
local issues. And that is what we do, and we do that best. And
we are able to understand what the implications are, whether
big disasters or small, big issues or small issues. But to get
down to that localized level and having it closer to Main
Street really gives an added value to the local constituents.
And it really is that same kind of a setup where, just because
the Federal Government does provide the resources, it is still
left to serve the locals with the local managers, whether they
are insurance Commissioners or emergency managers or any other
type of analogy like that. And that has worked very well, and I
think we are suggesting the same thing.
Mr. Scott. Thank you.
Thank you for extending my time, Mr. Chairman.
Chairman Baker. Yes, sir, Mr. Scott.
Mr. Miller.
Mr. Miller of California. Thank you, Mr. Chairman.
To begin with, I want to say I don't support government
getting in the insurance business. I don't think we should do
that. I don't believe in total deregulation. But a lot of what
I am going to say, you are probably not going to agree with. My
favorite committee when I was in the State legislature years
ago was the Insurance Company Committee, and 10 years ago I
would never have thought a Federal charter was something that
was needed. But I have somewhat changed my mind watching the
way things have gone. Some of the comments arguing against that
is, well, you could see a decline of State charters. Like
banks, that could be true, but that doesn't make it bad. That
just could be a reality.
One other comment was, well, it would probably take a long
time to develop regulations for a Federal charter, and it is
going to take some time, but NAIC has set up uniformed agent
licensing regulations nationwide every year for 132 years, and
it still hasn't happened. So I think we can beat that time
frame right off the bat. I think that is something that is
doable.
Another thing that I caught, we were talking about changing
the system and the words we used, if we can get a reform--if we
can get the reforms enacted by the States. But the operative
word that stands out is ``if.'' and that just doesn't seem to
happen, because herding State legislators is like herding cats.
I mean, to get all these different States going in the same
direction is very, very difficult. And insurance companies just
have this incredible patchwork of regulatory filings and
approvals, and that really impacts the bottom line in the
services and its cost based on delays, because equally
important, it dictates the pace of developing new products. And
that is something I think we need to be very, very careful of.
Even efforts to regulate uniformity consistently failed. I
have not seen anything that makes me believe that if we don't
have an optional Federal charter--and I say optional, because
nobody is mandated to do it. But more than 3 years ago NAIC
unveiled--you called it a new modernization effort designed to
improve State insurance regulations. But even then it wasn't
new, because you have been talking about that same process
since 1871, and the effort has yet really to prove to be
successful. And I am not trying to be critical. Please don't
take it that way. But I did read all your paperwork, and I have
been looking at this issue very seriously for the last probably
4 or 5 years and I think it is time that we look at an optional
Federal charter, because, Mr. Chairman, I don't think we really
have much of an option but to do that.
By your own account, NAIC does not believe you can fully
implement a compact--I read here on interstate compact
attempts--until January 2009, and then there was a qualifier,
at earliest. And that is your paperwork, not my paperwork. I
think we can do a Federal charter by then, an optional Federal
charter. I really do.
Chairman Baker. Will your gentleman yield for one moment,
just to make the observation. I had to go back and clarify, but
that is with regard to life only. That doesn't include the
broader insurance industry.
Mr. Miller of California. So we are going to really get
farther out, the time. I was giving them the benefit of the
doubt there. We are getting farther out when we consider
everything that is not even being considered right now.
Chairman Baker. I just wanted to be helpful.
Mr. Miller of California. Well, Mr. Chairman, I would
really like to sit down and--we talked about this before. And I
am from California, and I watch some of these States--and I am
not trying to impugn the States, because everybody has the
right to do what they want to. But they call them consumer
friendly bills. And all it does is attempt to regulate the
insurance industry, which is fine. But understand, any time you
place a mandate on business, that cost is passed on to
consumers. And some States for some reason don't realize that
when they continually mandate that insurance companies must
provide more and more and more and more and more, the people
are going to have to pay for it, because you cannot mandate
that businesses lose money. They are not going to do it. They
are going to leave the marketplace. I mean State Farm Insurance
almost pulled--they aren't writing any new policies in
California, and they have about 20 percent of the policies.
This is a very serious issue. And I applaud all of you,
because you have a real tough job. I mean, it is a nightmare. I
can't imagine doing what you are trying to do and you have to
do. But even when you come up with a concept that you believe
will work, you have got to hope everybody agrees. And if they
don't, there is really not much that can be done about it. At
least with an optional Federal charter we can do something
about it. And if we are wrong, if it is not good, people are
not going to use companies that are using the optional Federal
charters; they will use the companies that are a State charter.
If the State charters can provide a better service, better
rates, and the consumers are happier, they are going to stick
with that. But if some of us are right and an optional Federal
charter can come in with a program and they can do it quickly
and rapidly and they can come in with new procedures and new
programs that benefit consumers rapidly, instead of spending 18
months, 2 years as they try to implement throughout the
States--if that proves to be right, consumers are going to
benefit, and if it is not right consumers will continue with
the State charter.
So it doesn't eliminate options, and the part I am having
difficulty understanding is what is wrong with creating another
option? If competition is usually proved to be good, those who
compete the best and provide the best tend to succeed. And
years ago the Japanese auto industry proved that to our
industry. You know, Chrysler and Ford and GM all took it for
granted that everybody is going to buy American, and they
created junk, and nobody bought it. And then when they had to
compete, they created a product that people wanted.
Well, I think we are trying to create competition here, and
you are kind of hamstrung in many fashions because you are
asking States to do what you think is good and they can just
turn their back and decide to do what they want to do and you
really don't have any teeth.
So I am not trying to criticize you, I applaud you. I think
you are trying to do the right thing. But I just think, you
know, like in the time when they talked about optional Federal
charters for banks, I am sure there is a lot of people saying,
oh, it is a bad idea. I think it proved to be a pretty good
idea, and yet there are still State banks out there operating
today that can compete if they want to. And, yes, there has
probably been a decline because you have seen Federal charters
do a pretty good job.
And with that, Mr. Chairman, I thank you.
Mr. Lucas of Kentucky. Mr. Chairman.
Chairman Baker. Mr. Lucas.
Mr. Lucas of Kentucky. I may be out of order, but I would
like to completely associate with my colleague from California.
I agree with everything you say, Mr. Miller.
Mr. Miller. Lord love you. Thank you.
Chairman Baker. Pass the collection plate.
Mr. Sherman.
Mr. Sherman. Ken, you don't know him like I know him.
Mr. Hannon. Mr. Chairman, can I make a comment?
Chairman Baker. Certainly, Senator.
Mr. Hannon. You, both you and Representative Miller have
rightfully referred to some comments in the NAIC testimony
apparently about 2009. Having been part of the leadership of
trying to get this compact together--and believe me, herding
cats would have been easier--I do think that this committee
needs to take note of the major achievement in doing that and
the fact that it was only really adopted this summer. And
legislatures have not been in session since then, so they have
not even had a chance to have the bills introduced much less
entertain them for action. It would be like someone asking you
on December 1 why aren't you acting on the 2004 budget? It is
not the right time yet. So I think there is a need to recognize
that.
Second, NCSL has not put any deadline of 2009. We are
looking to try to get immediate action and try to get people to
address these issues. I would hope that we might--you have
taken great leadership in these issues. I hope we might enlist
you in that because of getting this adopted. There is a need.
There is a need if you keep talking about other options, of
people will say those other options are more viable and the
compact is not. I believe this compact offers some major good
governmental policy. And so I just wanted to say, A, 2009 is
not the NCSL number; and, second, we could use your help.
Chairman Baker. And just a brief response, Mr. Miller. I
would say that we are not in any way belittling the compact
effort. We are appreciative of progress in any form or
direction.
Mr. Miller of California. Mr. Chairman, if you would allow
me. I in no way intended to impugn anybody's effort. I think
you are doing a wonderful job. I want to make that very, very
clear.
Chairman Baker. I think you did, sir. And all we are
suggesting, I believe, is that whatever the deadline might be
today in the agreed-upon, discussed, internal view of the
various organizations, there is--and by way of record, Mr.
Emanuel referred to our second hearing this year. We have had
11 in the last 3 years. We have been pretty busy on the topic.
And it is symptomatic of members' interest to have some
material progress demonstrated that affects rates at the
consumer level. And whatever that time constraint is, that is
really one of the issues that I raised at the outset is how
long is enough time to get an appropriate response. I think Mr.
Kanjorski's view in learning of the date of the compact was a
bit surprised, and I think Mr. Miller's view basically is that
it may be too long. And we are trying to be helpful here in
saying that we can understand the clock is running and progress
has been made, but we are trying to help speed it up a bit, is
really the point.
And I am sorry, Mr. Sherman. You are recognized.
Mr. Sherman. Thank you. Mr. Chairman, my own experience is
shaped by the Northridge earthquakes, since I represent
Northridge. Some of you will remember that some of our
consumers were not paid, that our State regulator found it
unnecessary to impose fines on those insurance companies that
made voluntary contributions to his foundation, when this led
to that foundation putting on all these God awful commercials
with this guy's face on them telling us that he believed in
consumer protection and then his unceremonious departure from
State government. This illustrates a few things. First, that
you need regulation. Second, that State regulation doesn't
always work all that well. It also illustrates the fact that
whether it is tornadoes in Arkansas or earthquakes in
California, when it comes to property and casualty there is a
special sensitivity to different types of natural disasters,
and that any regulator in Washington would have to be imbued
with that sensitivity or defer to the States involved, although
I guess we ought to have good tornado insurance provisions and
rules in California notwithstanding the absence of any
tornadoes.
Mr. Bachus brought up the idea that maybe we could have a
Federal role take place in one area of insurance or another
rather than try to do the whole package, and I am trying to
understand what the different pieces might be that could be
dealt with more or less separately.
It occurs to me that you have got the chartering of an
insurance company which invariably involves dechartering them
if they abuse consumers. You have got rating the solvency of
that insurance company, which plugs again into their charter.
You have got approval of different products, and life and
annuity being the area where you have the least local input.
That is to say, we have earthquakes, you have tornadoes, but,
you know, we have got heart attacks in both States. But you
have got product approval, and then finally you have got agent
regulation.
Are there other pieces in this puzzle that I haven't
identified? Perhaps the Commissioner from Arkansas could tell
me if I have left something out.
Mr. Pickens. No, I think you have identified practically
all of them, and I would refer you to our modernization plan
that I think in great detail sets out our plan in great detail
and, again, addresses each and every one of the points.
Mr. Sherman. Now, as far as agent regulation, I don't
detect any push to have the Federal Government take that over,
but I am less involved in this--I guess I am not supposed to
ask the Chairman questions--but is there much effort here in
our subcommittee to get involved in agent regulation, or is it
more the company----
Mr. Ose. If the gentleman would yield, I think the
principal thing is as much uniformity on all fronts as is
practicable. Many agents now do so multi-state, and the more
flexibility we provide--the traditional Republican response,
the less bureaucracy we can have, the better.
Mr. Sherman. So that is an issue we need to look at. Is
there general agreement that the life and annuity area is the
area where there has been the most problems or disadvantages of
having to go to each of the 50 States to get approval every
time somebody comes up with some nifty new product to allow
investors to avoid income taxes by investing in insurance?
Mr. Pickens. To directly answer your question on that
point, the pressure I guess from our own State insurance
regulators from the industry is primarily aimed at the life
insurance product approval process.
Mr. Sherman. That includes the annuity process?
Mr. Pickens. Yes, sir.
Mr. Sherman. I might add, annuity should be called life
insurance and life insurance should be called death insurance,
but I never took a marketing course.
Mr. Pickens. And the wait there. And the other issue is
producer licensing, speed to market and producer licensing, and
I would add a third----
Mr. Sherman. Producer licensing, is that agent----
Mr. Pickens. Yes, sir, same thing. That includes agents,
brokers and all involved, producers.
And then market conduct reform where we monitor and take
action where necessary, the relationship between the insured
and the insurer, and this goes back a little bit to your
question, but you mentioned what I would characterize as kind
of the politization of insurance in California from time to
time. I mean, you have had some diametrically opposed theories
of regulation in California, you really have. You have got Prop
103 that, you know, is at least a model that some of the
nationwide consumer representatives like Mr. Hunter point to as
being the model. I respectfully disagree with him on that
point, because it wouldn't work in my State. But what would you
have if you had a Federal regulator? The politics involved in
insurance aren't going away, because, you know, we all need
health insurance, we all need life insurance, we need our auto
insurance and homeowners. Folks are still going to be mad if
their rates go up. They are still going to want to call
somebody and get those problems taken care of. And I think you
risk further politicizing the insurance business, which I think
is a bad thing. I think that is a bad thing. I think you need
to take politics out of regulation as much as you can.
Mr. Sherman. On the other hand, the idea of 50 different--
doing a job 50 different times. Of course, there is not a lot
of efficiency here in Congress where each of 435 offices does
the same thing, but the idea that the same product needs to go
through 50 different processes, as part of government that
drives me crazy.
Mr. Pickens. We agree with you. It shouldn't have to do
that.
Mr. Sherman. And I was not here earlier, but I gather that
the idea of this compact, should all the cats be herded, is to
go through just one process for approving product or----
Mr. Pickens. Yes, sir. We have got a single point of filing
up and running right now, SERFF, System for Electronic Rate and
Form Filing. Companies can file electronically. The average
turnaround time right now through SERFF is 17 days, and we
estimate 75,000 filings coming through that process this year.
That is currently available to----
Mr. Sherman. So we could just have hearings and pound the
table and not ever do anything, and then inspire you folks to
get your act together and be of great service.
Mr. Ose. And that is the gentleman's last question. His
time is expired, too.
Mr. Pickens. It has proven to be helpful, as the Chairman
pointed out, yes, sir.
Mr. Ose. So you are doing good work, Mr. Sherman.
Mr. Inslee.
Mr. Inslee. Thank you. You probably are pretty fortunate to
be here this week when we had a demonstration of one of the
most feckless regulatory performances in Federal Government
history from the SEC. So you have come at the right time to
talk about this issue. You are a bit fortuitous.
Our experience in Washington--we have got a great
Commissioner, Mike is doing some great work. He has done great
work on trying to protect consumers from predatory single-
premium credit insurance, and it has really been rapacious in
some circumstances. So we are kind of jealous of protecting
that.
But I want to ask you as far as this effort, what should be
the first goal of trying to have a more nationally uniform
system? And what is the most difficult one to achieve that and
still maintain State charter? That is a broad question.
Mr. Serio. I suppose the goal is to come up with a system--
and I think we have--that allows for uniformity across the
States, like I think we have had based upon an agreement as to
what that baseline should be and then allowing where a company
wants to go into a particular jurisdiction and operate in that
market, give them the most expedient way to operate in that
marketplace where that marketplace may have some unique rules.
What has been the concern--and I will let the industry
speak for itself--hasn't so much been that there is not
uniformity, but there is not even a baseline in most cases
between--from one State to the next to the next for those that
operate on a multi-state platform. But creating that baseline,
creating that foundation of uniformity across the spectrum, and
then going to the legislators and to the unique needs of New
York or Washington or any other State, making it as effortless
as possible for a company to operate within that market, where
they clearly know what those specific rules are, not wide and
varying deviations but those things that are just unique to
that environment, giving them a pathway to do it in the most
expeditious manner.
And that is the thing we have been focusing on in New York
between leveraging technology, making it easy, transparency of
process so that the companies know that they are not going to
get questions at the end of the day, the so-called desk drawer
rules or unwritten rules of regulation, and all the things that
they used to complain about with respect to State regulation.
One of the curiosities in this entire discussion, both
today and in the previous proceedings, has been that the things
they complain about today have nothing--are different, and
completely different than what they complained about 5 years
ago. They complain about unwritten rules, desk drawer rules, 5
years ago and how they can't understand what is required of
them in an individual State. So we lay it out, put it on our
Web site, tell them follow these rules and you will get a
product. And to this day, we cannot get the companies to follow
those rules and get a product. They will not follow the rules
that we lay out for them, that we will not deviate from, and
that has been part of the frustration for us.
But I think the baseline, creating that uniform system of
getting to product approval, getting to producer licensing, I
think is the first step, and then we can go and talk about the
individual and unique needs of the individual States.
Mr. Inslee. What do you think, from what many in the
industry would want to achieve, is the most difficult to do
without a Federal charter?
Mr. Serio. I think the most difficult thing to do without a
Federal charter is--from their perspective--I think is that
they want a rule to apply to all jurisdictions. And that is the
challenge that I think comes back both to the subcommittee and
to the committee and to the Congress as a whole: How do you
change the rules? Do you do it by a matter of process where you
simply say, okay, they can have a Federal license? Or do you
have to affirmatively change the rules that they are currently
operating under?
One of the challenges for us has been to work through the
differences between the major markets. Florida, California, New
York, Texas, Illinois have been the biggest market shares in
the country, and we also happen to have among the strongest and
most stringent rules with respect to this.
They would say, well, we want to get away from that, and
then I think the biggest challenge would be how does the
Congress then say the rule is going to be something less than
they are already in the major markets where they are operating,
and I think that is what they are asking for.
Mr. Inslee. Thank you.
Mr. Ose. I thank the gentleman.
Mr. Royce, do you have questions?
Mr. Royce. Yes. Thank you, Mr. Chairman.
I wanted to ask Commissioner Pickens, first of all, in your
opening remarks you mentioned that we should ask our
constituents what they think about the Federal regulation of
insurance, and I think that is a good idea. I frequently talk
to constituents in my district, and they are concerned, because
many of them have a very difficult time getting new homeowners
policies because of excessive regulation in California, and
major insurance companies just can't do business there right
now. And I would ask, what is your solution for that regulatory
problem in California?
Mr. Pickens. Good question, Mr. Royce. Tell you what;
California is a different market than the Arkansas market. I
think that is one thing to point out. And it is difficult for
me to sit here and say what would work in California just
because it works in my State, because you all have particular
problems that we don't; and, again, I think that points to one
of the strengths of State regulation.
Californians to date, I mean, California passed Proposition
103. It was passed by a majority of the consumers out there,
and from my standpoint--again, I know there are others, in our
organization probably, and I know Mr. Germandi would disagree
with this, but I think Prop 103 has resulted in a distortion of
that marketplace, and that is a lot of the problem that was--
but that is what people wanted at that level, and I just don't
know how--if you passed a Federal law that is going to make
Californians more happy.
Mr. Royce. Well, let me ask another question of our panel
of witnesses here, and that goes to another aspect of this, and
that is the fact that in business, firms like to have as much
certainty for returns as possible before they go through the
process of investing in new products. And in the current
regulatory structure, why would insurance companies want to
allocate capital to develop new products and then go through
the process of hiring more salespeople or spend money on
marketing if they can't sell those products on a national
scale? It seems to me that is fundamental.
We are asking insurance companies to wait until 2009 for an
interstate compact. However, they still do not have any
guarantees that if they show that kind of patience they are
going to be rewarded in 6 years with the ability to go through
and market on that.
And so how is this process helpful for purchasers of
insurance products, given the time line?
Mr. Pickens. You mean the----
Mr. Hannon. If I could answer it, having done just from the
NCSL standpoint, the compact, we did not put any impediment
towards that compact being adopted sooner. We would hope it
would. We recognize, especially when it comes to annuities--now
that the market for annuities is recovering after a lull of 2
years, we would recognize that people need to have all of the
elements that you rightfully outlined of certainty and being
able to calculate their rate of return on investment, et
cetera.
If you have a compact with a central filing, an ability to
file at one place in product approval, then once gain that
approval, sell in any of the States that are part of the
compact, we feel it would be quicker than any other mechanism
that could be adopted.
Someone estimated that just based I guess on their watching
the States, it could be as late as 2009. That is not a view I
share. I think that with an appropriate presentation, with the
fact that the NAIC, in order to give people a sense of what the
compact would be like, has established a working committee to
come up with proposed rules, suggested rules, so people can
take a look at it and not just buy a compact per se, but buy a
fully fleshed out entity, something like that could be
implemented much sooner.
Mr. Royce. Any other observations?
Mr. Serio. Mr. Royce, you asked a great question, and I
think you hit the nail on the head. That is really what we are
faced with, whether we are talking about homeowners insurance
or New York commercial liability after 9/11 or earthquake
insurance or anything else.
You pretty much have summed it up like this. This is a
question of how are they going to invest their assets, commit
their assets to a particular State, when each of those States
have differing challenges.
Part of the problem has been that a lot of insurance
regulation had been built upon what you call rate regulation
rather than cost regulation. We have said many times over, rate
will follow the cost. You keep the costs of insurance down and
the costs of the risks down, the rate will follow. But for many
years that had always been rate regulation that we are going to
keep the rates artificially low. Companies say I can't get
enough of return, my capital costs too much, so I can't
possibly operate in your jurisdiction.
I think we have gotten away from that. We have talked about
competitive rating systems. So long as we keep an eye on the
costs, unreasonable rules that increase the costs of insurance
or the costs of covering those risks really is where the focal
point should be.
As you have said, if you keep those costs under control,
the capital will come in, because the companies are always
trying to figure out where are they going to invest their
assets next. We have a rule in New York pertaining to
construction that is--that most companies won't even get into,
because it is an absolute liability-type of standard. I am not
saying yea or nay on that issue itself, but the answer we got
from the companies was how could I possibly commit scarce
capital to an absolute liability line of insurance?
It is a fair question. It has nothing to do with speed to
market. It has nothing to do with producer licensing, but goes
down to the very essence of whether a company can and will want
to operate, whether it is in my State or any other State.
And that is what this really comes down to. If we make it
competitive and profitable within reason for them, they will
come in and they will operate in New York or any other State.
And that is really the bottom line to this.
Mr. Ose. The gentleman's time has expired.
Mr. Royce. Thank you, Mr. Chairman.
Mr. Ose. Thank you, Mr. Royce.
Gentlemen, we do appreciate your participation in the
hearing today. It has been most helpful. Our message is still
pretty clear. I know we are making progress, but hurry up.
Thank you very much.
I would like to ask our second panel to come up, and while
you are coming to the witness table, make sort of an
unfortunate advisory. I have been given notice by those
managing the process on the floor that we can expect a series
of votes probably beginning shortly after 5 o'clock that will
be of some duration.
My request is--I know this flies in the face of fairness,
having taken so long with the first panel--is that to the
extent practicable, that if you can minimize your statement to
a goal of perhaps 3 minutes as opposed to the traditional 5, we
can get through everyone's testimony and actually proceed with
committee questioning before we are interrupted.
It would be my intent that when the votes are finally
announced, that the committee would conclude its work, because
we are likely to be on the floor for about an hour, and I would
not want to withhold each of you from your important business
for an hour waiting on us to come back.
So with that advisory in mind, let me welcome Mr. John T.
Fitts, Deputy General Counsel, Progressive Insurance Company.
Also state that everyone's written testimony, of course,
will be made part of the record. And please proceed at your
leisure.
STATEMENT OF JON T. FITTS, DEPUTY GENERAL COUNSEL, PROGRESSIVE
INSURANCE COMPANY
Mr. Fitts. Thank you, Mr. Chairman, members of the
committee. In light of the circumstances, I will certainly try
to be brief and direct you to my written testimony which I
think certainly lays out the essence of our position.
I talk to you from the perspective of a national group of
companies that writes automobile insurance in 48 States. We are
collectively the third largest writer of automobile insurance.
We support the need for regulatory reform. Our concerns today
primarily relate to the cost of the variance in State-by-State
regulation, our ability to get product to market on a timely
basis and adequately priced, and making the market conduct and
financial examination processes more efficient.
If I can leave you with one thought, it is this: that
insurance companies spend millions and millions of dollars
dealing with regulatory and compliance issues, and most of that
money is spent dealing with the variance that we find in State-
to-State regulation. And so for national companies like
Progressive, the notion of uniformity and consistency is
absolutely appealing.
So this leads us to the question of can the State
regulatory system deliver a uniform national regulatory policy
that will help us cut costs out of our system and that will
help us hold down the price of our product?
And much as we are supportive of State regulation and
believe that it has a vital role to play in things like
solvency and consumer protection, believe that it has value in
being close to the marketplace and being able to help to
address the periodic stresses that come upon our industry, we
have great reservations about the ability of the State
regulatory system to deliver consistency and uniformity on a
50-State basis. And primarily that arises from many of the
comments that have been made earlier; that in the end, the NAIC
or NCOIL or NESL can recommend positions to States, but they
really do not have the power to force States to adopt them.
And so we, like other companies, think about whether there
are Federal solutions to this issue. We are not a proponent of
optional Federal chartering, nor are we a proponent of
federalizing the insurance marketplace, but we do see real
opportunity in the use of Federal standards, which would
preempt the field, not a floor but a floor and a ceiling both,
which would be interpreted by the Federal courts, which would
preserve the benefits of State regulation but at the same time
provide the uniformity and consistency which I think will
benefit consumers and will benefit our industry.
We are concerned that if we continue down the current path
and the NAIC and the States are not successful, in 2 or 3 years
there may be no stopping an optional Federal charter. It may be
the only thing that--there may be consensus among at least the
larger companies, the national companies and the regional
companies, that this is the only approach that will really
work. So we would encourage Congress to consider optional
Federal standards.
In our testimony we raise agent and company licensing or
producer and company licensing, market conduct and speed to
market. I think that is a quick rendition of my testimony, and
I will respond to questions later if you have any.
Mr. Ose. Thank you very much for your courtesy, sir.
[The prepared statement of John T. Fitts can be found on
page 79 in the appendix.]
Mr. Ose. Mr. Jaxon A. White, Chairman and CEO, Medmarc
Insurance Company Group. Welcome, sir.
STATEMENT OF JAXON A. WHITE, CHAIRMAN AND CEO, MEDMARC
INSURANCE GROUP
Mr. White. Good afternoon, Chairman Baker and members of
the subcommittee. I am the Chairman and CEO of the Medmarc
Insurance Group. This is a position I have held for the last 19
years. We are a small insurance company, 60 employees. We will
have about $75 million in written premium this year.
My objective in the following comments is designed to
educate and inform about the lack of uniformity among State
regulatory mechanisms and how that really impacts a small
property and casualty insurance company.
I would like to make some quick points about company
licensing, rate and form filing and market conduct, because in
my view the inconsistency of regulatory requirements from State
to State is more than a distraction. It is a competitive
barrier that disadvantages small insurers much more than large
insurers.
We entered business in 1979 by partnering with a large
insurer in numerous States. That large insurer issued the
policies and they dealt with the regulatory compliance matters.
For our part, we supplied that large insurer with underwriting
and rating decisions. This is sometimes referred to in the
industry as a ``fronting'' relationship.
That business relationship was far from ideal, but it was
expedient, and it was necessary in view of the company
licensing laws that existed in 1979 and are largely unchanged
today.
Now, that is a perilous business situation, because we are
a mutual insurance company, and we were wholly dependent on
that large insurer for the benefit of their State licenses and
their willingness to continue in business with us on a year-to-
year basis. To become a completely independent company, we had
to obtain our own licenses in all 50 States and the District of
Columbia.
When we looked at the situation in 1993, it became so
obvious to us that the State insurance company licensing system
was a de facto barrier to small property and casualty insurers,
and we needed a nationwide business opportunity, because our
policyholders, both current and prospective, are found in all
50 States.
We were looking at a 5-year process to get licensed in all
States. So we made a very important business decision. We
decided that the only option for us at that point was to
purchase an insurance company shell. We spent $3.6 million for
the purchase of that shell, and that consumed about 10 percent
of our net worth in 1995. That was necessary because we had to
get into the marketplace on a national basis, and we understood
from the very beginning that we have no disagreement with State
company licensing laws. It is just a matter of are they
consistently applied for large and small insurers alike.
Subsequent to purchase of that company, we found that we
had difficulties in filing rates and forms. We use a form of
coverage known as claims-made. Many insurance departments don't
like that form of coverage. So we have had to manage to come up
with several different variations on that. That makes our
pricing, rating decisions difficult. It also impacts our profit
planning.
In order to get around that issue, that is, to provide our
policyholders where we find them in all 50 States with an
option to buy coverage from us, we purchased another shell
insurance company, in this case a surplus lines insurance
company, which is then allowed in all States to have rates and
forms without formal filing approvals. The purchase price there
was $3.5 million. So now we are up to $7 million over about a
5-year period in order to acquire a national platform. Again, I
don't quarrel against State sovereignty in insurance company
licensing and in rate and form filing, but we sell a very
unique commercial casualty product, and our policyholders are
sued in all 50 States, but yet we have to deal with company
licensing in all 50 States as well as rate and form. There is
an inconsistency there.
Finally, I would stress on the market conduct area, we have
found that there are enormous inconsistencies in market
conduct. Large States and small States can be quite different
in the way they approach the issue, and our concern here is
that perhaps there might be one area--and we are proponents of
Federal standards--I can't describe them for you, and I am sure
members of the company cannot enunciate them right now, but it
may well be that Federal standards could help us with one
principal area to start with, market conduct or perhaps with
insurance company licensing.
That is a very quick summary of some written testimony that
I have supplied to the committee, and I would be happy to
respond to your questions.
Mr. Ose. Thank you very much, Mr. White.
[The prepared statement of Jaxon A. White can be found on
page 159 in the appendix.]
Mr. Ose. Mr. William B. Fisher, Vice President and
Associate General Counsel, Massachusetts Mutual Life Insurance
Company. Welcome, Mr. Fisher.
STATEMENT OF WILLIAM B. FISHER, VICE PRESIDENT AND ASSOCIATE
GENERAL COUNSEL, MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
Mr. Fisher. Thank you, Mr. Chairman and members of the
subcommittee. I offer my testimony today from the perspective
of one of the largest life insurers in the country marketing
national products on a nationwide basis.
Modernization of insurance regulation is one of the most
critical issues facing both Mass Mutual and the entire life
insurance industry. Increasingly, we compete with competitors
who operate under far more efficient regulatory systems. The
inefficiency and the lack of uniformity permeates virtually all
aspects of insurance regulation, with the most pressing
concerns being the issues discussed earlier.
Our customers ultimately bear the cost of inefficient
regulation. When we are not able to offer the latest and least
expensive version of a product because a State has not approved
it, our customers lose. Inefficiency also translates into lost
opportunities and duplicative effort.
For 2002 alone, we estimate that we lost up to $60 million
in sales as measured by premium, due to our inability to bring
products to market in a timely manner. Due to differing State
requirements and interpretations, it is common for us to have
anywhere from 30 to 40 versions of a given product in the
States.
Further, in the past 5 years, Mass Mutual has undergone 14
separate State market conduct examinations, which is 13 too
many.
Mass Mutual commends the State regulators and legislators
for their very good-faith commitment and dedication of
extensive effort toward regulatory modernization, as evidenced
by the original NAIC statement of intent in March of 2002 and
their more recently released action plan.
The action plan sets forth a very ambitious agenda to
modernize State insurance regulation. Given the basic nature of
a 50-State regulatory system, however, we doubt the ability of
the States to accomplish the comprehensive uniformity and
regulatory efficiency that is sorely needed.
In our 50-State system where each State is responsible for
protecting its residents, there will undoubtedly continue to be
differences among the States on how best to accomplish that
job, thereby undermining the unprecedented collaboration in
home State deference called for in the action plan.
The action plan also calls for enactment of legislation in
the States, which introduces yet another level of political
complexity. On what is perhaps our most pressing issue,
inefficient and disparate regulation of product, the action
plan falls far short of the mark, with a goal of only having 30
States by year-end 2008.
Mass Mutual supports congressional enactment of optional
Federal charter legislation for insurers. This legislation will
provide strong consumer protection by establishment of
requirements as strong as those found in the States, including
adoption of continued regulation of life insurance products.
Optional Federal charter also represents the most immediate and
best means of accomplishing comprehensive uniformity and
efficiency, since it calls for a single regulator and a single
set of standards for Federally chartered carriers.
Finally, an optional Federal charter will provide the
needed Federal insurance regulatory presence in Washington that
again was discussed earlier.
I appreciate this opportunity to testify before you.
Mr. Ose. Thank you very much, Mr. Fisher.
[The prepared statement of William B. Fisher can be found
on page 68 in the appendix.]
Mr. Ose. Next witness is Mr. Tom Ahart, President, Ahart,
Frinzi & Smith Insurance Agency. Welcome, sir.
STATEMENT OF TOM AHART, PRESIDENT, AHART, FRINZI AND SMITH
INSURANCE AGENCY
Mr. Ahart. Thank you very much. I would first like to say
that Ron Tubertini was supposed to testify originally as an
agent from Mississippi. I am a good friend, have worked with
him with the testimony. Unfortunately he couldn't get out of
Mississippi on his flight today. They were all canceled. So I
was called and drove down from New Jersey because I worked with
Ronnie on this. So the testimony we submitted would be my
testimony as well, and I will give a summary on that right now.
I am President of an insurance agency in New Jersey. I am
currently licensed in seven States, and I think in all of the
testimonies that I have heard today and in other days, there
has really been agreement that there have been a couple major
problems in the current regulation--State regulation. And
number one would be the licensing issues; number two, the
speed-to-market issues. And we would agree with that--with
everyone else that there are major problems right now that need
to be addressed.
I think when I look at the ways they can be handled, I hear
people say we could continue to be State regulated or we should
shift completely to some kind of Federal regulation or optional
Federal charter, and I would like to talk about both of those
for a minute and then give my own ideas of the different way.
First, on maintaining State regulation, I have been--always
been a big proponent of State regulation, mainly with consumer
issues. I think being an agent gives us a pretty good
perspective to talk about these things. I work with insurance
companies all the time. I know the problems that they get into,
the problems that it causes us. I know the problems that as
agents we have from day to day, and I know our consumer
problems and what they complain about.
So I think we have a pretty good perspective, being down in
the trenches, of exactly what is happening out in the
marketplace. And I would say that I have worked very closely
with the NAIC, and I would commend them on their new action
plan. However, on one side as I commend them, you know, I think
they are trying--and I think in the last 5 years especially,
they have made big improvements as to where they have come in
being able to get some things done; but the fact of the matter
is that things like producer licensing, for instance, they--
even though they might have 41 States currently complied with
Gramm-Leech-Bliley, that doesn't help me with the other 9
States and it also doesn't help me that on paper they are
complied with, but yet when I try to get a license it doesn't
work quite as easily as they have said.
So uniformity and reciprocity has been a problem, and my
problem with some of these issues being solved at the NAIC
level is that they really don't have the power to make all the
States comply, so they really can't guarantee uniformity. And I
think, for example, it is an issue that needs to be done
anymore with changes in the global marketplace, increases in
technology. I have a lot of insureds that all of a sudden,
instead of just having a business in New Jersey, they have a
sales office in Georgia or in Maryland or in Massachusetts or
Arizona or wherever it might be, and that is not unusual
anymore to have that. And as soon as that happens, I have to be
licensed in every one of those States in order to get them the
proper coverage for those offices. And what I found is it is
not nearly as easy as people say. In the last 6 months, as a
matter of fact, we have had to be licensed in three additional
States.
One State, I can say it worked great. They used the
national database. We filled out a form on the Internet, and
within 2 weeks we got our nonresidence license. Another State,
it took 6 months and was just constant paperwork, constantly
sending stuff back to us, and our insureds were upset because
we couldn't help them. I had to make them get a different agent
in a different State which they didn't like.
So there clearly are problems. I don't see how the NAIC, no
matter what kind of plan they came up with, can change that if
they can't mandate all their States to act.
As far as Federal regulation goes, my problem with that is
that it is complete overkill. In all the issues I have heard,
it mainly is involved with licensing. It is mainly involved
with speed-to-market issues. And the problem--and we can
correct those problems in other ways without changing the whole
State regulation system. And, you know, it has been mentioned
that consumer protection is a great big plus for State
regulation. Well, why would we go to something that is
completely unknown in order to change that?
So Federal regulation it will be--I have worked for 20
years as an independent agent and have been very involved in
the association, the Independent Insurance Agents and Brokers
of America, and they have come up with a proposal that I think
is a middle-ground, pragmatic approach which allows us to keep
State regulation and all the good things that they do; and in
those issues that can't be helped by State regulation, like
speed-to-market licensing, we use Federal legislation, not
regulation, but Federal legislation to pass laws that would
actually create standards that States would have to comply
with, not minimum standards.
I mean, some people misconstrue, I think, what the bill is
about, but it would be actual standards that States would have
to comply with and it would create uniformity and reciprocity.
And that could be handled as issues come up on an as-needed
basis and not create all the problems with having a new Federal
bureaucracy that has things that is completely unknown.
So from our--from my proposal, I would just say that, you
know, I believe in State regulation; but in those areas where
it didn't work, we should use Federal legislation and preempt
State laws.
Mr. Ose. Thank you, Mr. Ahart.
[The prepared statement of Ronnie Tubertini who was
represented by Tom Ahart can be found on page 148 in the
appendix.]
Mr. Baker. Our next witness is Mr. Neal S. Wolin, Executive
Vice President and General Counsel for the Hartford. Welcome,
sir.
STATEMENT OF NEAL S. WOLIN, EXECUTIVE VICE PRESIDENT AND
GENERAL COUNSEL, THE HARTFORD
Mr. Wolin. Mr. Chairman, thank you very much. Members of
the subcommittee, it is a great pleasure to have been asked to
provide some views on how Congress might reform insurance
regulation.
As you know, insurance has become a multibillion-dollar
industry, and it is our view that the present structure of
regulation adds unnecessary costs to insurance products and
restricts our ability to meet consumer preferences.
There are really three areas that seem most critical--most
critically in need of modernization: forms, rates and solvency.
With respect to forms, insurance companies must file forms
for each of the product lines for which they seek to operate
and in each of those jurisdictions in which they seek to
operate. And for us as a national carrier, that means filing
forms in each of the 50 States and the District of Columbia.
And each of those jurisdictions have different standards for
form approval.
For us, for example, on the property and casualty side we
file 5,500 forms a year, and on the life side another 2,500
forms. This elaborate process is an enormous burden on us and
on the rest of our industry, but most importantly, we think has
negative effects on our ability to serve consumers.
First of all, consumers ultimately pay the cost of our
compliance with this regulatory burden. In addition, the
complexity of the process interferes with our ability to bring
new and better products to market.
With respect to rates, the insurance industry is marked by
robust competition, competition which we think should and can
establish prices at the most consumer-friendly levels.
Government price controls often distort the connection between
risk and price and often ultimately hurt the consumer or lead
insurers to withdraw from the market. Our view is that price
controls should be used as a regulatory tool only as a last
resort and only after market-based efforts have failed.
With respect to capital adequacy, addressing rate and form
concerns obviously doesn't mean ending all regulation. Strict
solvency regulation is also needed to protect consumers from
underpricing by companies willing to collect premiums now and
avoid paying claims later by declaring bankruptcy. When States
force companies to remain in markets and sell products at
artificially low prices, companies flounder, State guarantee
funds are forced to pick up the pieces and pass on costs to
consumers, taxpayers and, more specifically, to insurance
policyholders.
Nearly 20 years ago, Mr. Chairman, a predecessor of this
committee investigated the ability of State regulators to
perform the twin missions of company solvency and consumer
protection. The subsequent report and hearings produced
headlines on deficiencies in both areas.
Since then, the NAIC and many active individual
Commissioners have strived in good faith to improve
consistency, quality, efficiency and speed. Notwithstanding
their good faith, however, the actual reforms have been too
slow in coming. In fact, the NAIC's new action plan adopted
less than 2 months ago echoes many of the initiatives announced
and pursued over the past two decades. The plan strives for
greater standardization and speed, but leaves the State
structure and its multiplicity of rules still in place.
At this committee's initiative, the GAO recently studied
efforts of the States and the NAIC to streamline and modernize
market conduct. The GAO study cautioned that it was uncertain
not only when, but even whether the NAIC and the States could
accomplish this goal. We share that concern and believe that
any plan which lacks uniformity and consistency will not
produce the modernization necessary for our consumers.
The Hartford believes that the solution that best provides
value to consumers and the economy overall is one that grants
national insurers the level of Federal oversight offered to
other large financial institutions. We believe that Congress
should develop legislation permitting companies the option to
be chartered and regulated at the Federal level. Policyholders,
claimants, and taxpayers will all be well served by regulation
that is standardized, efficient, and time sensitive.
And the key word here is optional, Mr. Chairman. If some
State, regional, or national insurers believe that their
customers in the marketplace will be better served by State
regulation, they should have that choice.
Thank you again for the opportunity to appear today, and I
would be delighted to answer any questions.
Mr. Baker. Thank you very much, sir.
[The prepared statement of Neal S. Wolin can be found on
page 164 in the appendix.]
Mr. Ose. The next participant is Mr. Markham McKnight,
President, Wright and Percy Insurance, but, more importantly,
my constituent. Welcome, Mr. McKnight. Good to see you, sir.
Hope you are happy and things are well.
STATEMENT OF MARKHAM McKNIGHT, PRESIDENT, WRIGHT AND PERCY
INSURANCE
Mr. McKnight. Things are well. It is good to see you as
well. Thank you.
Thank you, Mr. Chairman, for this opportunity and for your
hard work on these issues. I am President of Wright and Percy
Insurance in Baton Rouge. We are one of the largest insurance
brokerage firms in Louisiana, providing an array of products to
corporate individual customers.
Earlier this year my firm was purchased by BancorpSouth, a
large financial institution based in Mississippi which
currently operates insurance agencies in three States. This
marriage is a reflection of the huge consolidation and
convergence of the financial services industry, not only
nationally but internationally as well, particularly on the
insurance agency brokerage side.
Today, more than 80 percent of all business insurance
premiums placed in the country are brokered by 250 firms. There
was a time when those in my ranks fought bank insurance
affiliations, but as a result of the reforms that Congress
created through Gramm-Leach-Bliley, today we are finding we
have a more competitive and a fair marketplace for the sale of
financial products.
I want to associate my remarks with Mr. Fisher and Mr.
Wolin with respect to urging you to look toward the dual
banking regulatory option as a model for treatment of the
insurance industry. While no system is perfect, it is clear to
almost everyone in the banking industry that their system has
created a healthy competition among regulators and has enabled
banks to operate across jurisdictions and introduce products in
a far more streamlined way than our insurance system. And I
don't believe there is any evidence to suggest that 90-some-odd
regional offices of the OCC are any less responsive to
consumers than the 50 State-chartered regulators.
I believe that it is critical to the long-term viability of
the insurance industry that Congress pass legislation creating
the optional charter. There is also a more immediate need,
though, for forms that can't wait for the resolution of the
Federal charter debate.
NARAB is an excellent template for Federal intervention and
has had very good results. For decades NAIC has attempted to
streamline the agent-broker licensing system with only modest
achievements, results that were frankly outstripped by the pace
of interstate and international convergence.
The NARAB provisions gave the States 3 years to create
licensing reciprocity and threatened a national license
clearinghouse if they failed to do so. Many States responded
positively to the threat of NARAB, and today the majority of
the States have passed the model producer licensing statute,
New York being the latest. Yet the NAIC's testimony here today
does not even mention NARAB as the reason for these advances.
Additionally, a Federal court has recently ruled that the
countersignature laws, one of the last vestiges of
protectionism in the States, are unconstitutional.
The task on agent-broker licensing reform is unfinished,
and we think that the goal should be 50-State reciprocity or
uniformity. Nine States, including two of the largest, do not
have reciprocity. Additionally, NARAB only addresses individual
licensing and not agency licensing. We would encourage you to
take the next step to that end, and we don't think this goal
can possibly be met without Federal intervention.
There are some other problems that deserve immediate
attention that could also be stepping stones to the path
towards the optional charter. Some studies have shown that it
can take as much as 2 years for a new product to be approved
for sale on a nationwide basis. Banking and security firms by
contrast can get a new product into the national marketplace in
30 days or less.
Congress should address these problems by establishing some
sort of NARAB-like incentives to encourage States to bring
their speed-to-market initiatives into harmony.
In conclusion, I strongly agree with your statements that
Congress needs to consider short-term and long-term solutions.
With need State-based reforms. We need continued Federal
oversight and pressure to reach uniformity in State laws, and
we need you to continue laying the foundation for an optional
Federal charter.
I urge this subcommittee to begin work now on those reforms
that are easily attainable in the short term, such as further
producer licensing reforms, speed to market, and increased
access to alternative markets as well as the long-term reforms
that may require fuller examination and debate before
enactment. Thank you.
Mr. Ose. Thank you very much, Mr. McKnight.
[The prepared statement of Markham McKnight can be found on
page 99 in the appendix.]
Mr. Ose. Thank all of you. That was a stellar performance
to give those six statements in that record time. For what it
is worth among the members still here, that scores a few
points.
Let me start with what I consider to be obvious low-hanging
opportunities for some improvement. If we are to assume that a
new Federal building on K Street filled with employees may take
a while, it seems that NAIC and their compact and NCOIL with
its models have, at least at the national professional level,
adopted some platform of enhancements which experts in the
field agree are responsible. Their difficulty is they cannot
unilaterally impose those recommendations on their membership,
and they are then reliant on State legislatures to act in
accordance with those practical recommendations.
If we were to take the models of NCOIL, the elements of the
compact, put it together in a sack and give a clock by which
those improvements must be considered adopted at the State
level to establish basically uniformity without a national
charter consideration, is that a significant enough improvement
from the various perspectives at the desk to warrant the effort
to do that? And I will make the obvious caveat. There are some
who feel that if we act at all, that then the inertia to move
further goes away for a while.
Other members can speak to that, but from my perspective, I
think this is going to be a continual ongoing effort for some
years to come. I don't think we can get a bill done in a short
period of time that is a universal solution. I do believe we
can get to a universal solution, but I think we have to
demonstrate that the elements that many proponents of the
national charter indicate can be validated by taking
progressive steps.
Now, whoever wants to jump in, please do. Yes, sir.
Mr. Wolin. Mr. Chairman, it is, clearly, from our
perspective, not and all-or-nothing question. We have been
working with the NAIC and will continue to do so on reforms.
I think that the goals that you have mentioned, the compact
and other things, are certainly laudable goals, and if
implemented as expressed would be meaningfully better than the
current circumstance.
Having said that, I think that it is going to be a long
time in coming, some of these things, and even if the Congress
were to put a clock on it as you suggest, it still leaves the
possibility, maybe even the likelihood, that you will have 51
different jurisdictions interpreting a Federal law in all kinds
of ways.
I would note that for NARAB, for example, 3 years on, we
still have at least a third of the marketplace not affected,
and also a number of States still with different rules,
slightly different rules, but nonetheless creating a burden for
those of us who want to operate in all of the jurisdictions of
the United States.
So I guess my bottom-line answer is that we would want to
continue to work with Congress and with your subcommittee, as
well as with the NAIC and others, but I think we are skeptical
that those kinds of sort of partial solutions will really get
to a place where we will be operating with the effectiveness
and the efficiency on behalf of our customers that we would
like to be at.
Mr. Ose. Mr. Ahart.
Mr. Ahart. I mean, I would agree, Chairman, with you
completely, except I would say have no clock. I believe in
reciprocity and uniformity completely, and I think that it
needs to be established where States just have to do it. And,
you know, the argument that, you know, States are going to
interpret it differently or anything like that, we have 50
different States right now, and they interpret a lot of things
differently that the government does. But that all gets done,
and so I don't think this would be any different.
Mr. Ose. Yes, sir.
Mr. McKnight. I would like to add that--kind of put it back
in your terms, that if we put all these things in a sack and
shook them around I would suggest, all due respect to the NAIC,
being the hard--the NAIC and the hard work and effort that they
have put in the last several years--nothing has come about with
the NAIC unless there has been Federal intervention at this
point in time.
I would suggest that the compact would be a bottom line,
nothing more than a confederacy of States, with no one being
held accountable at any point, place, or time.
If you want to look at some of the direct issues--and you
said pinpoint some issues that you would approach--I would
approach the uniformity and the licensing in the 50 States.
That effort very frankly--because they have 41 States--that
effort is complete by the NAIC. It is complete, but it is not a
win. Although we have 41 in compliance, the remaining
jurisdictions have a significant percentage of the property
casualty premiums out there mainly coming to California and
Florida.
So the 3-year time period with the incentives that were in
place with NARAB seem to work pretty well, and I don't see why
there couldn't be a follow-up with like-kind incentives and put
a 3-year time period on it and push through the reciprocity,
address the speed-to-market issues by possibly limiting the
preapproval systems that are in place in the States. And at the
same time, I would also push for the alternative market
solutions.
Mr. Ose. Well, I appreciate that, and I am tending more
toward uniformity than just reciprocity. Reciprocity still
presents redundancy problems in meeting this 3-States'
requirement or that 3-States' requirement. I think if we don't
shoot for uniformity, we are going to wind up with a
significant remaining hodgepodge at the end of the day if we
make progress.
Mr. McKnight. I agree with that a hundred percent.
Mr. Ose. Mr. Fisher.
Mr. Fisher. A few comments on that. I worked very hard on
the interstate compact with the NAIC, and also testified three
times before Senator Hannon's committee at the NCSL. I am
pretty familiar with it.
I think there are a number of things we have to look at
with respect to the compact. First of all, it is, as Senator
Hannon indicated, a compromise document. That being the case,
for example, a State may join the compact by enacting
legislation, but it still retains within the right--within its
rights within the compact the right to opt out of product
standards on an individual basis.
We basically said, okay, we can go along with that on the
theory that everybody is going to be operating in good faith,
and we hopefully will not see too much of that.
I think a more subtle concern has to do with the provisions
of the compact that supersede conflicting State law. After a
very long political process, those provisions were limited only
to product content requirements, and that seems like it is the
logical thing to do, but it is very difficult. And the NAIC is
seeing this in connection with the standards which are being
set right now, that it is very difficult to discretely excise a
piece of State regulation in the product arena away from some
of your market conduct laws, because the two are very heavily
interdependent.
So there are a number of challenges, but more importantly,
I think I would just make the observation that from my
company's perspective, we are really looking for comprehensive
uniformity and efficiency of regulation, not on an incremental
basis; and in our view, the Federal charter is really the only
way of getting there in an efficient fashion. And we have--I
testified 2 years--over 2 years ago before this subcommittee,
and we are now--what we have is a failed CARFRA, an interstate
compact that hopefully will be passed in the States, but the
NAIC says it may only be 30 by the end of 2008.
Mr. Ose. Mr. White.
Mr. White. In 1981, Mr. Chairman, this Congress passed the
Products Liability Risk Retention Act. It further strengthened
that law in 1986, and it did that so that it was a market-based
solution, that being that one State could then control the
fortunes of an enterprise that wanted to sell its products in
50 States.
There was a certain amount of resistance among State
insurance Commissioners, but you could see as that process
unfolded that there was a Federal mandate there, that there was
a law in place that they could consult, and although the NAIC
did a nice job in coming up with handbooks and interpretive
works, it still was a bit of a challenge over time to overcome
the State's right philosophy. Yet the Federal Government knew
in its full justification that that law had a specific purpose
to solve a specific market-driven opportunity, and many of
those organizations exist today and satisfy a variety of
product needs and consumer needs. And yet they are not
regulated by 50 States.
So it is just an illustration I would bring to your
attention.
Mr. Ose. Thank you.
Mr. Fitts, did you----
Mr. Fitts. Yes. I might as well jump in. Everybody else has
commented.
As a property casualty company, we really have no opinion
on the compact. You started out, though, with an example where
we bundle up a group of NCOIL model acts and we throw them out
to the States and say you have got X number of years to act on
these.
I have a couple of comments about that. I don't think what
you are saying is the same as NARAB and NCOIL--excuse me, NARAB
and GLB. That didn't work for a couple of reasons, one of which
you really put your finger on, and that is that it didn't
really press the uniformity. And in the end uniformity is where
we are ultimately going to gain the cost gains that are going
to be able to make us more competitive.
I am also a little bit concerned about the notion of just
wrapping together model laws from NCOIL or the NAIC. I think
that it might make some sense to slow down, for Congress to
identify the areas which it wants to address and then reengage
both regulators, consumers,and insurance companies in
determining what might be the best model, the optimal model,
for insurance regulation as opposed to taking something that
may have been done 2 or 3 years ago, that was never done as a
national standard, and give us an opportunity to be a part of
the deliberative process.
But I do agree that we need to be careful, to move slowly
so there are no unintended consequences and so we do this
right.
Mr. Ose. If I may, I am going to recognize Mr. Lucas, and
if Mr. Shays wants to get in before we have to go vote.
Mr. Lucas. I will be brief, Mr. Chairman.
I listened to all the testimony today, and, you know, I can
understand why property and casualty people would want to be
held at the State level and regulated. I understand that
totally. But as being in the insurance business for 30 some
years and going through the frustrations of trying to deal in
three States and more at times, again, the speed to market was
really a major, major issue. I can appreciate the fact that the
people from the States, you know, there are some jurisdiction
protections. We understand that fully here in Congress about
protecting our jurisdictions, but I really have a difficult
time seeing why the optional Federal charter does not work well
where people choose to utilize that.
You know, the consumer wins because, let's face it, any new
additional cost always goes to the bottom line, and in a
competitive situation--and our insurance companies are all
going to be competitive--who is going to win here? It is going
to be the consumer. And I think we need to look out for that.
So I really don't have any questions other than I am still
not convinced that having the ability for an optional Federal
charter, particularly for the life companies, isn't the way to
go. Thank you.
Mr. Ose. Thank you, Mr. Lucas. Mr. Shays.
Mr. Shays. This is not a hearing that--I only have had 3
hours of sleep, given that I was watching elections last night
back in my district and not liking the results.
But I am wrestling with the bottom-line fact that I feel
that the message is if you really want proper oversight--I
mean, in the whole hearing--it has got to be done by States,
because the Federal Government can't do the oversight. It is
going to take a long time either way, and I think that it is
impossible ultimately to be a competitive industry if you have
got to work with 50 States.
And so I would like to know how I can see quick action that
enables our companies to be competitive internationally and not
having to have so much stupid paperwork throughout the country.
I mean, it doesn't make sense to me ultimately. It seems to me
like it is just a practice that existed for a long time.
So I understand, you know, as we look at it, three or four
Federal, a dual system, and all of you would like some Federal
action. But I guess the question I want to ask is why does it
have to be this way? Why do we have to have this kind of bait?
Why does it take so long? Why does it have to be this way in
this day and age?
Mr. McKnight. I don't think it has to take that long.
During the first panel's testimony by Commissioner Pickens, he
referred to the nationwide filing and how that was going to
solve a lot of the problems, being able to file at one point
and move forward. And while those filing efforts may be more
efficient, it still does nothing to speed the preapproval
processes that go on in every State.
So I agree with your comments in that regard and I don't
think that is being properly addressed in the compact that is
being put forward. I think that does have to--I think that is a
stepping stone. When you address speed to market, it is a
stepping stone to Federal chartering.
Mr. Ahart. I would just like to say that I think there is
an easier way to do it, and that is to use the Federal laws
approach, the Federal tools approach, to handle speed-to-market
issues. For instance, you could have a Federal law where, you
know, forms are filed and used in 30 days. They are approved
after 30 days. If they are not----
Mr. Shays. Even under a State-chartered system?
Mr. Ahart. Yeah, because I think what is happening is you
are doing Federal laws which the States would have to comply
with. So right now you have a political system in 50 different
States where they don't all listen to the NAIC, and for their
own political reasons they do certain things, but for the most
part the State regulation works very well.
So those areas where it doesn't work well, like in speed-
to-market issues or in licensing for one reason or another, you
pass a Federal law where they have to comply, and it takes it
out of the political arena at the State level. Yet the States
could still actually regulate it and make sure that it is
complied with.
Mr. Shays. Give me the best argument against that.
Mr. Fisher. Perhaps I can help there.
First of all, on the light side at least, a lot of States
have those so-called ``deemer laws'' and they have not worked
all that well, partly because companies are not all that
willing to take a so-called ``deemer approval'' if they have
not heard from the State within 30 days.
In many cases, the regulators view the deemer approval as
not being real approvals and feel they can talk to you after
the 30 days are up.
I can give you an example for my company and my industry in
my home State many years ago. Our deemer law has been in effect
as long as I have been with Mass Mutual, which is over 30
years. We had a Commissioner who had a pet peeve on something.
Mr. Shays. A what?
Mr. Fisher. A pet peeve. I do not remember what his issue
was.
For a year and a half every product filed was automatically
disapproved as being in violation of the law. That was it. No
company could get any product approved in that State.
So I am not sure the deemer laws really go far enough, but
more importantly, they also do not achieve uniformity. They
really go to the process of filing, not to the substance of the
contract.
Mr. Shays. Yes, sir.
Mr. Ahart. The filing use was an example; it could be
whatever the Federal law deemed to be done to be the best law
possible. So, you know, I would say the one problem with the
argument, you know, about how it is done in certain States
right now is, if you had a Federal regulator, which was the
State he was talking about, and then they disapproved
everything for everybody, you would be in a lot worst case.
There is nothing to show that the Federal regulator would be
any worse or any better than the State regulator, so instead of
creating another level of Federal bureaucracy, you are
determining what the best possible solution is and then
creating uniformity by passing that and making all comply.
Mr. Shays. Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Shays.
Let me make a request for a slightly early Christmas
present, and let me restate my initial observation and not just
the NAIC compact, but the NCOIL models that they outlined--even
the one they hadn't yet adopted, if that is publicly available.
You bundle all of that, can each of you from your various
perspectives, if you choose to comment, give us something which
indicates where those generally agreed-upon reform principles
are deficient from your perspective? And what other additional
reforms might you consider if we were to consider within the
Congress the adoption of a proposal that would have immediate
operative effect?
Take that for what it is. It is a request for you to
analyze what the State leadership has come up with their offer;
and we, as a committee, need to understand where that State
offer is deficient if, in fact, it would be by combining them
all.
It would seem to be in just making a public debate here
with NAIC and the NCOIL folks, and my question to that panel in
fairness was: Why can't we do what you recognize nationally
instead of waiting on the legislative bodies to act
voluntarily; and the response wasn't particularly strong, and I
got the response, no Federal action was the goal.
I am suggesting that Federal action might be appropriate,
but if we use the recommendations the State professional
organizations have contemplated themselves--if they are, in
fact, reasonable--that would seem to be persuasive with many
members of the committee.
But I would like to request, you know, by the middle of
December perhaps, you know, take a month, if you could get
something back to the committee for us to consider as a
response to that, it might be helpful. And then for those who
are advocates of the national Federal charter, which I
recognize, please give us the reasons why you think that
approach is not responsive. And we'd be happy to get that.
I am reaching no conclusions here. I am just asking for
professional help to analyze what is out there on the table
from the various perspectives, to see if we cannot get the
committee to come forward with something in the next session of
the Congress, whatever that might look like, making no
judgments, making no proclamations.
I am not suggesting we have a bill. I am just talking to my
friends in private, so--which, of course, you will read about
tomorrow.
And let me express my appreciation to you. We are down to
just a few minutes remaining on this vote. As I indicated, we
have a series of votes that will keep us about an hour. I wish
we had more time; I regret this has happened, but at this time
I have to state, our committee hearing is now adjourned.
Thank you, gentlemen.
[Whereupon, at 5:32 p.m., the subcommittee was adjourned.]
A P P E N D I X
November 5, 2003
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