[Senate Hearing 110-1194]
[From the U.S. Government Publishing Office]
S. Hrg. 110-1194
OVERSIGHT OF THE PROPERTY
AND CASUALTY INSURANCE INDUSTRY
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
APRIL 11, 2007
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West TED STEVENS, Alaska, Vice Chairman
Virginia JOHN McCAIN, Arizona
JOHN F. KERRY, Massachusetts TRENT LOTT, Mississippi
BYRON L. DORGAN, North Dakota KAY BAILEY HUTCHISON, Texas
BARBARA BOXER, California OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida GORDON H. SMITH, Oregon
MARIA CANTWELL, Washington JOHN ENSIGN, Nevada
FRANK R. LAUTENBERG, New Jersey JOHN E. SUNUNU, New Hampshire
MARK PRYOR, Arkansas JIM DeMINT, South Carolina
THOMAS R. CARPER, Delaware DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota
Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
Christine D. Kurth, Republican Staff Director and General Counsel
Kenneth R. Nahigian, Republican Deputy Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on April 11, 2007................................... 1
Statement of Senator Klobuchar................................... 71
Statement of Senator Lott........................................ 62
Statement of Senator Nelson...................................... 82
Statement of Senator Pryor....................................... 1
Witnesses
Bowman, Julie Benafield, Insurance Commissioner, State of
Arkansas; Member, National Association of Insurance
Commissioners.................................................. 14
Prepared statement........................................... 16
Hood, Hon. Jim, Attorney General, State of Mississippi........... 3
Prepared statement........................................... 5
Hunter, J. Robert, Director of Insurance, Consumer Federation of
America........................................................ 22
Prepared statement........................................... 23
Regan, David W., Vice President, Legislative Affairs, National
Automobile Dealers Association................................. 54
Prepared statement........................................... 56
Appendix
Calvin, Michael R., Interim President and CEO, American
Association of Motor Vehicle Administrators, prepared statement 87
Response to written questions submitted by Hon. Maria Cantwell
to:
Julia Benafield Bowman....................................... 94
J. Robert Hunter............................................. 97
The National Association of Realtors, prepared statement......... 90
OVERSIGHT OF THE PROPERTY
AND CASUALTY INSURANCE INDUSTRY
----------
WEDNESDAY, APRIL 11, 2007
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 9:22 a.m. in room
SR-253, Russell Senate Office Building, Hon. Mark Pryor,
presiding.
OPENING STATEMENT OF HON. MARK PRYOR,
U.S. SENATOR FROM ARKANSAS
Senator Pryor. Well, let me go ahead and call the hearing
to order.
I want to thank my colleagues for being here this morning.
And I know we'll have a few more drift in. There's a lot going
on on the Senate calendar today. We have a number of hearings
and a number of things going on on the floor, so you'll see
some Senators come and go here.
I'd like to thank our panel of witnesses. In fact, we
originally had two panels, and Attorney General Hood and
Commissioner Bowman have graciously agreed to just consolidate
the two panels to make it, I think, easier on everybody. But
I'd like to thank everybody for being here. Mostly what we're
going to talk about today is the property and casualty
insurance industry. I think everything's fair game, but
generally the focus is property and casualty lines of
insurance.
We want to really look at the industry and look at the
insurance markets in the U.S. to make sure the industry's
healthy--that it's doing the things it's doing--that customers
and consumers are being served here all over the country.
I'd like to thank Senator Inouye for allowing me to chair
the hearing this morning. He invited a number of witnesses
today, many of whom said yes. And we appreciate your being
here.
I will note that we did try to invite a number of property
and casualty associations to appear today. Some had conflicts,
some felt like this might be an unfriendly venue for them,
which is unfortunate. We're not going to name any names,
Senator Lott. But----
[Laughter.]
Senator Pryor. Anyway, for various reasons, none of them
were able to appear today, but they have been invited, and we
want you to know that they were invited. We wanted to give them
a chance to speak their piece.
I would like to just make my remarks very, very quickly,
and then allow the panel to give their remarks. We have a
couple of Senators here who have to slip out and cover some
other hearings at which either they will chair or the ranking
members will have to introduce someone, et cetera. So, let me
just be very brief.
You know, we had a terrible hurricane season in 2005. There
were lots and lots of homes and personal property that were
damaged all over the Gulf Coast and this country. However, 2005
proved to be one of the most profitable years for the insurance
industry. Property and casualty insurers earned an
unprecedented profit of $28 billion in 2006, reversing a net
loss of $5.4 billion in 2005. Policyholder surplus grew for the
fourth straight year in 2006 to approximately $498 billion, up
13\1/2\ percent from approximately $439 billion. While the
profitability of the industry is not in question, the treatment
of customers, policyholders, consumers, by the property and
casualty insurance industry has raised some flags.
We have heard, in my office--and I'm sure every Senator in
the Senate today has heard--complaints of various kinds from
constituents about how they've been treated by their insurance
companies. And I'm sure that some of these are very valid, some
of them, you know, may just be based on misunderstandings or a
misreading of the contract, et cetera. So, we certainly
understand that. But we know that the insurance industry is a
very important industry for this country. There are lots of
issues that relate to insurance. It's an important part of our
Nation's economy. It's very important to citizens all over this
country, and, truly, all over the world.
So, with that, what I would like to do is just acknowledge
our panelists today, allow them to make some statements, and
then, if we want to make some opening statements--but I know
that there are some Senators that need to hurry on to a
subsequent hearing. Would that be okay with my colleagues? Is
that OK?
Let me just introduce them in the sequence that they'll
speak, and then we'll give everybody 5 minutes to make an
opening statement. If you could keep it brief, I know we would
appreciate it. But I know you've come here, traveled a long
distance, and have some important things to say.
First will be Attorney General Jim Hood. He's the Attorney
General of the State of Mississippi. And I have a fondness in
my heart for attorneys general, because I used to be one,
before----
[Laughter.]
Senator Lott. They all look alike.
[Laughter.]
Senator Pryor. You know, before they kicked me out of that
organization, I enjoyed being an attorney general.
Next, we have Julie Benafield Bowman. She's the
Commissioner of the Arkansas Insurance Department. It's great
to have you here. Then we have Dr. Robert Hunter, Director of
Insurance for the Consumer Federation of America. And last, we
have David Regan, Vice President, Legislative Affairs, National
Automobile Dealers Association.
So, again, thank all of you all for being here.
Attorney General Hood, if you could open us up.
STATEMENT OF HON. JIM HOOD, ATTORNEY GENERAL,
STATE OF MISSISSIPPI
Mr. Hood. Thank you, Senator Pryor.
I thank your state very much for coming--for taking our
people in who fled from the storm. And many of you--and from
other states--you know, the bright spot in all of this has been
how the church groups have come down and torn out sheetrock and
done so much for our people on the Gulf Coast. And thanks to
the Senate and Senator Lott for all the work that you've done,
and getting us money to help us try to get on our feet down
there for our homeowners and businesses.
There were actually three storms that we've had to
experience as a result of Katrina--Katrina itself, when it hit.
The insurance claims handling practices and their refusal to
pay was the second storm. And now we're experiencing the third
storm, and that is the astronomical cost increases of insurance
premiums that are inhibiting our rebuilding efforts down on our
Gulf Coast.
I'm, as Attorney General--Senator Pryor, you know very
well--it seems like every 2 weeks, us attorneys general send
y'all a letter requesting that the Federal Government not pre-
empt State law. So, very seldom do we come to the Federal
Government and ask for help. This is one of those situations,
because we are dealing with an industry that our states are
unable to properly regulate. And I'll give you Exhibit A, that
being the way State Farm has treated the people of the State of
Mississippi after the hurricane hit, and their--the way they've
handled their practices.
I spoke, here, to the--a Congressional panel recently, and
a lobbyist for--and Mark Racicot, I believe, was his name, was
talking about that the state had intimidated State Farm, that
an attorney general had attempted to prosecute them and bullied
them, basically, a company of that size, which is ridiculous.
And Senator Lott has a document, I think, that will show what
actually was going on down on our Gulf Coast, and what the
insurance companies were actually doing, and that is an exhibit
that I believe he'll be talking with you a little about.
One I'd like to mention to you is Exhibit A and what State
Farm did, and that's attached to my testimony here. It's a
letter from State Farm, after--we had reached a settlement
agreement with them, and part of the settlement agreement was
that I not indict them for crimes in Mississippi. They had said
all along they were going to stay in Mississippi and continue
to write policies. But, you see, that's what was vital to us,
because they're 33 percent of the market on the Gulf Coast, and
they're 25 percent statewide. If I'd of indicted them, and they
would have pulled out of the State of Mississippi, then we
would have had a gap that could not have been filled. And they
threatened the state. And this is why I want the Federal
Government to step in, take away their antitrust provisions,
and license them on a Federal level, because there have got to
be some controls, because they, in the past, have had such
power and strength, they can stomp their foot and people run
away. As AG's know, we have a duty, no matter how much heat
they crank up--they sent out letters. They didn't send me one.
I'm actually a State Farm policyholder, myself. But, you know,
the--one of their sentences is, is, ``Simply put, we cannot
continue to write new policies under a contract that is now
being reinterpreted by the courts and certain elected
officials.'' They have attempted to--they've criticized Senator
Lott, and tried to claim that just because it was his home,
that he's involved in this. He's seen what has happened. He's
been on the ground--he's got a document he is going to talk
about--and seen some of the problems. And I appreciate Senator
Lott standing up and fighting for his people down on our coast,
and the people of Mississippi statewide, because, you see, when
they pulled out, they stopped writing policies all over the
State, stopped writing new in--new homeowners policies. And
that impacted their own insurance agencies up in north
Mississippi, where I'm from. They're not able to do it. And it
was just punishment. It was an attempt to intimidate the people
of the State of Mississippi, particularly a Federal judge, who
is senior status now, a very conservative Federal judge, who
found that one of their provisions was void, the anti-
concurrent cause provision, because it basically made the
policy worthless. And, furthermore, he found what has been in
Mississippi a State law of proximate cause for over 100 years,
the burden of proof is on the--in an all-risk policy--is on the
insurance companies. So, they've tried to intimidate the State,
and that's why we need Federal regulation.
Now, I've mentioned the fact that we have reached a--an
initial settlement with State Farm in our State civil
litigation. And, there again, part of that was to keep them
within the State. But what they did, they tried to claim that
we are the ones who are trying to change their contract. In
fact, they changed their own policies by issuing what's called
a wind/water protocol. That is attached to my testimony as
Exhibit C, I believe, and they--we had to transcribe it. But
what it did, it went out September 15, and it changed the whole
way the policy is written. It required them to dump off on the
Federal taxpayers, through the Federal Flood Insurance Program,
by changing--if you have Federal flood insurance--on page 2 of
that transcript, you can clearly see--they require, if they--if
you have flood insurance, then we don't pay anything on wind.
They make the Federal Government pay it all. And they don't try
to develop a percentage as to how much of it was wind. So,
they're not even--they're not even, you know, honoring their
own policies.
I mentioned the anti-concurrent clause provision that's
already been stricken. And I don't like to complain. And I'm
out of time. But I'd briefly like to suggest a couple of things
that--and that's what you asked me to do--as to what we, maybe,
should try to develop, proposed solutions.
You know, I think what we should do is some kind of
government all-risk, whether the government takes it or we
require the insurance companies to take all the risk in every
state, be licensed--in order to be licensed by the Federal
Government, you would have to cover all risk in all states and
spread that risk around. I'm a free-market person, and I'd
rather see us, probably, do it that way. But if they won't
participate in that type of program, then maybe the Government
needs to take it over and take wind versus water.
Because, you see, in closing, the bottom line is this. If
there's a slab out there, you can't tell what took that
property out. And the burden is on the insurance companies to
prove that. And the reason that we define a situation of wind
versus water as a dichotomy that's false, and it's developed by
the insurance industry, because what they can do in a
situation, if it's a slab and they don't know, they dump over
on us taxpayers. We're having to pay it anyway. So, at some
point we need to settle this situation, one way or the other.
I appreciate your attention and for inviting me to be here,
and I'll be glad to answer any questions that I'm able to.
Thank you.
[The prepared statement of Mr. Hood follows:]
Prepared Statement of Hon. Jim Hood, Attorney General,
State of Mississippi
Overview
Good morning, Mr. Chairman and Members of the Committee. Thank you
for inviting me here today to discuss the availability and
affordability of property and casualty insurance in the Gulf Coast and
other coastal regions. My name is Jim Hood, and I am the Attorney
General for the State of Mississippi. I am encouraged by the
Committee's attention to this urgent matter.
We cannot solve the problems that face the insurance industry
without understanding the true nature of those problems. The citizens
of Mississippi are experiencing first-hand the overwhelming power of
the insurance industry, an industry that cannot be effectively
regulated by state insurance commissioners. Short of Federal criminal
prosecutions, the industry is not, in practice, limited in any
meaningful way by the Federal Government. The insurance industry is
running wild.
Much of this debate has centered on the sanctity of contracts. For
example, State Farm has complained that their policies are ``now being
reinterpreted by the courts and certain elected officials.'' [See
Exhibit A] That would indeed be a problem, if it had actually occurred.
What really happened is much different.
The Mississippi Attorney General's Office (hereinafter ``MSAG'')
has learned that State Farm acted after Hurricane Katrina to create and
implement three different tactics for denying coverage. These tactics
are not set forth in the policies themselves. Homeowners could not
agree to those conditions, because they were never made aware that
requirements outside of their policies would be used to deny their
coverage. On information and belief, these policies were not presented,
for review, to our state's Insurance Commissioner. State Farm's
policies on the Mississippi Gulf Coast are not being ``reinterpreted''
by the courts and elected officials--they are being ignored altogether
by the ``good neighbors'' who issued them.
What remedy do these citizens have? Tens of thousands of
Mississippians have failed to get any relief from State Farm's agents,
catastrophe team members or mediators. To add insult to injury, our
citizens are then criticized as being litigious when they turn to the
courts for relief after they have been unable to get it any other way.
Their former homes are ridiculed by disparaging references to houses
built on sandbars. Somehow the homeowner's expectation of payment is
preposterous, but the industry's decision to issue a policy on what
they later decide is a risky property and collect premiums is not
questioned. An honest assessment would acknowledge that Mississippians
do not live on sandbars and hold insurers accountable for honoring
policies they write. We also have to question the quality of the
actuarial data used to set rates if the premiums charged are not
related to actual risk.
Defenders of the industry brag that only 1 percent of Katrina
claims are currently disputed, but fail to mention that the insurance
industry defines ``claim'' as a demand for payment under an applicable
policy. This definition conveniently omits the common scenario in which
a homeowner reports wind damage for coverage under a wind policy, and
State Farm denies that any wind damage occurred. The industry
definition of a ``resolved'' claim seems, in many instances to be
synonymous with ``closed.'' Homeowners who participated in mediation
and received ten cents on the dollar for their damages may have their
cases counted as closed, but these are hardly satisfied customers.
Self-reporting of customer satisfaction by the insurance industry
cannot be taken at face value.
The MSAG has worked diligently to reach an agreement with State
Farm that would encourage them to continue doing business in the State
of Mississippi. Insurance Commissioner Dale's recent announcement of an
agreement with State Farm to re-examine approximately 35,000 claims
represents more than a third of the claims recognized by State Farm in
Mississippi. However, no extraordinary deals should be required here at
all. State Farm has had nineteen months to evaluate and pay these
claims. They do not need a deal with either the MSAG or the Insurance
Commission in order to pay what they owe.
The remainder of this report will briefly outline the following:
tactics State Farm used to circumvent contractual
obligations;
the impact of those tactics and other conduct on the
National Flood Insurance Program (NFIP);
lessons learned from Hurricane Katrina.
I. Tactics Used by State Farm to Circumvent Contractual Obligations
A. A Combination of Tactics: Selective Application of Anti-Concurrent
Causation Clauses and the Adoption of a Wind/Water Protocol
Legal gymnastics in the form of anti-concurrent causation clauses
and a wind/water protocol were employed by State Farm after the storm
to deny coverage. Policy exclusions should be understandable to the
agents selling the policies, the customers buying them, and the
personnel interpreting them when a claim is made. The so-called ``anti-
concurrent causation clauses'' and the water exclusions featured in
Homeowners policies that became disputed after Katrina are excessively
convoluted and confusing. Members of the Committee are urged to review
Exhibit B for the comprehensibility of these provisions.
In August of 2006, the Honorable Judge L.T. Senter, Jr. of the U.S.
District Court for the Southern District of Mississippi, Southern
Division, found Nationwide's anti-concurrent causation clause to be
unacceptably vague in the Leonard case, pointing out that ``[t]his
reading of the policy would mean that an insured whose dwelling lost
its roof in high winds and at the same time suffered an incursion of
even an inch of water could recover nothing under his Nationwide
policy--. . .--I do not believe this is a reasonable interpretation of
the policy.'' \1\ An honest and realistic assessment of whether this
language is likely to be applied consistently and fairly by employees
and vendors with varying degrees of training and experience working
under challenging circumstances, yields little certainty.
---------------------------------------------------------------------------
\1\ Leonard v. Nationwide Mutual Insurance, 438 F. Supp. 2d 684,
689 (S.D. Miss. 2006).
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State Farm may have recognized this problem. A wind/water protocol
issued September 13, 2005, instructed CAT workers, in under three
pages, how to make coverage decisions. The protocol was prefaced with
this explanation:
Because of the combination of wind and water damages many homes
sustained from Hurricane Katrina, the following materials have
been developed and are intended for use as a guide for handling
various wind and/or water claims in Louisiana, Mississippi and
Alabama.
[See Exhibit C]
Surely Homeowners policies issued by State Farm already
contemplated that in a hurricane, a combination of wind and water
damages could and would occur. The wind/water protocol was not
available for policyholders' review but it was, by its very language,
designed to evaluate their right to coverage.
Notably, the protocol maintained the anti-concurrent causation
clause, but only in certain situations. The second page of the protocol
features the following language:
Damage to Property Caused by Flood Waters with available Flood
Policy: Where wind acts concurrently with flooding to cause
damage to the insured property, coverage for the loss exists
only under flood coverage, if available . . .
[See Exhibit C]
Stated differently, the protocol dictates that if damage is caused
by both wind and water, the policyholder only gets paid if they have a
flood policy. If they have a wind policy, they get nothing. Thus, the
anti-concurrent causation clause is applied to deny claims of
policyholders who have no flood insurance, and is used to shift the
burden to the Federal Government through the NFIP. The burden on the
NFIP is discussed at length in the next section.
The insurance industry is quick to cite the need for predictability
as a reason to exit the Mississippi market, but policyholders deserve
predictability too. At the very least, their rights should be
interpreted under the policies they sign, not protocols developed after
the storm.
B. The Third Tactic: Introducing New Terminology after the Storm
The most generic definition of a hurricane is a ``tropical
cyclone.'' Thus the event of a hurricane is defined by a combination of
wind and water. Reducing claims to a question of ``wind versus water''
is a simplification that reflects the insurance industry's approach to
claims and has little or nothing to do with the actual experience of a
hurricane.
It is easy enough to neatly sort out which policyholders have
purchased wind coverage, flood coverage, or both. Looking at a concrete
slab that used to be a family home and determining with any reasonable
degree of certainty that 50 percent of the damage was caused by wind
and 50 percent was caused by water is a tall order, not to be
undertaken lightly by under-qualified adjusters and/or rookie, or even
seasoned, engineers. Individual lawsuits filed since Katrina have
inevitably featured a battle of weather experts, but the actual
decisions regarding causation of damage were not made onsite by
professional weather experts. Soliciting the advice of adjusters and
engineers to determine whether a home was destroyed by ``wind or
water'' makes any ensuing ``investigation'' more closely correlated
with the availability of coverage than the factual findings of damage.
After the storm, the MSAG received complaints from homeowners who
were advised by State Farm employees or vendors that they could not
recover for wind damage unless they demonstrated ``discernible wind
damage.'' Placing the burden on the policyholder to prove the nature of
the damage represents a departure from long-standing Mississippi law.
The term ``discernible wind damage'' is not included in policy language
or Mississippi law, which makes it a disturbing standard to use when
determining whether a family will have their coverage denied and live
indefinitely in a FEMA trailer. This is yet another illustration of how
policyholders were unable to rely on the language in their actual
policies because State Farm changed the rules.
II. Impact of These Tactics on the NFIP
Wind and water occur together naturally in a hurricane, but not in
insurance policies. Part of the challenge of keeping the NFIP and
private insurers viable is untangling our understanding of these two
forces of nature and either imposing a somewhat artificial division in
order to allocate risk and assess damages or developing a unified
approach that accurately reflects the reality of the destruction a
hurricane can cause.
In our investigation, we found evidence that adjusters for E.A.
Renfroe, working for State Farm, were dispatched to damage sites and
instructed to determine whether the damage could be categorized as a
slab, ``popsicle stick,'' or ``cabana.'' ``Popsicle stick'' is industry
slang for a foundation with support pilings intact; a ``cabana'' is
industry slang for a structure that maintains some degree of post and
lintel support but is otherwise a skeleton due to water washing
through.
Not much effort beyond riding past the property in a car and
looking out the window would seem to be required to make this
determination, but the fees for this adjusting ``service'' were passed
along to the NFIP. Adjusters were instructed that if they found the
property to be in one of these three conditions, they were to request
that an engineering inspection be ordered to provide additional
guidance in assessing the damage. This subsumes that the adjusters were
not considered qualified or sufficient to make a final determination as
to the cause of damage. However, many of these adjusters at this stage,
without the benefit of an engineering report and often without the
benefit of proper flood training and certification themselves, would go
ahead and recommend maximum payment of flood coverage and contents
through the NFIP.
So, to illustrate, a home is insured by State Farm under a
homeowner's policy for $500,000 for structural damage and $250,000 for
contents; in addition the homeowner purchases $250,000 of protection
against structural damage due to flood and $100,000 for contents due to
flood pursuant to NFIP policies. An adjuster visits the damage, and
determines that maximum coverage is available under the NFIP.
Software programs used by the industry to price home repairs and
reconstruction are admittedly not regulated by the NFIP.\2\ This can
result, for example, in a claim against an NFIP policy, with a
calculation of $1.00 per square foot for drywall repair, and a
companion claim under a Homeowners policy for the same property,
calculating a drywall repair at $0.60 The MSAG is also aware of at
least one instance in which a list of contents submitted by the
insureds bore no resemblance to the list of contents ultimately
submitted by their insurance provider for payment on that same claim to
the NFIP. On the second list, items had been added, and values had been
elevated to bring the claim up to the amounts needed to trigger
coverage through the NFIP.
---------------------------------------------------------------------------
\2\ Associated Press. Isabel Claims under Scrutiny, Baltimore Sun,
March 12, 2004, ``NFIP claims director James Shortley said the program
does not regulate the software that adjusters use, explaining, `We
would have to verify prices in every little town'.''
---------------------------------------------------------------------------
Continuing our illustration, the adjuster then advises the
homeowner that further investigation will be needed to assess the
extent of wind damage. However, by approving payment through the NFIP,
the adjusters have already made a decision about the ratio of damage
attributable to wind and that attributable to water. Unfortunately, the
ratio is not based on the actual damage. It is based on the
availability of coverage. Damage should be assessed first, then the
availability of coverage. Reversing this order turns the entire premise
of insurance on its head.
The claims adjusting process continues as an engineer may then
visit the property and submit a report of damage to State Farm. The
homeowners were not allowed to see these reports. Even though the
report was requested in order to assist the adjuster's evaluation, the
reports were not given to adjusters. The reports were not given to the
claim representatives or even openly circulated within State Farm
catastrophe offices. Records of whether and when engineering reports
had been ordered and received were accessible only to a limited number
of catastrophe employees, and the reports themselves were reviewed by
only a handful of people.
The MSAG is not aware of any instances in which a professional
engineer's conclusion established a ratio of wind to water damage that
contradicted the initial assessment of flood damage by an adjuster. In
fact, the engineering reports usually did not separate wind and water
damage out into any sort of ratio or proportion at all. How then, is a
relatively untrained adjuster considered qualified to do a perfunctory
inspection and determine that the proportion of damage correlates with
the limits on Federal flood policies?
Clearly State Farm is willing to spend the NFIP's money with only
nominal investigation, but is much more deliberate and hesitant to
spend its own. This may explain why the industry experienced record-
breaking profits last year and the NFIP is on track to be bankrupt by
September of this year.
III. Lessons Learned from Katrina
What is the appropriate response of state and Federal Government
when an insurance company simply disregards its contractual
obligations? How can anyone accurately assess whether or not an
insurance company can reasonably be expected to continue doing business
in coastal areas without getting to the truth of how much a private
insurer actually owed, and how much of that was improperly passed on to
the NFIP? If another hurricane hits, and the insurance industry uses
the same tactics they did after Hurricane Katrina, who can stop them?
If the industry's anti-trust exemption if not revoked, we will probably
be asking ourselves these same questions after the next disaster.
Insurers want to argue both that it is unreasonable to expect them
to cover coastal areas and that government involvement is not warranted
because it would ``displace'' private capital. If private industry
continues to abandon the 130 million Americans who live in coastal
regions, one could hardly say that private capital has been displaced.
It has been withdrawn, and a vacuum exists that threatens the housing
market and economic viability of significant parts of our country. One
of the biggest benefits the insurance industry has to offer, the
ability to capitalize risk and spread it globally, is completely absent
in areas that have been abandoned after natural disasters. The industry
opposes government intervention on the grounds that it will simply
shift risk around, rather than spreading it, but Hurricane Katrina has
shown us the industry's willingness to shift its own obligations onto
the taxpayers supporting the NFIP.
The insurance industry has also asserted that the 2005 hurricane
season wiped out premiums and underwriting for the last several years
in Mississippi and Louisiana. If the premiums charged in Mississippi
were not enough to cover the policies, then perhaps the inquiry should
be into whether or not State Farm's actuaries anticipated implementing
this scheme to maximize coverage under the NFIP when they recommended
the rates in effect when Katrina hit.
Further, if homeowners can only expect to recover the amounts they
paid in through premiums, what is the difference in what a private
insurer can offer and a government-backed catastrophe savings account?
Many of our citizens would have been overjoyed to recover the amounts
they have paid in through premiums, but were denied even that modest a
benefit of their bargain with insurance companies.
According to recent publicity by State Farm,\3\ they have
``handled'' about 84,000 claims and paid out ``over one billion
dollars'' in Katrina claims in Mississippi, excluding all payments made
through the NFIP. That averages out to less than $12,000 per claim and
covers claims from an undisclosed number of Mississippi's eighty-two
counties. Insurance Commissioner Dale's agreement, under which State
Farm will ``re-examine'' approximately 35,000 claims and ``make
millions of dollars available'' may give the appearance of relief, but
guarantees policyholders nothing but another opportunity to be
exploited by State Farm.\4\ If State Farm could not make an accurate
determination of the cause of damage right after Hurricane Katrina, how
will they do a better job after nineteen months of cleanup and rain?
---------------------------------------------------------------------------
\3\ State Farm' Announces It Will Suspend Writing
Homeowners and Commercial Policies in Mississippi. http://
www.statefarm.com/about/media/media_releases/mississippi_home.asp. 4/2/
2007.
\4\ Associated Press, Insurance Regulator Says State Farm Agrees to
Re-examine Hurricane Cases. USA Today, March 19, 2007.
---------------------------------------------------------------------------
The industry's reverence for contracts is again belied by this
widespread practice of engaging policyholders in wrangling for months
or years to eventually have a small portion of their claim paid as a
``settlement.'' People who have survived natural disasters are in no
position to negotiate their insurance coverage after the fact, but this
is exactly what they are being required to do.
Payment of claims is a contractual obligation but is frequently
treated as a benevolent gift from the insurer to the insured. Katrina
has shown us that the regulatory status quo is not adequate to protect
policyholders' contractual rights.
IV. Conclusion
The MSAG's office has, in good faith, engaged in tireless efforts
to work with State Farm to make insurance affordable for our citizens.
However, we recognize that accepting premiums is not the same thing as
``doing business.'' If a State Farm insurance policy is nothing more
than a meaningless security blanket, then Mississippians do not benefit
from having them stay in the state to collect premiums. As the struggle
in our state and throughout the country demonstrates, insurance
companies are free to take the money and run from the market whenever
they choose. At the same time, prospective homeowners are unable to get
federally-backed mortgages without purchasing homeowners insurance. It
is for this reason that a discussion of free markets is not entirely
appropriate when applied to a product that people are legally required
to buy.
No easy reconciliation of the competing interests in this
discussion can be made, but Congress urgently needs to take actions to
keep homeowners from losing faith in the insurance industry altogether.
Consumers who faithfully pay their premiums should not have to wonder
why, after nineteen months of inspections, mediations, phone calls and
letters, they are no better off than those who did not buy insurance at
all. If the industry wants to serve coastal areas, they must be held
accountable, just as any other business would be. The antitrust
exemption provided by McCarran-Ferguson has yielded outrageous results.
If the industry pulls out of coastal areas, it cannot then object to
the government's response in assisting an abandoned segment of the
population. Thank you for inviting me today. I look forward to your
questions.
Exhibit List:
Exhibit A--Letter issued to State Farm customers stating it will no
longer offer new homeowners policies to Mississippians.
Exhibit B--Anti-Concurrent Causation language found in homeowners
insurance policies issued by Allstate, Nationwide and State Farm.
Exhibit C--Wind/Water Protocol issued by State Farm on September
13, 2005.
Exhibit A
State Farm Insurance
Duluth, GA
Lynn Gunn
Pelahatchie, MS.
Dear Lynn,
Recently, State Farm' announced it will no longer offer
new homeowners or commercial insurance policies in Mississippi. This
decision certainly didn't come easily or quickly--it's unfortunate, but
necessary. The unpredictable legal and political environment in the
state leaves us unable to accept any additional risk in the Mississippi
homeowners market. Simply put, we cannot continue to write new policies
under a contract that is now being reinterpreted by the courts and
certain elected officials.
We've built our business by talking to people and by establishing
relationships and helping them protect what they value most. Rest
assured, that's what we will continue to do.
You are a valued customer with whom I'm proud to call this state
home. We want to work with you to make Mississippi stronger and more
vibrant than ever before. While we cannot offer homeowners or
commercial insurance policies in addition to the ones you already own,
we look forward to meeting your insurance and financial services needs
through the more than 70 other products State Farm offers. These
include auto, life and health insurance, as well as a variety of
financial services.
I invite you to call your State Farm agent with questions you may
have about what I've shared in this letter, or about what you may read
or hear in the news.
It is an honor for us to serve you. I appreciate your business and
your loyalty.
Sincerely,
G. Webb Howell
State Farm Vice President--Agency
Exhibit B
Taken from Allstate Property and Casualty Insurance Company Deluxe
Homeowners Policy, Elmer and Alexa Buente v. Allstate Insurance Company
et al, Civil Action 1:05CV712 LTS-JMR, U.S. District Court, S.D. Miss.,
Judge Senter's Memorandum Opinion, March 24, 2006.
With respect to the insured dwelling (Section I, Coverage A) and
other structures (Section I, Coverage B):
Losses We Do Not Cover . . .
We do not cover loss to the [insured] property consisting of or
caused by:
1. Flood, including but not limited to surface water, waves,
tidal water, or overflow of any body of water, or spray from
any of these, whether or not driven by wind.
* * * * *
4. Water or any other substance on or below the surface of the
ground, regardless of its source. This includes water or any
other substance which exerts pressure on, or flows, seeps or
leaks through any part of the residence premises.
* * * * *
21. Weather conditions that contribute in any way with a cause
of loss excluded in this section to produce a loss.
* * * * *
23. We do not cover loss to property . . . when:
(a) there are two or more causes of loss to the covered
property; and
(b) the predominant cause(s) of loss is (are) excluded
under Losses We Do Not Cover, items 1 through 22 above.
With respect to personal property (Section I, Coverage C, Personal
Property Protection):
Losses We do Not Cover . . .
We do not cover loss to [insured personal] property caused by
or consisting of:
1. Flood, including, but not limited to surface water, waves,
tidal water or overflow of any body of water, or spray from any
of these, whether or not driven by wind.
* * * * *
4. Water or any other substance on or below the surface of the
ground, regardless of its source. This includes water or any
other substance which exerts pressure on, or flows, seeps or
leaks through any part of the residence premises.
* * * * *
13. Weather conditions that contribute in any way with a cause
of loss excluded in this section to produce a loss.
* * * * *
15. We do not cover loss to [insured personal] property when:
(a) there are two or more causes of loss to the covered
property; and
(b) the predominant cause(s) of loss is (are) excluded
under Losses We Do Not Cover items 1 through 14 above.
Taken from Nationwide homeowners insurance policy, Paul Leonard and
Julie Leonard v. Nationwide Mutual Insurance Company, Civil Action
No.1:05 CV475 LTS-RHW, U.S. District Court, S.D. Miss., Judge Senter's
Memorandum Opinion, August 15, 2006.
Section 1, Property Coverages
Coverage A--Dwelling
Coverage B--Other Structures
Coverage C--Personal Property
Property Exclusions, Section 1
1. We do not cover loss to any property resulting directly or
indirectly from any of the following. Such a loss is excluded even if
another peril or event contributed concurrently or in any sequence to
cause the loss.
* * * * *
(b) Water or damage caused by water-borne material. Loss
resulting from water or water-borne material damage described
below is not covered even if other perils contributed, directly
or indirectly to cause the loss. Water and water-borne material
damage means:
(1) flood, surface water, waves, tidal waves, overflow
of a body of water, spray from these, whether or not
driven by wind.
* * * * *
(n) Windstorm or hail to any:
(1) structure, other than a building, including the
supports and screens, with a roof-like covering of
cloth, metal, plastic or fiberglass, whether or not the
structure is attached to a building.
(2) screens, including their supports, around a pool,
patio or other areas.
(3) property lines and similar walls, including
seawalls, greenhouses, hothouses, slathouses, trellis,
pergolas, cabanas and outdoor equipment used to service
the residence premises.
(4) structure, including property in or on the
structure, which is in whole or part, in or over water.
2. We do not cover loss to any property resulting directly or
indirectly from the following if another excluded peril contributes to
the loss:
* * * * *
(c) Weather conditions, if contributing in any way with an
exclusion listed in paragraph 1 of this Section.
Taken from State Farm homeowners policy, John Tuepker and Claire
Tuepker v. State Farm Fire & Casualty Company, Civil Action No.
1:05CV559 LTS-JMR, Judge Senter's Memorandum Opinion, May 24, 2006.
Section I, Losses Insured
Coverage A--Dwelling
Coverage B--Personal Property
Section I--Losses Not Insured
1. We do not insure for any loss to the property described in
Coverage A which consists of, or is directly and immediately
caused by, one or more of the perils listed in items a. through
n. below, regardless of whether the loss occurs suddenly or
gradually, involves isolated or widespread damage, arises from
natural or external forces, or occurs as a result of any
combination of these:
a. collapse, except as specifically provided in Section
I Additional Coverages, Collapse.
* * * * *
2. We do not insure under any coverage for any loss which would
not have occurred in the absence of one or more of the
following events. We do not insure for such loss regardless of:
(a) the cause of the excluded event; or (b) other causes of the
excluded event; or (c) whether other causes acted concurrently
or in any sequence with the excluded event to produce the loss;
or (d) whether the event occurs suddenly or gradually, involves
isolated or widespread damage, arises from natural or external
forces, or occurs as a result of any combination of these:
* * * * *
c. Water Damage, meaning:
(1) flood, surface water, waves, tidal water,
tsunami, seiche, overflow of a body of water;
or spray from any of these, all whether driven
by wind or not;
* * * * *
3. We do not insure under any coverage for any loss consisting
of one or more of the items listed below. Further, we do not
insure for loss described in paragraphs 1 and 2 immediately
above regardless of whether one or more of the following: (a)
directly or indirectly cause, contribute to or aggravate the
loss; or (b) occur before, at the same time, or after the loss
or any other cause of the loss:
* * * * *
c. weather conditions.
However, we do insure for any resulting loss from items a., b., and
c. unless the resulting loss is itself a Loss Not Insured by this
Section.
Exhibit C
September 13, 2005
State Farm Claim Associates handling CAT FL
in the Central and Southern Zones
Property and Casualty Claim Consulting Services
Re: Wind/Water Claim Handling Protocol
Action Required
Summary
Because of the combination of wind and water damages many homes
sustained from Hurricane Katrina, the following materials have been
developed and are intended for use as a guide for handling various wind
and/or water claims in Louisiana, Mississippi and Alabama.
Action
The protocol below outlines the process that should be used for
determination of coverage in those locations.
Protocol Detail
Each claim should be handled on its merits. A causation
investigation should be conducted and appropriate claim file
documentation is required. Any available information should be
considered in making a coverage determination. This information will
include, but is not limited to:
Evidence gathered at the onsite inspection. This includes
documentation of physical evidence such as water lines, an
examination of the debris, and an analysis of the physical
damage to the structure.
Evidence gathered at neighboring locations.
Information from witnesses and policyholders.
Input from experts that may be retained to provide guidance.
The damage to insured properties will fall into the following
categories and should be handled as detailed below:
Damage to the property was caused by windstorm.
Damage to separate portions of the property can be
attributed to either windstorm or excluded water.
Damage to the property was caused by excluded water; with no
available coverage.
Damage to the property was caused by flood waters; covered
by an available flood policy.
Damage Caused by Windstorm
When the investigation indicates that the damage was caused by
windstorm, the claim will be handled under the applicable provisions of
the involved properly policy. Consideration should be given to
determine if a hurricane deductible or a windstorm hail exclusion
endorsement is involved and the claim handled accordingly.
Damage to Separate Portions with Distinguishable Wind and Excluded
Water
Each type of damage should be documented in the claim file. The
claim representative should calculate the separate damage attributable
to each peril and handle the adjustment accordingly. In those cases
where the policyholder has policies for both a windstorm and a flood,
payments should be issued under the applicable policy.
Damage Caused by Excluded Water
When the investigation indicates that the damage was caused by
excluded water and the claim investigation does not reveal independent
windstorm damage to separate portions of the property, there is no
coverage available under the homeowners policy pursuant to the
following language in Section 1 Losses Not Insured:
``2. We do not insure under any coverage for any loss which
would not have occurred in the absence of one or more of the
following excluded events. We do not insure for such loss
regardless of: (a) the cause of the excluded event; or (b)
other causes of the loss; or (c) whether other causes acted
concurrently or in any sequence with the excluded event to
produce the loss; or (d) whether the event occurs suddenly or
gradually, involves isolated or widespread damage, arises from
natural or external forces, or occurs as a result to any
combination of these:
* * * * *
c. Water Damage, meaning:
(1) flood, surface water, waves, tidal water, tsunami, selche,
overflow of a body of water, or spray from any of these, all
whether driven by wind or not . . .''
Other Losses Not Insured may be applicable, including 2.c.(2) and
(3), 3.(a), (b) and (c).
Damage to Property Caused by Flood Waters with Available Flood Policy
Where wind acts concurrently with flooding to cause damage to the
insured property, coverage for the loss exists only under flood
coverage, if available. The flood damage claim should be handled
consistent with the terms of the flood policy providing coverage as
outlined in Operation Guide 71-06.
Claims Where the Causation Investigation is Ongoing
Payment can be made under a reservation of rights for ALE or Loss
of Income under the property policy until the final coverage decision
is made. The policyholder should be advised in writing that:
The investigation is ongoing.
No coverage decision has been made.
In the event it is determined that there is no covered
damage, no further payment will be made on ALE or Loss of
Income.
They may undertake an independent investigation.
All claims in this category must be reviewed by the Claim Team
Manager before a final decision is made. Management should be involved
in any claim where it is deemed necessary to retain an expert to assist
in the determination of causation.
For More Information
Any question on this protocol should be directed to your Claim Team
Manager.
cc. P & C Claims Executive
Southern Zone Executive and Claim Managers
Central Zone Executive and Claim Managers
P & C Claims Directors and Consultants
Catastrophe Services Claim Managers
Catastrophe Services Section and Team Managers
Zone Section Managers
Senator Pryor. Thank you.
Ms. Bowman?
STATEMENT OF JULIE BENAFIELD BOWMAN, INSURANCE COMMISSIONER;
STATE OF ARKANSAS; MEMBER, NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS
Ms. Bowman. Thank you.
Chairman Pryor, Vice Chairman Stevens, Senator Lott,
Senator Vitter, thank you very much for the opportunity to
testify here today.
Thank you. I usually don't need a mike. I'm usually told I
had a big mouth anyway, but I'll use it.
I was asked to testify today on the role of insurance
commissioners in regulating the property and casualty insurance
industry, the financial health of the property and casualty
insurance industry, and its market activities, such as pricing,
underwriting, and settling claims.
As the Insurance Commissioner for the State of Arkansas,
I'm also a member of the National Association of Insurance
Commissioners.
Related to the topic matter today, I am--I serve as the
Vice Chair of the National Association of Insurance
Commissioners, Market Regulation and Consumer Affairs
Committee, and am a member of various task forces at that
Committee level.
I'll provide you, today, with my perspective, to help you
understand how insurance regulators protect consumers, and, in
my view, on the health of the property and casualty insurance
industry and their market activities.
The first thing, and most important job of an insurance
commissioner, is consumer protection. That's our first goal.
That's the mission of an insurance commissioner. That's the
first thing we look at. And this is accomplished by maintaining
strong, cooperative regulatory oversight of insurers' solvency
and monitoring insurer marketing activities so that a healthy,
competitive marketplace exists to serve consumers.
In its simplest form, insurance regulation is about two
things. The primary job of an insurance regulator is to make
sure that insurance companies remain solvent so that they can
pay the claims as they become due, and to make sure that
insurers treat their customers and claimants fairly.
Second, there's a misunderstanding about what constitutes
an insurance market and how insurers go about serving their
markets. One could assume that each State has a single
marketplace, but that's probably inaccurate. For example, in
Arkansas, we don't spend a whole lot of time worrying about
hurricanes. I think my fellow commissioners in the Gulf States
spend a lot of time worrying about hurricanes and how to
finance those problems. Our property insurance writers are more
concerned about earthquakes, tornado--I mean, earthquakes,
tornados, lightning, hail, those type issues. Certainly, those
can be very devastating. We have a lot of earthquake risk,
because of the New Madrid Fault in Arkansas.
And, while you might view Arkansas as a small State, from
an insurance perspective, it's really not. We have two distinct
insurance markets when it comes to personal lines: in auto
insurance, as well as home insurance--homeowners' insurance.
Little Rock is an urban area which is very different from the
rural areas of Arkansas, so there's a lot of difference when
you're looking at insuring automobile liability in the Little
Rock area and homeowners' insurance in the Little Rock area, as
to those rural areas in Arkansas. As I mentioned earlier, the
eastern part of our State has the earthquake exposure that is
very different from the western portions of Arkansas.
Third, in spite of paying for the record levels of
catastrophes in 2004 and 2005, as Senator Pryor mentioned, the
financial health of the property and casualty insurance
industry has never been better. It is safe to say that 2006 was
a very good year for the U.S. property and casualty insurance
industry. There were no hurricanes that made landfall in 2006,
and other catastrophe losses were low. The lack of major
catastrophes, combined with favorable market pricing
conditions, led to a record year for insurers. The industry
posted an underwriting gain of over $34 billion, and it
achieved its lowest combined ratio in years, estimated to be
92.6 percent. Let me explain that just a little bit.
The combined ratio is a way to determine if insurers made
money on their insurance operations, with 100 percent combined
ratio being at the breakeven point. So, we look at 100 percent
being the breakeven point. So, a combined ratio below 100
percent means that the underwriting part of the business was
profitable. Remember, I said that their combined ratio was 92.6
percent, well below the 100 percent that's the marker.
In addition in--to making money on underwriting, insurers
also make money on their investments. Between underwriting
results and their investment results, the property and casualty
industry's policyholder surplus grew to almost $480 billion.
So, the property and casualty industry is very healthy, despite
the losses that they received year before last.
Finally, I will comment on insurer pricing, rate
regulation, and insurer practices related to claim settlement
and underwriting.
In particular, I would like to explore some myths that are
promoted by some who hope that you would do away with State-
based regulation, or at least offer them a choice of regulatory
frameworks. You will probably hear from industry
representatives that rate regulation causes them to be less
competitive than they might be otherwise. They generally refer
to rate regulation as price control. This is an inaccurate
term. The process in almost all States for virtually all
insurance products written by property and casualty insurers
starts with the insurance company actuaries preparing a rate-
change proposal, and providing it to insurer management.
Management considers the input from their actuaries and their
marketing people, and they decide whether a rate filing will be
submitted. And then, if so, how much that rate filing might be.
That rate filing has been prepared and submitted to the
regulator, to the insurance commissioner. In some cases, it
must be approved by the regulator in advance. Most States,
though, and in many lines of business, it doesn't. For example,
in Arkansas, the personal lines, and most small commercial
lines, the rates would be filed, and the insurers would be able
to use them within 20 days, as long as the markets are
competitive. Prior approval would only be required if I were to
find that the particular market is noncompetitive. In Arkansas,
workers' comp is subject to prior approval, as well as medical
malpractice. Those rates are subject to prior approval.
Otherwise, it's a file and use. Insurers that write large
commercial risk would not even be required to make a filing.
Insurers often maintain that price controls make them
noncompetitive. I think you will agree that the financial
performance of the property and casualty industry in recent
years makes these statements ring hollow. I expect that some
witnesses will agree with these statements and suggest that
insurance regulators should do more to lower prices, and I
would welcome any questions you have about the industry and
regulation of the property and casualty industry.
[The prepared statement of Ms. Bowman follows:]
Prepared Statement of Julie Benafield Bowman, Insurance Commissioner;
State of Arkansas; Member, National Association of Insurance
Commissioners
Chairman Inouye, Vice Chairman Stevens, Senator Pryor and Members
of the Committee, thank you for the opportunity to testify here today
on the role of insurance commissioners in regulating the property and
casualty insurance, the financial health of the property and casualty
insurance industry, and its market activities such as pricing,
underwriting and settling claims.
My name is Julie Bowman. I am the Insurance Commissioner for the
State of Arkansas and an active member of the National Association of
Insurance Commissioners (NAIC). Related to the topic matter of today's
hearing, I serve as Vice Chair of the NAIC's Market Regulation and
Consumer Affairs Committee and am a member of the Workers' Compensation
Task Force, the Speed to Market Task Force, the Operational
Efficiencies Working Group.
Today I would like to provide my perspective to help you understand
how insurance regulators protect consumers and my views on the health
of the property and casualty insurance industry and their market
activities.
First, the most important job of an insurance commissioner
is to protect insurance consumers. This is accomplished by
maintaining strong, cooperative regulatory oversight of insurer
solvency and monitoring insurer marketing activities so that a
healthy competitive marketplace exists to serve consumers.
Second, there is misunderstanding about what constitutes an
insurance market and how insurers go about serving the markets
that they choose to serve.
Third, in spite of paying for record levels of catastrophes
in 2004 and 2005, the financial health of the property and
casualty insurance industry has never been better.
Finally, I will comment on insurer pricing, rate regulation,
and insurer practices related to claim settlement and
underwriting. In particular I would like to explore some myths
that are promoted by some who hope that you would do away with
state-based insurance regulation or at least offer them a
choice of regulatory frameworks.
Insurance Regulation and Consumer Protection
The most important job of an insurance commissioner is to protect
insurance consumers. This is accomplished by maintaining strong,
cooperative regulatory oversight of insurer solvency and monitoring
insurer marketing activities so that a healthy competitive marketplace
exists to serve consumers.
In its simplest form, insurance regulation is about two things. The
primary job of an insurance regulator is to make sure that insurance
companies remain solvent so that they can pay claims as they become due
and to make sure that insurers treat their customers and claimants
fairly. An insolvent insurer does not have the resources to pay its
claims and therefore, is of no use to either its policyholders or those
with claims against them. A recalcitrant insurer that fails to comply
with state consumer protection laws and regulations also can be a
problem if it fails to deliver the expected insurance benefits to
consumers at times when they are needed the most.
The goal of financial regulation is protecting consumers against
excessive insurer insolvency risk. Insurance regulators protect the
public interest by requiring insurers to meet certain financial
standards and taking remedial action when needed. Congress has chosen
to leave the regulation of insurers to the states under the terms
specified in the McCarran-Ferguson Act, and state legislatures have
created regulatory frameworks in state law to address financial
regulation. A typical state would have capital adequacy standards that
would include minimum capital and surplus requirements to protect
policyholders and claimants against unexpected increases in liabilities
and decreases in the value of assets held by insurers. In addition,
states also use a risk-based capital test that more specifically
measures the risks each insurer assumes. Risk-based capital is intended
to provide capital adequacy standards that are related to risk, that
raise the safety net for insurers, that are uniform among states and
that provide for regulatory action when actual capital falls below the
standard.
States also have enacted legislation that regulates the reserves
that an insurer is obligated to set aside for future claims payments.
One of the uncertainties for property and casualty insurers is to
determine the reserves needed for claims that have already occurred,
but not yet paid. Regulators review insurer financial statements and
actuarial opinions to assess whether insurers are establishing adequate
reserves for unpaid losses.
There are investment restrictions specified in state laws. State
laws take a conservative approach to insurer investments with most
states limiting the amount of investments an insurer can make in non-
investment grade assets. State regulators work collectively through the
NAIC's Securities Valuation Office (SVO) to monitor the assets held by
insurers. The SVO assigns a credit rating to assets that are not
otherwise rated by a rating agency such as Standard & Poors or AM Best.
This function helps state examiners with their evaluation of the assets
that an insurer holds as part of a financial examination.
These regulatory requirements are of little value if there is no
mechanism in place to monitor insurers' compliance with the
requirements. The purpose of solvency monitoring is to ensure that
insurance companies are meeting regulatory standards and to alert
regulators if action is needed to protect policyholders' interests.
State regulators have established a vast solvency monitoring system
that encompasses a range of regulatory activities, including financial
reporting, early-warning systems, financial analysis and onsite insurer
examinations. Annual and quarterly financial statements filed by
insurers serve as the principle source of information to assess insurer
financial position. Insurers generally are examined every 3 years.
States coordinate the financial examinations through the NAIC
association-wide or zone exams process to avoid duplicative or
redundant examinations of the same insurer.
State insurance regulators have developed a certification program
for insurance departments. The goal of the certification process is to
ensure that a state's solvency regulation meets certain minimum
requirements so that other jurisdictions can have a degree of
confidence in the state's financial oversight of its domestic insurers.
Adopted in 1990, the NAIC's Financial Regulation Standards and
Accreditation Program establishes standards that states must meet to
become accredited. Each insurance department's financial regulatory
framework and monitoring program is reviewed by an independent review
team that assesses the department's compliance. A compliance review
will look at three areas: laws and regulations; regulatory practices
and procedures; and organizational and personnel practices. States that
pass the review are recognized as accredited states.
Market regulation deals with insurer pricing, product development
and market practices. If insurers are able to use their market power to
raise prices above competitive levels, then regulators can improve
market performance by setting a price ceiling at the competitive price
level. This rarely happens as the competitive structure of most markets
prevents insurers from acquiring significant market power.
Market regulation also encompasses review of contractual language
before it is sold to consumers. This basic consumer protection helps
both the insurer and the policyholder by having an expert state
employee review the insurance contract before the transaction with the
policyholder. Property and casualty insurance contracts are based in
state laws and regulations. State regulators with expertise in the
state's civil justice system and requirements enacted by the state
legislature review the contract for statutory compliance.
Another form of market regulation is the market analysis and market
conduct examination process. Market analysis is about the collection of
data and review of it to determine if insurers are treating
policyholders and claimants fairly. Market conduct examinations are
called if the regulator suspects that an insurer is failing in this
duty. Some market conduct exams are done without suspicion of wrong
doing. In this type of exam, a regulator would review a sampling of
claims files to see that statutory timeliness requirements are met and
that the insurer provided the claimant with a reasonable settlement in
accordance with the policy provisions.
Insurance Markets
While the rest of the world thinks of the United States as having
the largest insurance market, it is not a single marketplace but rather
a combination of smaller markets that, when aggregated, yield a $1.35
trillion ``marketplace.'' In comparison, the insurance market in Japan
is roughly $475 billion and the U.K. is $300 billion. The largest state
market is California with $124 billion in written premiums. Only Japan,
the U.K., France Germany and Italy have larger markets than California.
Following California is New York with $116 billion, Florida with $92
billion and Texas with $82 billion. Of the top ten jurisdictions in the
world, four are the states previously mentioned. My state, Arkansas,
has $8.6 billion, slightly less than Poland and Mexico, but larger than
the insurance markets in Argentina, Turkey, Israel and Thailand.
One could assume that each state has a single marketplace, but even
that comparison is inaccurate. For example, in Arkansas, we do not
spend much time worrying about hurricanes. I know my fellow
commissioners in the Gulf States spend a great deal of time thinking
about them and how to finance the devastating losses that they cause.
Our property insurance writers are more concerned with tornados,
lightning and hail. We also have some earthquake risk as we are exposed
to the New Madrid Fault. Although you might view Arkansas as a small
state from an insurance perspective, we have two distinct insurance
markets when it comes to personal lines polices such as auto insurance
and homeowners insurance. Little Rock is an urban area with different
market dynamics than the rural areas of the state. As I mentioned
earlier, the Eastern part of our state has earthquake exposure that is
different from the Western portions of the state.
Since insurance markets are different, insurers approach them in
different ways. Citizens in Western Arkansas have no difficulty
obtaining earthquake coverage, while the Eastern residents,
particularly those living near the fault line, have recently
experienced some availability problems and the prices for the coverage,
when offered, have risen sharply. In most of the country, for most
lines of business, insurance is a voluntary offering by a private
enterprise with the intent that the insurance sold will generate
sufficient revenues to pay all claims and expenses with a little bit
left over to provide a profit for the owners. Sometimes the public
misperceives that they have a right to obtain insurance.
We do have some obligation to make sure that our citizens can
obtain the essential insurance coverages that they need. Most state
governments require that citizens buy auto insurance if they wish to
operate a motor vehicle. Banks and other lending institutions generally
require the purchase of property insurance as a condition for obtaining
a loan. Thus, it is in the public's interest for government to take
steps to see that all citizens are served by making available auto
insurance and property insurance to those that need it. When the
private sector chooses not to serve a market, the states generally have
stepped in and created a residual market to meet that pressing need. A
variety of types of residual market mechanisms are available in the
states, including FAIR plans, catastrophe funds, assigned risk plans
and joint underwriting associations.
Nationwide, the property and casualty insurance market for
individuals and businesses is healthy and competitive. It has been well
recorded that, despite record catastrophic losses, the industry is also
enjoying record profits. However, there are some coastal regions of the
country where the insurance market is in crisis, due largely to
insurers' reluctance to provide insurance in areas of perceived high
risk and, subsequently, the reinsurance costs associated with those
areas. It is important for you to know that insurance costs are not
going up directly to recoup the losses of 2004 and 2005. They are going
up because the losses of 2004 and 2005 have demonstrated a level of
risk potential for the future that has insurers rethinking what their
prospective losses will be going forward. When an insurer suffers a 1-
in-500 year event in consecutive years, it rightly begins to question
the validity of its models and risk management assumptions, and adjusts
its future expected losses accordingly. At the same time, reinsurers
are drawing those same conclusions, which add to the overall price
increase.
In terms of what areas of the country are suffering an insurance
crisis, another important distinction is the difference between coastal
states and coastal regions within those states. Most coastal states,
perhaps with the exception of Florida, have a relatively healthy
property and casualty market in the vast majority of the state. Even in
Florida the auto insurance market is performing well; however, the
property insurance market is troubled. In Alabama, only 2 of the 67
counties are having insurance issues, and even within those counties,
the problems are limited largely to within just a few miles of the
coast. In Mississippi, 6 of its 82 counties are directly experiencing
problems. Louisiana, which took the brunt of hurricane Katrina, only
has experienced troubles in the 24 of its total 62 coastal parishes.
These trouble spots are somewhat limited, but they comprise the bulk of
the cases we have all heard about on the news, where insurance costs
are skyrocketing, building has come to a standstill, and mortgage
defaults are on the rise.
In some areas of the country however, the lack of availability and
affordability is impacting the entire state--as is the case in Florida
and South Carolina. The Florida market has been battered by 8 storms in
2 years resulting in $38 billion in losses, and the impact spans
virtually the entire state. For those living in Florida's high-risk
areas, the real tragedy occurred after the storms as policyholders
experienced displacement, shortages in building supplies, shortages in
homebuilding labor, rising insurance premiums, mortgage defaults, and
the unavailability of private insurance. Even today, one can sea blue
tarps covering homes that have not been repaired fully from the prior
hurricane seasons.
Although the voluntary market recapitalized by infusing
approximately $1 billion of new capital into the private market, this
situation is not self-sustaining. There are a far greater number of
insurance companies exiting the homeowners insurance market than there
are new companies entering. Even for those companies staying in the
market, there has been a significant retrenchment. Companies are
enforcing stricter underwriting standards to limit their exposure in
certain high-risk areas or limiting types of property they select to
insure.
South Carolina has been at the forefront of regulatory
modernization and is considered a model regulatory environment by many
insurers. The state also adopted the 2003 International Building Codes
and has not had a direct hit from a major hurricane (e.g., Category 3
or better) in nearly two decades. Yet, South Carolina is experiencing
many of the same problems that the Gulf Coast states are experiencing.
Shortly after Hurricane Katrina, admitted carriers were seeking to
increase rates by 100 to 200 percent, decreasing coverage by requiring
5 to 10 percent deductibles, non-renewing long-term policyholders and
discontinuing writing new business in certain areas. Surplus lines
carriers were increasing rates even more--by as much as 300-400
percent. Condominiums were particularly hard hit as insurers recognized
the risk concentration they presented. One development saw its premium
increased from $126,000 to $879,000 and it took 5 different insurers to
piece together the coverage. Many condominium owners in South Carolina
are retirees and senior citizens on fixed incomes so, again, this
problem is having a disparate impact on a large segment of the
population who do not have many options.
South Carolina has implemented many of the measures the insurance
industry says need to be in place to create the kind of free-market
environment that would enable the private sector to handle this
problem, and yet, the state is seeing only scattered relief from the
lack of available and affordable property insurance. In South
Carolina's coastal counties, the number of policies written by admitted
insurers has only increased 3 percent, while population has grown 9
percent, building permit activity has increased 27 percent, and
property values have increased 28 percent since 2000. Like other
coastal states, South Carolina also has a Wind Pool to pick up policies
that the private market won't cover. From 2001 through the third
quarter of 2006, the written premiums for the Wind Pool increased 88
percent for residential lines and 448 percent for commercial lines. In
the past several months, however, there are indications that the
coastal property insurance market may be improving. Insurers are not
reporting the same problems acquiring reinsurance as they did in 2006.
Other insurers and producers have indicated that capacity within the
reinsurance market has increased and that reinsurers are looking at
deploying that increased capacity in the coastal property insurance
market in South Carolina and other southeastern states. Additionally,
the Wind Pool has reported that it is losing some of the condominiums
that it insured in 2006. These condominiums are canceling coverage with
the Wind Pool because they are finding better coverage and/or better
rates elsewhere. Recently, the Wind Pool indicated that it has had some
days with negative written premium. All are indications that there is
more capacity within the market.
Outside of Florida, those markets are absorbing the impact of
recent catastrophic events, but in areas that were hit hardest,
insurers are responding as if the next big catastrophe is certain to be
a hurricane that hits the exact same region in the Gulf Coast, and
pricing coverage accordingly. This begs the question, what happens if
the next catastrophe is an earthquake in the Midwest or a massive
Nor'easter in New England? Will those policyholders see a doubling and
tripling of their rates because insurers are not adequately hedging
their risk, and we as a nation are not doing the pre-event building,
planning, and mitigation steps that limit those losses? Clearly, people
who build and buy homes or operate businesses directly in harms way,
whether that is on a coastline or a fault line, should pay insurance
costs that reflect that risk, but they should not be the scapegoats for
insurers, reinsurers, risk modelers, regulators, and legislators who
fail to learn the lessons of 2004 and 2005.
Financial Health of the Property and Casualty Industry
Let me first caution that the figures I am providing are
preliminary and might change slightly as more information arrives in
regulators' offices. Annual financial statements are due March first of
each year. There are some insurers who ask for and are granted filing
extensions. When the filings are received, they undergo a thorough
evaluation with many checks and balances known as ``crosschecks'' that
are applied to assure that the data submitted is complete and as
accurate as it can be. This process takes time.
It is safe to say that 2006 was a very good year for the U.S.
property and casualty insurance industry. There were no hurricanes that
made landfall in 2006 and other catastrophe losses were low. The lack
of major catastrophes combined with favorable market pricing conditions
led to a record year for insurers. The industry posted an underwriting
gain of over $34 billion and it achieved its lowest combined ratio in
years, estimated to be 92.6 percent. The combined ratio is a way to
determine if insurers made money on their insurance operations with 100
percent combined ratio being a break-even point. Thus a combined ratio
below 100 percent means that the underwriting part of the business was
profitable. In addition to making money on underwriting, insurers also
make money on their investments. Between underwriting results and
investment results, the property and casualty industry's policyholders'
surplus grew to almost $480 billion.
Rate Regulation and Insurer Practices
You likely will hear from industry representatives that rate
regulation causes them to be less competitive than they might be
otherwise. They generally refer to rate regulation as price control.
This is an inaccurate term. The process in almost all states for
virtually all insurance products written by property and casualty
insurers starts with the insurance company actuaries preparing a rate
change proposal and providing it to insurer management. Management
considers the input from their actuaries and from their marketing
people and decides whether a rate filing will be submitted and, if so,
how much will be charged. The rate filing is then prepared and
submitted to the state regulator. In some cases, it must be approved by
the regulator, but for many states and many lines of business, it does
not. For example, in Arkansas, for personal lines products and small
commercial lines products an insurer would file the rates and be able
to use them within 20 days as long as the markets are competitive.
Prior approval would be required only if I were to find that a
particular market is noncompetitive. Insurers who write large
commercial risks would not even be required to make a filing.
Insurers often maintain that price controls make them
noncompetitive. I think you will agree that the financial performance
of the property and casualty industry in recent years makes that
statement ring hollow. I expect that some witnesses will agree with
these statements and suggest that insurance regulators should do more
to lower prices.
Insurance is a cyclical business. In some years, insurers make a
decent return and, in other years, competitive forces lead them to
lower prices and they lose money. Catastrophes can affect the bottom
line. It is a regulators job to balance the competing interests of all
parties to the insurance contract. Insolvent insurers do not pay claims
so insurance regulators must be sure that insurers are charging
adequate rates. Consumers want to pay low prices for quality insurance
products. Thus the insurance regulator must assure that rates are not
excessive and that the insurance contract delivers reasonable benefits
that comply with state laws and regulations. Insurance consumers want
their insurers to treat them fairly with regard to price and claim
settlement. Thus the insurance commissioner is charged with making sure
that rates are not unfairly discriminatory. I say ``unfairly
discriminatory'' because rates are, by nature, discriminatory. Insurers
assess the risks that each consumer presents and have a rating system
that uses a variety of risk classification factors to determine the
price that a person or family will pay. Each state has an Unfair Trade
Practices Act and many have Unfair Claim Settlement Practices
Regulations that govern insurer conduct in the marketplace.
The invitation letter to this hearing inquires about claims and
policy writing practices of insurers. Insurance is a business of
contracts. Each insurance policy is a contract between the policyholder
and the insurer to perform certain activities if certain unintended
events occur. The requirements for the coverage provisions of insurance
contracts are based in state law and regulation. It may be that if a
state has enacted a law or regulation, it is because some insurer at
some time disadvantaged a policyholder or claimant who complained about
the treatment to a state legislator who drafted a law to fix the
problem. Thus, not all insurance contract provisions have a law in
place that specifies how that contract is to be drafted. Since actions
of insurers are local, it also safe to say that no two states have
exactly the same laws on the books.
Recent news events related to the 2004 and 2005 hurricane seasons
have shown a spotlight on insurance contracts. The most common problem
was consumer dissatisfaction with claim settlements related to whether
it was wind or water that caused a particular loss. This problem arose
because the coastal consumer cannot go to a single insurer and obtain
all of the coverages he or she needs. The National Flood Insurance
Program (NFIP) was created in the 1960s because insurers no longer
wanted to provide coverage for floods. The storm surge in hurricanes is
considered to be a flood by the insurance industry and the NFIP. To be
fully covered in a coastal county, a family might need to purchase
three separate insurance policies: a homeowners policy from a private
insurer that covers all perils except for wind and flood, a wind policy
from a state-based Wind Pool and a flood policy from the NFIP. The
problem for the consumer arises when there is debate about which of the
perils caused a particular loss. In other words, did the wind knock
down the house before the storm surge washed all the wreckage away or
did the house withstand the wind only to be washed away by the storm
surge? When all that remains of the house is a pile of rubble, it is
difficult for claims adjusters to determine which peril was responsible
for the damages. Having multiple adjusters assessing a single loss only
compounds the problem.
A companion problem is the fact that the homeowners policy, the
wind policy and the flood policy all have different coverage limits and
the details of what is covered differ in each policy. Thus, it is
possible for a well-meaning homeowner to try to do the right thing by
purchasing three insurance contracts and end up with a shortfall at
claim settlement time.
Much has been made of the anti-concurrent cause language in a
standard property insurance policy. This provision is a direct result
of the bifurcated insurance system we have, and was developed by the
insurance industry to protect insurance companies from having to pay
for losses (in this case, flood losses) which are excluded from
coverage and for which they did not collect a premium. It is a
provision that frankly had not been tested at the magnitude of a storm
like Hurricane Katrina where wind and water losses were so wide spread.
Some have suggested that this provision allows companies to avoid
paying their obligations of coverage when flood damage is present. This
is not the intent of that language, and the vast majority of companies
do not distort the provision to shirk their obligations. In
Mississippi, for example, where this issue has become the subject of
much debate, Commissioner Dale issued a bulletin immediately following
Hurricane Katrina to all property and casualty insurers instructing
them that the burden of proof for determining the cause of loss is on
the insurers, not the policyholders. Furthermore, Commissioner Dale
advised companies that when there was doubt as to whether damage was
caused directly by flood or wind, the insurers were to err in favor of
covering the insured.
Despite this, there have been serious allegations that some
companies or adjusters have wrongly denied claims while misconstruing
this provision, and they are now being forced to defend that contention
to their insurance department or in the courts. The fact that insurers
feel compelled to structure their policies to create legal barriers to
segregate various perils (with the cost to defend these legal barriers
often factored into rates), and those barriers add confusion and
uncertainty for policyholder who are now challenging those barriers in
courts. It is worth considering a system that offers consumers an all-
perils policy that covers wind and water and eliminates the need for
this provision along with any possible distortion or manipulation of
its intent.
Our role as insurance commissioners is to foster an industry that
prepares people before and then provides for them after some of the
worst possible events that they may endure in their lifetime. Thank you
for taking the time to hold this hearing, for inviting me here today to
participate, and for your continued interest and leadership on this
crucial issue. I am pleased to answer any questions that you may have.
Senator Pryor. Great, thank you.
Mr. Hunter?
STATEMENT OF J. ROBERT HUNTER, DIRECTOR OF INSURANCE, CONSUMER
FEDERATION OF AMERICA
Mr. Hunter. Good morning.
I also formerly served as the Federal Insurance
Administrator and ran the National Flood Insurance Program
under Presidents Ford and Carter, and also as Texas Insurance
Commissioner.
In 2004, four hurricanes hit Florida. The property and
casualty insurance industry set a record profit. In 2005,
Katrina and other hurricanes, another record profit. In 2006,
no storms, a third straight record profit. A total, over the 3
years, of $157.4 billion in profit, which amounts to profit,
not premium, $524 for every American, or $1,574 per household,
in profit.
At the same time, as you've heard, there have been some
problems of getting claims paid along the Gulf Coast. And
profits are a good thing. A strong industry is necessary. But
unjustified profits and excessive capitalization and
precipitous acts by insurance companies to stop writing
business or drop business or jack up prices--I got a call last
night from my daughter, who's price in--5 miles off the coast
in Florida, in a very modest home, is now well over $5,000 a
year, and she really can't afford it.
After Hurricane Andrew hit, in 2002, the insurance industry
had--said they had a problem, and they wanted to retool. And we
all worked on it. I worked with them in Florida, and then later
in Texas as Commissioner. They said they needed to sharply cut
back coverage through deductibles and other provisions. They
said they needed to jack up prices significantly using
scientific models. They said they needed State pools to dump
high risks. And they got all those things.
They also said--and I know it personally, because I was
commissioner, and I also heard it in Florida--they also said
that when these three things were done, there would never be
any kind of crisis again. That was their promise in order to
gain these--and yet, we know today they reneged on that. Now,
whether they mismanaged the transition after Hurricane Andrew
or are gouging today, I leave it to you to consider which it
is, but if you look at the profits, you might think it might be
the latter.
Consumers face serious insurance problems outside of the
Gulf Coast, as well. Attorney General Spitzer, before he became
Governor, of course, found bid-rigging, hidden kickbacks, the
largest, most sophisticated insurers in the country--I mean,
buyers, rather--the largest, most sophisticated buyers were
duped by the insurance companies because of their antitrust
exemption and other things. Insurers use identical or similar
claims processing systems throughout the country to
systematically underpay claims; and yet, State regulation has
not done anything about it.
Congress should study these serious issues; and, in doing
so, Congress should reject insurance industry proposals that
have been introduced, such as the creation of an optional
Federal charter, which would, astonishingly, given the weakness
of State regulation, actually gut the few protections that are
in place. If you're going to move, Congress, please make sure
that consumers are protected, not insurance industry
protection.
For example, in the wake of Hurricane Katrina along the
Gulf Coast, the insurance commissions would have no authority,
under an optional Federal charter-type provision, to actually
re-regulate rates or move in and protect consumers.
We urge Congress to reject the anti-consumer proposals.
Instead, look for options that would improve competition and
oversight of the market. My main message to you is that tough
oversight of the market is not incompatible with vigorous
competition. The proof is California's auto insurance market.
Proposition 103 was passed by the people. It included a total
competitive package, which included repeal of the State
antitrust exemption, and it also included vigorous regulation.
It has the best system of prior approval rate regulation in the
Nation, and tended to hold prices down to the--to a reasonable
level. It has allowed insurers to realize profits that are
slightly above the national average since it was introduced,
but the consumers have seen prices drop dramatically. When it
passed, California's auto insurance rates were 36 percent
higher than the Nation, they were the third highest State in
the country. Today, they're the 19th, and their rate is
actually below the national average. So, the combination of
regulation and competition working together, why not both? They
both seek the same goal, they both seek the lowest possible
price consistent with a fair return for the insurer. They can
work together.
So, immediate steps that Congress should consider are:
One--and this is the most important--repeal the antitrust
exemption. And we like S. 618 very much, and we thank Senator
Lott and the others who have supported that. We've testified,
already, before the Judiciary Committee, about that.
We like the idea of clearer disclosure for the benefit of
consumers. And, again, we point to Senator Lott's bill as a
good example of what we're talking about, S. 1061.
We'd like to see the FTC freed up to help consumers in
the--in these markets, particularly unfair discrimination that
we know exists throughout the country. Things like use of
consumer's occupation or educational attainment to price
insurance is not right.
FTC should also study the unfair claims settlement
practices of insurers, particularly the use of computerized
systems designed to underpay claims, being used across the
industry.
We should look at the questions of title insurance and
other things that inappropriately drive up home purchasing
costs, and the kickbacks involved there.
Consumer groups do not care who regulates insurance,
really. They don't care if it's State or Federal. But we do
care that the regulatory system be excellent. We are critical
of the current state-based system, but we will not accept a new
Federal system that's worse.
Mr. Chairman, it's--it is possible to create a regulatory
system, whether it's State or federally based, that protects
consumers and forces vigorous industry competition. We think
this hearing is a great first step toward those goals.
[The prepared statement of Mr. Hunter follows:]
Prepared Statement of J. Robert Hunter, Director of Insurance,
Consumer Federation of America
Good morning, Mr. Chairman and members of the Committee. Thank you
for inviting me here today to discuss the state of the property/
casualty insurance industry in America and the quality of insurance
regulation. My name is Bob Hunter. I am the Director of Insurance for
the Consumer Federation of America. CFA is a non-profit association of
300 organizations that, since 1968, has sought to advance the consumer
interest through research, advocacy and education. I am a former
Federal Insurance Administrator under Presidents Ford and Carter and
have also served as Texas Insurance Commissioner. I am also an actuary,
a Fellow of the Casualty Actuarial Society and a member of the American
Academy of Actuaries.
America's insurance consumers, including small businesses, are
vitally interested in high quality insurance regulation, quality that
is weak and declining throughout the Nation today. Therefore, your
hearing is timely. We especially appreciate the fact that the Committee
is beginning its review with an overall examination of insurance
regulation--why it exists, what are its successes and failures--rather
than solely reviewing proposed legislation. In order to determine
whether Federal legislation is necessary and what its focus should be,
it obviously makes a great deal of sense for the Committee to first
conduct a thorough assessment of the current situation. If the
``problems'' with the present insurance regulation regime are not
properly diagnosed, the ``solutions'' that Congress enacts will be
flawed.
In this testimony, I will first discuss why regulation of the
insurance industry is necessary, including a review of the key reasons
regulation is required and why some current developments make
meaningful oversight even more essential. I will then point out that
consumers are agnostic on the question of whether regulation should be
at the state or Federal level but we are very concerned about the
quality of consumer protections that are in place, wherever the locus
of regulation resides in the future. I will then list a few of the most
pressing problems, including claims practices and availability
concerns, that insurance consumers are presently facing that require a
regulatory response.
I then provide a brief history of the insurance industry's desire
for Federal regulation in the early years of this country and the
reasons why the industry switched to favoring state regulation in the
later half of the 19th century. The industry is now split on the
question of whether state-based regulation should continue. I will
point out that the industry has generally shifted its allegiance over
the years to support the oversight by the level of government that
imposes the weakest regulatory regime and the fewest consumer
protections. Since this balance shifts over time, some insurers now
favor a new system where they can change from state to Federal
regulation or back again at their whim, should a regulator propose
rules that they do not like.
I explain why market ``competition'' alone cannot be relied upon to
protect insurance consumers, despite insurer attempts to reduce or
eliminate consumer protections. The absence of regulatory oversight of
policy forms (i.e., coverages) and risk classifications (i.e., how
consumers are grouped for the purpose of charging premiums) often leads
to a hollowing out of coverage offered in insurance policies, unfair
discrimination and the abdication of the insurance system's primary
role in loss prevention. Industry deregulation proposals--
euphemistically termed ``modernization'' or ``uniformity''--will likely
increase the already widespread problems of insurance availability and
affordability and further erode incentives for loss prevention.
Furthermore, industry claims that competition is incompatible with
regulation are not borne out by the facts. The experience in states
like California demonstrates that appropriate regulation enhances
competition, while also ensuring that insurers compete fairly and in a
manner that benefits consumers. The maximization of both competitive
forces and regulatory oversight in California has resulted in a
generous return for these companies and high-quality protection for
consumers.\1\
I then set forth the principles for a regulatory system that
consumers would favor, showing ways to achieve regulatory uniformity
without sacrificing consumer protections.
Finally, I briefly discuss some of the regulatory proposals put
forth in recent years by the insurers, including the optional Federal
charter approach and the SMART Act, both of which CFA strongly opposes.
We do indicate support for S. 618, a bill that would repeal the
McCarran-Ferguson Act's broad antitrust exemption that insurers enjoy,
to end the collusion in pricing and other market decisions that are
legal today. The Senate Judiciary Committee is working on S. 618, which
also has broad support from other national consumer organizations.\2\
Why is Regulation of Insurance Necessary?
The rationale behind insurance regulation is to promote beneficial
competition and prevent destructive or harmful competition in various
areas.
Insolvency: One of the reasons for regulation is to prevent
competition that routinely causes insurers to go out of business,
leaving consumers unable to collect on claims. Insolvency regulation
has historically been a primary focus of insurance regulation. After
several insolvencies in the 1980s, state regulators and the National
Association of Insurance Commissioners (NAIC) enacted risk-based
capital standards and implemented an accreditation program to help
identify and prevent future insolvencies. As fewer insolvencies
occurred in the 1990s through to today, state regulators appear to be
doing a better job.
Unfair and Deceptive Policies and Practices: Insurance policies,
unlike most other consumer products or services, are contracts that
promise to make certain payments under certain conditions at some point
in the future. Consumers can easily research the price, quality and
features of a television, but they have very limited ability to do so
on insurance policies. Because of the complicated nature of insurance
policies, consumers rely on the representations of the seller/agent to
a far greater extent than for other products. Regulation exists to
prevent competition that fosters the sale of unfair and deceptive
policies and claims practices.
Unfortunately, states have not fared at all well in this area.
Rather than acting to uncover abuses and instigate enforcement actions,
states have often reacted after lawsuits or news stories brought bad
practices to light. For example, the common perception among regulators
that ``fly-by-night'' insurance companies were primarily responsible
for deceptive and misleading practices was shattered in the late 1980s
and early 1990s by widespread allegations of such practices among
household names such as MetLife, John Hancock, and Prudential. MetLife
sold plain whole life policies to nurses as ``retirement plans,'' and
Prudential unilaterally replaced many customers' whole life policies
with policies that didn't offer as much coverage. Though it is true
that state regulators eventually took action through coordinated
settlements, the allegations were first raised in private litigation;
many consumers were defrauded before regulators acted.
The revelations and settlements by New York Attorney General Eliot
Spitzer show that even the most sophisticated consumers of insurance
can be duped into paying too much for insurance through bid-rigging,
steering, undisclosed kickback commissions to brokers and agents and
through other anticompetitive acts. The recent New York Times article
on long-term care insurance claims abuses are another example of
serious problems consumers face in the current weak regulatory
climate.\3\ The appalling abuses of consumers that occurred in the wake
of Hurricane Katrina are also a noteworthy example of the inadequacy of
state oversight.
Claims abuses: Consumers pay a lot of money for insurance policies,
which are promises for future protection should some unfortunate event
occur. If these promises are broken, the consumer can be devastated.
Many concerns have been raised about such broken promises in the poor
performance of property-casualty insurers in paying legitimate claims
in the wake of Hurricane Katrina. Consider this startling blog from the
President of the Association of Property/Casualty Claims Professionals,
James Greer, posted on the website of the Editor of the National
Underwriter:
James W. Greer, CPCU: Although I live and work in Florida, my
home is on the Mississippi Gulf Coast where I have family
spread from one side of the state to the other. I spent 6
months there leading a team of over 100 CAT adjusters and
handling the wind claims for the state's carrier of last
resort.
I personally walked through the carnage, saw the people, and
felt the sorrow. I climbed the roofs, measured the slabs, and
personally witnessed very visible and clear damage caused by
both water AND WIND.
I also observed something else that surprised me, and, after 28
years as a claims professional who has carried ``the soul'' of
a bygone industry in my practices and preachings, I was ashamed
of those to whom I had vested a lifetime career: An
overwhelming lack of claims adjusters on the Mississippi Gulf
Coast. The industry simply did not respond.
The industry appeared as distant to the Miss. Gulf Coast as the
Federal Government was accused of being to New Orleans. It was
as if some small group of high-level financial magnates decided
that the only way to save the industry's financial fate from
this mega-disaster was to take a total hand's off approach and
hide beneath the waves and the flood exclusion.
While media reps repeatedly quoted, ``Each claim is different
and will be handled on its own facts and merits,'' the carriers
behaved as one . . . if there was evidence of water, or you
were within a certain geographic boundary, adjusters were
largely absent on the coast. (Emphasis added.)
(Actually, State Farm did have one of the largest CAT
facilities, located centrally on the coast, but there was
little evidence of other carrier presence.)
I personally observed large carriers simply refusing to
respond, or even consider arguments of wind involvement . . .
well-rationalized sets of facts, coverage and legal arguments.
The silence from industry officials ``far from the field'' who
retained the authority for claim decision-making was deafening.
In an article posted on the Association of Property & Casualty
Claims Professionals' website shortly after Katrina hit, I
described the catastrophe as ``Claims Greatest Challenge,'' and
pondered the industry would respond. Now we know.
As a member of an old Aetna family that has been widely
dispersed since its demise in the 1990s, I remember the day
when leaders of that fine company routinely cited, and tried to
honor, the social/moral contract the insurance industry had
with society. It is clear that, in today's business
environment, the soul of the insurance industry is missing, and
despite the rhetoric of its PR machine, the industry no longer
recognizes such a social/moral obligation.
As a lifetime claims professional, I will never quit writing,
teaching and showing those who are interested the way things
should be done to serve the best interests of the industry and
its customers according to the best practices and behaviors of
a bygone claims age. Perhaps someday a change in mindset will
once again begin to evolve.
Clearly, for the Mississippi Gulf Coast, the Katrina
catastrophe, the animosity and the litigation, it was never
really about flood . . . nor was it about the flood exclusion.
It was, and is, about the failure of the insurance industry to
keep its promise . . . a promise that it will respond when loss
occurs.
The only thing sold in insurance is peace of mind. The victims
of this storm, and certainly those in Mississippi, will never
again find peace of mind in insurance.
Actions do speak loudest. On the Mississippi Gulf Coast, the
insurance industry simply failed to act. In the end, it will
pay dearly for that decision, as will all of society.
James W. Greer, CPCU, President, Association of Property &
Casualty Claims Professionals (PCCP) \4\
There are also adverse implications for consumers in the use of
claims payment software by insurance companies. Insurers have reduced
their payouts and maximized their profits by turning their claims
operations into ``profit centers'' by using computer programs and other
techniques designed to routinely underpay policyholder claims. For
instance, many insurers are using programs such as ``Colossus,'' sold
by Computer Sciences Corporation (CSC.) \5\ CSC sales literature touted
Colossus as ``the most powerful cost savings tool'' and also suggested
that the program will immediately reduce the size of bodily injury
claims by up to 20 percent. As reported in a recent book, ``. . . any
insurer who buys a license to use Colossus is able to calibrate the
amount of `savings' it wants Colossus to generate . . . If Colossus
does not generate sufficient `savings' to meet the insurer's needs or
goals, the insurer simply goes back and `adjusts' the benchmark values
until Colossus produces the desired results.'' \6\ In a settlement of a
class-action lawsuit, Farmers Insurance Company has agreed to stop
using Colossus on uninsured and underinsured motorist claims where a
duty of good faith is required and has agreed to pay class members cash
benefits.\7\ Other lawsuits have been filed against most of America's
leading insurers for the use of these computerized claims settlement
products.\8\
Programs like Colossus are designed to systematically underpay
policyholders without adequately examining the validity of each
individual claim. The use of these programs severs the promise of good
faith that insurers owe to their policyholders. Any increase in profits
that results cannot be considered to be legitimate. Moreover, the
introduction of these systems could explain part of the decline in
benefits that policyholders have been receiving as a percentage of
premiums paid in recent years.
Colossus has been bought by most major insurance companies in
response to marketing efforts by CSC promising significant savings.
McKinsey & Company has also encouraged several companies to use
Colossus.\9\ ``Before the Allstate launched a project in 1992 (called
CCPR--Claims Core Process Redesign), McKinsey named its USAA project
`PACE' [Professionalism and Claims Excellence]. At State Farm, McKinsey
named its project `ACE' [Advanced Claims Excellence].'' \10\
When McKinsey introduced Allstate to Colossus, ``McKinsey already
knew how Colossus worked having proved it in the field at USAA.'' \11\
This quote was footnoted as follows: ``See McKinsey at (PowerPoint
slide number) 7341: ``The Colossus sites have been extremely successful
in reducing severities with reductions in the range of 10 percent for
Colossus-evaluated claims.'' \12\
I have been a witness in some of the cases against insurers using
the Colossus product and I am covered by a protective order in these
cases (I could go on at length about why these protective orders are
bad public policy, particularly coupled with secrecy provisions in
settlements, in that the bad practice that was uncovered often
continues to harm people). I am, therefore, limited in this testimony
to what is in the public domain. However, as I describe above, there is
public information about the use of common consultants and vendors by
insurance companies that have adopted Colossus and similar systems. I
strongly urge this Committee to probe the question of whether these
vendors and consultants have been involved in encouraging and
facilitating collusive behavior by insurance companies with these
claims systems. I also urge you to investigate whether a similarity in
Hurricane Katrina claims payment procedures and actions (or non-
actions), as mentioned above, could indicate collusive activity by some
insurers.
The use of these products to cut claims payouts may be at least
part of the reason that consumers are receiving record low payouts for
their premium dollars as insurers reap unprecedented profits. As is
obvious in the following graph, the trend in payouts is sharply down
over the last twenty years, a period during most state insurance
regulators have allowed consumer protections to erode significantly and
when Colossus and other claims systems were being introduced by many
insurers.\13\
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
It is truly inappropriate for property/casualty insurers to be
delivering only half of their premium back to policyholders as
benefits.\14\
State insurance departments have been sound asleep on the issue of
the negative impact that Colossus and other such products have on
policyholder rights, and even on the right to good faith claims
settlements. The Federal Trade Commission (FTC) should be empowered to
undertake investigations and other consumer protection activities to
help stop the insurers from engaging in such acts on a national basis.
Insurance Availability: Some insurance is mandated by law or
required by lenders to complete financial transactions, such as
mortgage loans. In a normal competitive market, participants compete by
attempting to sell to all consumers seeking the product. However, in
the insurance market, participants compete by attempting to ``select''
only the most profitable consumers. This selection competition leads to
availability problems and redlining.\15\ Regulation exists to limit
destructive selection competition that harms consumers and society.
Lawsuits brought by fair housing groups and the Department of
Housing and Urban Development (HUD) over the past 15 years have
revealed that insurance availability problems and unfair discrimination
exist and demonstrate a lack of oversight and attention by many of the
states. NAIC had ample opportunity after its own studies indicated that
these problems existed to move to protect consumers. It retreated,
however, when, a few years ago, insurers threatened to cutoff funding
for its insurance information database, a primary source of NAIC
income.
Serious problems with home insurance availability and affordability
surfaced this spring along America's coastlines. Hundreds of thousands
of people have had their homeowners' insurance policies non-renewed and
rates are skyrocketing. As to the decisions to non-renew, on May 9,
2006 the Insurance Services Office (ISO) President and CEO Frank J.
Coyne signaled that the market is ``overexposed'' along the coastline
of America. In the National Underwriter article, ``Exposures Overly
Concentrated Along Storm-prone Gulf Coast'' (May 15, 2006 Edition), the
ISO executive ``cautioned that population growth and soaring home
values in vulnerable areas are boosting carrier exposures to dangerous
levels.'' He said, ``The inescapable conclusion is that the effects of
exposure growth far outweigh any effects of global warming.''
Insurers started major pullouts on the Gulf Coast in the wake of
the ISO pronouncement. On May 12, 2006, Allstate announced it would
drop 120,000 home and condominium policies and State Farm announced it
would drop 39,000 policies in the Wind Pool areas and increase rates
more than 70 percent.\16\ Collusion that would be forbidden by
antitrust laws in most other industries appears to be involved in the
price increases that have occurred. (See section below entitled ``Where
Have All the Risk Takers Gone?'' below.)
One obvious solution to discrimination and availability problems is
to require insurers to disclose information about policies written by
geo-code, and about specific underwriting guidelines that are used to
determine eligibility and rates. Such disclosure would promote
competition and benefit consumers; but state regulators, for the most
part, have refused to require such disclosure in the face of adamant
opposition from the industry. Regulators apparently agree with insurers
that such information is a ``trade secret'' despite the absence of
legal support for such a position. In addition, though insurance
companies compete with banks that must meet data disclosure and lending
requirements in underserved communities under the Community
Reinvestment Act (``CRA''), insurers refuse to acknowledge a similar
responsibility to communities.
Reverse Competition: In certain lines of insurance,\17\ insurers
market their policies to a third party, such as creditors or auto
dealers, who, in turn, sell the insurance to consumers on behalf of the
insurer for commission and other compensation. This compensation is
often not disclosed to the consumer. Absent regulation, reverse
competition leads to higher--not lower--prices for consumers because
insurers ``compete'' to offer greater compensation to third party
sellers, driving up the price to consumers.
The credit insurance market offers a perfect example of reverse
competition. Every few years, consumer groups issue reports about the
millions of dollars that consumers are overcharged for credit
insurance. Despite the overwhelming evidence that insurers do not meet
targeted loss ratios in most states, many regulators have not acted to
protect consumers by lowering rates.
The markets for low value life insurance and industrial life
insurance are characterized by overpriced and inappropriately sold
policies and a lack of competition. This demonstrates the need for
standards that ensure substantial policy value and clear disclosure.
Insurers rely on consumers' lack of sophistication to sell these
overpriced policies. With some exceptions, states have not enacted
standards that ensure value or provide timely, accurate disclosure.
Consumers continue to pay far too much for very little coverage.\18\
Information for Consumers: True competition can only exist when
purchasers are fully aware of the costs and benefits of the products
and services they purchase. Because of the nature of insurance policies
and pricing, consumers have had relatively little information about the
quality and comparative cost of insurance policies. Regulation is
needed to ensure that consumers have access to information that is
necessary to make informed insurance purchase decisions and to compare
prices.
While the information and outreach efforts of states have improved,
states and the NAIC have a long way to go. Some states have succeeded
in getting good information out to consumers, but all too often the
marketplace and insurance regulators have failed to ensure adequate
disclosure. Their failure affects the pocketbooks of consumers, who
cannot compare adequately on the basis of price.
In many cases, insurers have stymied proposals for effective
disclosure. For decades, consumer advocates pressed for more meaningful
disclosure of life insurance policies, including rate-of-return
disclosure, which would give consumers a simple way to determine the
value of a cash-value policy. Today, even insurance experts can't
determine which policy is better without running the underlying
information through a computer. Regulators resisted this kind of
disclosure until the insurance scandals of the 1990s, involving
widespread misleading and abusive practices by insurers and agents,
prompted states and the NAIC to develop model laws to address these
problems. Regulators voiced strong concerns and promised tough action
to correct these abuses. While early drafts held promise and included
some meaningful cost-comparison requirements, the insurance industry
successfully lobbied against the most important provisions of these
proposals that would have made comparison-shopping possible for normal
consumers. The model disclosure law that NAIC eventually adopted is
inadequate for consumers trying to understand the structure and actual
costs of policies.
California adopted a rate-of-return disclosure rule a few years ago
for life insurance (similar to an APR in loan contracts) that would
have spurred competition and helped consumers comparison-shop. Before
consumers had a chance to become familiar with the disclosures, life
insurance lobbyists persuaded the California legislature to scuttle it.
Are the Reasons for Insurance Regulation Still Valid?
The reasons for effective regulation of insurance are as relevant,
or in some instances even more relevant, today than five or 10 years
ago:
Advances in technology now provide insurers access to
extraordinarily detailed data about individual customers and
allow them to pursue selection competition to an extent
unimaginable 10 years ago.
Insurance is being used by more Americans not just to
protect against future risk, but as a tool to finance an
increasing share of their future income, e.g., through
annuities.
Increased competition from other financial sectors (such as
banking) for the same customers could serve as an incentive for
misleading and deceptive practices and market segmentation,
leaving some consumers without access to the best policies and
rates. If an insurer can't compete on price with a more
efficient competitor, one way to keep prices low is by offering
weaker policy benefits (i.e., ``competition'' in the fine
print).
States and lenders still require the purchase of auto and
home insurance. Combining insurer and lender functions under
one roof, as allowed by the Gramm-Leach-Bliley Act, could
increase incentives to sell insurance as an add-on to a loan
(perhaps under tie-in pressure)--or to inappropriately fund
insurance policies through high-cost loans.
Insurers are gutting coverage inside of homeowners insurance
policies in ways that are difficult for consumers to understand
or overcome.\19\
As consumers are faced with these changes, it is more important
than ever that insurance laws are updated and the consumer protection
bar is raised, not lowered.
Given that Regulation is Important for Consumers, Who Should Regulate--
the States or the Federal Government?
Consumers are not concerned with who regulates insurance, but they
are concerned with the ability of the regulatory system. Consumer
advocates have been (and are) critical of the current state-based
system, but we are not willing to accept a Federal system that guts
consumer protections in the states and establishes one uniform but weak
set of regulatory standards.
I am one of the very few people who have served as both a state and
Federal insurance regulator.\20\ My experience demonstrates that either
a Federal or state system can succeed or fail in protecting consumers.
What is critical is not the locus of regulation, but the quality of the
standards and the effectiveness of enforcement of those standards.
Both state and Federal systems have potential advantages and
disadvantages:
------------------------------------------------------------------------
Item Federal State
------------------------------------------------------------------------
Experience overseeing all aspects No Yes
of insurance regulation?
Responsive to local needs? No Yes
Handle individual complaints No Some States
promptly and effectively?
Limited impact if regulatory No Yes
mistakes are made?
Not subject to political pressure No No
from national insurers?
Not subject to political pressure Yes No
from local insurers?
Efficient solvency regulation? Yes Yes
Effective guarantee in event of Yes No
insolvency?
Adequately restricts revolving Maybe No
door between regulators and
industry?
More uniform regulatory approach? Yes No
Can easily respond to micro-trends No Yes
impacting only a region or a
state?
Can easily respond to macro-trends Yes No
that cross state borders?
Has greater resources, like date Yes No
processing capacity?
------------------------------------------------------------------------
Despite many weaknesses that exist in state regulation, a number of
states do have high-quality consumer protections. States also have
extensive experience regulating insurer safety and soundness and an
established system to address and respond to consumer complaints. The
burden of proof is on those who for opportunistic reasons now want to
shift away from 150 years of state insurance regulation to show that
they are not asking Federal regulators and American consumers to accept
a dangerous ``pig in a poke'' that will harm consumers.
CFA agrees that better coordination and more consistent standards
for licensing and examinations are desirable and necessary--as long as
the standards are of the highest--and not of the lowest--quality. We
also agree that efficient regulation is important, because consumers
pay for inefficiencies. CFA participated in NAIC meetings over many
months helping to find ways to eliminate inefficient regulatory
practices and delays, even helping to put together a 30-day total
product approval package. Our concern is not with cutting fat, but with
removing regulatory muscle when consumers are vulnerable.
Top Six Problems Facing Insurance Consumers Today
1. Insurers Are Increasingly Privatizing Profit, Socializing Risk and
Creating Defective Insurance Products by Hollowing out
Insurance Coverage and Cherry Picking Locations in Which They
Will Underwrite
There are two basic public policy purposes of insurance. The first
is to provide individuals, businesses and communities with a financial
security tool to avoid financial ruin in the event of a catastrophic
event, whether that event is a traffic accident, a fire or a hurricane.
Insurers provide this essential financial security tool by accepting
the transfer of risk from individuals and by spreading the individual
risks through the pooling of very large numbers of individual risks.
The pool of risks is diversified over many types of perils and many
geographic locations.
The second essential purpose of insurance is to promote loss
prevention. Insurance is the fundamental tool for providing economic
incentives for less risky behavior and economic disincentives for more
risky behavior. The insurance system is not just about paying claims;
it is about reducing the loss of life and property from preventable
events. Historically, insurers were at the forefront of loss prevention
and loss mitigation. At one point, fire was a major cause of loss. This
is no longer true, in large part due to the actions of insurers in the
20th century.\21\
Left to a ``competitive'' or deregulated market, insurers are
undermining these two core purposes of insurance. They have hollowed
out the benefits offered in many insurance policies so they no longer
represent the essential financial security tool required by consumers
and have pushed the risk of loss onto taxpayers through Federal or
state programs. The most glaring example of these two actions is
demonstrated by insurer actions in the wake of Hurricane Katrina.
Losses covered by insurance companies were a minority fraction of the
losses sustained by consumers because insurers had succeeded in
shifting exposure onto the Federal Government through the Flood
Insurance Program,\22\ onto states through state catastrophe funds and
onto consumers with higher deductibles and sharply reduced coverage
inside of the homeowners insurance policy. Despite the worst
catastrophe year ever in terms of dollars paid by the private insurance
industry, the property-casualty industry realized record profits in
2005. The trend toward shifting risk away from the primary insurance
market has clearly gone too far when the property-casualty insurance
industry experiences record profits in the same year as it experiences
record catastrophe losses.
The critical conclusion here is that what the insurance industry
calls ``competition,'' which is essentially a completely or virtually
deregulated market in which price collusion is not prevented by the
application of antitrust law, will not protect consumers from unfair or
unreasonable classification, policy form or coverage decisions by
insurers. The overwhelming evidence is that a market failure regarding
policy forms and coverage has triggered a need for greater regulatory
oversight of these factors to protect consumers.
Where Have All the Risk Takers Gone? Unaffordable Home Insurance that
Covers Less and Less Risk
In 2004, four major hurricanes hit Florida, but the property-
casualty insurance industry enjoyed record profits of $40.5 billion. In
2005, Hurricane Katrina resulted in the highest hurricane losses ever,
but the insurance industry also had another record year of profits,
which reached $48.8 billion. Here is a chart from a Los Angeles Times
article on this subject: \23\
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Since the article was published, the property-casualty industry has
reported the largest annual profit in its history. In 2006, the
industry net income was $68.1 billion.\24\ To put this into
perspective, the $157.4 billion in profit over the last 3 years equates
to roughly $524 for every American, or $1,574 per household.\25\
Some might argue that insurers are risk takers. Although, that may
be true for the reinsurance industry,\26\ it is certainly not true for
the primary market. The primary market has succeeded in eliminating
much risk. This is not an opinion, but a simple fact.
If one purchases a property-casualty insurance company's stock,
with few exceptions, one has bought into a business that is lower in
risk than the market in general, hurricanes notwithstanding. This is
shown in any Value Line publication, which tests the risk of a stock.
One key measure is the stock's Beta, which is the sensitivity of a
stock's returns to the returns on some market index, such as the
Standard & Poor's 500. A Beta between 0 and 1, such as utility stocks,
is a low-volatility investment. A Beta equal to 1 matches the index. A
Beta greater than 1 is anything more volatile than the index, such as a
``small cap'' fund.
Another measure of a shareholder's risk is the Financial Safety
Index, with 1 being the safest investment and 5 being least safe. A
third measure of risk is the Stock Price Stability reported in 5
percentile intervals with 5 marking the least stability and 100 marking
the highest.
Consider Allstate. At the same time the company has taken draconian
steps to sharply raise premiums and/or cutback coverage for many
homeowners in coastal areas, it has presented shareholders with very
low risk: \27\ Beta = 0.90; Financial Safety = 1, and Stock Price
Stability = 95.
ValueLine posts results for 26 property/casualty insurers.\28\ The
simple averages for these carriers are: Beta = 0.97; Financial Safety =
2.4; and Stock Price Stability = 83.
By all three measures, property/casualty insurance stocks are of
below-average risk, safer than buying an S&P 500 index fund. Therefore,
long-term below-average returns for insurers should be expected given
the low-risk nature of this investment. The low returns demonstrate
that the capital market is performing efficiently by awarding below-
average returns to a below-average risk industry.
Another measure of how property/casualty insurers have insulated
themselves from risk is the extraordinary profits they have earned in
recent years. In 2004, insurers posted their largest dollar net (after
tax) profit in history ($40.5 billion) despite the fact that four major
hurricanes caused significant damage in Florida. Insurers achieved
another record of $48.8 billion in 2005, despite the unprecedented
losses caused by hurricanes Katrina, Rita, and Wilma. In 2006, profits
were the highest yet because of low hurricane activity, excessive
rates, the use of programs to systematically keep payments to
policyholders low and other reasons discussed in this testimony.
How did insurers do it? Some of the answers are clear:
First, insurers made intelligent use of reinsurance, securitization
and other risk spreading techniques. That is the good news.
Second, after Hurricane Andrew insurers modernized ratemaking by
using computer models. This development was a mixed blessing for
consumers. While this caused huge price increases for consumers, CFA
and other consumer leaders supported the change because we saw insurers
as genuinely shocked by the scope of losses caused by Hurricane Andrew.
Insurers promised that the model, by projecting either 1,000 or 10,000
years of experience, would bring stability to prices. The model
contained projections of huge hurricanes (and earthquakes) as well as
periods of intense activity and periods of little or no activity.
In the last year, however, Risk Management Solutions (RMS) and
other modelers are moving from a 10,000-year projection to a five-year
projection, which will cause a 40 percent increase in loss projections
in Florida and the Gulf Coast and a 25-30 percent jump in the Mid-
Atlantic and Northeast. This means that the hurricane component of
insurance rates will sharply rise, resulting in overall double-digit
rate increases along America's coastline from Maine to Texas. The RMS
action interjects politics into a process that should be based solely
on sound science. It is truly outrageous that insurers would renege on
the promises made in the mid 1990s. CFA has called on regulators in
coastal states to reject these rate hikes.
It is clear that insurance companies sought this move to higher
rates. RMS's press release of March 23, 2006 states:
`Coming off back-to-back, extraordinarily active hurricane
seasons, the market is looking for leadership. At RMS, we are
taking a clear, unambiguous position that our clients should
manage their risks in a manner consistent with elevated levels
of hurricane activity and severity,' stated Hemant Shah,
President and CEO of RMS. `We live in a dynamic world, and
there is now a critical mass of data and science that point to
this being the prudent course of action.'
The ``market'' (the insurers) sought leadership (higher rates), so
RMS was in a competitive bind. If it did not raise rates, the market
would likely go to modelers who did. So RMS acted and other modelers
are following suit.\29\ It is simply unethical that scientists at these
modeling firms, under pressure from insurers, appear to have completely
changed their minds at the same time after over a decade of using
models they assured the public were scientifically sound. RMS has
become the vehicle for collusive pricing.
A year after CFA warned the coastal states and the NAIC about the
problems with RMS new methods, little protection for consumers has been
put in place. Consumers and businesses in coastal areas have suffered
significant harm in the form of unjustified rate increases because the
NAIC took no action to end collusion and the retreat from science by
the modelers. Florida, to its credit, did not allow the new model to be
used by primary insurers and it appears as if Georgia has not allowed
it either. In the meantime, residents in the other 16 states along the
coast have been paying rates up to 50 percent higher solely because of
the changes adopted by RMS and other modelers. At the same time, it has
become more and more obvious that those who questioned the scientific
legitimacy of the modeling changes were correct.
Consider the series of investigative articles on this topic that
ran in the Tampa Tribune earlier this year indicating that the
scientists consulted by RMS on their model no longer support the
methodology that was used. ``On Saturday, one of the scientists whom
Risk Management Solutions consulted, Jim Elsner, a professor of
geography at Florida State University, told the Tribune that the
company's five-year model `points to a problem with the way these
modeling groups are operating' and that the results contain assumptions
that are `actually unscientific.' . . . Thomas R. Knutson, a research
meteorologist with the National Oceanic and Atmospheric Administration
in Princeton, N.J., and another Risk Management expert panelist, said
Saturday the five-year timeline didn't come from the experts. `I think
that question was driven more by the needs of the insurance industry as
opposed to the science,' he said.'' \30\
Scientists not employed by RMS are also speaking out: `` `It's
ridiculous from a scientific point of view. It just doesn't wash well
in the context of the way science is conducted,' said Mark S. Frankel,
director of the Scientific Freedom, Responsibility and Law Program at
the American Association for the Advancement of Science, in Washington
. . . Charles Watson, an engineer who specializes in numerical hazard
models, said RMS acted irresponsibly. `Especially for something with
trillions of dollars in property value, and peoples' lives and
livelihood are literally at stake in these decisions. It is
irresponsible to implement before peer review. There are tremendous
policy implications.' '' \31\
Even RMS's competitors are stating that the methodology for the 5-
year model does not represent good science. In an article in
Contingencies, the magazine of the American Academy of Actuaries,\32\
AIR's Senior Vice President, David A. LaLonde, said, ``We [AIR]
continue to believe, given the current state of the science, that the
standard base model based on over 100 years of historical data and over
20 years of research and development remains the most credible model.''
AIR's entire premise in the article is that short-term projections,
like 5 years, are not appropriate. Since AIR followed RMS's lead in
using the 5-year model despite their misgivings, LaLonde acknowledged
that policyholders have experienced rate increases of ``as much as 40
percent higher than the long-term average in some regions.'' AIR also
seems to confirm the possibility of collusion between modelers and
insurers, stating that, ``. . . many in the industry challenged
catastrophe models and called for a change.''
To date, the NAIC has been absent on an issue that is vital to
millions of Americans who live and work near the Nation's coastlines.
As stated above, this regulatory negligence has harmed millions of
consumers.
In a third major development, insurers have not only passed along
gigantic price increases to homeowners in coastal areas, but they have
also sharply gutted coverage. Hurricane deductibles of two to 5 percent
were introduced. Caps on home replacement costs were also added. State
Farm has a 20 percent cap. Other insurers refuse to pay for any
increased replacement costs at all, even though demand for home
rebuilding usually surges in the wake of a hurricane, driving
replacement costs up sharply. Insurers also excluded coverage for laws
and ordinances, so that if a home has to be elevated to meet flood
insurance standards or rewired to meet local building codes, insurers
no longer have to pay.
But the most egregious change was the introduction into homeowners
insurance policies of the anti-concurrent causation (``ACC'') clause.
This is the most draconian reduction of all that insurers have
attempted to impose in recent years. It removes all coverage for wind
damage if another, non-covered event (usually a flood) also occurs,
regardless of the timing of the events. Under this anti-consumer
measure, if a hurricane of 125 miles-per-hour rips a house apart but
hours later a storm surge floods the property, the consumer would
receive no reimbursement for wind losses incurred. This is
intellectually ambiguous, even if the language creating such an
unbelievable attempt to confuse consumers is found to be clear.
At a hearing held by the House Financial Services Oversight
Subcommittee on February 28, 2007, Mississippi Attorney General Jim
Hood testified that a number of insurance companies operating on the
Gulf Coast had tried to escape paying legitimate homeowners' claims
after Hurricane Katrina through the use of ACC clauses. Although the
ACC clauses were invalidated by a Mississippi judge, insurers intended
to refuse to pay wind damage caused by the hurricane if flooding
occurred at about the same time, even if the flood hit hours after a
home was damaged by wind. The court ruling only affected insurers in
Mississippi, so insurers may still be using ACC clauses in other states
in the region.
In some cases, particularly those involving the complete
destruction of a home down to a slab, insurers did not even seriously
study or ``adjust'' the claim, declaring the wind coverage to be
trumped by the flood. Such cases often lead to the payment of full
flood coverage, even if all or some of the losses paid by the NFIP were
really caused by wind damage that should have been paid by insurers
under a homeowner's policy.
Consider a $200,000 home that is covered by just a homeowners
policy, with no flood insurance protection. Assume that hurricane winds
strike the home for several hours, causing $150,000 worth of damage.
Two hours later a flood hits, causing an additional $25,000 in damage
for a total damage of $175,000. If the insurer of the home has an ACC,
the policyholder would get nothing. If the policyholder had, in
addition to the homeowners policy, a flood policy for $200,000, the
wind claim would be denied and taxpayers would likely pay $175,000 when
they should only pay $25,000. Insurers who get paid handsomely to
service the flood insurance program, the Write Your Own (``WYO'')
companies, should be prohibited from having policy language that has
the effect, as ACC does, of shifting insurer losses onto the taxpayers.
Congress must make sure that the flood program is not being used by
private insurers as a place to lay off their obligations.
Finally, insurers have simply dumped a great deal of risk, non-
renewing tens of thousands of homeowner and business properties.
Allstate, the leading culprit after Hurricane Andrew, is emerging as
the heavy once more in the wake of Katrina. After Andrew, Allstate
threatened to non-renew 300,000 South Floridians, provoking a state
moratorium on such action. Today, Allstate is non-renewing even in Long
Island and not writing in entire states, like Connecticut. Yes, you
heard me right, all of Connecticut, even places many miles from the
coast!
These actions present a serious credibility problem for insurers.
They told us, and we believed that Hurricane Andrew was their ``wake
up'' call, with the size and intensity surprising them and causing them
to make these massive adjustments in price, coverage and portfolio of
risk. What is their excuse now for engaging in another round of massive
and precipitous actions?
Insurers surely knew that forecasters had predicted for decades
that an increased period of hurricane activity and intensity would
occur from the 1990s to about 2010. They also surely knew a storm of
Hurricane Katrina's size, location and intensity was possible. The New
Orleans Times-Picayune predicted exactly the sort of damage that
occurred in a series of articles 4 years ago.\33\
Take Allstate's pullout from part of New York and their refusal to
write any new business in the entire state of Connecticut. It is very
hard to look at this move as a legitimate step today when no pullout
occurred after Hurricane Andrew. Why isn't the probability of a
dangerous storm hitting Long Island or Connecticut already accounted
for in the modeling--and rate structure--that were instituted after
Hurricane Andrew? This type of precipitous action raises the question
of whether Allstate is using the threat of hurricane damage as an
excuse to drop customers they have had but do not want to retain for
other reasons, such as clients in highly congested areas with poorer
credit scores. Whether it was mismanagement that started a decade ago
or the clever use of an opportunity today, consumers are being
unjustifiably harmed. Insurance is supposed to bring stability, not
turmoil, into peoples' lives.
2. The Revolution in Risk Classification has Created Many Questionable
Risk Characteristics, Generated New Forms of Redlining and
Undermined the Loss Prevention Role of the Insurance System
As discussed above, one of the primary purposes of the insurance
system is to promote loss prevention. The basic tool for loss
prevention is price. By providing discounts for characteristics
associated with less risky behavior and surcharges for characteristics
associated with more risky behavior, the insurance system provides
essential economic signals to consumers about how to lower their
insurance costs and reduce the likelihood of events that claim lives or
damage property.
Over the past fifteen years, insurers have become more
``sophisticated'' about rating and risk classification. Through the use
of data mining and third party databases, like consumer credit reports,
insurers have dramatically increased the number of rating
characteristics and rate levels used.
We are certainly not against insurers using sophisticated analytic
tools and various databases to identify the causes of accidents and
losses. We would applaud these actions if the results were employed to
promote loss prevention by helping consumers better understand the
behaviors associated with accidents and by providing price signals to
encourage consumers to avoid the risky behaviors surfaced by this
sophisticated research.
Unfortunately, insurers have generally not used the new risk
classification research to promote loss prevention. Rather, insurers
have used new risk classifications to undermine the loss prevention
role of insurance by placing much greater emphasis on risk factors
unrelated to loss prevention and almost wholly related to the economic
status of potential policyholders. The industry's new approach to risk
classification is a form of redlining, where a host of factors are
employed that are proxies for economic status and sometimes race.
For example, although Federal oversight of the impact of credit
scores in insurance underwriting and rating decisions has been quite
poor,\34\ it is well-documented in studies by the Texas and Missouri
Departments of Insurance that credit scoring is biased against low
income and minority consumers.\35\ And recently, GEICO's use of data
about occupation and educational status has garnered the attention of
New Jersey legislators.\36\ But other factors have not received similar
visibility. Several auto insurers use prior liability limits as a major
rating factor. This means that for two consumers who are otherwise
identical and who are both seeking the same coverage, the consumer who
previously had a minimum limits policy will be charged more than the
consumer who previously was able to afford a policy with higher limits.
As with credit scoring and occupation/educational status information,
this risk classification system clearly penalized lower income
consumers.
Once again, deregulated ``competition'' alone will not protect
consumers from unfair risk classification and unfair discrimination.
Once again, this market failure demands close regulatory scrutiny of
the use of risk classification factors when underwriting, coverage and
rating decisions are made.
Let me present one more example of the illegitimate use of risk
classification factors to illustrate our concern. Insurers have
developed loss history databases--databases in which insurers report
claims filed by their policyholders that are then made available to
other insurers. Insurers initially used the claims history databases--
Comprehensive Loss Underwriting Exchange (CLUE) reports, for example--
to verify the loss history reported by consumers when applying for new
policies. However, in recent years, insurers started data mining these
loss history databases and decided that consumers who merely made an
inquiry about their coverage--didn't file a claim, but simply inquired
about their coverage--would be treated as if they had made a claim.
Penalizing a consumer for making an inquiry on his or her policy is not
just glaringly inequitable; it undermines loss prevention by
discouraging consumers from interacting with insurers about potentially
risky situations.
Although insurers and the purveyors of the claims databases--
including ChoicePoint--have largely stopped this practice after much
criticism, simple competitive market forces without adequate oversight
harmed consumers over a long period and undermined the loss prevention
role of the insurance system. Moreover, as with the use of many
questionable risk classification factors, competitive forces without
regulatory oversight can actually exacerbate problems for consumers as
insurers compete in risk selection and price poor people out of
markets.
3. Insurance Cartels--Back to the Future
The insurance industry arose from cartel roots. For centuries,
property-casualty insurers have used so-called ``rating bureaus'' to
make rates for insurance companies to use jointly. Not many years ago,
these bureaus required that insurers charge rates developed by the
bureaus. (The last vestiges of this practice persisted into the 1990s).
In recent years, the rate bureaus have stopped requiring the use of
their rates or even calculating full rates because of lawsuits by state
attorney generals. State attorney generals charged in court that the
last liability insurance crisis was caused in great part by insurers
sharply raising their prices to return to ISO rate levels in the mid-
1980s. As a result of a settlement with these states, ISO agreed to
move away from requiring final prices. ISO is an insurance rate bureau
or advisory organization. Historically, ISO was a means of controlling
competition. It still serves to restrain competition since it makes
``loss costs'' (the part of the rate that covers expected claims and
the costs of adjusting claims) which represent about 60-70 percent of
the rate.\37\ ISO also makes available expense data to which insurers
can compare their costs in setting their final rates. ISO sets classes
of risk that are adopted by many insurers. ISO diminishes competition
significantly through all of these activities. There are other such
organizations that also set pure premiums or do other activities that
result in joint insurance company decisions. These include the National
Council on Compensation Insurance (NCCI) and National Insurance
Services Organization (NISS). Examples of ISO's many anticompetitive
activities are attached.
Today the rate bureaus still produce joint price guidance for the
large preponderance of the rate. The rating bureaus start with historic
data for these costs and then actuarially manipulate the data (through
processes such as ``trending'' and ``loss development'') to determine
an estimate of the projected cost of claims and adjustment expenses in
the future period when the costs they are calculating will be used in
setting the rates for many insurers. Rate bureaus, of course, must bias
their projections to the high side to be sure that the resulting rates
or loss costs are high enough to cover the needs of the least
efficient, worst underwriting insurer member or subscriber to the
service.
Legal experts testifying before the House Judiciary Committee in
1993 concluded that, absent McCarran-Ferguson's antitrust exemption,
manipulation of historic loss data to project losses into the future
would be illegal (whereas the simple collection and distribution of
historic data itself would be legal since that would be a pro-
competitive activity). This is why there are no similar rate bureaus in
other industries. For instance, there is no CSO (Contractor Services
Office) predicting the cost of labor and materials for construction of
buildings in the construction trades for the next year (to which
contractors could add a factor to cover their overhead and profit). The
CSO participants would go to jail for such audacity.
Further, rate organizations like ISO file ``multipliers'' for
insurers to convert the loss costs into final rates. The insurer merely
has to tell ISO what overhead expense load and profit load they want
and a multiplier will be filed. The loss cost times the multiplier is
the rate the insurer will use. An insurer can, as ISO once did, use an
average expense of higher cost insurers for the expense load if it so
chooses plus the traditional ISO profit factor of 5 percent and
replicate the old ``bureau'' rate quite readily.
It is clear that the rate bureaus \38\ still have a significant
anti-competitive influence on insurance prices in America.
The rate bureaus guide pricing with their loss cost/
multiplier methods.
The rate bureaus manipulate historic data in ways that would
not be legal absent the McCarran-Ferguson antitrust exemption.
The rate bureaus also signal to the market that it is OK to
raise rates. The periodic ``hard'' markets are a return to rate
bureau pricing levels after falling below such pricing during
the ``soft'' market phase.
The rate bureaus signal other market activities, such as
when it is time for a market to be abandoned and consumers
left, possibly, with no insurance.
More recently, insurers have begun to utilize new third party
organizations (like RMS and Fair Isaac) to provide information (often
from ``black boxes'' beyond state insurance department regulatory
reach) for key insurance pricing and underwriting decisions, which
helps insurers to avoid scrutiny for their actions. These organizations
are not regulated by the state insurance departments and have a huge
impact on rates and underwriting decisions with no state oversight.
Indeed RMS's action, since it is not a regulated entity, may be a
violation of current antitrust laws.
The Senate Judiciary Committee is in the midst of a review of the
antitrust exemption. The Chairman and Ranking Member have introduced S.
618, a bill that would repeal the antitrust exemption and allow the FTC
to get involved if the insurers engage in anticompetitive behavior not
immunized by the state action doctrine. CFA supports passage of S.
618.\39\
4. Reverse Competition in Some Lines of Insurance
As indicated above, some lines of insurance, such as credit
insurance (including mortgage life insurance), title insurance and
forced placed insurance, suffer from ``reverse competition.'' Reverse
competition occurs when competition acts to drive prices up, not down.
This happens when the entity that selects the insurer is not the
ultimate consumer but a third party that receives some sort of kickback
(in the form of commissions, below-cost services, affiliate income,
sham reinsurance, etc.).
An example is credit insurance added to a car loan. The third-party
selecting the insurer is the car dealer who is offered commissions for
the deal. The dealer will often select the insurer with the biggest
kickback, not with the lower rate. This causes the price of the
insurance to rise and the consumer to pay higher rates.
Other examples of reverse competition occur in the title and
mortgage guaranty lines, where the product is required by a third party
and not the consumer paying for the coverage. In these two cases, the
insurer markets its product not to the consumer paying for the product,
but to the third party who is in the position to steer the ultimate
consumer to the insurer. This competition for the referrers of business
drives up the cost of insurance--hence, reverse competition.
We know from the investigations and settlements by New York
Attorney General Eliot Spitzer that even sophisticated buyers can
suffer from bid rigging and other negative consequences of ``reverse-
competition''. Even when unsophisticated consumers purchase insurance
lines that don't typically have reverse competition, these buyers can
suffer similar consequences if they do not shop carefully. Independent
agents represent several insurance companies. At times, this can be
helpful, but not always. If a buyer is not diligent, an agent could
place the consumer into a higher priced insurer with a bigger
commission rate for the agent. Unfortunately, this happens too often
since regulators have not imposed suitability or lowest cost
requirements on the agents.
5. Claims Problems
Many consumers face a variety of claims problems. Often, their only
recourse is to retain an attorney, an option that is not affordable for
consumers in many situations. For example, many Gulf Coast residents
are in litigation over handling of homeowners claims by insurers after
Hurricane Katrina. We have seen many reports from consumers of
situations that appear to involve bad claims handling practices,
particularly related to policy forms that appear ambiguous.\40\
Some insurers have also adopted practices that routinely ``low-
ball'' claims offers through the use of computerized claims processing
and other techniques that have sought to cut claims costs arbitrarily.
See the fuller discussion of claims problems earlier in this
testimony.
6. The Revolving Door between Regulators and the Insurance Industry
Results in Undue Industry Influence at the National Association
of Insurance Commissioners
Consider this list of recent NAIC Presidents and their current
place of employment:
2006: Al Iuppa--moved in mid-term as NAIC President to become
chief lobbyist for the insurer Zurich Financial Services Group
2005: Diane Koken--recently resigned as Pennsylvania's
commissioner to, as an AP story put it: ``Koken . . . said she
has accepted a nomination to the board of a national insurance
company. She declined to identify the company but said she
expects to be elected in April and decided to step down
effective February 19 to avoid potential conflicts of
interest.'' \41\
2004: Ernest Csiszar--moved in mid-term as NAIC President to
lobby on behalf of the property-casualty insurers as President
of the Property Casualty Insurers Association
2003: Mike Pickens--currently lobbies on behalf of insurers as
a private attorney
2002: Terrie Vaughn--currently lobbies on behalf of life
insurers as a Board Member of Principal Financial Group
2001: Kathleen Sebelius--currently Governor of Kansas
2000: George Nichols--currently works for New York Life
The revolving door of regulators to industry and of industry to
regulators is particularly troubling given the role of the NAIC in
state insurance regulation.\42\ The NAIC plays a major role in guiding
state insurance oversight, yet it is organized as a non-profit trade
association of regulators and, consequently, lacks the public
accountability of a government agency, like an insurance department.
For example, it is not subject to Freedom of Information statutes. In
addition, policy decisions are made at the NAIC by allowing each state
one vote, not matter the population of the state. This means that the
Commissioner of Insurance in South Dakota has equal influence as the
California or New York regulator. The result is that regulators in
states comprising a minority of the country's population can determine
national policy for the entire country. This problem is exacerbated by
the inappropriate industry influence resulting from the revolving door
between regulators and industry.
Why Have Insurers Recently Embraced Federal Regulation (Again)?
The recent ``conversion'' of some insurers to the concept of
Federal regulation is based solely on the notion that such regulation
would be weaker. Insurers have, on occasion, sought Federal regulation
when the states increased regulatory control and the Federal regulatory
attitude was more laissez-faire. Thus, in the 1800s, the industry
argued in favor of a Federal role before the Supreme Court in Paul v.
Virginia, but the court ruled that the states controlled because
insurance was intrastate commerce.
Later, in the 1943 SEUA case, the Court reversed itself, declaring
that insurance was interstate commerce and that Federal antitrust and
other laws applied to insurance. By this time, Franklin Roosevelt was
in office and the Federal Government was a tougher regulator than were
the states. The industry sought, and obtained, the McCarran-Ferguson
Act. This law delegated excusive authority for insurance regulation to
the states, with no routine Congressional review. The Act also granted
insurers a virtually unheard of exemption from antitrust laws, which
allowed insurance companies to collude in setting rates and to pursue
other anticompetitive practices without fear of Federal prosecution.
From 1943 until recently, the insurance industry has violently
opposed any Federal role in insurance regulation. In 1980, insurers
successfully lobbied to stop the Federal Trade Commission from
investigating deceptive acts and practices of any kind in the insurance
industry. They also convinced the White House that year to eliminate
the Federal Insurance Administration's work on insurance matters other
than flood insurance. Since that time, the industry has successfully
scuttled any attempt to require insurers to comply with Federal
antitrust laws and has even tried to avoid complying with Federal civil
rights laws.
Notice that the insurance industry is very pragmatic in their
selection of a preferred regulator. They always favor the least
regulation. It is not surprising that, today, the industry would again
seek a Federal role at a time they perceive little regulatory interest
at the Federal level. But, rather than going for full Federal control,
they have learned that there are ebbs and flows in regulatory oversight
at the Federal and state levels, so they seek the ability to switch
back and forth at will.
Further, the insurance industry has used the possibility of an
increased Federal role to pressure NAIC and the states into gutting
consumer protections over the last three or 4 years. Insurers have
repeatedly warned states that the only way to preserve their control
over insurance regulation is to weaken consumer protections.\43\ They
have been assisted in this effort by a series of House hearings, which
rather than focusing on the need for improved consumer protection have
served as a platform for a few Representatives to issue ominous
statements calling on the states to further deregulate insurance
oversight, ``or else.''
This strategy of ``whipsawing'' state regulators to lower standards
benefits all elements of the insurance industry, even those that do not
support any Federal regulatory approach. Even if Congress does nothing,
the threat of Federal intervention is enough to scare state regulators
into acceding to insurer demands to weaken consumer protections.
Unfortunately for consumers, the strategy has already paid off,
before the first insurance bill is ever marked up in Congress. In the
last few years, the NAIC has moved suddenly to cut consumer protections
adopted over a period of decades. The NAIC is terrified of
Congressional action and sees the way to ``save'' state regulation is
to gut consumer protections to placate insurance companies and
encourage them to stay in the fold. This strategy of saving the village
by burning it has made state regulation more, not less vulnerable to
Federal takeover.
The NAIC has also failed to act in the face of a number of serious
problems facing consumers in the insurance market.
NAIC Failures to Act
1. Failure to do anything about abuses in the small face life
market. Instead, NAIC adopted an incomprehensible disclosure on
premiums exceeding benefits, but did nothing on overcharges, multiple
policies, or unfair sales practices.
2. Failure to do anything meaningful about unsuitable sales in any
line of insurance. Suitability requirements still do not exist for life
insurance sales even in the wake of the remarkable market conduct
scandals of the late 1980s and early 1990s. A senior annuities
protection model was finally adopted (after years of debate) that is so
limited as to do nothing to protect consumers.
3. Failure to call for collection and public disclosure of market
performance data after years of requests for regulators to enhance
market data, as NAIC weakened consumer protections. How does one test
whether a market is workably competitive without data on market shares
by zip code and other tests?
4. Failure to call for repeal of the antitrust exemption in the
McCarran-Ferguson Act as they push forward deregulation model bills.
Indeed, the NAIC still opposes repeal of the antitrust exemption even
as they deregulate . . . effectively seeking to deregulate cartel-like
organizations.
5. Failure to do anything as an organization on the use of credit
scoring for insurance purposes. In the absence of NAIC action, industry
misinformation about credit scoring has dominated state legislative
debates. NAIC's failure to analyze the issue and perform any studies on
consumer impact, especially on lower income consumers and minorities,
has been a remarkable dereliction of duty.
6. Failure to end use of occupation and education in underwriting
and pricing of auto insurance.\44\
7. Failure to address problems with risk selection. There has not
even been a discussion of insurers' explosive use of underwriting and
rating factors targeted at socio-economic characteristics: credit
scoring, check writing, prior bodily injury coverage limits purchased
by the applicant, prior insurer, prior non-standard insurer, not-at-
fault claims, not to mention use of genetic information, where Congress
has had to recently act to fill the regulatory void.
8. Failure to heed calls from consumer leaders to do something
about contingency commissions for decades until Attorney General
Spitzer finally acted.
9. Failure to even discover, much less deal with, the claims abuses
relating to the use of systems designed to systematically underpay
claims for millions of Americans.
10. Failure to do anything on single premium credit insurance
abuses.
11. Failure to take recent steps on redlining or insurance
availability or affordability. Many states no longer even look at these
issues, 30 years after the Federal Government issued studies
documenting the abusive practices of insurers in this regard. Yet,
ongoing lawsuits continue to reveal that redlining practices harm the
most vulnerable consumers.
12. Failure to take meaningful action on conflict of interest
restrictions even after Ernie Csiszar left his post as South Carolina
regulator and President of the NAIC in September 2004 to become
President of the Property Casualty Insurers Association of America
after negotiating deregulation provisions in the SMART Act desired by
PCIAA members.
NAIC Rollbacks of Consumer Protections
1. The NAIC pushed through small business property-casualty
deregulation, without doing anything to reflect consumer concerns
(indeed, even refusing to tell consumer groups why they rejected their
specific proposals) or to upgrade ``back-end'' market conduct quality,
despite promises to do so. As a result, many states adopted the
approach and have rolled back their regulatory protections for small
businesses.
2. States are rolling back consumer protections in auto insurance
as well. New Jersey, Texas, Louisiana, and New Hampshire have done so
in the last 2 years.
3. NAIC has terminated free access for consumers to the annual
statements of insurance companies at a time when the need for enhanced
disclosure is needed if price regulation is to be reduced.
Can Competition Alone Guarantee a Fair, Competitive Insurance Market?
Consumers, who over the last 30 years have been the victims of
vanishing premiums, churning, race-based pricing, creaming, and
consumer credit insurance policies that pay pennies in claims per
dollar in premium, are not clamoring for such policies to be brought to
market with even less regulatory oversight than in the past. The fact
that ``speed-to-market'' has been identified as a vital issue in
modernizing insurance regulation demonstrates that some policymakers
have bought into insurers' claims that less regulation benefits
consumers. We disagree. We think smarter, more efficient regulation
benefits both consumers and insurers and leads to more beneficial
competition. Mindless deregulation, on the other hand, will harm
consumers.
The need for better regulation that benefits both consumers and
insurers is being exploited by some in the insurance industry to
eliminate the most effective aspects of state insurance regulation such
as rate regulation, in favor of a model based on the premise that
competition alone will protect consumers.\45\ We question the entire
foundation behind the assumption that virtually no front-end regulation
of insurance rates and terms coupled with more back-end (market
conduct) regulation is better for consumers. First of all, there are
many reasons why competition in insurance is weak (see a list of these
reasons attached as Attachment 2). The track record of market conduct
regulation has been extremely poor. As noted above, insurance
regulators rarely are the first to identify major problems in the
marketplace.
Given this track record, market conduct standards and examinations
by regulators must be dramatically improved to enable regulators to
become the first to identify and fix problems in the marketplace and to
address market conduct problems on a national basis. From an efficiency
and consumer protection perspective, it makes no sense to lessen
efforts to prevent the introduction of unfair and inappropriate
policies in the marketplace. It takes far less effort to prevent an
inappropriate insurance policy or market practice from being introduced
than to examine the practice, stop a company from doing it and provide
proper restitution to consumers after the fact.
The unique nature of insurance policies and insurance companies
requires more extensive front-end regulation than other consumer
commodities. And while insurance markets can be structured to promote
beneficial price competition, deregulation does not lead to, let alone
guarantee, such beneficial price competition.
Front-end regulation should be designed to prevent market conduct
problems from occurring instead of inviting those problems to occur. It
should also promote beneficial competition, such as price competition
and loss mitigation efforts, and deter destructive competition, such as
selection competition, and unfair sales and claims settlement
practices. Simply stated, strong, smart, efficient and consistent
front-end regulation is critical for meaningful consumer protection and
absolutely necessary to any meaningful modernization of insurance
regulation.
Is Regulation Incompatible With Competition?
The insurance industry promotes a myth: that regulation and
competition are incompatible. This is demonstrably untrue. Regulation
and competition both seek the same goal: the lowest possible price that
is consistent with a reasonable return for the seller. There is no
reason that these systems cannot coexist and even compliment each
other.
The proof that competition and regulation can work together to
benefit consumers and the industry is the manner in which California
regulates auto insurance under Proposition 103. Indeed, that was the
theory of the drafters (including myself) of Proposition 103. Before
Proposition 103, Californians had experienced significant price
increases under a system of ``open competition'' of the sort the
insurers now seek at the Federal level. (No regulation of price is
permitted but rate collusion by rating bureaus is allowed, while
consumers receive very little help in getting information.) Proposition
103 sought to maximize competition by eliminating the state antitrust
exemption, laws that forbade agents to compete, laws that prohibited
buying groups from forming, and so on. It also imposed the best system
of prior approval of insurance rates and forms in the nation, with very
clear rules on how rates would be judged.
As our in-depth study of regulation by the states revealed,\46\
California's regulatory transformation--to rely on both maximum
regulation and competition--has produced remarkable results for auto
insurance consumers and for the insurance companies doing business
there. The study reported that insurers realized very nice profits,
above the national average, while consumers saw the average price for
auto insurance drop from $747.97 in 1989, the year Proposition 103 was
implemented, to $717.98 in 1998. Meanwhile, the average premium rose
nationally from $551.95 in 1989 to $704.32 in 1998. California's rank
dropped from the third costliest state to the 20th.
As of 2003, the average annual premium in California was $832.69
(ranked 19th) vs. $837.88 for the Nation.\47\ Since California
transitioned from relying simply on competition--as promoted by
insurers--to full competition and regulation, the average auto rate
went up by 11.3 percent while the national average rose by 51.8
percent--a powerhouse result for California's consumers! \48\ In 1989,
California consumers were paying 36 percent more that the national
average, while today they pay virtually the national average price.
How Can Uniformity be Achieved Without Loss of Consumer Protections?
CFA would endorse a more uniform national or multi-state approach
if certain rigorous conditions were met. The attached fact sheet,
Consumer Principles and Standards for Insurance Regulation,\49\
provides detailed standards that regulators should meet to properly
protect consumers, whether at the state, multi-state or national level.
It should be noted that none of the proposals offered by insurers or on
behalf of insurers to Congress come close to meeting these standards.
One obvious vehicle for multi-state enforcement of insurance
standards is the NAIC. The NAIC Commission of the Interstate Insurance
Product Regulation Compact began operation with a small staff on June
13 of this year. We have favored empowering the NAIC to implement such
a multi-state approach only if the NAIC's decision-making procedures
are overhauled to make it a more transparent, accountable body with
meaningful regulatory powers. These steps would include public access
to insurer filings during the review process and formal, funded
consumer participation. To date, regulators have refused to take these
steps. Moreover, the Commission will be unlikely to carry out its role
as a truly independent regulator due to inadequate funding. The
Commission will be receiving and reviewing life, annuity and long term
care filings for at least 27 states, but its current budget only allows
for a total staff of three people. As stated above, recent NAIC
failures demonstrate that it is not an impartial regulatory body that
can be counted on to adequately consider consumer needs.
Because of its historical domination by the insurance industry,
consumer organizations are extremely skeptical about its ability to
confer national treatment in a fair and democratic way. It is essential
that any Federal legislation to empower the NAIC include standards to
prevent undue industry influence and ensure the NAIC can operate as an
effective regulatory entity, including:
Democratic processes/accountability to the public, which
must include: notice and comment rulemaking; on the record
voting; accurate minutes; rules against ex parte communication;
public meeting/disclosure/sunshine rules/FOIA applicability.
A decision-making process subject to an excellent
Administrative Procedures Act.
Strong conflict of interest and revolving door statutes
similar to those of the Federal Government to prevent undue
insurance industry influence. If decision-making members of the
NAIC have connections, past or present, to certain companies,
the process will not be perceived as fair.
Independent funding. The NAIC cannot serve as a regulatory
entity if it relies on the industry for its funding. The bill
should establish a system of state funding to the NAIC at a set
percentage of premium so that all states and insured entities
equally fund the NAIC.
National Independent Advocate. To offset industry
domination, an independent, national, public insurance counsel/
ombudsman with necessary funding is needed. Consumers must be
adequately represented in the process for the process to be
accountable and credible.
Regulation by Domiciliary States Will Lead to Unacceptably Weak
Standards
When I was Texas Insurance Commissioner, I had to go into another
state to seek a court order to declare an insurer, domiciled in the
other state, insolvent. The commissioner of that state refused to do so
because of local politics (several ex-Governors were on the Board of
the failed insurer).
CFA opposes allowing a domiciliary state to essentially act as a
national regulator by allowing domiciled companies to comply only with
that state's standards. This approach has several potential problems,
including the following:
It promotes forum shopping. Companies would move from state
to state to secure regulation from the state that has the least
capacity to regulate, provoking a ``race to the bottom.''
The state of domicile is often under the greatest political
and economic pressure not to act to end harmful business
practices by a powerful in-state company.
The resources of states to properly regulate insurance vary
widely.
It is antithetical to states' rights to apply laws from
other states to any business operating within their borders. If
such a move is made, however, it is imperative that consumers
have a national, independent advocate.
It promotes a lack of consistency in regulation because
companies could change domiciliary state status.
Residents of one state cannot be adequately represented by
the legislature/executive of another. If a resident's state
consumer protections did not apply, the resident would be
subject to laws of a state in which they have no
representation. How can a consumer living in Colorado influence
decisions made in Connecticut?
Rather than focusing on protecting consumers, this system
would change the focus to protecting itself and its regulatory
turf, as has happened in the bank regulatory system. State and
Federal banking regulators have competed to lower their
consumer protections to lure banks to their system.
We would be particularly concerned with proposals to give
exclusive control of market conduct exams to a domiciliary
state. Unscheduled exams by a state are very important for that
state's ability to protect its consumers from abuse. States
must retain the ability to act quickly based on complaints or
other information.
``One-Stop'' Policy Approval Must Meet High Standards
Allowing insurers to get approval for their products from a single,
unaccountable, non-state regulatory entity would also lead to extremely
weak protections unless several conditions are met:
An entity, such as the NAIC's Coordinated Advertising, Rate
and Form Review Authority (CARFRA), that is not subject to
authorizing legislation, due process standards, public
accountability, prohibitions on ex parte communications, and
similar standards should not have the authority to determine
which lines would be subject to a one-stop approval process or
develop national standards. It also must have funding through
the states, not directly from insurers. Independent funding
ensures that the regulatory entity is not subject to unfair and
detrimental industry influence.
Any standards that apply must be high and improve the
ability of consumers to understand policies and compare on the
basis of price. Consumers do not want ``speed-to-market'' for
bad policies.
Any entity that serves as national standard setter, reviewer
and/or approver needs Federal authorizing legislation. An
``interstate compact'' or ``memorandum of understanding'' is
unworkable and unaccountable.
Giving the regulated insurer the option to choose which
entity regulates it is an invitation to a race to the bottom
for regulatory standards.
Standardization of forms by line has the potential to assist
consumers if done in such a way to enhance understanding of
terms, benefits, limitations and actual costs of policies.
Public/consumer input is essential if the entity makes
decisions that ultimately affect information provided to and
rates charged consumers.
We support the concept of an electronic central filing
repository, but the public must have access to it.
To retain oversight of policies and rates affecting their
residents, states must have the ability to reject decisions of
the entity.
Any national system must include a national, externally
funded consumer-public advocate/counsel to represent consumers
in standard setting, development of forms, rate approval, etc.
Current Federal Proposals
Given the extremely sorry state of state regulation, it is hard to
believe that a Federal bill could be crafted that would make matters
worse. Yet, insurers have managed to do it--not once, but twice! Their
bills not only don't provide the basic standards of consumer protection
cited above, they would undermine the extremely low standards of
consumer protection now extant in many states.
Greater resistance in Congress and extremely low public opinion of
insurers in the wake of their poor performance after Hurricane Katrina,
which occurred as the insurers rolled to 3 years of record profits in a
row, has led insurers to step back from regulatory ``reform'' right
now. As one insurance lobbyist told me, ``We are not pushing in this
atmosphere--we do not want to risk having a bill that actually might
enhance regulation, our goal all along has been deregulation, not
uniformity.'' Nonetheless, it is important to reflect on how harmful to
consumers these proposals would be.
Insurer Dream Bill #1: Optional Federal Insurance Charter
The bills that have been drafted by trade associations like the
American Bankers Association and the American Council of Life Insurers
would create a Federal regulator that would have little, if any,
authority to regulate price or product, regardless of how non-
competitive the market for a particular line of insurance might be.
(One of these bills was introduced last year by Senators Johnson and
Sununu as S. 2509.) The bills also offer little improvement in consumer
protection or information systems to address the major problems cited
above. Insurers would be able to choose whether to be regulated by this
weak Federal regulator or by state regulators.
Consumer organizations strongly oppose an optional Federal charter
that allows the regulated company, at its sole discretion, to pick its
regulator. This is a prescription for regulatory arbitrage that can
only undermine needed consumer protections. Indeed the drafters of such
proposals have openly stated that this is their goal. If elements of
the insurance industry truly want to obtain uniformity of regulation,
``speed to market'' and other advantages through a Federal regulator,
let them propose a Federal approach that does not allow insurers to run
back to the states when regulation gets tougher. We could all debate
the merits of that approach. CFA and the entire consumer community
stand ready to fight optional charters with all the strength we can
muster.
Insurer Dream Bill #2: SMART Act
The State Modernization and Regulatory Transformation (SMART) Act
was proposed by former House Financial Services Chairman Michael Oxley
and Representative Richard Baker as a discussion draft in 2005. Rather
than increase insurance consumer protections for individuals and small
businesses while spurring states to increase the uniformity of
insurance regulation, this sweeping proposal would override important
state consumer protection laws, sanction anticompetitive practices by
insurance companies and incite state regulators into a competition to
further weaken insurance oversight. It is quite simply one of the most
grievously flawed and one-sided pieces of legislation that we have ever
seen, with absolutely no protections for consumers. The consumers who
will be harmed by it are our Nation's most vulnerable: the oldest, the
poorest and the sickest.
For example, the discussion draft would have preempted state
regulation of insurance rates. Imagine the impact on the Gulf Coast of
that brilliant idea! This would leave millions of consumers vulnerable
to price gouging, as well as abusive and discriminatory insurance
classification practices. It would also encourage a return to insurance
redlining, as deregulation of prices would include the lifting of state
controls on territorial line drawing. States would also be helpless to
stop the misuse of risk classification information, such as credit
scores, territorial data and the details of consumers' prior insurance
history, for pricing purposes. The draft approach goes so far as to
deregulate cartel-like organizations such as the Insurance Services
Office and the National Council on Compensation Insurance, while
leaving the Federal antitrust exemption fully intact.
What the draft does not do is as revealing as what it does require.
It does not create a Federal office to represent consumer interests,
although the draft creates two positions to represent insurer
interests. It takes no steps to spur increased competition in the
insurance industry, such as providing assistance or information to the
millions of consumers who find it extremely difficult to comparison
shop for this complex and expensive product, or eliminating the
antitrust exemption that insurers currently enjoy under the McCarran-
Ferguson Act. Insurers are not required to meet community reinvestment
requirements, as banks are, to guarantee that insurance is available in
underserved communities. Nothing is done to prevent insurers from using
inappropriate information, such as credit scores or a person's income,
to develop insurance rates.
CFA supports the goals outlined in several sections of this draft.
As stated above, we are not opposed to increasing uniformity in
insurance regulation. Unfortunately, however, in almost every
circumstance in which the draft attempts to ensure uniformity, it
chooses the weakest consumer protection approach possible. Like the
OFC, this approach has no chance in the current Congress, given the
outrage over insurer practices and profits.
Insurer Dream Bill #3: Non-admitted Insurance/Reinsurance Regulation
This sharply scaled-back version of the SMART Act would only apply
to surplus (non-admitted insurance) lines of insurance and reinsurance.
It has been introduced this year by Senators Martinez and Nelson as S.
929. It would provide for a method of collecting state premium taxes
for surplus lines and allocating this income to the states. It would
give deference to the regulations of the home state of the entity
purchasing the insurance policy and in regulating surplus lines
brokers. Further, the bill would adopt the NAIC's non-admitted
insurance model act for eligibility requirements for surplus lines
carriers on a national basis, preempting other state laws. It allows
large buyers of insurance to get surplus lines coverage without having
to show, as most states require today, that a search of the licensed
market was made and no coverage was found.
It would give deference to the home state of the ceding insurer for
regulation, prohibiting any state from enforcing extra-territorial
authority of its laws. Solvency regulation would be done by the state
of domicile of the reinsurer.
CFA opposes this bill because it is based upon many faulty
assumptions. First, it assumes that large buyers of insurance are
sophisticated enough that they don't need protections that would
normally be provided in an insurance transaction. Of course, the
investigations and settlements implemented by New York Attorney General
Eliot Spitzer mentioned above refute this assumption.
Secondly, the bill assumes that the domiciled state of an insurer
is best for solvency regulation. This is not true. As indicated
earlier, when I was Insurance Commissioner of Texas, we had to
investigate an insolvent insurer in another state because the
commissioner of that state refused to do so. We list above several
other objections to giving deference to the state of domicile, which
are also relevant.
Third, the bill raises concerns about great regulatory confusion
and ineptitude that would likely result when the state of the insured
entity regulates all parts of that entity's insurance transaction. What
does Iowa, for instance, know about the hurricane risk/claims of the
operations of an Iowa business on the Gulf Coast or how no-fault or
other unique state laws should apply to a given claim situation?
Fourth, the bill would allow consumers to be harmed in the event
that a surplus lines insurer becomes insolvent. This is because the
guaranty associations in all states do not cover claims for surplus
lines insurers. This may be no problem for the defunct policyholder and
the defunct insurer, but it sure is a problem for the people that the
policyholder may have injured.
A Pro-Consumer Bill: The Insurance Consumer Protection Act of 2003
Only one recent bill considers the consumer perspective in its
design, adopting many of the consumer protection standards cited in
this testimony. That was S. 1373 introduced by Senator Hollings. The
bill would adopt a unitary Federal regulatory system under which all
interstate insurers would be regulated. Intrastate insurers would
continue to be regulated by the states.
The bill's regulatory structure requires Federal prior approval of
prices to protect consumers, including some of the approval procedures
(such as hearing requirements when prices change significantly) being
used so effectively in California. It requires annual market conduct
exams. It creates an office of consumer protection. It enhances
competition by removing the antitrust protection insurers hide behind
in ratemaking. It improves consumer information and creates a system of
consumer feedback.
If Federal regulation is to be considered, S. 1373 should be the
baseline for any debate on the subject.
A Pro-Consumer Bill Whose Time has Come: Amending the McCarran-Ferguson
Act to Remove the Antitrust Exemption
Insurers say they want competition alone to determine rates. The
best way for Congress to help spur competition in the insurance
industry would be to repeal the McCarran-Ferguson Act, as proposed by
S. 618. This would test the industry's desire to compete under the same
rules as virtually all other American businesses.
Wisely, S. 618 also unleashes the Federal Trade Commission to
perform oversight of anticompetitive insurer behavior, a key step
necessary for effective and efficient consumer protection. We strongly
support passage of this legislation.
Another Pro-Consumer Bill: Improving Disclosure to Consumers
One cause of the problems we have witnessed in the settlement of
Hurricane Katrina claims is that consumers cannot understand complex
insurance policy language. Senator Lott's Bill, S. 1061, the
``Homeowners' Insurance Noncoverage Disclosure Act,'' is an essential
step to help people know what will not be covered if some calamity
occurs to a home. The use of the FTC, an agency too long restrained
from helping Americans with insurance problems, is also welcome. CFA
supports passage of S. 1061.
Conclusion
CFA looks forward to working with the Committee to strengthen
consumer protections for insurance, Mr. Chairman. I will be happy to
respond to questions at the appropriate time.
Endnotes
\1\ See ``Why Not the Best,'' an analysis of why California has the
best regulatory scheme in the Nation at www.consumerfed.org.
\2\ The consumer groups that support S. 618 include CFA, the Center
for Economic Justice, the Center for Insurance Research, the Center for
Justice and Democracy, Consumers Union, the Foundation for Taxpayer and
Consumer Rights, New Jersey Citizen Action, Public Citizen, and United
Policyholders.
\3\ ``Aged, Frail and Denied Care by Their Insurers,'' March 26,
2007.
\4\ ``Your Own Worst Enemy, Continued,'' Blog of Sam Friedman,
Editor, National Underwriter Magazine, www.property-casualty.com,
February 21, 2007. Posted on January 31, 2007 23:06. The blog has other
interesting posts on this subject.
\5\ Other programs are also available that promise similar savings
to insurers, such as ISO's ``Claims Outcome Advisor.'' These are bodily
injury systems but other systems, such as Exactimate, ``help'' insurers
control claims costs on property claims.
\6\ ``From Good Hands to Boxing Gloves--How Allstate Changed
Casualty Insurance in America,'' Trial Guides, 2006, Berardinelli,
Freeman and DeShaw, pages 131, 133, 135.
\7\ Bad Faith Class Actions, Whitten, Reggie, PowerPoint
Presentation, November 9, 2006.
\8\ Ibid.
\9\ ``. . . Mc Kinsey & Co. has taught Allstate and other insurance
companies how to deliver less and less.'' Berardinelli, Freeman and
DeShaw, page 17.
\10\ Ibid. Page 57.
\11\ Ibid. Page 132.
\12\ Ibid.
\13\ CFA tested this drop in benefits related to premiums to see if
it could be attributed to a drop in investment income. Over the
timeframe studied, there was a 3 percent drop in investment income.
Since insurers typically reflect about half of investment income in
prices, CFA believes that the drop in investment income accounts for
only 1.5 points of the 15-point drop. That is, investment income
explains only about one-tenth of the drop in benefit payouts to
consumers per dollar expended in insurance premium.
\14\ Insurers contend that the loss adjustment expense is a benefit
to consumers. Obviously, this is a ``benefit'' that does not go to the
consumer or repair cars, doctor bills, etc. But even the loss and LAE
ratio itself is at a record low for many decades, at under 70 percent.
\15\ The industry's reliance on selection competition can have
negative impacts on consumers. Insurance is a risk spreading mechanism.
Insurance aggregates consumers' premiums into a common fund from which
claims are paid. Insurance is a contractual social arrangement, subject
to regulation by the states.
The common fund in which wealth is shifted from those without
losses (claims) to those with losses (claims) is the reason that the
contribution of insurance companies to the Gross National Product of
the United States is measured as premiums less losses for the property-
casualty lines of insurance. The U.S. Government recognizes that the
losses are paid from a common fund and thus are a shift in dollars from
consumers without claims to those with claims, not a ``product'' of the
insurance companies.
Competition among insurers should be focused where it has positive
effects, e.g., creating efficiencies, lowering overhead. But rather
than competing on the basis of the expense and profit components of
rates, the industry has relied more on selection competition, which
merely pushes claims from insurer to insurer or back on the person or
the state. States have failed to control against the worst ravages of
selection competition (e.g. Redlining).
Some of the vices of selection competition that need to be
addressed include zip code or other territorial selection; the
potential for genetic profile selection; income (or more precisely
credit report) selection; and selection based on employment. Targeted
marketing based solely on information such as income, habits, and
preferences, leaves out consumers in need of insurance, perhaps
unfairly.
\16\ ``Insurers Set to Squeeze Even Tighter,'' Miami Herald, May
13, 2006.
\17\ Such as credit insurance, title insurance and force-placed
insurance.
\18\ My April 26, 2006 testimony before the House Committee on
Financial Services on title insurance, detailing the reverse
competition impact on that vastly overpriced product, can be found at:
http://www.consumerfed.org/pdfs/Title_Insurance_
Testimony042606.pdf.
\19\ See the discussion of the anti-concurrent causation clause
below.
\20\ I was Texas Insurance Commissioner and Federal Insurance
Administrator when the Federal Insurance Administration was in HUD and
had responsibility for the co-regulation of homeowners insurance in the
FAIR Plans, as well as flood and crime insurance duties.
\21\ Through such innovations as the creation of Underwriter's
Laboratory.
\22\ The National flood Insurance Program has been in place since
1968 because insurers could not price or underwrite the risk. The
program has now developed the information for such pricing and
underwriting and consideration should be given to returning some of
this risk to private insurance control. The Federal program has had
excessive subsidies and has been ineffective in mitigating risk as well
as the private insurers could do it.
\23\ Gosselin, Peter, ``Insurers Saw Record Gains in Year of
Catastrophic Losses,'' Los Angeles Times, April 5, 2006.
\24\ ``Review/Preview,'' A.M. Best and Co. January 2007.
\25\ U.S. Census Bureau, Projections of the Number of Households
and Families in the United States: 1995 to 2010.
\26\ CFA is still researching that question.
\27\ ValueLine, December 22, 2006 edition.
\28\ The stocks are ACE Ltd., Alleghany Corp., Allstate Corp.,
American Financial Group, W.R. Berkley Corp., Berkshire Hathaway, Inc.,
CAN Financial, Chubb Corp., Cincinnati Financial, Everest Re Group, HCC
Insurance, Hanover Insurance Group, Markel Corp., Mercury General, Ohio
Casualty Corp., Old Republic International Corp., PMI Group, Inc.,
Partner Re, Ltd., Progressive Corp., PLI Corp., Safeco Corp., St. Paul/
Travelers Group, Selective Insurance, Transatlantic Holdings, 21st
Century Insurance Group and XL Group, Ltd.
\29\ According to the National Underwriter's Online Service on
March 23, 2006, ``Two other modeling vendors--Boston-based AIR
Worldwide and Oakland, Calif.-based Eqecat--are also in the process of
reworking their hurricane models.''
\30\ New Speaker Challenges Insurance Risk Projections, Tampa
Tribune, 1/10/07.
\31\ Ethicist Questions Insurance Rate Data; Tampa Tribune, 1/12/
07.
\32\ What Happened in 2006? Contingencies, March/April 2007.
\33\ McQuaid, John; Schleifstein, Mark, ``Washing Away,'' New
Orleans Times-Picayune. June 23-27, 2002.
\34\ Federal agencies with potential oversight authority paid
virtually no attention to the possible disparate impact of the use of
credit scoring in insurance until Congress mandated a study on this
matter as part of the Fair Access to Credit Transactions (FACT) Act
(Section 215). Unfortunately, the agency charged with completing this
study, the Federal Trade Commission, has chosen to use data for this
analysis from an industry-sponsored study that cannot be independently
verified for bias or accuracy. It is very likely, therefore, that the
study will offer an unreliable description of insurance credit scoring
and its alternatives.
\35\ ``Report to the 79th Legislature: Use of Credit Information by
Insurers in Texas,'' Texas Department of Insurance, December 30, 2004;
``Insurance-Based Credit Scores: Impact on Minority and Low Income
Populations in Missouri,'' Missouri Department of Insurance, January
2004.
\36\ Letter from Consumer Federation of America and NJ CURE to NAIC
President Alessandro Iuppa regarding GEICO rating methods and
underwriting guidelines, March 14, 2006.
\37\ A list of activities of ISO is attached as Attachment 3.
\38\ By ``rate bureaus'' here I include the traditional bureaus
(such as ISO) but also the new bureaus that have a significant impact
on insurance pricing such as the catastrophe modelers (including RMS)
and other non-regulated organizations that impact insurance pricing and
other decisions across many insurers (credit scoring organizations like
Fair Isaac are one example).
\39\ My testimony on this bill at the Senate Judiciary Committee
hearing of March 7, 2007 can be found at http://judiciary.senate.gov/
pdf/03-07-07McCarran-FergusonHearing-HunterTestimony.pdf.
\40\ Reviews of calls to the Americans for Insurance Reform hotline
are available at www.insurance-reform.org.
\41\ ``Diane Koken Resigns After Ten Years as PA Insurance Chief,''
The Associated Press, Feb. 13, 2007. See http://www.yorkdispatch.com/
pennsylvania/ci_5225171
?source=sb-google.
\42\ Studies over the years show that 50 percent of all
commissioners come from and return to the insurance industry. Studies
also show that about 20 percent of state legislators serving on
insurance committees in state legislatures are actively employed
directly or indirectly by the insurance industry.
\43\ The clearest attempt to inappropriately pressure the NAIC
occurred at their spring 2001 meeting in Nashville. There, speaking on
behalf of the entire industry, Paul Mattera of Liberty Mutual Insurance
Company told the NAIC that they were losing insurance companies every
day to political support for the Federal option and that their huge
effort in 2000 to deregulate and speed product approval was too little,
too late. He called for an immediate step-up of deregulation and
measurable ``victories'' of deregulation to stem the tide. In a July 9,
2001, Wall Street Journal article by Chris Oster, Mattera admitted his
intent was to get a ``headline or two to get people refocused.'' His
remarks were so offensive that I went up to several top commissioners
immediately afterward and said that Materra's speech was the most
embarrassing thing he had witnessed in 40 years of attending NAIC
meetings. He was particularly embarrassed since no commissioner
challenged Mattera and many commissioners had almost begged the
industry to grant them more time to deliver whatever the industry
wanted.
Jane Bryant Quinn, in her speech to the NAIC on October 3, 2000,
said: ``Now the industry is pressing state regulators to be even more
hands-off with the threat that otherwise they'll go to the feds.'' So
other observers of the NAIC see this pressure as potentially damaging
to consumers.
Larry Forrester, President of the National Association of Mutual
Insurance Companies (NAMIC), wrote an article in the National
Underwriter of June 4, 2000. In it he said, ``. . . how long will
Congress and our own industry watch and wait while our competitors
continue to operate in a more uniform and less burdensome regulatory
environment? Momentum for Federal regulation appears to be building in
Washington and state officials should be as aware of it as any of the
rest of us who have lobbyists in the Nation's capital . . . NAIC's
ideas for speed to market, complete with deadlines for action, are
especially important. Congress and the industry will be watching
closely . . . The long knives for state regulation are already out . .
.''
In a press release entitled ``Alliance Advocates Simplification of
Personal Lines Regulation at NCOIL Meeting; Sees it as Key to Fighting
Federal Control'' dated March 2, 2001, John Lobert, Senior VP of the
Alliance of American Insurers, said, ``Absent prompt and rapid progress
(in deregulation) . . . others in the financial services industry--
including insurers--will aggressively pursue Federal regulation of our
business . . .''
In the NAIC meeting of June 2006, Neil Alldredge of the National
Association of Mutual Insurance Companies pointed out that ``states are
making progress with rate deregulation reforms. In the past 4 years, 16
states have enacted various price deregulation reforms . . . (but)
change is not happening quickly enough. . . . He concluded that the
U.S. Congress is interested in insurance regulatory modernization and
the insurance industry will continue to educate Congress about the slow
pace of change in the states.'' Minutes of the NAIC/Industry Liaison
Committee, June 10, 2006.
\44\ Florida has held hearings on the practice.
\45\ If America moves to a ``competitive'' model, certain steps
must first be taken to ensure ``true competition'' and prevent consumer
harm. First, insurance lines must be assessed to determine whether a
competitive model, e.g., the alleviation of rate regulation, is even
appropriate. This assessment must have as its focus how the market
works for consumers. For example, states cannot do away with rate
regulation of consumer credit insurance and other types of insurance
subject to reverse competition. The need for relative cost information
and the complexity of the line/policy are factors that must be
considered.
If certain lines are identified as appropriate for a
``competitive'' system, before such a system can be implemented, the
following must be in place:
Policies must be transparent: Disclosure, policy form and
other laws must create transparent policies. Consumers must be
able to comprehend the policy's value, coverage, actual costs,
including commissions and fees. If consumers cannot adequately
compare actual costs and value, and if consumers are not given
the best rate for which they qualify, there can be no true
competition.
Policies should be standardized to promote comparison-
shopping.
Antitrust laws must apply.
Anti-rebate, anti-group and other anti-competitive state
laws must be repealed.
Strong market conduct and enforcement rules must be in place
with adequate penalties to serve as an incentive to compete
fairly and honestly.
Consumers must be able to hold companies legally accountable
through strong private remedies for losses suffered as a result
of company wrongdoing.
Consumers must have knowledge of and control over flow and
access of data about their insurance history through strong
privacy rules.
There must be an independent consumer advocate to review and
assess the market, assure the public that the market is
workably competitive, and determine if policies are
transparent.
Safeguards to protect against competition based solely on risk
selection must also be in place to prevent redlining and other
problems, particularly with policies that are subject to either a
public or private mandate. If a competitive system is implemented, the
market must be tested on a regular basis to make sure that the system
is working and to identify any market dislocations. Standby rate
regulation should be available in the event the ``competitive model''
becomes dysfunctional.
If the industry will not agree to disclose actual costs, including
all fees and commissions, ensuring transparency of policies, strong
market conduct rules and enforcement then it is not advocating true
competition, only deregulation.
\46\ ``Why Not the Best? The Most Effective Auto Insurance
Regulation in the Nation,'' June 6, 2000; www.consumerfed.org.
\47\ State Average Expenditures and Premiums for Personal
Automobile Insurance in 2001, NAIC, July 2005.
\48\ Insurers have posted excellent profits as well. Over the
decade ending in 2004, California insurers enjoyed a return on equity
for private passenger auto insurance of 11.1 percent vs. 8.5 percent
for the Nation (Report on Profitability by Line by State 2004, NAIC).
\49\ Attachment 1.
Attachment 1
Consumer Principles and Standards for Insurance Regulation
1. Consumers should have access to timely and meaningful
information about the costs, terms, risks and benefits of insurance
policies.
Meaningful disclosure prior to sale tailored for particular
policies and written at the education level of the average
consumer sufficient to educate and enable consumers to assess a
particular policy and its value should be required for all
insurance; it should be standardized by line to facilitate
comparison shopping; it should include comparative prices,
terms, conditions, limitations, exclusions, loss ratio
expected, commissions/fees and information on seller (service
and solvency); it should address non-English speaking or ESL
populations.
Insurance departments should identify, based on inquiries
and market conduct exams, populations that may need directed
education efforts, e.g., seniors, low-income, low education.
Disclosure should be made appropriate for medium in which
product is sold, e.g., in person, by telephone, on-line.
Loss ratios should be disclosed in such a way that consumers
can compare them for similar policies in the market, e.g., a
scale based on insurer filings developed by insurance
regulators or an independent third party.
Non-term life insurance policies, e.g., those that build
cash values, should include rate of return disclosure. This
would provide consumers with a tool, analogous to the APR
required in loan contracts, with which they could compare
competing cash value policies. It would also help them in
deciding whether to buy cash value policies.
A free look period should be required; with meaningful state
guidelines to assess the appropriateness of a policy and value
based on standards the state creates from data for similar
policies.
Comparative data on insurers' complaint records, length of
time to settle claims by size of claim, solvency information,
and coverage ratings (e.g., policies should be ranked based on
actuarial value so a consumer knows if comparing apples to
apples) should be available to the public.
Significant changes at renewal must be clearly presented as
warnings to consumers, e.g., changes in deductibles for wind
loss.
Information on claims policy and filing process should be
readily available to all consumers and included in policy
information.
Sellers should determine and consumers should be informed of
whether insurance coverage replaces or supplements already
existing coverage to protect against over-insuring, e.g., life
and credit.
Consumer Bill of Rights, tailored for each line, should
accompany every policy.
Consumer feedback to the insurance department should be
sought after every transaction (e.g., after policy sale,
renewal, termination, claim denial). The insurer should give
the consumer notice of feedback procedure at the end of the
transaction, e.g., form on-line or toll-free telephone number.
2. Insurance policies should be designed to promote competition,
facilitate comparison-shopping and provide meaningful and needed
protection against loss.
Disclosure requirements above apply here as well and should
be included in the design of policy and in the policy form
approval process.
Policies must be transparent and standardized so that true
price competition can prevail. Components of the insurance
policy must be clear to the consumer, e.g., the actual current
and future cost, including commissions and penalties.
Suitability or appropriateness rules should be in place and
strictly enforced, particularly for investment/cash value
policies. Companies must have clear standards for determining
suitability and compliance mechanism. For example, sellers of
variable life insurance are required to find that the sales
that their representatives make are suitable for the buyers.
Such a requirement should apply to all life insurance policies,
particularly when replacement of a policy is at issue.
``Junk'' policies, including those that do not meet a
minimum loss ratio, should be identified and prohibited. Low-
value policies should be clearly identified and subject to a
set of strictly enforced standards that ensure minimum value
for consumers.
Where policies are subject to reverse competition, special
protections are needed against tie-ins, overpricing, e.g.,
action to limit credit insurance rates.
3. All consumers should have access to adequate coverage and not be
subject to unfair discrimination.
Where coverage is mandated by the state or required as part
of another transaction/purchase by the private market (e.g.,
mortgage), regulatory intervention is appropriate to assure
reasonable affordability and guarantee availability.
Market reforms in the area of health insurance should
include guaranteed issue and community rating and, where
needed, subsidies to assure healthcare is affordable for all.
Information sufficient to allow public determination of
unfair discrimination must be available. Geo-code data, rating
classifications and underwriting guidelines, for example,
should be reported to regulatory authorities for review and
made public.
Regulatory entities should conduct ongoing, aggressive
market conduct reviews to assess whether unfair discrimination
is present and to punish and remedy it if found, e.g.,
redlining reviews (analysis of market shares by census tracts
or zip codes, analysis of questionable rating criteria such as
credit rating), reviews of pricing methods, and reviews of all
forms of underwriting instructions, including oral instructions
to producers.
Insurance companies should be required to invest in
communities and market and sell policies to prevent or remedy
availability problems in communities.
Clear anti-discrimination standards must be enforced so that
underwriting and pricing are not unfairly discriminatory.
Prohibited criteria should include race, national origin,
gender, marital status, sexual preference, income, language,
religion, credit history, domestic violence, and, as feasible,
age and disabilities. Underwriting and rating classes should be
demonstrably related to risk and backed by a public, credible
statistical analysis that proves the risk-related result.
4. All consumers should reap the benefits of technological changes
in the marketplace that decrease prices and promote efficiency and
convenience.
Rules should be in place to protect against redlining and
other forms of unfair discrimination via certain technologies,
e.g., if companies only offer better rates, etc. online.
Regulators should take steps to certify that online sellers
of insurance are genuine, licensed entities and tailor consumer
protection, UTPA, etc. to the technology to ensure consumers
are protected to the same degree regardless of how and where
they purchase policies.
Regulators should develop rules/principles for e-commerce
(or use those developed for other financial firms if
appropriate and applicable.)
In order to keep pace with changes and determine whether any
specific regulatory action is needed, regulators should assess
whether and to what extent technological changes are decreasing
costs and what, if any, harm or benefits accrue to consumers.
A regulatory entity, on its own or through delegation to an
independent third party, should become the portal through which
consumers go to find acceptable sites on the web. The standards
for linking to acceptable insurer sites via the entity and the
records of the insurers should be public; the sites should be
verified/reviewed frequently and the data from the reviews also
made public.
5. Consumers should have control over whether their personal
information is shared with affiliates or third parties.
Personal financial information should not be disclosed for
purposes other than the one for which it is given unless the
consumer provides prior written or other form of verifiable
consent.
Consumers should have access to the information held by the
insurance company to make sure it is timely, accurate and
complete. They should be periodically notified how they can
obtain such information and how to correct errors.
Consumers should not be denied policies or services because
they refuse to share information (unless information is needed
to complete the transaction).
Consumers should have meaningful and timely notice of the
company's privacy policy and their rights and how the company
plans to use, collect and or disclose information about the
consumer.
Insurance companies should have a clear set of standards for
maintaining the security of information and have methods to
ensure compliance.
Health information is particularly sensitive and, in
addition to a strong opt-in, requires particularly tight
control and use only by persons who need to see the information
for the purpose for which the consumer has agreed to the
sharing of the data.
Protections should not be denied to beneficiaries and
claimants because a policy is purchased by a commercial entity
rather than by an individual (e.g., a worker should get privacy
protection under workers' compensation).
6. Consumers should have access to a meaningful redress mechanism
when they suffer losses from fraud, deceptive practices or other
violations; wrongdoers should be held accountable directly to
consumers.
Aggrieved consumers must have the ability to hold insurers
directly accountable for losses suffered due to their actions.
UTPAs should provide private cause of action.
Alternative Dispute Resolution clauses should be permitted
and enforceable in consumer insurance contracts only if the ADR
process is: (1) contractually mandated with nonbinding results,
(2) at the option of the insured/beneficiary with binding
results, or (3) at the option of the insured/beneficiary with
non-binding results.
Bad faith causes of action must be available to consumers.
When regulators engage in settlements on behalf of
consumers, there should be an external, consumer advisory
committee or other mechanism to assess fairness of settlement
and any redress mechanism developed should be an independent,
fair and neutral decision-maker.
Private attorney general provisions should be included in
insurance laws.
There should be an independent agency that has as its
mission to investigate and enforce deceptive and fraudulent
practices by insurers, e.g., the reauthorization of FTC.
7. Consumers should enjoy a regulatory structure that is
accountable to the public, promotes competition, remedies market
failures and abusive practices, preserves the financial soundness of
the industry and protects policyholders' funds, and is responsive to
the needs of consumers.
Insurance regulators must have a clear mission statement
that includes as a primary goal the protection of consumers:
The mission statement must declare basic fundamentals by
line of insurance (such as whether the state relies on rate
regulation or competition for pricing). Whichever approach is
used, the statement must explain how it is accomplished. For
instance, if competition is used, the state must post the
review of competition (e.g., market shares, concentration by
zone, etc.) to show that the market for the line is workably
competitive, apply anti-trust laws, allow groups to form for
the sole purpose of buying insurance, allow rebates so agents
will compete, assure that price information is available from
an independent source, etc. If regulation is used, the process
must be described, including access to proposed rates and other
proposals for the public, intervention opportunities, etc.
Consumer bills of rights should be crafted for each line of
insurance and consumers should have easily accessible
information about their rights.
Regulators should focus on online monitoring and
certification to protect against fraudulent companies.
A department or division within the regulatory body should
be established for education and outreach to consumers,
including providing:
-- Interactive websites to collect from and disseminate
information to consumers, including information about
complaints, complaint ratios and consumer rights with regard to
policies and claims.
-- Access to information sources should be user friendly.
-- Counseling services to assist consumers, e.g., with health
insurance purchases, claims, etc. where needed should be
established.
Consumers should have access to a national, publicly
available database on complaints against companies/sellers,
i.e., the NAIC database. NAIC is implementing this.)
To promote efficiency, centralized electronic filing and use
of centralized filing data for information on rates for
organizations making rate information available to consumers,
e.g., help develop the information brokering business.
Regulatory system should be subject to sunshine laws that
require all regulatory actions to take place in public unless
clearly warranted and specified criteria apply. Any insurer
claim of trade secret status of data supplied to the regulatory
entity must be subject to judicial review with the burden of
proof on the insurer.
Strong conflict of interest, code of ethics and anti-
revolving door statutes are essential to protect the public.
Election of insurance commissioners must be accompanied by a
prohibition against industry financial support in such
elections.
Adequate and enforceable standards for training and
education of sellers should be in place.
The regulatory role should in no way, directly or
indirectly, be delegated to the industry or its organizations.
The guaranty fund system should be a prefunded, national
fund that protects policyholders against loss due to
insolvency. It is recognized that a phase-in program is
essential to implement this recommendation.
Solvency regulation/investment rules should promote a safe
and sound insurance system and protect policyholder funds,
e.g., providing a rapid response to insolvency to protect
against loss of assets/value.
Laws and regulations should be up to date with and
applicable to e-commerce.
Antitrust laws should apply to the industry.
A priority for insurance regulators should be to coordinate
with other financial regulators to ensure consumer protection
laws are in place and adequately enforced regardless of
corporate structure or ownership of insurance entity. Insurance
regulators should err on side of providing consumer protection
even if regulatory jurisdiction is at issue. This should be
stated mission/goal of recent changes brought about by GLB law.
-- Obtain information/complaints about insurance sellers from
other agencies and include in databases.
A national system of ``Consumer Alerts'' should be
established by the regulators, e.g., companies directed to
inform consumers of significant trends of abuse such as race-
based rates or life insurance churning.
Market conduct exams should have standards that ensure
compliance with consumer protection laws and be responsive to
consumer complaints; exam standards should include agent
licensing, training and sales/replacement activity; companies
should be held responsible for training agents and monitoring
agents with ultimate review/authority with the regulator.
Market conduct standards should be part of an accreditation
process.
The regulatory structure must ensure accountability to the
public it serves. For example, if consumers in state X have
been harmed by an entity that is regulated by state Y,
consumers would not be able to hold their regulators/
legislators accountable to their needs and interests. To help
ensure accountability, a national consumer advocate office with
the ability to represent consumers before each insurance
department is needed when national approaches to insurance
regulation or ``one-stop'' approval processes are implemented.
Insurance regulator should have standards in place to ensure
mergers and acquisitions by insurance companies of other
insurers or financial firms, or changes in the status of
insurance companies (e.g., demutualization, non-profit to for-
profit), meet the needs of consumers and communities.
Penalties for violations must be updated to ensure they
serve as incentives against violating consumer protections and
should be indexed to inflation.
8. Consumers should be adequately represented in the regulatory
process.
Consumers should have representation before regulatory
entities that is independent, external to regulatory structure
and should be empowered to represent consumers before any
administrative or legislative bodies. To the extent that there
is national treatment of companies, a national partnership, or
``one-stop'' approval, there must be a national consumer
advocate's office created to represent the consumers of all
states before the national treatment state, the one-stop state
or any other approving entity.
Insurance departments should support public counsel or other
external, independent consumer representation mechanisms before
legislative, regulatory and NAIC bodies.
Regulatory entities should have a well-established structure
for ongoing dialogue with and meaningful input from consumers
in the state, e.g., a consumer advisory committee. This is
particularly true to ensure that the needs of certain
populations in the state and the needs of changing technology
are met.
Attachment 2
Why Insurance Is an Essential Public Good, Not Some Normal Product That
Can Be Regulated Solely Through Competition
1. Complex Legal Document. Most products are able to be viewed,
tested, ``tires kicked'' and so on. Insurance policies, however, are
difficult for consumers to read and understand--even more difficult
than documents for most other financial products. For example,
consumers often think they are buying insurance, only to find they
bought a list of exclusions.
2. Comparison Shopping is Difficult. Consumers must first
understand what is in the policy to compare prices.
3. Policy Lag Time. Consumers pay a significant amount for a piece
of paper that contains specific promises regarding actions that might
be taken far into the future. The test of an insurance policy's
usefulness may not arise for decades, when a claim arises.
4. Determining Service Quality is Very Difficult. Consumers must
determine service quality at the time of purchase, but the level of
service offered by insurers is usually unknown at the time a policy is
bought. Some states have complaint ratio data that help consumers make
purchase decisions, and the NAIC has made a national database available
that should help, but service is not an easy factor to assess.
5. Financial Soundness is Hard to Assess. Consumers must determine
the financial solidity of the insurance company. One can get
information from A.M. Best and other rating agencies, but this is also
complex information to obtain and decipher.
6. Pricing is Dismayingly Complex. Some insurers have many tiers of
prices for similar consumers--as many as 25 tiers in some cases.
Consumers also face an array of classifications that can number in the
thousands of slots. Online assistance may help consumers understand
some of these distinctions, but the final price is determined only when
the consumer actually applies and full underwriting is conducted. At
that point, the consumer might be quoted a much different rate than he
or she expected. Frequently, consumers receive a higher rate, even
after accepting a quote from an agent.
7. Underwriting Denial. After all that, underwriting may result in
the consumer being turned away.
8. Mandated Purchase. Government or lending institutions often
require insurance. Consumers who must buy insurance do not constitute a
``free-market'', but a captive market ripe for arbitrary insurance
pricing. The demand is inelastic.
9. Incentives for Rampant Adverse Selection. Insurer profit can be
maximized by refusing to insure classes of business (e.g., redlining)
or by charging regressive prices.
10. Antitrust Exemption. Insurance is largely exempt from antitrust
law under the provisions of the McCarran-Ferguson Act.
Compare shopping for insurance with shopping for a can of peas.
When you shop for peas, you see the product and the unit price. All the
choices are before you on the same shelf. At the checkout counter, no
one asks where you live and then denies you the right to make a
purchase. You can taste the quality as soon as you get home and it
doesn't matter if the pea company goes broke or provides poor service.
If you don't like peas at all, you need not buy any. By contrast, the
complexity of insurance products and pricing structures makes it
difficult for consumers to comparison shop. Unlike peas, which are a
discretionary product, consumers absolutely require insurance products,
whether as a condition of a mortgage, as a result of mandatory
insurance laws, or simply to protect their home or health.
Attachment 3
Collusive Activity by the Insurance Services Organization That Is
Allowed by the McCarran-Ferguson Antitrust Exemption
The ISO website has extensive information on the range of services
they offer insurance companies. The website illustrates the deep
involvement that this organization has in helping to set insurer rates,
establishing policy forms, underwriting policies and in setting other
rules.
Some examples:
The page ``The State Filing Handbook,'' promises 24/7 access
to ``procedures for adopting or modifying ISO's filings as the
basis for your own rates, rules and forms.''
The page ``ISO MarketWatch Cube'' is a ``powerful new tool
for analyzing renewal price changes in the major commercial
lines of insurance . . . the only source of insurance premium-
change information based on a large number of actual
policies.'' This price information is available ``in various
levels of detail--major coverage, state, county and class
groupings--for specific time periods, either month or quarter .
. .''
``MarketWatch'' supplies reports ``that measure the change
in voluntary-market premiums (adjusted for exposure changes)
for policies renewed by the same insurer group . . . a valuable
tool for . . . strategically planning business expansion,
supporting your underwriting and actuarial functions . . .''
``ISO's Actuarial Service'' gives an insurer ``timely,
accurate information on such topics as loss and premium trend,
risk classifications, loss development, increased limits
factors, catastrophe and excess loss, and expenses.''
Explaining trend, ISO points out that the insurer can
``estimate future costs using ISO's analyses of how inflation
and other factors affect cost levels and whether claim
frequency is rising or falling.'' Explaining ``expenses'' ISO
lets an insurer ``compare your underwriting expenses against
aggregate results to gauge your productivity and efficiency
relative to the average . . .'' NOTE: These items, predicting
the future for cost movement and supplying data on expenses
sufficient for turning ISO's loss cost filings into final
rates, are particularly anti-competitive and likely, absent
McCarran-Ferguson antitrust exemption protection, illegal.
``ISO's Actuarial Services'' web page goes on to state that
insurers using these services will get minutes and agendas of
``ISO's line actuarial panels to help you keep abreast of
ratemaking research and product development.''
The ``Guide to ISO Products and Services'' is a long list of
ways ISO can assist insurers with rating, underwriting, policy
forms, manuals, rate quotes, statistics, actuarial help, loss
reserves, policy writing, catastrophe pricing, information on
specific locations for property insurance pricing, claims
handling, information on homeowner claims, credit scoring,
making filings for rates, rules and policy forms with the
states and other services.
Finally, ISO has a page describing ``Advisory Prospective Loss
Costs,'' which lays out the massive manipulations ISO makes to the
historic data. A lengthy excerpt follows:
``Advisory Prospective Loss Costs are accurate projections of
average future claim costs and loss-adjustment expenses--
overall and by coverage, class, territory, and other
categories.
Your company can use ISO's estimates of future loss costs in
making independent decisions about the prices you charge for
your policies. For most property/casualty insurers, in most
lines of business, ISO loss costs are an essential piece of
information. You can consider our loss data--together with
other information and your own judgment--in determining your
competitive pricing strategies.
``The insurance pricing problem--Unlike companies in other
industries, you as a property/casualty insurer don't know the
ultimate cost of the product you sell--the insurance policy--at
the time of sale. At that time, losses under the policy have
not yet occurred. It may take months or years after the policy
expires before you learn about, settle, and pay all the claims.
Firms in other industries can base their prices largely on
known or controllable costs. For example, manufacturing
companies know at the time of sale how much they have spent on
labor, raw materials, equipment, transportation, and other
goods and services. But your company has to predict the major
part of your costs--losses and related expenses--based on
historical data gathered from policies written in the past and
from claims paid or incurred on those policies. As in all forms
of statistical analysis, a large and consistent sample allows
more accurate predictions than a smaller sample. That's where
ISO comes in. The ISO database of insurance premium and loss
data is the world's largest collection of that information. And
ISO quality checks the data to make sure it's valid, reliable,
and accurate. But before we can use the data for estimating
future loss costs, ISO must make a number of adjustments,
including loss development, loss-adjustment expenses, and
trend.
``Loss development . . . because it takes time to learn about,
settle, and pay claims, the most recent data is always
incomplete. Therefore, ISO uses a process called loss
development to adjust insurers' early estimates of losses to
their ultimate level. We look at historical patterns of the
changes in loss estimates from an early evaluation date--
shortly after the end of a given policy or accident year--to
the time, several or many years later, when the insurers have
settled and paid all the losses. ISO calculates loss
development factors that allow us to adjust the data from a
number of recent policy or accident years to the ultimate
settlement level. We use the adjusted--or developed--data as
the basis for the rest of our calculations.
``Loss-adjustment expenses--In addition to paying claims, your
company must also pay a variety of expenses related to settling
the claims. Those include legal-defense costs, the cost of
operating a claims department, and others. Your company
allocates some of those costs--mainly legal defense--to
particular claims. Other costs appear as overhead. ISO collects
data on allocated and unallocated loss-adjustment expenses, and
we adjust the claim costs to reflect those expenses.
``Trend--Losses adjusted by loss-development factors and loaded
to include loss-adjustment expenses give the best estimates of
the costs insurers will ultimately pay for past policies. But
you need estimates of losses in the future--when your new
policies will be in effect. To produce those estimates, ISO
looks separately at two components of the loss cost--claim
frequency and claim severity. We examine recent historical
patterns in the number of claims per unit of exposure (the
frequency) and in the average cost per claim (the severity). We
also consider changes in external conditions. For example, for
auto insurance, we look at changes in speed limits, road
conditions, traffic density, gasoline prices, the extent of
driver education, and patterns of drunk driving. For just three
lines of insurance--commercial auto, personal auto, and
homeowners--ISO performs 3,000 separate reviews per year to
estimate loss trends. Through this kind of analysis, we develop
trend factors that we use to adjust the developed losses and
loss-adjustment expenses to the future period for which you
need cost information.
``What you get--With ISO's advisory prospective loss costs, you
get solid data that you can use in determining your prices by
coverage, state, territory, class, policy limit, deductible,
and many other categories. You get estimates based on the
largest, most credible set of insurance statistics in the
world. And you get the benefit of ISO's renowned team of
actuaries and other insurance professionals. ISO has a staff of
more than 200 actuarial personnel--including about 50 members
of the Casualty Actuarial Society. And no organization anywhere
has more experience and expertise in collecting and managing
data and estimating future losses.''
ISO's activities extensively interfere with the competitive market,
a situation allowed by the provisions of the McCarran-Ferguson Act's
extensive antitrust exemption.
Senator Pryor. Thank you.
Mr. Regan?
STATEMENT OF DAVID W. REGAN, VICE PRESIDENT,
LEGISLATIVE AFFAIRS, NATIONAL AUTOMOBILE
DEALERS ASSOCIATION
Mr. Regan. Thank you, Mr. Chairman and Members of the
Committee.
I'm David Regan, Vice President of Legislative Affairs for
the National Automobile Dealers Association. Our members sell
and service all makes--international nameplate, domestic
nameplate, from the Mini Cooper to the Mack Truck. Also, last
year we sold 20 million used vehicles. So, our members have a
direct interest in the integrity of the titling process and the
availability of reliable VIN-based vehicle history data.
Each year, thousands of wrecked, flooded, and stolen
vehicles are sold with clean titles to unsuspecting consumers.
Fraudulent resellers thrive, for three reasons. One, the 51
jurisdiction State motor vehicle titling regime is confusing,
contradictory, and incomplete. Two, just because an insurance
company declares a total loss does not always mean that the
insurance company has to obtain a new title reflecting that
severe damage. And, three, there is no public database for
total-loss vehicles, and dealers and consumers do not have
enough timely access to DMV title data.
Last year, the insurance companies totaled approximately 5
million vehicles. Unfortunately, the total-loss vehicle sold
today at salvage auction could be tomorrow's raw material for
the fraudulent rebuilder and title-washer. The confusing State
title laws and the loss mitigation model of the insurance
companies work in tandem to the detriment of consumers.
There's one central economic fact about the loss mitigation
model of the insurance companies. The cleaner the title at
salvage auction, the higher the sales price for a totaled
vehicle. Therefore, the insurance companies have a powerful
short-term economic incentive to oppose more aggressive State
titling laws, and to under-report under existing State titling
laws. However, consumers and dealers have exactly the opposite
economic interest. Before making a purchase, they want to know
if a vehicle has ever been declared a total loss.
Unfortunately, if the insurance company fails to report the
total loss to the DMV and obtain a branded title, no public
document may ever exist to put future purchasers on notice that
the car was declared a total loss. This failure to report
shifts the risk of nondisclosure to subsequent purchasers.
To remedy this lack of disclosure, Congress--NADA believes
that Congress should enact S. 545, which would require
insurance companies to make commercially available the
following information: the VIN of the total-loss vehicle; the
date of the declaration of total loss; the odometer reading of
the vehicle on the date of total loss; a simple reason for
total loss, such as flood, salvage, or stolen and recovered;
and whether or not the airbag deployed as a result of the event
triggering the declaration of total loss. This disclosure would
be made when the insurance company sends a loss payoff to the
insured. Please note that none of this VIN-based data would
trigger any privacy concerns under Federal or State law.
Also, it is our understanding that this new Federal
disclosure requirement would not pre-empt State laws, but
simply would complement the disclosure regime under existing
State title branding statutes.
There is precedent for such a system. In the U.K. and in
Australia, insurance companies already provide total-loss data.
Also, here in the United States the NICB provided, for the
first time, some total-loss data when vehicles were flooded in
the 2005 hurricanes. NADA applauds the efforts of the NICB in
this regard. But if it is in the public interest to post the
VINs of hundreds of thousands of Katrina cars, isn't it also in
the public interest to post the VINs of the millions of
vehicles that are totaled every year because of severe
accidents?
Also, Congress should ask some questions of the insurance
companies to determine the extent to which they share total-
loss data among themselves. For example, if insurance company A
totals a car, and the wrecked car is then purchased at salvage
auction, repaired and resold with a clean title to an
unsuspecting consumer, what happens when that consumer tries to
insure the vehicle that they have just purchased? Can insurance
company B access some industry database to determine if the
vehicle has been declared a total loss? If so, can insurance
company B then use that information to refuse to write coverage
or to charge a higher premium to reflect the higher risk of the
rebuilt vehicle? If so, will the insurance company then inform
the consumer that that car is actually a rebuilt wreck rather
than an undamaged vehicle? These are the type of questions that
we would like to see asked and answered in the context of
congressional oversight about this issue of total-loss
disclosure.
In conclusion, before buying a used vehicle, consumers,
businesses, and dealers want to know one thing: Has the car
ever been declared a total loss? The declaration of a total
loss is the most significant event in the economic life of a
motor vehicle. That should be--that information should be
publicly available prior to any purchase. Using today's
technology and the existing databases of the insurance
companies, this disclosure is possible. We volunteer to work
with any and all interested parties to make public access to
total-loss data a reality.
Thank you for your interest in this issue, and we'll be
happy to take your questions.
[The prepared statement of Mr. Regan follows:]
Prepared Statement of David W. Regan, Vice President, Legislative
Affairs, National Automobile Dealers Association
More Complete and Timely Total Loss Data Are Necessary To Combat Title
Fraud
My name is David Regan. I am Vice President of Legislative Affairs
for the National Automobile Dealers Association. NADA's 20,000
franchised auto and truck dealerships sell, service and repair new and
used car and trucks, all makes and models from the Mini Cooper to the
Mack Truck. NADA's membership penetration is 93 percent of all domestic
and international nameplate dealerships. The majority of NADA's members
are small, family-owned and community-based businesses, and NADA's
members employ more than one million people nationwide.
Overview of the Title Fraud Problem
At NADA, we applaud the members of this Committee and Senator Lott
in particular for focusing on such an important national issue.
According to news accounts, flooding caused by the Gulf Coast
hurricanes in 2005 damaged more than 500,000 vehicles. Unfortunately,
many of these severely damaged vehicles have been reconditioned and
sold to unsuspecting buyers. In an effort to put consumers on notice of
the nature of the problem, NADA's website (www.nada.org) contains tips
on how to spot a flood vehicle. However, increased public awareness is
only a part of the solution.
This problem is not limited to ``Katrina cars.'' Flooding in New
England and North Carolina and other areas of the Nation has led to
countless other flood vehicles. Moreover, cars severely damaged in
accidents are a major part of the title fraud problem as well. If an
insurance company deems a car to be ``totaled'' as a result of
collision, theft, or fire damage, the vehicle might be rebuilt and
given a clean title that does not disclose damage. Last year, we
believe that insurance companies totaled approximately five million
vehicles.
Each year thousands of totaled vehicles are fraudulently sold to
unsuspecting buyers as undamaged vehicles. These vehicles may then
surface in the classified section of your local newspaper, at a
wholesale auto auction, in a consumer-to-consumer sale, or as a ``trade
in'' on the lot of a franchised dealer. The fraudulent rebuilders and
resellers enjoy substantial profit margins because: (1) state motor
vehicle titling laws are confusing, contradictory and incomplete; (2)
insurance companies have a short-term economic interest in under-
reporting total loss vehicle data; and (3) the public and private
sectors have failed to exploit existing technology to produce timely
electronic transparency for motor vehicle title histories.
Today, I will outline how confusing state title laws and insurance
company practices benefit fraudulent rebuilders and resellers and how
S. 545 could help remedy this problem.
Disparities in State Titling Laws Create Opportunities for Fraud
The laws of fifty states and the District of Columbia govern the
titling and registration of motor vehicles, creating a systemic lack of
uniformity. A motor vehicle title documents ownership of a specific
vehicle, whereas a motor vehicle registration provides permission to
operate a specific vehicle. Although the trend in state titling laws
has been toward more uniformity during the past several years, the 51
jurisdictions still conduct business 51 different ways. Each
jurisdiction has created a distinct paper title, different computer
programs to issue and track titles and registration, and a separate,
extensive body of statutes and regulations to govern the titling and
registration of motor vehicles within their respective borders.
Additionally, these discrepancies can be complicated by the informal
policies and procedures used by title clerks, which may vary even
within jurisdictions.
In common usage, a ``title brand'' is a notation on the face of a
certificate of title that provides notice to all subsequent purchasers
of the damage, condition, or prior use of a vehicle. A ``brand'' is a
word, symbol or abbreviation printed on the title itself. The 51
titling jurisdictions use a wide variety of brands, such as
reconstructed, salvage, rebuilt salvage, rebuilt, restored,
reconditioned, junk, non-repairable, taxi, police, flood damage, fire
damage, unsafe, and repaired. The complete list is extensive and
confusing.
Because 51 jurisdictions title vehicles 51 different ways, many
opportunities for fraud exist. Under the current system, any
unscrupulous rebuilder can repair or refurbish a wrecked or flood
damaged car (typically a late model car ``totaled'' by an insurance
company) and then obtain a ``clean'' or ``washed'' title in a state
with weak title disclosure rules. The new title will contain no
reference to the damage, leaving the buyer (consumer, wholesale auction
or retail dealer) to rely on a physical inspection of the vehicle that
may not expose the extent of the damage or rely on commercially
available title history products, such as Auto Check and CARFAX.
The vehicle history products in the market today are helpful, but a
clean vehicle history report is not conclusive evidence that a vehicle
has never sustained significant damage. Vehicle history services can
only report information to which they have access. While title history
products have improved in the past few years, the 2005 settlement
between State Farm Insurance and the state Attorneys General
demonstrates the extent to which the title data within a state
department of motor vehicles is incomplete. Many state titling laws do
not require insurance companies to obtain a salvage title for every
totaled vehicle. Moreover, the insurance companies have a powerful
economic incentive not to obtain a salvage title. Insurance companies
receive higher sale prices for these totaled vehicles at salvage
auctions if the titles are not branded. As a result, DMV title
databases do not include all totaled vehicles.
Insurance Company Procedures Exacerbate the Problem
Every year millions of motor vehicles are ``totaled'' by insurance
companies, and many of these vehicles routinely re-enter used car
commerce. Typically, an insurance company ``totals'' a vehicle when the
projected repair costs are too excessive in relation to the fair market
value of the vehicle immediately prior to the flood or accident. Once
the insurance company has totaled a car, the company usually sends a
check to the insured, takes possession of the vehicle, and sells the
damaged vehicle at a salvage auction to mitigate loss. Unfortunately,
fraudulent rebuilders frequently buy totaled vehicles at salvage
auction, repair them, and sell the cars as undamaged to an unsuspecting
buyer, thereby reaping huge profits.
The current loss mitigation model used by insurance companies
increases the likelihood of subsequent fraudulent activity. The
attached chart (``How Total Loss Vehicles Reenter the Market'') and
explanatory material attempts to present the interrelationship between
the state titling laws and the loss mitigation model of the insurance
companies. While this process may vary from state to state and from
insurance company to insurance company, the graphic depicts the lack of
transparency that increases risk to subsequent buyers. The red flags
indicate the points in the process where fraudulent activity may occur.
If the insurance company fails to obtain a salvage title for the
totaled vehicle, no public document may ever exist to put future
purchasers on notice that the car was totaled. The insurance company
may fail to report the status of the vehicle to the DMV because:
(a) The state titling law may not trigger an obligation by the
insurance company or the original owner to report to the DMV;
or
(b) State law may contain a reporting obligation, but the
insurance company may fail to comply because of administrative
oversight.
The settlement between State Farm and 49 state attorneys general
confirms that this is not a hypothetical problem.
Insurance companies have a powerful economic incentive to oppose
more aggressive title laws or to underreport under existing laws. A
total loss vehicle with a clean title is likely to sell at auction for
substantially more than the same vehicle with a salvage or flood title.
In other words, there is a market-based premium for a clean title and a
market-based penalty for a salvage or flood title.
Consumers have exactly the opposite economic interest--they want to
know if a vehicle has been declared a total loss. The decision to total
a vehicle is based on a variety of factors and may vary from company to
company and from insured to insured, but one fact is abundantly clear--
a declaration of total loss is one of the most material factors in
determining the value of a vehicle. Every subsequent purchaser would
want to know--prior to the sale--if a vehicle has been totaled.
The Solution must Focus on Pre-transaction Transparency: Insurance Data
on Total Loss Vehicles Should Be Released to the Public and DMV
Data Should Be Enhanced and Released More Quickly
The type of disclosure advocated in S. 545 is consistent with the
Federal and state privacy laws that strictly limit the use of personal
information obtained in the titling process. The Federal Driver Privacy
Protection Act and similar state statutes limit the distribution of
names and addresses included in title databases. The distribution of
VIN-based title branding data or VIN-based total loss vehicle data
would not include the personal identifiers protected by those statutes.
More transparency, more timeliness, and more technology are
necessary to provide buyers more complete and reliable VIN-specific
data before a purchase. All buyers of a used vehicle (consumers,
businesses, wholesale auctions, and even automobile dealers taking a
vehicle in trade) have the same economic interest--determining fair
market value prior to purchase. A more complete, near real-time title
history would provide a more accurate picture of a vehicle's prior
condition/use. The insurance companies should be commended for
providing some total loss vehicle data for many of the flood vehicles
from the hurricanes. The VINs for some of these vehicles are now
available on the website of the National Insurance Crime Bureau, but
more should be done. One good example of this is PEMCO Insurance in
Washington state, which voluntarily disclosed total losses due to heavy
storms in November 2006. S. 545 would require the disclosure of the
following total loss data: the VIN of a totaled car; the reason for the
total loss (flood, collision, stolen, etc.); the date of total loss;
the odometer reading on that date; and whether or not the airbag
deployed. Armed with total-loss information, consumers, businesses,
dealers, auto auctions--anyone buying used cars--should be able to
easily identify one of these severely damaged vehicles, even if the
title was washed.
We understand that this legislation would NOT pre-empt state motor
vehicle titling laws, but would create a separate data set that could
be used to complement title data held by DMVs.
Comments about the National Motor Vehicle Title Information System
(NMVTIS)
Congress has recognized that technology should play a critical role
in this arena. The Anti-Car Theft Act of 1992 authorized the creation
of NMVTIS. As envisioned, NMVTIS would become the single source for
title history data from all 51 jurisdictions. The American Association
of Motor Vehicle Administrators (AAMVA) has attempted to link all 51
databases in real-time using a combination of Federal funds, state
funds, and internal resources. The system envisioned would provide
real-time, title clerk-to-title clerk linkage and then provide third
party access to title histories. NMVTIS has not been completed because
state resources are required to reconfigure state DMV systems to
communicate with NMVTIS. AAMVA's attempts to design and implement a
system to provide public access to NMVTIS have not been successful.
NMVTIS should be reconfigured to focus on providing consumers
transparency prior to a transaction. The vast majority of the resources
of NMVTIS have been used in an attempt to link DMVs so that title
clerks can talk to title clerks electronically before issuing new
titles. Unfortunately, most title fraud occurs before a title clerk
ever sees an application for a new title. DMVs document motor vehicle
ownership after a transaction has occurred. Moreover, DMVs do not have
the statutory authority, expertise, or financial resources to package
and market VIN history data to the public.
NADA has also expressed concerns to the AAMVA leadership regarding
the existing economic model for NMVTIS. First, additional Federal
funding is not likely, so completion of the system is highly doubtful
absent an additional source of funding. Second, even if additional
public funding were forthcoming we have serious doubts the current
model would be self-sustaining. Third, the private sector still does
not have access to the title data in NMVTIS, despite the 1992 Anti Car
Theft Act requirement granting such access. As a result, we have stated
on numerous occasions publicly and privately, that NMVTIS must be
redesigned to achieve its original purpose.
NADA believes the best solution is a partnership between AAMVA and
a private sector vendor that has the funding and technological
expertise to build upon the existing NMVTIS system. Private sector
information vendors are essential to the distribution of data to
consumers. Any NMVTIS-based solution must rely on the private sector to
package and market title histories to the general public. These vendors
already buy title data from DMVs in bulk, usually every month. If the
states simply provided daily electronic updates instead of monthly, the
private sector could use technology to close the window for fraud. The
end result would be an efficiently administered, up-to-date system that
would provide consumers with more timely information. The very same
technology could be used to provide title clerk to title clerk access
as well.
Congress should require the Department of Justice to implement the
1992 Anti-Car Theft Act to require insurance companies to disclose
total loss data and salvage auctions to disclose sales data. DOJ has
existing statutory authority to create more motor vehicle title
transparency in a matter of months. 49 U.S.C. 30501-30505. Congress
should compel DOJ to initiate the rulemaking that was originally
intended and enforce the penalties under existing law for failing to
submit data to NMVTIS. The rule should: (1) recognize that NMVTIS has
been created; (2) require insurance companies to submit to NMVTIS VIN-
based information on total loss vehicles; (3) require salvage auctions
and junk yards to submit to NMVTIS VIN-based information for vehicles
sold at salvage auctions and junk yards; (4) require NMVTIS to engage a
private sector joint venture partner to market the NMVTIS data to
consumers no later than December 31, 2007; and (5) encourage state DMVs
to submit VIN-based motor vehicle title and registration data to NMVTIS
in electronic batch form every 24 hours. All data marketed to the
public must comply with Federal and state privacy protection statutes.
NADA believes S. 545 to require insurance companies to make total
loss data available to perspective purchasers would complement a newly
configured NMVTIS with AAMVA working with the private sector to more
aggressively enhance consumer access to title history data.
Conclusion
Any solution to the title fraud problem must be viewed through the
pre-transaction lens. The technological solution to the problem of
flood vehicles--and all other title fraud--lies in creating near real-
time, pre-transaction access to the vehicle history data that DMVs,
insurance companies, and salvage yards currently collect. The enactment
of S. 545 would provide a dramatic step in the drive to provide
consumers more pre-transaction transparency.
NADA and the franchised automobile and truck dealers throughout the
country are prepared to assist with efforts to eliminate title fraud.
Thank you for the opportunity to present our views, and I look forward
to your questions.
Exhibit A: How Total Loss Vehicles Reenter the Market
Box 1. The process begins when an insurance company declares a
total loss on a vehicle.
Boxes 2a-2d. In step 2, the insurance company determines if the
nature and extent of the damage requires the insurance company to
obtain a salvage or flood title under state law. (The fact that the
insurance company declares a total loss does not automatically trigger
an obligation under state laws to obtain a salvage title. Each state
has specific statutory and regulatory requirements that control this
process.) Under 2a, the insurance company permits the consumer to
retain the vehicle after receiving a total loss payment. This creates a
red flag because the original owner could repair and resell without
disclosure to the unsuspecting buyer in box 5b. In 2b, the company
obtains a salvage title, so that title should accompany the vehicle
throughout the process and surface in the title history search based on
DMV records. However, when the insurance company does NOT obtain a
salvage title, as in 2c, the red flag is noted because the vehicle will
go to the salvage auction with a clean title, despite having been
declared a total loss.
Boxes 3a-3d. Step 3 captures the representative transactions at a
salvage auction. Reputable buyers at salvage auctions, the recyclers in
box 3b, purchase the totaled cars for scrap or parts. The potential for
fraud still exists, however, as shown in box 3d. Unscrupulous resellers
will purchase the wrecked vehicle solely to obtain a VIN with a clean
title. They will then switch that VIN with a stolen vehicle of the same
make and model. In some instances, criminals will walk a salvage yard
just to collect VINs. If the VINs have ``clean'' vehicle history
reports, the criminals will steal the same make, model, and year, and
simply switch the VIN with a clean VIN plate. Box 3c depicts the
rebuilders (legitimate and fraudulent) purchasing vehicles at salvage
auction.
Box 4. This step shows that legal and illegal activity may occur
after the vehicle is rebuilt. In box 4a the legitimate rebuilder
obtains the necessary title documents and fully discloses the nature of
the damage when selling to the informed consumer in box 5a. However, in
boxes 4a and 4b no such disclosure occurs so a red flag is noted. In
4b, even if the rebuilder received a salvage title at auction, the
fraudulent rebuilder simply washes the salvage title by obtain a clean
title in another state. Then the fraudulent reseller unloads the
damaged car to the unsuspecting consumer in box 5b without disclosure.
The consumer may obtain a title history report, but the data in the
private sector database may not be current enough to assist the
consumer before the purchase. Similarly, a licensed dealer may not have
access to title data prior to a trade-in. In box 4c, the fraudulent
reseller does not even have to wash the title, because the insurance
company never notified the DMV of the total loss. Moreover, the
unsuspecting consumer can find no protection at all in relying on a
title history because the insurance company has never provided the DMV
any information about the total loss.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
April 11, 2007
To: Members of the Senate Commerce Committee
From: Salvage Auto Fraud Reform Coalition (SAFR)
In 2005, over five million vehicles were ``totaled'' by insurance
companies, including over 500,000 from Hurricanes Katrina and Rita.
Unfortunately, thousands of these wrecked, flooded, or stolen vehicles
are sold with clean titles to unsuspecting consumers each year. We, the
undersigned, who represent millions of U.S. workers, believe
legislation is necessary to require that insurers make total-loss data
available to the public, thereby ``red-flagging'' the vehicle forever,
and putting consumers on notice of a vehicle's serious damage history.
Too often totaled cars are rebuilt and returned to the
marketplace--but without a ``red flag'' to alert consumers. Many of
these totaled vehicles are dangerous, yet insurance companies are not
required to make the VINs public. Clearly, the most direct and
effective method to provide consumers with more complete vehicle
histories is for insurance companies to make the VINs of totaled
vehicles available to the public.
Insurance companies already collect total-loss disclosure
information, however, they do not provide this valuable information to
consumers. The disclosure of total-loss data would be VIN-based and
would not include any personal identifiers protected by Federal and
state privacy laws. Consumers could obtain this total-loss information
easily and quickly through existing vehicle history providers.
Last year Congress examined the problem of title washing and title
fraud to protect consumers from unknowingly purchasing flood and
salvage vehicles. Hearings were held on the issue, and total-loss
disclosure legislation was introduced in the Senate and House. Once
again, legislation has been introduced in the 110th Congress in both
the Senate (S. 545) by Senator Trent Lott, R-Miss., and the House (H.R.
1029) by Representative Cliff Stearns, R-Fla.
Passage of total-loss disclosure legislation would provide used car
buyers an important tool for making better decisions about vehicle
safety and fair market value. We respectfully urge you to support
committee consideration of this important safety and consumer
protection legislation early this session.
Sincerely,
National Automobile Dealers Association
Alliance of Automobile Manufacturers
American International Automobile Dealers Association
Association of International Automobile Manufacturers
Automotive Recyclers Association
Automotive Service Association
Experian
Honda
Hyundai Motor America
Mazda North American Operations
National Auto Auction Association
National Independent Automobile Dealers Association
Volkswagen of America, Inc.
Senator Pryor. Thank you very much.
I want to thank all the panelists for their opening
statements.
Let me start, if I may, with Commissioner Bowman. You
mentioned some catastrophic risks in the State of Arkansas. I
think you mentioned earthquakes, tornados, hailstorms, and I
guess ice storms and floods. So, I assume, from your statement
there, it's fair to say that these catastrophic challenges with
insurance are not limited just to the Gulf Coast area. All over
the country, you have chances of catastrophic losses. Is that
fair to say?
Ms. Bowman. That's exactly right. All States are concerned
about the different catastrophic possibilities. All States--I
think, looking over all the States, except maybe one--I think
North Dakota has, probably, fewer catastrophic possibilities
than the other States, but they all have some sort of
catastrophe possibility.
Senator Pryor. Can you just give us a--maybe a one minute
tutorial on rates, how rates are set? For example, if there's a
hurricane on the Gulf Coast, does it cause rates in Arkansas to
increase? Or if there's an earthquake on the West Coast, will
it cause the rates in Maine to increase? Could you tell us how
the rate structure works?
Ms. Bowman. No, they should not. They are--it's state-by-
state, basically. The--for instance, your constituents in
Arkansas should not be paying for the--through their policy,
should not be paying for the catastrophes on the Gulf Coast for
what they had. The rates would be set based on the losses or
the--not the losses, but the future projections for what the
model might be in Arkansas. For instance, they're going to look
at what--they're going to look at what the history has been,
and what they project the future might be, in Arkansas, for
projected losses for the catastrophes in Arkansas specifically.
Senator Pryor. When you say----
Ms. Bowman. They would not pay for the Gulf Coast. They
would not take that into account.
Senator Pryor. When you say they ``should not,'' or they
``would not,'' in your experience do they take that into
account, though?
Ms. Bowman. No, we are looking at that. Each insurance
department looks into that. When the rates are filed, we look
at that and make sure that that's not taken into account. We
look at each rate--each time that a rate is filed, we look at
three things, and all the departments do this. We make sure
that when the rate is filed it is not inadequate, it is not
unfairly discriminatory--because rates themselves are
discriminatory--and it is not too high. You're not looking to
make--you're making sure that the rate is appropriate and that
it is fair.
Senator Pryor. And you also review the policies in the
State. For example, what the attorney general was talking about
a few moments ago--and the term he used was ``anti-concurrent
causation''--not just you, but the States, the State insurance
commissioners and departments, they look at the language of the
policies to make sure that they're not misleading and that
they're clear and that they're not being marketed in the wrong
way. Is that one of your consumer protection functions?
Ms. Bowman. Absolutely. Every policy must be filed with us,
and we review those. As a matter of fact, we have a rule and
reg in Arkansas that those policies must be written at
basically an eighth-grade reading level. It's called a Flesch
Score----
Senator Pryor. OK.
Ms. Bowman.--and that--that's a national--pretty much a
national standard of how they must be written.
Senator Pryor. All right, thank you.
Senator Lott?
STATEMENT OF HON. TRENT LOTT,
U.S. SENATOR FROM MISSISSIPPI
Senator Lott. Well, thank you, Mr. Chairman, for having
this hearing. And I want to thank Senator Inouye, our full
Committee Chairman, and Senator Stevens, for cooperating with
our staffs and the Subcommittees to have hearings of this
nature.
And I want to thank all the panel. You're all very
interesting and very well qualified to help us in this area.
But you did raise a number of questions that I'd like to
pursue, so I ask my chairman and my colleague to bear with me,
because this whole issue wells up so many questions and so many
emotions in me that it's hard for me to, you know, control all
the concerns and the questions that I might have.
But let me just begin on the other--left side, or the right
side from the audience, with Attorney General Hood from
Mississippi. Thank you for being here. Thank you for your
testimony. I thought you did a very good job. And thank you for
the job you've done in the State. You took on the biggest boy
in town, and I think you handled it very well.
I know it was a tough decision for you, because you had a
lot of evidence of misconduct and fraud. But I think you chose
a solution, rather than revenge, which was a very powerful
force. And those of us that have suffered and bled together in
Hurricane Katrina area, our whole state and our neighbors in
Louisiana and Alabama and Texas, with Katrina and Rita.
I won't go into a long history, but this is particularly
profound for me, because when I practiced law, I was with the
firm that defended State Farm. And I've had my insurance--my
entire life was State Farm insurance, although I'm pulling away
from that as fast as I can now. And I lost my house. I didn't
have a slab, because my house was actually about 8 or 9 feet up
off the ground, and I just had dirt under the house. And when I
got there, I didn't have a slab, I had nothing, just a plot of
ground. And so, I have experienced all the difficulties that a
lot of people have along the coast.
I also lost my car, a 2 year old, I believe it was,
Escalade, General Motors product. I took it 12 blocks from the
beach, parked on the north side of my office building,
convinced it would be safe from wind and water. And when I got
there, I opened the door, and water poured out. It had about 3
feet of water in it. It looked fantastic. Beautiful car. Only
problem was, it wouldn't crank, and it was totaled. I wonder
where it is today. And so, you know, I experienced that.
I was very interested, Commissioner--is that your title,
Commissioner? Bowman--about how you require understandable
language. Maybe I should move to Arkansas, because----
Ms. Bowman. We'd welcome you.
[Laughter.]
Senator Lott. Well, going back to when I was trying to be a
young lawyer, I always thought that the policy languages were a
bunch of total gobbledygook. People don't have the foggiest,
faintest idea of what they really have covered, or not covered.
And we need to make sure that it is defined in plain English.
The reason why I know we need to do it is because the
industry opposes that--you know, to have some area where it's
highlighted what you have or what you don't have, in some
understandable sense. If lawyers can't understand it, or if
judges and lawyers will argue over it, what about the average
man or woman working in the shipyard or in a poultry plant or
in the Toyota plant in north Mississippi? So, we've got a lot
of work to do here.
So, I've experienced it, and it's emotional with me, and I
admit it. But, for the property and casualty industry--not just
State Farm, but Allstate and Nationwide and all the others--to
be denying claims when you--if you had a slab, it was
concluded, ``Oh, it was all water.'' Zero wind damage. Now, who
believes that? Defies common sense. We were pounded for hours
before the tidal surge came in. And so, there clearly was wind
damage. I was told, in my case, ``Oh, no, no, you had no wind
damage.'' And yet, we have all kinds of evidence to the
contrary. After the fact, I actually found part of the siding
of my house 35 feet up off the ground in a live oak tree. Still
there. The water was not that high. It might have been 21 feet.
No, wind put it up there. But I--so, I had no siding damage?
The list goes on.
But what we want here--and at the same time claims were
being denied and saying, ``We're not going to provide insurance
along the coast,'' and then eventually, ``Oh, well, we're not
going to cover, you know, homes statewide,'' the industry is
recording historic profits, and CEO--State Farm CEO gave
himself an 82 percent pay raise, or something of that nature.
This is outrageous. And I have found them to be arrogant and
meanspirited and convinced that they can whip Attorney General
Hood and Congress and me and anybody else who gets in their
way. Well, they may have a surprise coming. With the help of my
colleagues, we're going to try to fix some of these problems.
And so, let me come to you, Attorney General Hood. Let me
first introduce a document here. Maybe we should call this
document D, because a couple have been--already been
introduced. This is correspondence between engineers. It's
identified--this came to my attention just yesterday--from
forensicanalyst.com. And they had been doing business with
State Farm, but State Farm had stopped doing business with
them. But the--these e-mails begin with, ``Subject: We are back
in business with State Farm for now.'' And then, this person
says, ``This is very good news, but I have serious concern
about the ethics of this whole matter. I really question the
ethics of someone who wants to fire us simply because our
conclusions don't match his or hers. If State Farm is going to
tell us what to put in our reports, then I think we have a
situation similar to State Farm wanting my personal financial
information. In my opinion, we need to find a more rational and
ethical client to be dealing with.''
Attorney General Hood, are you familiar with this document?
Mr. Hood. Yes, sir, Senator Lott. We obtained this during
our grand jury investigation. And I've heretofore been unable
to comment about the document. However, yesterday, while I was
on the plane up here, a lawyer found this in discovery, so it
now is in the--it is in the civil realm. But this document, one
sentence in here that I thought particularly disturbing for our
Federal Government to be looking at was that the--they're
talking about--in the second paragraph, about placing
percentages of damage to property. Initially, State Farm
requested that the engineers give them a percentage of damage,
meaning wind versus water, whichever the percentage was. And
then they came back and they wanted no percentages, because
they said that they'd have to settle for that. And, two, what's
more important for the Federal Government is that they were
worried about having to prorate the Federal Government claims
that they had already agreed and just allowed, without even
investigation, the--us taxpayers to have to pay 100 percent on
the Federal flood claims. So, I'm glad that this document came
out, and this is what we were looking at in our criminal
investigation.
Senator Lott. Would you explain, as you understand it,
exactly, now, who these e-mails are between? Who are these
people?
Mr. Hood. It's--Forensics is a North Carolina engineering
firm that State Farm had engaged to handle some of their
contract engineering examinations. Randy Down is the one
sending the letter to Bob Kochan, who is the manager, or--and
part owner, I think, of this Forensics.com.
What had happened was, State Farm was coercing them to
change their engineering reports. And, in fact, they were going
to--they did fire some of the people who wouldn't go along with
them.
Senator Lott. And you have a lot more evidence of this type
in your files, I presume, some of which has not been made
public, but----
Mr. Hood. Yes, sir. I'm--I was unable to comment on them.
And I thought it was unfair attacks for the industry to send a
lobbyist up here--Racicot, I believe, was his name--to attack
us on going after them down there. The last sentence down here
in this particular e-mail, of the first aspect of it, it says,
``It's obvious that State Farm would love to see every report
come through as water damage so that they can make the minimum
settlement. I now see why the Attorney General's Office is
already involved down there.'' We had a case, but, had we
indicted them, they would have left the State, shut down every
claims office, and they would have left such a hole that the
other companies could not have come in and filled it. So, we
were left with a choice: indict them, they leave the State; or
try to settle with 'em. And, as you spoke about, that's what we
reached. And that's still going on. They haven't fully complied
with the requirements that the Federal judge has placed on them
to reach a final settlement. But these are the kind of
documents that we've been--we've had to sit by and bite our lip
and watch their comments of how innocent they are.
[The information referred to follows:]
From: ``Randy Down''
To: ``Bob Kochan''
cc: ``Nellie Williams''
Sent: Tuesday, October 18, 2005 8:54 AM
Subject: Re: We are back in business with SF . . . for now!
Bob,
That's very good news. But I have a serious concern about the
ethics of this whole matter.
Lecky (is this a man or a woman?) seems to be a very highly
qualified adjuster to be making engineering conclusions that are more
accurate than ours. I really question the ethics of someone who wants
to fire us simply because our conclusions don't match hers (his?). If
SF is going to tell us what we are to put in our reports then I think
we have a situation similar to SF wanting my personal financial
information. In my opinion we need to find a more rational and ethical
client to be dealing with. Too many eggs in this basket to be risking
it on SF. They had already contradicted themselves regarding the
reports--with Mark (?) wanting percentages stated and his counterpart
calling a few days later and telling us to resubmit two reports that
had shown percentages and saying that SF absolutely does not want them
shown because they would then have to settle for the portion that was
reportedly caused by wind. I see now why other firms are bowing out.
Does this Lecky person understand that eye witness accounts are
standardly included in a forensic report, when available? To ignore
them would seem to be ignoring potential facts in the investigation
that could hurt our credibility later.
Her concern about the emotional element in the engineer's decisions
may have some validity (although I doubt It in Brian's case). But what
about the obvious fact that SF would love to see every report come
through as water damage so that they can make the minimum settlement. I
now see why the Attorney General's office is already involved down
there. She needs to be careful about what she is doing and saying.
--Randy
______
--Original Message--
From: Bob Kochan
To: Randy Down; Nellie Williams
Sent: Monday, October 17, 2005 7:17 PM
Subject: We are back in business with SF . . . for now!
Good Morning gang!
Hope this finds you both well this AM. I managed to get us back on
the roles with SF but we need to have a very frank conversation with
the boys down south to be sure that we don't fall in the same trap.
Between us, the client feels that Brian relied solely on eye
witness testimonies of others who were trapped in their attics and
panic stricken at the time during the height of the storm. Very biased
opinions of folks who may or may not have actually seen a significant
portion of the storm's effect on the subject house. I have copied you
both on an e-mail I sent to Brian last night in reply to his
conversation with Lecky King about this matter.
We also will need to adjust Manny's report such that the
conclusions are better supported. I happened to have been on that house
site and was able to convince Ms. King based upon what I saw that the
house roof first blew off weakening the walls and remaining structure
then the tidal wave came through . . . now known to have been in the
35-38 foot high range . . . knocked down the rest of the structure and
sent it floating away. Anyway she seemed to buy that but it is only
because I explained to her where 1 saw sections of the roof and other
debris. I also agreed with her in lot so ways. So we may need to redo
the wording of that report.
Randy, as you were down and out this afternoon, I had to make a few
decisions without consulting you . . . sorry but time was of the
essence in this matter and timing did prove to be critical . . . I have
committed to SF that we will send a new Structural PE to the site of
Brian's investigation tomorrow and have him perform a separate and
unbiased investigation of the loss. If we come up with the same
determination, we will only bill for one report, the final one. If we
come up with a different conclusion, we will absorb the total cost of
both reports . . . But Nellie I will need for you to distribute the
expenses over the other reports so we don't completely loose out OK?
Anyway I am calling for a conference call at 9:30 our time with
everyone to go over this matter in detail and make sure we are all
playing under the same guidelines.
Lastly, I will mention to you that Lecky told me that she is
experiencing this same concern with the other engineering companies who
are using engineers who happen to live in the area. In her words . . .
They are all too emotionally involved and are all working very hard to
find justifications to call it wind damage when the facts only show
water induced damage. I don't know if that is the problem in our team's
case but we must be careful that these reports have technically
defensible conclusions when submitted.
I will call in as the leader and will await each of your contacts
at 9:30 Tuesday AM.
Bye for now,
Bob
Senator Lott. Yes. Well, of course, what we're looking for
here are potential solutions--please, Mr. Chairman, bear with
me, if you would--in how we deal with this in the future.
Now, one of the things that--it seems to me--and I should
say this, not you--that the industry used flood insurance to
make it appear that they were actually providing insurance to
the customers. And so, if you had flood insurance, you paid
flood insurance, maximum of $250,000 per house, $100,000 for
content--then the companies, quite often, the same companies--
in my case, State Farm--became the agent to get the money for
flood insurance. They delivered the check and, in effect, said,
``OK, congratulations, you got $350,000, total.''
One of the things coming out of the hurricane that is
obvious to me is, we do need this flood insurance reform. We
need to increase the level of coverage, and we need to increase
what people pay. It's obviously not actuarily sound. Congress
had to come in and bail out the program twice in significant
amounts of money. And I just--I'm very suspicious that the
industry uses this as a cover to make it look like they're
really doing something. And, oh, by the way, they get a fee, of
course, for handling this money--this claim, which is then
given to their--the person that they insure, and then they deny
it.
The other thing is, I do really think we need to take a
serious look at the current exemption from the--from antitrust
laws. The McCarran-Ferguson--it was done in 1940 under very
questionable conditions and process at that time. Now, they
will--they are using--the big boys are using the little guys to
come up here and say, ``Oh, my goodness, if you do that, we'll
be put out of business, because we've got domestic companies in
Mississippi and, I'm sure, in Arkansas and other States, and
they use this rate-gathering process to determine what rates
they're going to set.'' I'm interested in a solution here. And
if there are some problems, I'd like to find a way of safe
harbor, maybe, for the smaller companies or just a $2 billion
exemption, but find a solution. But what they don't say is--
they complain about it, ``Oh, well, we need this rate-setting
capability.'' The truth of the matter is, the big companies
really don't. And what--but they don't mention that it does
allow collusion. And there's another area where I am very
concerned that collusion is, in effect, allowed under this
exemption. Do you have a impression of that, Attorney General
Hood?
Mr. Hood. Yes, sir. I don't recall any specific--our
investigation was not geared toward----
Senator Lott. Yes.
Mr. Hood.--those aspects. That's something the Federal
Government definitely needs to look into. And ours was strictly
geared on the insurance fraud statute. It applies to insurance
companies in Mississippi, and it applies to claimants. And our
investigation was strictly looking at their claims practices.
But I can tell you that, with the power that the industry has,
as a whole, they can dictate to a State. New Jersey--I think
they pulled out of the state of New Jersey.
Senator Lott. Well, they pulled out of part of Alabama, and
Alabama's Attorney General I don't think was going after them.
And the Senators weren't raising as much Cain as I was, and
didn't have the lawsuits pending as much. But yet--and they
said, ``But we're not going to cover that part down there in
south Alabama.'' What was their problem?
Mr. Hood. They're cherry-picking what areas they want to
cover and they're dumping the rest off on the taxpayers through
the State-funded Wind Pools. And, you know, I proposed, in
response to their announcement that they were going to pull
out, that if they're going to be licensed in Mississippi, that
they ought to have--and they write all lines in other States,
homeowners and so forth--they ought to have to write it all
over the State of Mississippi. That's what Florida did.
Senator Lott. Yes.
Mr. Hood. That was a proposal to try to respond. But
perhaps that--that's maybe what the Federal Government should
require and allow them to distribute the list--the risk
nationwide.
Senator Lott. Yes. Thank you very much, again, Attorney
General Hood.
Ms. Bowman, I was interested in a couple of things you
said. One, that rates don't--or, rates are not supposed to be
affected in other States. As a matter of fact, my colleague
Senator Larry Craig, from Idaho, who--I think his residence in
the Washington area was on a boat. And he noted that his rates
went up. And it had a tag line, in effect, saying, because of
something to do with Katrina--Katrina was in his rate
increase--his boat insurance was going to go up in Virginia.
Now, how could that be?
Ms. Bowman. Well, it shouldn't. Now, you can get into
reinsurance, and when you are talking about reinsurance, it
could have an effect overall, because the insurance companies
do reinsure, and the reinsurance companies are looking at an
overall effect. It should be minimal because of how the risk is
spread so thinly. It should be very small when you're talking
about the risk that's spread. But, from State to State to a
policyholder just at the company level, it should not. But I'm
very surprised to hear that it would say ``because of Katrina''
that----
Senator Lott. I was, too. And, apparently, so was he.
Ms. Bowman. Yes.
Senator Lott. Because I suspect they use it as cover to
jack up rates all over the country. And, at the same time, they
were denying these claims and were refusing to insure, they're
also asking the State insurance commissioner in our State, and
probably other States, for 200, 400 percent increases.
Ms. Bowman. I would think that the insurance commissioner
for that State would be interested in looking at that policy.
Senator Lott. On your plain English, you--do you feel like,
in your State, you know, plain understandable language is
required? And do you get it?
Ms. Bowman. It's required. Do we get it? I think we get
what is required. We get, in Arkansas, about 40,000 phone calls
a year to our consumer services division. And a lot of those
phone calls have to do with explaining what those terms mean
and what those policies mean. I agree with you that saying that
it's an eighth-grade reading level and understanding level may
not be exactly what it is----
Senator Lott. Right.
Ms. Bowman.--because I even have a hard time, sometimes,
understanding--I mean, I'm supposed to be in the business,
right?
Senator Lott. Right.
Ms. Bowman. I agree that it is difficult to----
Senator Lott. Right.
Ms. Bowman.--to understand.
Senator Lott. Well, thank you for your efforts.
Mr. Hunter, it's good to see you again.
Mr. Hunter. How are you?
Senator Lott. I take it you would be, as you indicated, for
some reform, if not repeal, of the antitrust exemption.
Mr. Hunter. Yes.
Senator Lott. I think you would probably be supportive of
flood insurance reform in a variety of ways.
Mr. Hunter. Including, I think, the Flood Insurance Program
should prohibit its write-your-own companies, that they pay a
very healthy fee to, by the way----
Senator Lott. Right. Right.
Mr. Hunter.--from allowing anti-concurrent causation-type
clauses in their policies, which will--which has the tendency
to dump risk onto the taxpayer that they don't deserve.
Senator Lott. You think plain English makes sense?
Mr. Hunter. Plain English makes sense, but the problem is,
it's a complex legal document. I've talked to thousands and
thousands of consumers. They understand every word, and they
don't have a clue what's in there. They can read every word and
understand it. It's in eighth-grade English, that's true. But--
--
Senator Lott. The best lawyers----
Mr. Hunter.--that doesn't mean anything----
Senator Lott.--I know wrote those policies.
Mr. Hunter.--because you have--the fact that you understand
every word doesn't mean you understand a big, long, complex
insurance policy, where clause 1--you have to look at clause
13, which refers you to clause 24. By the time they get three
paragraphs in, they're lost, even though they understand the
words.
Senator Lott. It sounded like some of our government
officials in the Federal Government----
Mr. Hunter. Yes, it's like the Federal Register.
Senator Lott.--wrote those policies. It's very, very----
Mr. Hunter. When I was a government official, I used to
write stuff that I understood, and, by the time the lawyers got
it ready for the Federal Register, I had no idea what it said.
Senator Lott. Yes. All right.
[Laughter.]
Senator Lott. But, of course, I'm very anxious, also, about
this damage to, you know, the title washing bill. And I know
you've been supportive of that, and you mentioned it--the bill,
in particular. Geez, you know, that, to me, looks like a--just
a classic case of fraud or--I mean, it--it's--to me, it's
criminal that you would be foisting off on an--you know, an
innocent consumer a vehicle that, you know, looks good, but
that's been totaled somewhere down the line by--because of a
wreck, a flood, hurricane, whatever.
Mr. Hunter. Absolutely. There has to be clear disclosure
for the consumers to understand what they're getting. I mean,
we--you can't possibly tell--a normal consumer can't--whether a
car has been in a flood or an accident----
Senator Lott. Right. But here's my concern. I actually had
this bill, a year or so ago, when we were trying to move it,
and what happens is, you know, very interested and good people
wanted to add to it. And, you know, consumer advocates wanted
to make it more wonderful. In Congress, the more wonderful you
make the bill, the heavier it gets, and the more likelihood
it'll die. This is an issue that needs to be addressed. It
needs to be done this year. We have bipartisan, bicameral
support. I've talked to subcommittee chairman Bobby Rush in the
House, Cliff Stearns, down in Florida, as a cosponsor. We need
to move this clean and quick. And so, I hope that you would
help us, you know, achieve that. It's one of these things we
can do, because everybody seems to acknowledge it needs to be
done.
And I want to thank the automobile industry for getting on
the point here. You could very easily, in effect, be a
participant--your industry--in this fraud. But, no, you are--
your people wind up getting burned, quite often, and you do
want honesty. You want to comment on that, Mr. Regan?
Mr. Regan. Yes, sir. And thank you, Senator Lott, for your
efforts, not only in the context of this legislation, but for
years you've been on the forefront of trying to address title
fraud, trying to address it legislatively. And I think your
efforts several years ago, frankly, have helped, to a certain
degree, to draw attention to this issue and to get some of the
States to act collectively and try to move to more standard
State titling legislation. But we've come to the conclusion
that we need to look at this from a technology perspective
rather than from the----
Senator Lott. Well, and these automobiles not only leave
the Gulf Coast hurricane area and wind up----
Mr. Regan. Yes.
Senator Lott.--in north Mississippi, where Attorney General
Hood's from, they wind up in North Carolina or Virginia.
Mr. Regan. Right.
Senator Lott. So they clearly are involved in interstate
commerce.
Mr. Regan. Right. For every one retail transaction----
Senator Lott. Or in Arkansas. We----
Mr. Regan. Right.
Senator Lott. We'll get the attention of----
Mr. Regan. Yes.
Senator Lott.--the Chairman here.
[Laughter.]
Mr. Regan. For every one retail transaction, there
typically are two wholesale transactions associated with that.
Senator Lott. Yes.
Mr. Regan. And we have industrywide support. We have the
auctions that support this. The auction industry's two broad
components--one, the salvage auction that disposes of vehicles
that have been totally--that have been totaled; and the other
auction--the other segment of the auction industry really
facilitates the flow of vehicles that are basically ready for
resale by retailers, and it facilitates the flow of those
vehicles throughout the country. And if we could--if we could
inject into the wholesale process this total-loss disclosure
concept, it would enable the auctions to spot these vehicles,
red-flag these VINs so that they--that basically you'd only
have the curbstoners, who are the unlicensed, basically
illegal, dealers of these vehicles out there. The curbstoners
would be, kind of, the distributors of last resort here.
Senator Lott. Right.
Mr. Regan. And this legislation really is about attacking
the fraudulent economic model of the curbstoners, as much as
anything else.
Senator Lott. Well, thank you all again for being here. You
know what the greatest danger is? I've seen it happen many
times over my 35 years in Congress. You have a disaster, you
have an incident, and we're all fired up, and we're alarmed and
determined to do something about it, and then time goes by, and
your attention is diverted, and your passions cool, and it
becomes--you get the money, and you hightail it, and you don't
have time to actually address the law. We have a problem in
this country with future expected cataclysmic disasters,
natural and manmade. We need to think about these things.
If we could just work in these four areas that have been
addressed here today, we could make a huge difference. Help us
keep the attention on this, and let's try to find a way to get
these targeted pieces of legislation done to help people all
over this country when they're faced with future situations
like we had.
Mr. Chairman, I believe my 4 minutes expired----
[Laughter.]
Senator Lott.--about 20 minutes ago.
[Laughter.]
Senator Lott. But thank you very much for your lenience.
Senator Pryor. Thank you.
Senator Klobuchar?
STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA
Senator Klobuchar. That's an act to follow.
Thank you all for being here. And I thought I would tell
Senator Lott that one of my first jobs when I was in college
was, actually taking consumer statutes and writing them in
plain language for the Attorney General's Office of Minnesota.
And I did that as a lawyer; now, I can say that I understand
this issue. And I also was thinking, as I listened to all of
you and appreciated Senator Lott's devotion to this issue, that
during the recess, I was up in Grand Forks, North Dakota, and
East Grand Forks and saw the damage there. Of course, it had
been many years ago, and to the point where the flooding was
two stories high, I think, and there were markers of where this
flooding was, and I saw the tremendous rebuilding that's gone
on, and how things can work when it's done well.
And so, I also have been very concerned, just hearing about
what went on in the southern part of the United States. I've
heard some of the stories around Minnesota. It just seems to me
that when people have these things happen, they should be able
to get insurance, it shouldn't be so hard to get these claims
paid, and that there must be a better way to do this.
I just have a few questions about whether you believe that
more Federal regulation of the property and casualty insurance
industry as a whole is necessary, and if you'd like to see more
Federal/State cooperation, and what Congress could be doing to
make this go more smoothly and be better for the citizens of
this country.
So, Attorney General Hood?
Mr. Hood. I would like to see both State and Federal
regulation. I've always supported the State's authority under
law to cover. But there are gaps now that need to be filled.
Basically, all the Federal regulation that you have is a
Federal criminal prosecution. For an industry this large that
can intimidate a State, such as things that they've done in
Mississippi, is--and then they have--they have a PR machine
that's incredible. You know, they keep talking about they've
paid all these claims, but maybe 1 percent--you know, how they
come at their percentages? They come at their percentages
because those people that they call it a flood claim, they
don't count those claims. They play with the statistics and the
percentages. So, a State can easily be intimidated, leaders in
a State. They pulled out of our State, for example, and stopped
writing new policies. So, there has got to be--what you're
doing, by looking at this issue, has probably kept them from
completely shutting down and pulling out of the State of
Mississippi--State Farm, that is. Allstate, Nationwide, the
other companies are watching what's going on, as well. So, I
thank you for investigating this issue. But I really think that
we need to look at some of the antitrust aspects and have full
Federal and State regulation.
Senator Klobuchar. Thank you.
Ms. Bowman. I think that consumer protections are best done
closer to the consumer, and so I'm more of keeping regulation
at the State level. I think there are some areas that probably
the Federal Government--the Federal Government already is in
the business of insurance regulation, and I think that there
are some areas that are better for the Federal Government to be
in, and that would be the TRIA area, if we see that has--that
has worked well, and probably should continue there. I think
that's been a great incentive for the private companies to
continue to write for those kinds of coverages.
And I appreciate that Senator Lott wants to look at the
antitrust provision of McCarran-Ferguson. Just because it's
been that way for a long time doesn't mean we ought to keep it
that way. But I appreciate the fact that he wants to look at it
carefully before we change it, because I am concerned about the
domestic companies in Arkansas, the small companies, and the
data-sharing information for ratemaking. That is important.
But, again, in--especially in the small States, when we're
looking at consumer protections--I mean, we know a lot of our
consumers on a first name basis, and they know us on a first
name basis. And, again, we get those 40,000 phone calls a year
in Arkansas, and they can call us, they know where to find us,
they can come to our office. And we understand what they're
talking about when they call us and they need help, and we
understand the dynamics, you know, in the small States
especially, when they ask us the questions. And when there is a
disaster, when the small town of Dumas, in Arkansas, is--half
of it is blown away by a tornado, we can get there immediately
and go help them find their insurance agent or their adjuster
and help them within just a matter of hours. And I think that's
very important.
One thing, too, that I think we might want to consider,
that I wasn't asked or--and I'm--sometimes I stick my nose
where I'm not supposed to, but I do that anyway--is when we're
talking about flood insurance, perhaps we should consider--and
the anti-concurrent-cause clause--consider an all-perils
policy. And--you know, look at the all-perils. Have a company
cover all perils so that you don't have the problem with the
anti-concurrent-cause clause issue, so that you don't have to
determine who's going to cover, whether it was wind, water, you
know, something like that. That might be something for them to
look at. And I think that some of the companies have been
approached about this issue, and that it is doable. And perhaps
looking at the flood program in a--maybe a different way, maybe
as more of a backstop or a reinsurance. I think there are some
ideas out there to look at. So, I appreciate the fact that this
Committee--and I told Senator Pryor this yesterday--I
appreciate the fact that this Committee is looking at insurance
as it hasn't in the past several years. I think it's very
timely, and I really do appreciate it. I think it's--I think
it's very important.
But, again, your--I've gone beyond your question, but I'm a
woman and I'm a lawyer, and so I do that all the time. But I do
think--in answer to your question, I do think State regulation,
as far as insurance is concerned, the more we can keep there,
the better. But, again, there are some places where--that we
need your help, and--at the Federal level.
Senator Klobuchar. OK. Thank you very much. I have to get
going, but I will maybe talk to the two of you about this in
the future. So, thank you.
Thank you very much.
Senator Pryor. Thank you, Senator Klobuchar. Thank you for
coming today.
I have a few more questions for the panel. I'm not going to
try to use my entire 4 minutes like Senator Lott did.
[Laughter.]
Senator Pryor. But I may be close to that.
Let me ask, if I can, Mr. Regan, about S. 545.
Mr. Regan. Yes.
Senator Pryor. When I was the Attorney General in my State,
we had some hurricanes. I don't remember if they were in
Florida or exactly where. And, sure enough, we saw some--a lot
of salvage vehicles come in our State, and all kinds of
problems. And, one of the things we learned very quickly is,
our salvage title law at the State level needed some cleaning
up. But the problem is, we could clean ours up, but they could
still come from other States, like Senator Lott talked about a
minute ago. So you think that S. 545 will fix that problem
nationally?
Mr. Regan. I think that the approach of Senator Lott's
bill, which is to push total-loss information into the public
domain faster than that information trickles through the DMV
process and the titling process, will help significantly. This
is really the last set of data that are collected in fairly
discrete places that--you know, basically, the computer
databases of the insurance companies. If we can push that data
out, at the same time continue to push the State DMV data out,
then I think the combination of those two sets of data will be
very powerful. It--you know, to say that it will fix the
problem is a big task, because this is a very--as you well
know, this is a very, very complex set--complex issue with a
lot of complex players and a lot of different stakeholders. But
the last--really the last big unknown out there, I think--or we
think, as an association--is the total-loss data. If we can get
that into the public domain, that will be a very powerful tool,
very powerful information set.
Senator Pryor. Some in the insurance industry--not all, but
some--have been reluctant to have a VIN-based disclosure. Do
you know why they're reluctant?
Mr. Regan. I think, as I've--we've said in our written and
in the oral testimony, they basically have a self-economic
interest. Even if they comply fully with State titling laws,
not every vehicle that is declared a total loss necessarily
gets a salvage title. So, if you're still complying with State
law in pushing that vehicle through the State titling system,
it may not require a salvage title, and the cleaner the title,
the higher the purchase price at salvage auction. Whereas, if
Senator Lott's bill were to become law, that vehicle would be
red-flagged--you know, that VIN would be red-flagged,
basically, as soon as the total-loss settlement occurs. Then
you get less at salvage auction. You know, that's--if you look
at it in that small box, then it's--the insurance company may
take a hit. But we think that the public interest demands that
you look at it, at the big box; the big box being, you know,
what happens to that vehicle after it gets sold at salvage
auction? And questions that we raised in my oral testimony, you
know, how is that vehicle reinsured? Why is it not in the
economic interest of all the insurance companies to know that a
total loss has been declared so that, you know, they're not in
the business of shifting that, you know, one bad apple, you
know, from one company to the other?
Senator Pryor. Let me ask this, too. Why shouldn't the law
require that, at the point of sale, there be a notice or a
sticker or something on a sheet of paper posted in the window
so that there is a notice to the consumer about the status of
that vehicle and whether it has ever been salvaged?
Mr. Regan. In----
Senator Pryor. Why shouldn't we do that?
Mr. Regan. In 1988, that very question was addressed at
great length in the context of the Federal Trade Commission
putting the Car Buyer's Guide rule into place. And ultimately,
the point-of-sale notice requirement, whether it's condition of
use, whether it's notice about a specific defect in the
vehicle, that approach was rejected, in the context of that
very extensive rulemaking; and, instead, the FTC chose to use a
different approach, which is--the Car Buyer's Guide says,
``Here's what your warranty is. If you have a warranty, here it
is,'' whether it's, ``You know, if you don't have a warranty,
it's as-is. If you do have a warranty, it's either limited or
there's the manufacturer's warranty.'' Or, if there's an
extended service contract, there's a box to check on that. And
also, that Buyer's Guide encourages the individual to get the
vehicle inspected. You know, the bottom line, there is no
substitute to buying a vehicle from somebody you know and trust
or, if you're not in that position, there's no substitute to
having the vehicle inspected. And so, it is--you know, the--
while I appreciate your concerns there, in essence, the Federal
Trade Commission has kind of addressed that, and has chosen--in
the 1990s, they reexamined the rule, and they agreed to stick
with the same choice.
Senator Pryor. OK.
Let me ask Mr. Hunter, if I may, about a software issue,
when it comes to claims adjusting and investigation. I'm aware
of two types of software. One's called Colossus, one's called
Claims Outcome Advisor. And there are probably others on the
market; I'm not just picking on those two. But, as I understand
it, some people that have looked at that software believe that
when claims adjusters and companies are using that software,
they will systematically underpay on claims. Is that your
experience? Could you tell the Committee about that?
Mr. Hunter. Yes, that's--there seems to be a--an ability--
and I would encourage you to look at the book ``From Good Hands
to Boxing Gloves,'' which explains how it was used in Allstate,
and--the ``boxing gloves'' being if you don't accept their
offer, which is a lowball, you go--you end up in court. And
that was the recommendation of McKinsey, and that's where that
quote came from, McKinsey's suggestion to Allstate of how to
implement this. And that became the title of the book by a
trial lawyer who brought a case and got these slides of
McKinsey, who introduced Colossus. Colossus, COA, Claims IQ,
were three systems that deal with--those are bodily injury
claims. There are other systems that deal with property damage
claims, like Xactimate and some others that are used, I'm sure,
down in Mississippi, when the--after Hurricane Katrina. So, you
have different types of systems, some of which at least have
the appearance, according to lawsuits and this book, of ability
for the management to dial in a savings that they want to
achieve in the claims process for the following year. And that,
obviously, is a extremely serious situation, and there doesn't
seem to have been any market-conduct examinations that have
caught it. There have been very few market-conduct examinations
that have even touched on it by the States.
Senator Pryor. Should that market conduct be evaluated at
the State level or the Federal level?
Mr. Hunter. State--well, I think it should be evaluated at
the Federal level, because I think there are some serious
questions about how come suddenly all the--you know, many
insurance companies are using these systems. And some will say,
``Well, it's because my competitors are suddenly able to come
in with lower rates, because they're saving so much money on
claims.'' But, nonetheless, whatever it is, it's not fair to
the people who are hurt.
Mr. Hood. Senator Pryor, may I----
Senator Pryor. Yes, sir.
Mr. Hood.--speak out of turn about this issue of software?
This is something that we've found in our investigation that's
disturbing, that the softwares are programmed differently for
the cost payments on the Federal flood program versus the
insurance policies themselves. For example, in the programs
it's set up to pay a dollar for sheetrock removal, where--for
flood program--for us taxpayers to pay it--whereas, if the
insurance company pays, you know, they only pay 60 cents. And
I'm not sure if it's square footage or--I actually have that
calculated. But I do know, for us taxpayers, it's a dollar to
pay it, for the insurance companies, it's 60 cents.
Senator Pryor. And you found out--you found that out
through your investigation?
Mr. Hood. Yes, sir. I think some of those documents are
actually out in public domain, under--where some civil lawyers
have discovered documents. It's--they're running about 9 months
behind us, and I can try to lay hands on those public
documents, where those--that has occurred, as well, and that's
set up in their software system.*
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\*\ [The information referred to is retained in the Committee
files.]
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Mr. Hunter. And it's not just claims. We have black boxes
that are being used to price hurricane insurance that are--a
lot of States have no clue what's going on inside those black
boxes. And then there are black boxes being used by Fair Isaac
and others to come up with credit scoring surcharges, which
sometimes can be 100 percent if you happen to be poor. And
things like that, that are beyond the regulatory reach of the
States, because it used to be that every time a price was
varied within a insurer's pricing system, it was through either
a rating bureau or by the insurer, and was regulated. But it
isn't true anymore. It's not regulated.
Senator Pryor. Mr. Hunter, let me also ask--Ms. Bowman, a
few moments ago, mentioned an all-perils policy. I'd like to
get your thoughts on that.
Mr. Hunter. I ran the National Flood Insurance Program. I
actually would think a all-perils policy would be good. But I'm
very concerned about giving the Federal Government more
authority right now, given the Flood Insurance Program. The
Flood Insurance Program promised the taxpayers--that we tried
to administer when I was running the program--was that we did
a--we--was to--in exchange for a program that gave subsidized
rates to people, the future building would be done wisely, and
that the--and the land use would be controlled in a way that--
and new construction would be paid--would be charged full
actuarial rates. We required that flood maps were updated every
3 years.
In Hancock County, Mississippi, recently, there were 76 new
flood maps. On average, the old flood maps were 20 years old
and were 10 feet too low. So, people were building what they
thought were safe houses, and they were actually 10 feet below
the level. People who thought they were outside the floodplain
were actually in the floodplain, because the floodplain was
much bigger, because the water is much--was much higher.
If the Flood Insurance Program cannot be administered
soundly, why would you expand it to anything new--wind or
anything like that? If a--if the program is encouraging unwise
construction through--and charging inadequate rates; therefore,
the--if I build 10 feet below the flood level, I should pay a
very high actuarial rate, according to the program--but if a--
if the program thinks I'm actually at the 100 percent level,
when I'm not, it's not going to charge me much of a rate at
all.
So, you have all these problems in the current Federal
program. I would be first in line for a--an all-perils policy
involving the Federal Government if we had a way to fix the
flood program and show how the program----
Senator Lott. Would you allow me to jump in?
Senator Pryor. Sure.
Senator Lott. Maybe we could do this----
Senator Pryor. Sure, go ahead.
Senator Lott.--together.
My colleague from Mississippi, Congressman Taylor has an
all-perils bill that he's introduced in the House. I've been
taking a look at it. A couple of my concerns are that--you
know, how would that work? And even though I might not sound
like it, I still want to leave as many things as I can in the
private sector. I don't want us to become the insurance company
for all disasters in America. I'd like the private sector to do
that.
The other thing, though, is--I'm concerned that--for
instance, I saw one proposal that was written up in, I think,
The New York Times, that--where some of the big companies have
proposed, ``Well, yes, we ought to have that. And, by the way,
we ought to say that any disaster that's over $6 billion, the
Government would pick up the rest.'' Well, geez, nice, thank
you very much. In other words, ``If there's any kind of a
problem, we're going to kick it off to you guys.''
And--for instance, I've always--I have supported, since 9/
11, the terrorism insurance. And then, when it came up for
renewal in 2005, there was resistance from the Office of
Management and Budget to extending it. But I was convinced that
we still needed it. But, this time, I'm not going to support
the extension, because what has happened is, the private sector
hasn't stepped in to provide the coverage, because the
Government is doing it.
So, and the----
Mr. Hunter. I total agree----
Senator Lott.--Government's not doing it very well. And, by
the way, you know, we've got to have terrorism insurance for,
you know, buildings in Rankin County, Mississippi. I don't
think that terrorists are going to hit Rankin County.
Mr. Hunter. Yes.
Senator Lott. So, I don't--just--those are a couple of key
questions that I've got to get--you know, settled in my mind.
How do you respond to it?
Mr. Hunter. Yes. Well, I--well, first of all, as you know,
I have historically opposed the extension of the terrorism
program, too, because I don't think it's necessary, and I think
the industry can handle it, except for nuclear/biological/
chemical. I don't--I do think they need help in that area.
But--and I'm--I have historically opposed expanding the
catastrophe coverage nationally, too; in part, because of the
serious, awful problems in the flood program. If the Federal
Government is going to mess up one program, I don't think we
should give them another one to mess up. I think it should be
done as some kind of reinsurance, where the flood part would be
reinsured, but that it would be done under a--under some kind
of formula where the industry had a piece of the action, some
skin in the game--a lot of skin in the game on everything,
except maybe some of the flood and some of the terror--the very
high, mega-catastrophes. But I don't--I don't even want to go
that far yet, because I'm afraid that the Federal Government,
as--FEMA has run this program has made it a mess. And I am--
therefore, I'm reluctant to have--to endorse any kind of even
multiperil policy. But it could be designed in a way that would
maximize private-sector involvement, and work, but it has to
work with real active involvement and oversight by the Federal
Government.
Senator Pryor. Ms. Bowman, did you want to add something?
Ms. Bowman. I did. Can you tell I'm on the edge of my seat?
I was not at all advocating that the Federal Government
take over the all-perils policy at all. I think the private
sector--the private market would do that. The companies would
do that. I agree, the Federal Government should not expand in
that area. And the--then the flood program would become the
reinsurance, possibly, for the all-perils, in some fashion.
And, of course, that would take a lot more study. Again, the
devil's in the details, always. But certainly, as I mentioned,
and maybe wasn't clear on, the companies--I believe that some
representatives from the National Association of Insurance
Commissioners has talked to some higher-ups, whoever they may
be, from some of the bigger companies who say, ``Yes, we think
that is a possibility of our writing the all-perils policies
for--including flood, and to take care of this anti-concurrent-
cause clause.''
Senator Pryor. Attorney General Hood, let me follow up on
that, on the anti-concurrent causation. What is the status of
that right now in Mississippi? How does that stand in your
State right now?
Mr. Hood. A Federal District Court judge made that finding,
and it's now--and the industry has it on appeal to the Fifth
Circuit, as to whether or not it--that clause is valid. He did
it on an ambiguity----
Senator Pryor. OK.
Mr. Hood.--issue.
Senator Pryor. So, in other words, a Federal judge looked
at it, saying, ``Ambiguous. It's going to be construed against
the writer of the policy, the drafter of the contract,'' and
so, right now is it for all insurance companies or just the one
company?
Mr. Hood. The court is applying that same rule of law in
dealing with all the companies on the anti-concurrent cause
provision.
Senator Pryor. OK. So, as it currently stands in
Mississippi, it's on appeal. But the insurance companies lost
that argument at the trial-court level. But on a national
level, these anti-concurrent causation clauses are in insurance
policies all over the country. Is that right? Is that fair to
say?
Mr. Hood. Yes, sir, that's what I understand, that most
every State has that. And that's been their argument, that the
insurance commissioners approved it. But that's not--the--a
State court has the right to decide--and a Federal court, based
upon State law--what is a--an ambiguous provision, or whatever.
And it's our position that that's a violation of our consumer
protection statutes, because it's a bait-and-switch. Anti-
concurrent cause clause, as this Federal judge described it in
his opinion, is that if wind weakens your house, blows the roof
off, as we found in some reports, and then you get an inch of
water in your property and it further weakens the structure,
and then it blows it away, they don't owe you a dime. Nothing.
And here's--let me just tell you, at--this is good example. My
roof in--up in Jackson; I'm about 160 miles inland--on the
house I have blew off. They--State Farm, my insurance, they
paid for my roof, no problem. But take Senator Lott's house,
down there. If it blew it off in--at my house, 180 miles inland
with 100-knot winds, think what it did to his house down there.
They zeroed him out. They say, ``We don't owe you a dime,
because it's the anti-concurrent cause provision.'' Now, that's
just ludicrous. And that's what they're actually--I didn't
believe that they would do it. I didn't believe they would use
that. But in their own court filings--we've got documents where
they--they're arguing all this in court, and they're taking it
up on appeal. They're actually doing it. Some of the smaller
companies go, ``Wait a minute, y'all are abusing this. You
know, you're going to get us all beat, and they're going to
strike this clause nationally.'' And that's probably--hopefully
what will be the outcome of all this, the way they've strong-
armed people--and other companies, too. Allstate, some of the
others, have been using it, as well--abusing it.
Mr. Hunter. The fact that it's in every State is proof of
the weakness of the oversight. This is--if ever there was an--a
dishonest, intellectually ambiguous at least--intellectually
ambiguous, if not-in-the-words ambiguous--it's at least--no one
could imagine that, ``My roof blows off and then an inch of
water 3 hours later, I get nothing.'' You just couldn't
possibly believe it, ``No, my company wouldn't do that.''
People come to an insurance company with trust. And these guys
were--that is such a despicable clause. The fact that every
State has approved it is just--it's a--an embarrassment for
State regulation.
Senator Pryor. Attorney General Hood, let me ask you, on
the salvage title issue with automobiles, have you had a
salvage title problem in your State that is related to Rita and
Katrina? And a second question is, is the State able to know--
where the vehicles that have been totaled as part of the
hurricane, and have been supposedly salvaged out as part of the
hurricane--do they know where those vehicles have ended up?
Mr. Hood. No. We--you know, as--you just have to deal with
what staff we have in our consumer protection.
Senator Pryor. Sure.
Mr. Hood. We were dealing with price gouging and all those
things. We did investigate some of the motor vehicles. We
rattled the chain really hard, threatened a lot of the
wholesalers, basically, if they didn't disclose, if they had
any idea--so, we just tried to beat it down with just practical
applications. But Arkansas, they bring titles over to
Mississippi and wash them----
Senator Pryor. Yes.
Mr. Hood.--because ours is so lax. And, you know, there was
a lot of chop-shops in the hills of northeast Mississippi, and
there was a lot of problems with that. This is a law
enforcement issue that they're raising on this bill. You
remember, it started probably during your tenure as AG. State
Farm actually came forward. Now, I don't know what caused them
to. But us AGs settled with State Farm----
Senator Pryor. Yes.
Mr. Hood.--where they had--they had--they'd have a title,
they'd buy it in, and it would be in the name of the person who
wrecked the car. Then they would take it to a auction. It would
sell, and State Farm's name was never in the title, so you
never knew that it was actually a totaled vehicle. We worked--
--
Senator Pryor. They'd wash it. They'd wash the title.
Mr. Hood. Yes. We worked with them, and they sent people
back to Mississippi and every State in the Union, and us AGs
worked with them. They paid for this, to go track those
vehicles down and pay those people the difference between a
wrecked car and a--and I bragged on them in that. In fresh
releases--I like working with the industries when they do the
right thing. And it is a problem, and, I think, nationally, if
we had a standard titling system, where that title is stamped
``totaled vehicle'' or something, it would really help the
consumers.
Senator Pryor. Yes. I think that's right, too.
One last question for you, Attorney General Hood. We've
talked a little bit about how some of these insurance companies
deliberately, systematically try to underpay claims, and there
are some incentives built in with their adjusters, et cetera,
to try to meet goals and underpay claims. Is it your
experience, after Katrina, that that is still going on in your
State?
Mr. Hood. It is. In their software--there again, it's
required for--if you have three--like carpenter, plumber, and--
three people, contractors you have to hire, then you're
entitled to a--an overhead and profit. And you're--because
you're acting as a general contractor. You're spending your
time off of work, and things like that, to organize these
efforts. We're going to have to go back now and look at all of
these claims for the failure to pay overhead and profit,
because they'll delete--they will shut that provision off in
their software, and they will refuse to pay that to homeowners
who have no clue that they're entitled to additional money. The
homeowners would think, ``I'm not entitled to any additional
money for that.'' But you are. I mean, you're entitled to be
able to hire a general contractor and give them that money. And
so, we--I feel comfortable, based upon the activity I've seen
down there, the way they've handled these claims, we're going
to probably have to go back and re-evaluate all of these claims
with all these companies. And that's a systematic problem that
has been found nationwide. There's been several class-actions
nationally in other States, where they've had to go back and
pay a lot of these damages. So, that's a--that's the next
battle that I've got on the front, and I'd--I'm hoping we can
get this settlement behind us on this one, and then move on and
make sure that they're paying that under the settlement that we
have on the table.
Senator Pryor. OK.
Senator Lott?
Senator Lott. Mr. Hunter, and maybe Commissioner Bowman
would like to get in on this, too, why is it so difficult to
determine what rates will be in the insurance industry? I mean,
you have to set rates or prices in all kinds of industry, but
we have this special carve-out for the insurance industry. And
I--I don't understand why that's so complicated or difficult,
even for a little domestic company, you know, to decide what
rates they're going to charge.
Mr. Hunter. Well, it is an actuarial calculation, and it
does require historic data. And the--but the argument that
they're not--that if you repeal the antitrust exemption, that a
small company could not have access to data is wrong. It's just
wrong. If you go back to the testimony--Representative Jack
Brooks had hearings on the--in the House Judiciary Committee--
lengthy hearings, and I think you've read, maybe, the--some of
the report, because that's where all this oddity of how it--how
the bill passed, the McCarran Act, with people being assured
that it was only a 2-year moratorium and all that, and it
turned out to be a permanent moratorium, with a little word-
changing in conference. And the--but if you look at the
testimony of the hearings, they had these--many experts at--in
antitrust law testify, and they said--every one of them,
regardless of their point of view about whether to--the bill
should be--whether you should repeal it or not--every one of
the experts said that the collection and dissemination of
historic data--purely historic data--would pass muster, because
it would be a pro-competitive act. So, small companies would
still have the data they need. And the--and there's no doubt
about it, if you review that--and I think you see the same kind
of things from the Antitrust Commission and others--that that
would happen. If--the question--where the insurance industry
currently is doing things that would be illegal if you--is when
they actually project the--those historic data into the future
and estimate, ``Well, what's it going to cost next year? What
do you think is--loss is going to be next year? How much is
inflation going to be?'' All--but these are things of
competition, how much is inflation going to be and questions
like that. I mean, if--why don't you allow builders to have a--
their own building antitrust exemption? Because they--it would
be nice for them to be able to know what the--to all agree
together on what the bricks and labor are going to cost next
year, and just add their own profit. But that's what they have
today. The insurance ratings organizations, the cartel-type
organizations, not only collect the historic data, they project
it, they manipulate it, they decide how to tweak it, how to--
what law changes mean, and things like that. They do all these
things that competitors should do by looking at the market. And
small companies would be protected, in terms of getting their
historic data. They would just have to make their own
adjustments to the data. And there are plenty of actuaries
available, and others, to do that. There are consumer actuaries
and other kinds of actuaries, public actuaries. There are more
public actuaries than there are actuaries working in the--like,
ten times more consulting actuaries than there are actuaries
working in rating organizations.
Senator Lott. What about it, Commissioner Bowman? Do you
have any comments on that?
Ms. Bowman. Well, there are several things that go into
ratemaking. One is loss costs, and there are other expenses and
things like that. And when you're looking at experience, for
instance, you need to look at the population. For instance, for
the smaller companies, there--you need to look at credible
data. And when you have the smaller companies, their population
is going to be smaller. For instance, for nursing home
liability, you may only have a population of five nurses. And
so, their loss experience is not going to be very credible. As
opposed to if you were able to pool that data and you're
looking at the loss experience from thousands of nurses, what
has happened in the past, so that you can predict the future.
Senator Lott. Thank you.
Mr. Hunter, do mutual companies pay a less corporate
effective tax rate than stock companies?
Mr. Hunter. I think so, but I'm not really an expert at it.
I----
Senator Lott. Well, who----
Mr. Hunter.--think that you'd better ask somebody else.
Senator Lott.--who is? I can't seem to find out anybody who
can help me----
Mr. Hunter. I believe they get a--I believe they get a tax
break, but I--but I'm not absolutely sure how it works.
Senator Lott. OK. I'll find somebody else to answer that.
Let me just conclude my participation--thank you, Senator
Pryor, for having the hearing and for allowing me to have a
little extra time--I do think we need to look at some law
changes in some of these areas that we've mentioned. But, also,
I always am an incurable optimist at--I believe there's a way
to get a--you know, a result of all of all this. What I'm
looking for here is for the insurance industry to pay--go back,
to pay the claims that have been filed, the lawsuits, settle
those, pay the claims, review the claims--and I'm talking about
all the companies, particularly the big three. What we want is
the people to get fair treatment. That's all we're really
looking for. But that also has to include providing insurance
statewide, including the last foot before you jump into the
Gulf of Mexico, at an affordable rate and a reasonable rate.
That's one of the problems that bothers me. While they're not
settling, and jacking rates, and not paying people, they're
making--they're having these historic, outrageous profits on
the backs of the people that need coverage.
So, what a--you know, if we can find a way to do those
three things, I think, you know, the companies will be better
off, and I know the people will be better off.
Thank you all for your time.
Senator Pryor. Thank you.
Senator Nelson, thank you for joining us today. I know
you've been in a very similar hearing in the Banking Committee.
OPENING STATEMENT OF HON. BILL NELSON,
U.S. SENATOR FROM FLORIDA
Senator Nelson. Thank you, Mr. Chairman. We're trying to
move a bill that Senator Lott is cosponsoring in trying to
address this overall question of affordability and availability
of insurance, which is a critical question in the State of
Mississippi. It's a critical question in Florida. And in trying
to address that, to bring consensus in an industry that has no
consensus, as to what should be the Federal role; where,
indeed, there's just outright warfare between insurance
companies and reinsurance companies, and the reinsurance
companies don't want the competition of State catastrophe
funds. The bill also addresses whether or not there should be a
regional catastrophe fund as a backup before you ever get to
the question of should there, or should there not be, a Federal
catastrophe fund, and all of these things.
But you're, Mr. Chairman, focusing more on the oversight of
this insurance industry. And I take it that, as I've been
testifying in the Banking Committee, you've been going into
things like the antitrust exemption and so forth.
Let me just mention, from my own experience, that one of
the problems is, we have a revolving door in the regulation of
insurance. An insurance commissioner in most of the States is
appointed, not elected, as they are in Mississippi and as they
used to be in Florida until I left, and then the insurance
industry had its way and got the insurance commissioner
appointed; and, by the way, in Florida, not even appointed by
one person, like the Governor, so you can have accountability;
he is appointed by the Governor and the entire cabinet. And
albeit the insurance commissioner is doing an excellent job,
and he's a professional, and he worked for me when I was the
elected insurance commissioner; nevertheless, what happens in
most of the States is a revolving door. I want you to hear
this, Senator Lott. The person who is appointed insurance
commissioner comes out of the insurance industry and he or she
is there, on the average, less than a year. And guess what
happens in the revolving door? Goes right back into the
insurance industry. Now, that's one of the things that could
help tighten up the regulation of insurance.
The NAIC is an excellent organization. And they, by the
way, have endorsed our bill to try to build this emergency
consensus commission on the insurance catastrophe. Hopefully,
they're going to weigh in on this, because when the big ones
hit, Katrina and Rita, they were Category 3's. And a Category 3
did to your coast, Senator Lott, exactly what you would expect
a Category 3 to do. But what everybody didn't expect was, on
the back side of the hurricane, in the winds from north to
south, all of the additional water caused the drainage canals
to drain into the main canals, the canals filled up, the
pressure built and breached the canals in two places, and the
rest of the bowl of New Orleans filled up, with all the
attendant economic and personal loss that occurred.
So, I know you've got one of the best right there because I
used to get him to help me. And yet, we've got a problem. And
we've got to address this problem. And I don't know how to
address it, other than trying to do it the way we were
confronted in the mid-1990s in Florida, with a paralyzed
marketplace, and that is to reach out and build consensus. The
argument that I made today in the Banking Committee--look at
the experience of Katrina. It's well over $200 billion of
economic loss, and guess who has paid most of that? Uncle Sam.
Well over $100 billion that Uncle Sam is shouldering. And, as a
result, at the end of the day, in these major kind of natural
catastrophes, the Federal Government's going to pick up the
tab. So, why don't we have a rational system in which to pick
up the tab, and where risk ought to be allocated, and how you
best mitigate that risk? And that means a lot of things, not
just, you know, catastrophe funds; that means building codes
being enforced and new building materials and new building
structures and better weather forecasting.
By the way, we've got a satellite under the jurisdiction of
this Committee that has gone on the blink--no, it hasn't gone
on the blink--it's a 5-year designed life. We're at the end of
the fifth year. If that satellite goes caput on us--it has
improved our accuracy on the prediction of the path of a
hurricane by 15 percent--if it goes out, we are--and we don't
have a replacement. And, of course, that, in this Subcommittee
that I chair, is one of the alarm bells that NOAA or NASA or
somebody needs an additional $400 million. We put that
satellite up within 12 months, from start to finish. We could
do that on this particular satellite. That's just another part
of this very complicated problem.
I didn't ask a question. I just pontificated.
[Laughter.]
Senator Pryor. Do you want to ask a question?
Senator Nelson. Well, I would hate to go by the opportunity
of hearing all of these eminent witnesses without saying
something, but what do you think about what I said, Mr. Hunter?
Mr. Hunter. You know I always agree with everything you
say, Senator.
[Laughter.]
Mr. Hunter. You weren't here when I said that my daughter,
who lives in Hollywood, just got her premiums charge of a
little over $5,000, and can't afford it, and wants to know if
she can still stay in Florida.
Senator Nelson. It has gotten so bad. People cannot afford
to stay in their homes because of the double whammy of property
taxes and insurance premiums. And that's the subject upon which
we just testified to the Banking Committee, with Governor
Crist.
Mr. Hunter. Well I think what Florida did was--in the
special session, was very thoughtful and wise, to
disintermediate some of the reinsurance. Because I was asked,
then, to come down and do some of the calculations for the
State, and we found that the reinsurers were charging up to ten
times their own actuarial rate calculation in the layers we
were looking at. And so, as a result, they were--and they
admitted, when we talked to them privately, that they were
greedy.
Senator Pryor. Any other questions?
Senator Nelson. Well, I would just add this. Part of the
way that we worked our way out of the problem back in the early
1990s, after the monster hurricane, Hurricane Andrew, people
could not get insurance from the private marketplace. All
right? The entire economy of a state such as Florida was
operating on the availability of homeowners insurance because
if you don't have homeowners insurance, you can't build homes,
and you can't sell homes, and you can't make loans on homes.
Now, I have just mentioned three major industries that are the
engines of a state's economy: construction, real estate, and
banking. The way that we had to address it, since the private
marketplace did not respond--because the insurance companies
wanted to pull out, and they were; we had 11 insurance
companies go bust after Hurricane Andrew. We had insurance
companies fleeing the state of Florida. And those who stayed,
like Allstate, canceled 50,000 policies. By the way, they're
doing that in droves right now as a result of the 2005
hurricanes.
So, where was the only place that people could get
homeowners insurance so that the State did not economically
grind to a halt? It was a quasi-government insurance company.
Then, it was called the JUA, the Joint Underwriting
Association. Today it's morphed into a bigger creature called
Citizens Insurance Company.
Interestingly, what the legislature of Florida has just
done is, the previous law said that you could only get
insurance from that creature as a last resort, if it wasn't in
the private marketplace, and the rates in that creature--then
the JUA, now Citizens--had to be higher than the normal
marketplace, because it was last resort. Problem was, last
resort was the only place that people could get insurance. So,
today the legislature in Florida has made that quasi-government
insurance company a competitor of the private marketplace, much
to the chagrin of the insurance companies. They don't want the
competition. But you can't have it both ways. You can't say,
``You're going to have the free reign of the market
competition, and then you did not, Mr. Insurance Company, offer
the free marketplace insurance policies so that people could
buy them.''
So, now we're suddenly seeing, just as a result of that one
thing--the Governor just testified this morning that he's
seeing rates come down as a result of that.
Would you comment on that, Mr. Hunter?
Mr. Hunter. Yes, I--I think that the expansion of Citizens
into full homeowners policy and the competitive approach is
wise. If you look at several States that have done competitive
State funds for worker's comp, they've worked quite well, and
have stabilized some tough markets.
What bothered me more than anything--and I even mentioned
this earlier, before you came--is, when I was commissioner in
Texas, and before that, when I was working with Florida, when
the Academic Task Force was working on the post-Andrew stuff--
is that the industry--basically, we said we need three things,
we need models for rates, because we would--and we agreed with
them--and they--and--but it meant doubling, tripling,
quadrupling the rates--they said we needed a Citizens or
someplace to dump our high risks, and we need to cut our
coverages with deductibles and other things. And if we do that,
and we understand it's going to be painful, in the future
you're going to have stability. That was what they told me in
Texas. And I believe that's what they told people in Florida,
too.
But now we don't have that stability. And that, to me, is--
especially at times of incredibly high profits, for them to be
acting so precipitously people--to drop people, to jack up
prices, double, triple, just--and walk away--I find that just
very hard to take, given the promises that were made a decade
ago.
Senator Nelson. There's a phrase, Mr. Chairman, in
insurance that is typically applicable to health insurance. And
the phrase is ``cherry-picking.'' And what it means is that an
insurance company is going to cherry-pick, like picking
cherries, the risks that it wants to insure. Well, guess what
those risks are? Those risks, in health, are the less risky
person, the healthier person, the younger person. They don't
want to insure the old and infirm because that's where they're
going to have to pay out. So, too, in the property and casualty
market. What you're seeing is, they want to shed this risk
because they feel like it's too much of a risk. They want to
make money on less risk because they have more certainty of
making money.
Now, that's the way, if you're running a business, you'd
certainly like to have it. But what are they in the business
of? They're in the business of insuring risk with a commodity
that is, now, not a luxury, it's a necessity because you can't
own a home unless you have insurance, unless you don't have a
mortgage. You can't drive a car unless you have insurance
because it's State law. And you sure better have some health
insurance. And if you don't, we see the consequence of that
with 44 million people who are uninsured, of which all of the
rest of us pay, because they do get healthcare.
I think we've got to rethink this whole issue. Now, I don't
know that I'm where Senator Lott is with regard to the
antitrust exemption. I just simply haven't immersed myself into
that enough. But I know that we're at a time in which the
Federal Government, if it is going to pay the tab of a major
catastrophe, at the end of the day, we have to have a more
rational system. And the private marketplace, that normally
would work, will not work when the risk is so high that no one
company can withstand the risk. And that's what we are
presented with regarding these potential natural catastrophes.
And it doesn't have to just be a hurricane; it can be an
earthquake in San Francisco, or an earthquake in Memphis; it
can be a tsunami, of which we have seen the effects over in
Asia; it could be any number of things. And we've got to get
our mind above this and ahead of the power curve.
Thank you, Mr. Chairman.
Senator Pryor. Thank you, Senator.
We're going to keep the record open for 2 weeks for Senator
who want to submit questions in writing.
Also, I noticed Senator Lott offered some documents. We'll
certainly make those part of the record.
And I want to, again, thank the witnesses for being here. I
know you traveled distances to be here, and I appreciate you
all being here. And we're going to continue to look at
insurance issues over the course of this Congress, and I really
appreciate you all getting us started on the right foot.
So, the hearing is adjourned. Thank you.
[Whereupon, at 11:15 a.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Michael R. Calvin, Interim President and CEO,
American Association of Motor Vehicle Administrators
Thank you for providing the American Association of Motor Vehicle
Administrators (AAMVA) the opportunity to provide a written statement
for the printed record to clarify some information about the National
Motor Vehicle Title Information System (NMVTIS), state motor vehicle
titling laws and Passenger Vehicle Loss Disclosure Act (S. 545).
AAMVA is a state-based, non-profit association representing motor
vehicle agency administrators and senior law enforcement officials in
the United States and Canada. Our members are the recognized experts
who administer the laws governing motor vehicle operations, driver
credentialing, and highway safety enforcement.
NMVTIS is a system that allows an electronic means to verify and
exchange titling, brand, and theft data among motor vehicle
administrators, law enforcement officials, prospective purchasers and
insurance carriers. NMVTIS allows state titling agencies to verify the
validity of ownership documents before they issue new titles. NMVTIS
also checks to see if the vehicle is reported ``stolen''--if so, the
states don't issue the new titles. Brands are not lost when the vehicle
travels from state to state, because NMVTIS keeps a history of all
brands ever applied by any state to the vehicle.
NMVTIS, once fully implemented nationwide, will allow access to a
variety of vehicle-related information for consumers, dealers, lenders,
insurance companies, law enforcement officials and state motor vehicle
administrators. AAMVA and its membership have continuously demonstrated
its ongoing belief in NMVTIS by investing more than $25 million of
AAMVA money for development, deployment, marketing and maintenance of
the system. This investment by AAMVA far exceeds the investment made to
date by the Federal Government in this federally mandated system.
Through AAMVA's continued efforts to implement the system, data on
approximately 55 percent of all registered vehicles in the United
States is available through NMVTIS (See Appendix A). Many of the states
have seen tangible benefits from using NMVTIS (Appendix B). For
example, in March 2005, the state of Florida cracked a car theft ring
responsible for cloning more than 250 cars worth $8 million and it was
able to identified cloned vehicles prior to issuing new titles as a
result of working with other participating states of Arizona and
Virginia. As another example, the state of New Hampshire has benefited
from the recapturing of brands lost by other non-participating states--
1,760 in 1 month, which helps to eliminate washed titles. As you can
see from these examples, AAMVA has been successful in our effort to
complete the implementation of NMVTIS. What Congress must remember is
that the implementation of NMVTIS is still the responsibility of the
Federal Government. AAMVA, as the operator of NMVTIS on behalf of the
Department of Justice, has developed and is operating the system that
has been fully implemented in several states. Additionally, a number of
other states are currently in development, and several other states,
while not fully on-line with NMVTIS, are providing data to the system.
A nationwide role out of NMVTIS has been severely hampered by a
lack of Federal funding for this Federal mandate. Additionally, the
continuing failure of the Department of Justice to complete its
rulemaking responsibilities regarding the reporting of total loss
information from insurance companies, as well as information from junk
and salvage operators, has also contributed significantly to the delay
in fully implementing the system. Federally authorized reviews of the
system, as well as the events of September 11, 2001, have also
contributed to implementation delays. If Congress would provide the
necessary funding, and prompt the Department of Justice to complete its
rulemaking responsibilities, it would be more compelling for the
remaining states to become on-line participants in NMVTIS.
AAMVA believes the long-term NMVTIS financial model initially
envisioned by the association, when fully implemented, will be self-
sustaining. The AAMVA Board of Directors developed and approved a
financial strategy that would ensure the economic viability of the
system. This plan is based on an annual fee structure for participating
states that will, when all states are fully implemented, provide the
funding necessary for the operation and maintenance of NMVTIS. This
funding plan does not, at this point, include any potential revenue
that could be generated by providing information to private sector
users, but those potential future revenues could be used to lessen the
financial impact on the states.
AAMVA continues to strongly believe that the Federal Government
should fund NMVTIS until it has been implemented nationwide (See
Appendix C). As a result of the support from members on this Committee
and other Members of the Congress, both the House and Senate included a
soft earmark in the FY 07 Commerce, Justice, and Science Appropriations
bill, however the year-long CR eliminated all projects.
Thank you for the opportunity to comment on the current and future
status of NMVTIS. AAMVA continues to believe that, when fully funded
and implemented nationwide, NMVTIS can meet all of the original
intentions of the Anti-Car Theft Act of 1992, including public access
to pertinent vehicle information prior to their purchase of a vehicle.
If S. 545 moves forward from the Committee, AAMVA request that language
be added requiring (a) that the total loss information be supplied to
NMVTIS and (b) the Departments of Justice and Transportation work
together in order to adopt the same terminology in order to prevent
confusion.
We appreciate support from members of the Committee in trying to
get Federal funds in the FY 07 CJS bill and we would appreciate if the
Committee can help get the Department of Justice to complete their
required rulemaking, and look forward to working with all interested
parties to ensure the successful nationwide implementation of NVMTIS.
Appendix A
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Appendix B
Participating States Reap Tangible Benefits From National Motor Vehicle
Title Information System (NMVTIS)!
Arizona
Has detected 15,864 possible stolen vehicles.
Identified cloned vehicles prior to issuing new titles as
result of working with other participating states of FL and VA.
Identified duplicate titles initiated by a crime ring using
Canadian documents.
Has realized a closer and more efficient working
relationship with law enforcement.
Has experienced a reduction in customer wait time and the
ability to identify problems upfront due to online, accurate
data.
Florida
In March 2005, FL cracked a car theft ring responsible for
cloning more than 250 cars worth $8 million.
Identified cloned vehicles prior to issuing new titles as a
result of working with other participatingstates of AZ and VA.
Indiana
BMV Title Supervisor, who has oversight of NMVTIS, declared
``NMVTIS is the best tool ever used!''
Stated that NMVTIS identifies brands daily that were missed
by non-participating states (i.e., titlewashing).
Has experienced a great reduction in lawsuits by consumers
who were given clear titles with missing brands (e.g., salvage,
rebuilt).
Has realized a closer and more efficient working
relationship with law enforcement.
Iowa
Since August 16, 2004, IA Motor Vehicle Enforcement has
investigated 161 reported stolen vehicles--resulted in seizure
of stolen vehicles and apprehension of suspects.
Has carried forward brands that would have otherwise
remained ``washed'' from the titles.
New Hampshire
Identified cloned vehicles prior to issuance of a new title
which eliminated additional clones.
Saves time and money by no longer requiring clerk to
manually update state record with returned title information--
NMVTIS does is instantly!
Benefit from capability to track which vehicles are moving
to be registered in another state.
Have detected possible stolen vehicles--46 theft notices
received in 1 month.
Has benefited from the recapturing of brands lost by other
non-participating states--1,760 in 1 month--eliminates washed
titles.
NH's MV Supervisor, who has oversight of NMVTIS, stated the
amount of funds spent to implement NMVTIS ``represents a small
fee considering the savings on . . . insurance fraud, cloning
vehicles, stolen vehicles, odometer fraud, preventing washed
brands for consumer protection--all thanks to NMVTIS!''
Ohio
Has experienced ``exceptional cooperation'' with OH Law
Enforcement, consumers, licensed OH dealers and motor vehicle
insurance carriers.
Since August 2004, has detected 3,817 possible stolen
vehicles through NMVTIS.
Since August 2004, has carried forward 22,458 vehicle brands
through NMVTIS.
South Dakota
Has captured brands lost by other non-participating states.
Saves time and money by no longer requiring clerk to
manually update state record with returned title information--
NMVTIS does is instantly!
Virginia
Has seen a 17.47 percent decrease in motor vehicle thefts
since 1992.
Averages 8,640 hits on stolen vehicles per year.
Has captured brands lost by other non-participating states.
Discovered ``cloned'' vehicles prior to issuing new titles
as result of working with AZ and FL.
Appendix C
NMVTIS Timeline and Federal Funding Provided
1992
Anti-Car Theft Act passed; DOT has oversight of NMVTIS
1993
1994
1995
1996
Initial funding from DOT--$890,000
Pilot states are identified
Anti-Car Theft Improvements Act is passed, moving NMVTIS
from DOT to DOJ
1997
Initial DOJ funding--$1 million
Additional pilot states are identified
1998
DOJ funding--$2.8 million
1999
Pilot completed
GAO recommends DOJ perform a life-cycle cost benefit
analysis
DOJ funding frozen (combined w/2000 appropriation)--$3.05
million (had been $3.15 million; $100,000 deducted for GAO cost
benefit analysis)
2000
System in production
GAO still conducting cost benefit analysis
DOJ funding frozen (combined w/1999 appropriation)--$3.05
million (had been $3.15 million; $100,000 deducted for GAO cost
benefit analysis)
June--GAO publishes its cost benefit analysis report: the
system is found to have the potential to save consumers from $4
billion to $11.3 billion annually
DOJ releases FY99/00 funding--$6.1 million
9/11 occurs and the emphasis moves from vehicle to drivers/
identification issues
No funding received for 2 years
2002
No Federal funding provided
2003
DOJ funding--$3 million
2004
DOJ funding--$494,700
2005
No Federal funding provided
2006
IJIS releases a report for DOJ revaluating NMVTIS and
concludes that ``NMVTIS program provides an invaluable benefit
to state DMVs and the public community as whole''
2007
The U.S. House and Senate included NMVTIS in both the FY 07
CJS spending bills but Congress did not enact individual
appropriations bills.
______
Prepared Statement of The National Association of Realtors
Introduction
The National Association of REALTORS (NAR) appreciates
the opportunity to present its views on property and casualty insurance
to the Committee on Commerce, Science and Transportation. We thank
Chairman Inouye and Ranking Member Stevens for holding this hearing to
investigate this issue of concern to homeowners and commercial property
owners in the Gulf Coast and other regions of the country.
The National Association of REALTORS is America's largest
trade association, representing more than 1.3 million members involved
in all aspects of the residential and commercial real estate business.
Ensuring the availability and affordability of property and casualty
insurance, therefore, is a top priority for members of NAR.
The storms that hit the Gulf Coast region in 2004 and 2005 have had
a significant impact on the availability and affordability of property
casualty insurance for homeowners and commercial property owners in the
region. These effects have been felt up the Atlantic seaboard as far
north as New England. Even states that have not suffered catastrophic
losses in decades are feeling the effects of insurance companies not
renewing policies and refusing to write new policies, especially in
coastal areas. In addition, the costs associated with the Federal
recovery efforts from these storms are being borne by taxpayers across
the country.
It is for these reasons that NAR strongly encourages the members of
this committee and Congress to develop a comprehensive policy that will
protect property owners, address insurance availability and
affordability, acknowledge the importance and limitations of markets,
and recognize the respective responsibilities of property owners and
all levels of government.
Overview
The catastrophic events of 2004 and 2005 have shown the need for a
comprehensive, forward-looking natural disaster policy. Such a policy
would recognize that property owners, private insurance markets, and
all levels of government must work together in order to successfully
address the problems (e.g., lack of available and affordable property
insurance) currently plaguing disaster-prone areas.
The availability and affordability of property insurance is, at its
core, a consumer issue. The importance of available and affordable
insurance to homeowners, commercial property owners and those who would
like to own their own home or place of business cannot be overstated.
Unfortunately, it is also something that consumers nationwide--even
those who are not in what have traditionally been considered
``disaster-prone'' areas--now know all too well.
The National Association of REALTORS believes that any
real solution to the insurance problems now facing this country must go
beyond a discussion of natural disaster insurance and include a
comprehensive natural disaster policy that addresses, but is not
limited to, insurance availability and affordability. A comprehensive
natural disaster policy also should take into account the
responsibilities of multiple actors including property owners,
insurance companies and each of the different levels of government in
preparing and paying for future catastrophic events. Consequently,
although this hearing is titled ``Oversight of the Property and
Casualty Insurance Industry,'' our statement offers suggestions for
what REALTORS believe should be included in a comprehensive
approach to addressing future catastrophic natural disasters.
Residential and Commercial Properties at Risk
A strong real estate market is the linchpin of a healthy economy,
generating jobs, wages, tax revenues and a demand for goods and
services. In order to maintain a strong economy, the vitality of
residential and commercial real estate must be safeguarded.
Today, insurance availability and affordability concerns are not
limited to the Gulf Coast region. We have heard from REALTORS
in numerous states, including New York, New Jersey, South Carolina and
North Carolina, expressing concerns about the availability and
affordability of property insurance. Their insurance concerns extend
beyond homeowners' insurance and include multifamily rental housing and
commercial property casualty insurance.
Insurance is a key component to financing the purchase of real
estate. Without property casualty insurance, lenders will not lend;
without insurance, borrowers are typically in default of their mortgage
terms. The limited availability and high cost of insurance, therefore,
not only threatens the ability of current property owners to hold onto
their properties, but also to slow the rate of housing and commercial
investment in these communities. Either of these threats could, in
turn, further delay the rebuilding of communities on our storm-ravaged
coasts.
The inability to obtain affordable insurance is a serious threat to
the residential real estate market, impacting not only single family
detached homes, but condominiums, co-operatives and rental units as
well. New home purchases, resale transactions and housing affordability
are affected in the following ways:
Homeowners' insurance is a necessary component in securing a
mortgage and buying and selling a home. If a potential
homebuyer is unable to obtain or afford the required insurance,
the sale will not be completed. As a result, potential
homebuyers are excluded from the market.
The cost of owning a home is directly tied to insurance
costs. Homeowners are required by their mortgage lenders to
maintain homeowners insurance, regardless of its cost. If the
homeowner is unable to afford the cost of that insurance, the
mortgage is in default and the lender may foreclose. If
disaster insurance coverage is required, potential buyers may
choose not to purchase a home because the insurance they need
is too expensive. If disaster coverage is optional but
expensive, owners may choose to go unprotected.
Insurance costs impact rent levels. Insurance costs incurred
by multi-family property owners are ultimately passed on to
tenants through higher rents. This impacts housing
affordability, particularly for low-income renters.
Many of NAR's commercial members in the Gulf Coast and coastal
regions have also reported problems with commercial insurance
availability and affordability. Members have experienced large
increases in premiums--in some cases more than four-fold with
concurrent increases in deductibles and decreases in coverage--and in
some cases, a complete lack of availability. These changes put the
property owner at greater financial risk to recover from losses, while
also affecting property values since dramatic insurance increases often
cannot be passed on to tenants. For example, in the multifamily housing
sector, the ability to pass on increased insurance costs in the form of
higher rent is often limited by market conditions, rent stabilization
laws and strict limits imposed on federally subsidized landlords. The
commercial property owner faces similar problems because leases may
cover more than 1 year and may include limitations on the amount of
expenses that may be passed on to the tenant. Thus, when insurance
costs rise from $0.10 to $0.50 cents per square foot, the landlord must
absorb most of the increased costs.
Often it is the smaller property owner that suffers the greatest.
Small owners cannot offset the increases in insurance costs for one
property with lower insurance costs in other parts of the country; nor
are they able to negotiate a lower multiple property rate. In
commercial real estate, there is a point at which insurance becomes
unaffordable--when insurance expenses are so high that the property no
longer generates sufficient income to cover expenses. This problem
forces many owners to sell their property.
Catastrophic Natural Disasters are a National Issue
The catastrophic events of 2004 and 2005 should serve as a wake up
call that highlights not only the importance of having insurance, but
also that individual property owners, insurance companies, all levels
of government, and taxpayers have a role in preparing for and
recovering from future catastrophic events. The ongoing recovery from
these storms shows that all taxpayers in the country have a stake in a
Federal natural disaster policy because their tax dollars are funding
recovery efforts.
As a result of the 2004 and 2005 hurricanes, attention has focused
on Florida and the Gulf Coast states, but other areas of the country
are also susceptible to large-scale natural disasters. Damage caused by
any of the following events could be as great as, if not greater than,
that caused by Hurricane Katrina: a repeat of the 1906 San Francisco
earthquake, another 1938 ``Long Island Express'' hurricane, or a
significant seismic event along the New Madrid fault, which extends
from northeast Arkansas, through southeast Missouri, western Tennessee,
western Kentucky to southern Illinois. While it is true that not all
areas of the country are susceptible to the large-scale disaster
scenarios above, the effects of these disasters certainly would be felt
by all taxpayers.
Elements of a Comprehensive Natural Disaster Policy
The National Association of REALTORS encourages Congress
to develop a comprehensive natural disaster policy that encourages
personal responsibility, promotes mitigation measures, ensures
insurance availability, and strengthens critical infrastructure (e.g.,
levees, dams, bridges, etc.). NAR supports the creation of a Federal
natural disaster policy that will promote available and affordable
homeowners' insurance in disaster-prone areas.
NAR supports the creation of a Federal policy to address
catastrophic natural disasters that:
1. Protects property owners by ensuring that transparent and
comprehensive insurance coverage is available and affordable,
with premiums being reflective of the risk involved;
2. Acknowledges the importance of personal responsibility of
those living in high-risk areas to undertake mitigation
measures, including the purchase of adequate insurance;
3. Provides property owners adequate incentives to undertake
mitigation measures where and when appropriate;
4. Acknowledges the importance of building codes and smart land
use decisions while also emphasizing that proper enforcement of
both is best left in the hands of state and local governments;
5. Recognizes the role of States as the appropriate regulators
of property insurance markets while identifying the proper role
of Federal Government intervention in cases of mega-
catastrophes; and
6. Reinforces the proper role of all levels of government for
investing in and maintaining critical infrastructure including
levees, dams, and bridges.
NAR believes that now is the time for Congress to address a
comprehensive natural disaster policy that includes natural disaster
insurance. The lack of a national natural disaster policy has had a
measurable direct impact on the availability and affordability of
property casualty insurance in many parts of the country. The inability
to obtain affordable homeowners' insurance is a serious threat to the
residential real estate market--and thus, our economy.
Homeowners and commercial property owners need insurance to protect
themselves, their families and their property in case of catastrophe.
However, if insurance is not available or affordable, many make the
unfortunate, but understandable, decision to purchase only the minimal
amount or type of insurance required. This is precisely the decision
many Californians have made--buying the required property casualty
coverage but foregoing earthquake insurance due to its high cost. The
problem with this rational economic decision is that if ``the big one''
hits, and people are not insured for that type of catastrophe, then the
American Taxpayer, that is to say everyone in the country, will pay.
NAR believes that people who bear risk should pay a fair share--by
obtaining and maintaining adequate insurance coverage.
Property owners should have confidence that their homes and
businesses will survive future catastrophic events. Appropriate
mitigation measures can help to create that confidence. Federal and
state governments can provide incentives (e.g., tax credits, insurance
rate reductions) to property owners to undertake appropriate mitigation
measures for their homes and businesses. Research conducted by the
Multihazard Mitigation Council of the National Institute of Building
Sciences found that a dollar spent on mitigation saves society an
average of four dollars.\1\
---------------------------------------------------------------------------
\1\ Multihazard Mitigation Council, ``Natural Hazard Mitigation
Saves: An Independent Study to Assess the Future Savings from
Mitigation Activities, Volume 1--Findings, Conclusions and
Recommendations,'' National Institute of Building Sciences, Washington,
D.C. (2005), p. 5.
---------------------------------------------------------------------------
States are the appropriate regulators of property insurance
markets, but there is a proper role for the Federal Government in
addressing mega-catastrophes. Some disasters are just too large or
unpredictable for the private market to deal effectively with the
resulting damage. At some level, there may be an appropriate role for
the Federal Government to intervene in insurance markets to prevent
market disruption and insolvencies among insurance companies. The level
of intervention, however, must be set at a level that will not
interfere with normal market forces. The difficulty lies in determining
the level at which such intervention would be appropriate.
Finally, an essential part of a comprehensive natural disaster
policy is the recognition of the basic responsibility of government at
all levels to build and maintain infrastructure. Hurricane Katrina was
not the largest hurricane to ever hit the Gulf Coast, but the failure
of the levees protecting New Orleans contributed significantly to the
loss of life and property from that storm. USA Today reported on
January 29, 2007, ``The Army Corps of Engineers has identified 146
levees nationwide [including three in Hawaii, two in Alaska, and 13 in
Arkansas] that it says pose an unacceptable risk of failing in a major
flood.'' \2\ According to the article, the City of Hartford,
Connecticut last year spent $5 million to repair levees to protect
thousands of properties worth approximately $2 billion--properties that
otherwise would have been required to purchase flood insurance.\3\ The
cost of maintaining levees can prove very costly, but is a relative
bargain when compared to the potential loss of life and property as
shown by the failure of the levees in New Orleans. Moving forward, NAR
believes that all levels of government must do a better job of
shouldering their respective responsibilities.
---------------------------------------------------------------------------
\2\ Peter Eisler, ``146 U.S. Levees May Fail in Flood,'' USA Today,
January 29, 2007. http://www.usatoday.com/news/nation/2007-01-28-
levees_x.htm?POE=NEWISVA.
\3\ Ibid.
---------------------------------------------------------------------------
To summarize, NAR believes that it is in the best interests of all
Americans to have a comprehensive Federal natural disaster policy that
includes aggressive mitigation and appropriate assumption of risk so
that affordable insurance for homeowners and commercial properties is
available. Having a comprehensive natural disaster policy is essential
in the coming years. There is no guarantee that 2007 or any future
years will be as benign for natural catastrophes as 2006. The question
is not whether there will be another Katrina-like event in size and
scope of destruction, but when. As we have learned, it is far less
costly to prepare ahead of time than to fund recovery efforts.
Proposed Legislative Approaches
Congress has, with varying levels of success, debated and voted on
natural disaster legislation since the 1990s. The National Association
of REALTORS encourages a healthy and vigorous debate during
the 110th Congress that leads to sound and productive legislation. NAR
supports the efforts of Members of Congress, especially Senators Bill
Nelson (D-FL) and Mel Martinez (R-FL), who have introduced and co-
sponsored seven bills to address this critical issue.
Legislation introduced in the Senate during the 110th Congress
takes different approaches to addressing the natural disaster insurance
issue including: allowing insurance companies to accumulate tax-
deferred catastrophic reserves (S. 926), allowing homeowners to create
catastrophic savings accounts similar to health savings accounts (S.
927), offering mitigation tax credits (S. 930), streamlining
regulations for ``surplus lines'' of insurance (S. 929), creating a
Federal fund to sell reinsurance to states with catastrophe funds (S.
928), funding hurricane research (S. 931), and creating a bipartisan
commission to study various insurance-related ideas and report back to
Congress (S. 292).
Mitigation has been proven to save money in the long-run. Ensuring
that infrastructure is sound, as shown by the comparison of Hartford
and New Orleans above, can also be life-saving. NAR believes that all
reasonable proposals should be considered as part of a comprehensive
solution to address future catastrophic events. The ultimate result of
any legislation should be to ensure that property casualty insurance is
available and affordable to homeowners and commercial property owners.
As a first step toward creating a comprehensive natural disaster
policy, NAR strongly encourages the Senate to enact legislation to
reform the National Flood Insurance Program in order to ensure its
long-term viability.
Conclusion
Thank you again for offering the opportunity to present to the
Committee the views of the National Association of REALTORS
on the need for a comprehensive natural disaster policy. NAR encourages
Congress to develop a comprehensive approach to natural disaster
preparedness that encourages personal responsibility, promotes
mitigation measures, ensures insurance availability, and strengthens
critical infrastructure (e.g., levees, dams, bridges, etc.).
Passage of an appropriate comprehensive national disaster policy is
a top legislative priority for REALTORS nationwide. We stand
ready to work with the members of the Committee on Commerce, Science,
and Transportation and others in Congress to develop a responsible
natural disaster policy that addresses the needs of consumers, the
economy and the Nation.
______
Response to Written Questions Submitted by Hon. Maria Cantwell to
Julie Benafield Bowman
Question 1. It appears in the wake of large past catastrophes such
as Hurricanes Katrina and Rita, insurance companies are choosing to
reduce significantly their risk exposure by increasing deductibles,
non-renewing policies, and not writing new policies. You mentioned in
your testimony that, due to the New Madrid fault, parts of Arkansas are
at risk for earthquakes. As you know, Washington State is also at risk
for earthquakes. Even so, it has been reported that nearly eight out of
ten Washington homeowners are not covered by earthquake insurance.
First, a homeowner must qualify for earthquake coverage. Next, there is
usually a high deductible and--given the value of the average home
today--the homeowner faces paying out tens of thousands of dollars
before coverage would kick in. Finally, the premium frequently proves
to be too expensive given the perceived risk and perceived risk
mitigation. Based on your experience in Arkansas and as a member of
NAIC, do you believe that there are functioning State markets for
earthquake insurance?
Answer. The availability and affordability of earthquake insurance
nationwide is limited by the willingness of insurance companies to
cover it, and for those that are, by the willingness of consumers to
pay for it. This is true even for state-run entities like the
California Earthquake Authority, where the take-up rate is around 14
percent largely because the coverage is expensive and comes with
limitations. Insurers perceive the potential severity of a massive
earthquake to be in the hundreds of billions of dollars; an amount that
could threaten the solvency of the entire industry. In areas of known
seismic risk, where the insurance is clearly most needed, there is
little market to speak of. In areas where there is relatively low
earthquake risk, coverage is readily available at modest prices.
Question 2. Should residential earthquake insurance be included in
a standard homeowner's policy for areas where there is a significant
risk of earthquakes?
Answer. Currently, earthquakes largely are an uninsured peril,
particularly in areas where the threat is greatest, due to the cost and
availability of covering it. Mandatory inclusion of earthquake coverage
would address the uninsured aspect, but not the affordability aspect.
Offering earthquake coverage as an optional coverage also does not
address affordability. Hurricane Katrina has shown us the two prongs of
the problem: the lack of comprehensive coverage, and the high cost of
providing this coverage. We can't solve one without addressing the
other. An all-perils insurance policy that closes gaps in coverage and
gets more people insured is good public policy, and we support that
concept, but Federal Government involvement, or spreading the risk
through capital markets may be necessary to spread the risk over time
and help make such coverage affordable.
Question 3. Should the structure of the home and the contents of
the home have separate deductibles? What are the implications for
separate deductibles rather than a single deductible when filing a
claim?
Answer. Generally there is not a separate deductible for the
dwelling and the contents. If a greater amount of risk is retained by
the homeowner, prices will be lower to reflect the lower loss costs
passed to the insurer. Thus, having two deductibles instead of one
would result in the homeowner retaining a greater portion of the risk.
While this would result in lower prices, it might add confusion to an
already complicated product.
Question 4. An earthquake endorsement in a standard homeowner's
policy generally excludes damages or losses from floods and tidal
waves--even when caused or compounded by an earthquake. However, loss
caused by landslide, settlement, mudflow and the rising, sinking and
contracting of earth may be covered if the damage resulted from an
earthquake. I can see the parallels between Attorney General Hood's
testimony regarding anti-concurrent causation clauses with respect to
Katrina and the earthquake insurance policies offered in my State. Has
NAIC taken a position on insurers use of anti-concurrent causation
clauses in their policies?
Answer. The anti-concurrent cause language in a standard property
insurance policy is a direct result of the bifurcated insurance system
we have, and was developed by the insurance industry to protect
insurance companies from having to pay for losses which are excluded
from coverage and for which they did not collect a premium. Some have
suggested that, following Hurricane Katrina, this provision allowed
companies to avoid paying their obligations of coverage when flood
damage was present. This is not the intent of that language, and the
vast majority of companies do not distort the provision to shirk their
obligations. Despite this, there have been serious allegations that
some companies or adjusters have wrongly denied claims while
misconstruing this provision, and they are now being forced to defend
that contention to their insurance department or in the courts. The
fact that insurers feel compelled to structure their policies to create
legal barriers to segregate various perils (with the cost to defend
these legal barriers often factored into rates), and those barriers add
confusion and uncertainty for policyholders who are now challenging
those barriers in courts, speaks to the need for an all-perils
insurance policy. An all-perils policy would effectively eliminate the
need for the anti-concurrent language along with any possible
distortion or manipulation of its intent.
Question 5. What if any role should the Federal Government play
when it comes to earthquake insurance?
Answer. If earthquake insurance is combined under an all-perils
policy, the cost for those in seismically active areas could make the
coverage unaffordable. All-perils insurance solves the public policy
problem of personal responsibility where those at risk are purchasing
the right insurance, but does not address the other problem of
affordability. The Federal Government should work with the states to
develop mechanisms to address the affordability issue. Again,
delivering comprehensive coverage will eliminate gaps in coverage and
confusion, and then the states and the Federal Government can focus on
making that coverage affordable.
Question 6. I take it from your testimony that you believe
repealing the anti-trust exemption under McCarran-Ferguson Act could
harm the property and casualty insurance market, particularly for
smaller companies, by threatening or eliminating the use of well
established market mechanisms. What are these key specific market
mechanisms?
Answer. The existing market mechanisms that could be threatened or
eliminated if Federal antitrust law were applied to their operation
include:
policy form standardization;
joint underwriting and residual market underwriting (i.e.,
high-risk pools);
sharing loss cost data;
statistical activities conducted by rating and advisory
organization; and
operation of state insolvency funds.
Each of these practices benefits consumers and helps foster a
competitive market for insurance. It is the smaller and medium sized
insurers that would be particularly harmed if these practices were
narrowed or eliminated by operation of the Federal antitrust laws.
Economists have long argued that an efficient and effective market for
insurance depends upon the sharing of information. Smaller insurers
with less claims experience, less sophisticated databases, and fewer
resources benefit from access to collective data about the marketplace.
Limiting the availability of this critical factual information will set
up barriers to smaller insurers entering into and effectively competing
in the market. Standardized insurance forms and definitions of risk
also enhance competition by easing comparison shopping for consumers
and allowing for improved data sharing pools for calculating loss
costs. Joint underwriting provides a method for insurers to share risk
that no insurer would assume alone such as high-value or high-risk
properties. A lead insurer in cooperation with other insurers spread
the risk by each insuring a portion. The limited Federal antitrust
exemption guards these collaborative efforts from charges of
anticompetitive behavior. Repealing the limited antitrust exemption
would squeeze those collaborations and limit the insurance options
available to owners of high-value or high-risk properties. It would
likely chill the ability of any single insurer to write a policy that
assumes total risk and to secure reinsurance as a backstop at a
reasonable rate. Finally, rating and advisory organizations collect and
disseminate statistical information, compile aggregated loss cost data
helpful in trending analyses, and provide other services that allow
small and medium-sized insurers to compete, thereby improving pricing
and choices for consumers. Without rating organizations, small and
medium sized insurers would be harmed by the lack of available loss
cost information necessary for complete knowledge about the risks they
seek to insure.
Question 7. As you know S. 618, the Insurance Industry Competition
Act of 2007 amends the McCarran-Ferguson Act to make the Federal Trade
Commission Act applicable to the business of insurance to the extent
that these businesses are not regulated by state law. What is the
danger of having the FTC provide a floor for consumer protection with
respect to property and casualty insurers for States?
Answer. State insurance regulators have as their primary mission
the protection of consumers. Every state has antitrust and unfair
competition laws, unfair trade practices laws, and laws and regulations
specifically directed at insurance sales and claim practices. State
regulators and attorneys general play complementary and supportive
roles in monitoring and investigating insurers, agents, and brokers to
prevent and punish activities prohibited by those state laws. These
activities involve constantly reacting to changing market conditions
and practices that are often state-specific. It also involves taking an
active role and making adjustments to methods and policies that
anticipate new challenges that threaten consumers and market stability.
Every day conscientious, skilled, experienced regulators monitor and
investigate business activities related to the two major obligations
insurers owe to consumers--issuing sound policies and paying claims on
time. Current Federal expertise and capacity necessary to evaluate
insurer conduct and practices is limited, at best, because of the long
and successful history of state regulation. It would take time for
Federal officials to become sufficiently expert in the business of
insurance to effectively establish consumer protections and there is a
risk that any Federal standards would conflict with or lower existing
state protections. Market uncertainty concerning which enforcement
regime is applicable will harm consumers and insurers.
______
Response to Written Questions Submitted by Hon. Maria Cantwell to
J. Robert Hunter
Question 1. In 2002, Washington State enacted legislation
restricting the use of credit scoring in insurance. Insurance companies
can no longer use credit history to cancel or non-renew an individual's
insurance policy. Insurance companies also can no longer deny coverage
or determine premiums using the absence of credit history, the number
of credit inquiries, collection accounts identified as medical bills,
the initial purchase or finance of a vehicle or house that adds a new
loan to the person's existing credit history, the total available line
of credit, or use of a particular type of credit card, debit card, or
charge card. Even with Washington State's strong laws, I continue to
have concerns regarding the potential disparate impact the use of
credit scores has on protected classes of consumers in my state, and
more broadly, across our Nation.
As you know, Section 215 of Fair and Accurate Credit Transactions
Act of 2003 required the Federal Trade Commission (FTC) to complete a
study regarding the potential disparate impact credit scoring for
insurance purposes has on protected classes of consumers no later than
2 year after enactment. The study is still pending. In your written
testimony, you raised concerns that the data the FTC has chosen to use
for its analysis comes from an insurance industry-sponsored study that
cannot be independently verified for bias or accuracy. You argue that
it is likely that the study will offer an unreliable description of
insurance credit scoring and its alternatives. In brief, how should the
FTC have designed its study to ensure that there is no bias in its
design and the information's accuracy could be independent verified?
Answer. The FTC should obtain data directly from insurers and the
requested data should be driven by the analysis necessary to satisfy
the requirements of the Section 215 study. The FTC has reversed the
process--its study is based upon the data the industry is willing to
provide. It is unreasonable for the FTC to rely upon data the industry
is willing to provide when the industry has a clear interest in the
outcome of the study and when the industry can bias the study by
providing biased data--biased in terms of what data are provided or
biased in terms of incorrect or erroneous data. Attachment 1 is a
letter which describes our concern with the FTC approach and our
suggestions for what they should have done.
(All attachments are retained in Committee files.)
Question 2. Are insurance scoring models treated as confidential
proprietary information under many state laws? What percent of property
and casualty insurers use credit scores as part of their underwriting
decisions?
Answer. Most states treat the insurance scoring models as non-
public information. Texas, Virginia and Connecticut are among the
states which make the models available to the public. The overwhelming
majority of insurers--over 90 percent as measured by market share--use
consumer credit information for either underwriting (decision to offer
or decline insurance), tier rating (which base rate level or rating
tier to assign a consumer to) and rating (as a discount or surcharge
off the base rate). More important, insurers' use of credit information
has great weight, or impact, on the premiums consumers pay. For auto
insurance, the most important factors determining premium are credit
history, prior liability limits and prior insurance. The Michigan and
Texas Departments publish lists of insurers using credit information on
their respective websites.\1\
---------------------------------------------------------------------------
\1\ Links to TX and MI list of insurers using scoring models:
http://www.tdi.state.tx.us/company/creduse.html; http://
www.michigan.gov/cis/0,1607,7-154-10555_12902_15784-111965
_,00.html.
Question 2a. How complex is the model that produces an insurance
score? Typically what factors are included? Typically, how heavily is
an individual's insurance score weighted by his or her credit score?
Has the relative weighting changed over time? Who has the authority to
ensure that prohibited factors are not included in insurance score
models?
Answer. The models range from relatively simple--a dozen or so
factors--to quite complex--several dozen factors. Attached are examples
of eight credit scoring models.\2\ Attachments 2i and 2j show a Summary
of Major Factors and a study of the impact of these factors on pricing
of insurance. What is striking about the models is how few of the
factors related to payment history and how many relate to economic
status and other behaviors not relevant to payment history.
---------------------------------------------------------------------------
\2\ Attachment 2a. ChoicePoint, 2b. State Farm, 2c. Met Life, 2d.
AIG, 2e. Met Gen, 2f. Progressive, 2g. Allstate, 2h. Hartford.
---------------------------------------------------------------------------
An insurance score is based on information in the consumer's credit
history but is not the same as the consumer's lending credit score.
Insurance scoring has taken on greater importance over time in
determining a consumer's premium for both auto and homeowners
insurance. State insurance regulators are charged with ensuring
prohibited factors are not included. However, most state laws are based
on the National Conference of Insurance Legislators' model law, which
provide little consumer protection in terms of prohibited factors in
the scoring models. There is no need to use race as a factor, for
example, because other permissible factors are very predictive of race.
Question 2b. Are some insurers including factors such as education
and occupation as part of their insurance score? Can education and
occupation be considered proxies for prohibited factors? If insurers do
include such factors in its proprietary scoring model, and the model is
kept confidential under the law of the State in which the insurer is
licensed to operate, would there be any opportunity for public
disclosure? If not, should there be public disclosure that insurers are
using such factors, particularly if it results in an adverse decision
for the applicant or current policy-holder?
Answer. A pure insurance score is based solely on information in
the consumer's credit history. Some insurers are developing a scoring
system for tier placement that combines credit history (or pure
insurance score) with other factors, such as prior liability limits,
prior insurance, education, occupation and other factors, typically
related to economic status.
There is generally no opportunity for public disclosure. A few
states require filing of underwriting and tier placement rules--
Michigan, Florida and Texas are examples--but consumers are generally
in the dark about what factors insurers consider in setting premiums.
In theory, consumers should learn about certain factors through an
adverse action notification pursuant to the Fair Credit Reporting Act.
However, these notices are limited to adverse actions resulting from
insurers' use of information from credit bureaus (also known as
consumer reporting agencies). However, even this consumer protection
has been undermined by insurer and credit bureau practices. Insurers
claim they do not need to send an adverse action notice to new business
applicants even if the consumer received a high premium because of
credit information. In addition, even when an adverse action notice is
provided, the reasons provided by insurers/credit bureaus are so
generic that they completely fail to inform consumers. Attached are
some ``reason codes.'' Improved disclosure is vital. See the Center for
Economic Justice's (``CEJ'') comments regarding disclosure to the
Washington Insurance Commissioner (Attachment 2k).
Question 3. Do you believe that Congress should look at restricting
the use of credit scoring in insurance similar to what Washington State
has done or should it prohibit the use of credit scoring in insurance
entirely? Are there some States that currently prohibit the use of
credit scores in insurance for its lines of personal insurance?
Answer. Congress should prohibit the use of consumer credit
information as the practice is inherently unfair, discriminates against
low-income and minority consumers and is arbitrary in practice.
Attachment 3 is a report of CEJ which gives you detailed discussion of
these issues.
Question 4. Some insurers argue that there is a correlation between
poor credit histories and the likelihood of filing a homeowner or auto
insurance claim. And as a result of using the predictive value of
credit scores to fine tune the rates that it can offer its customers,
insurers can charge higher premiums for riskier customers and better
rates to customers with good scores, instead of spreading the risk
equally across it customer base. To the best of your knowledge, is
there evidence of a causal relationship between an individual being
late on mortgage payments or credit card bills and a higher risk for
filing a claim under a homeowners or auto insurance policy?
Answer. There is a ``correlation'' between credit scores and
insurance claims, but it is a spurious correlation, meaning that credit
scores are simply a proxy for some other factor that is truly causative
of insurance claims. For example, if the racially discriminatory impact
of credit scores was removed, we believe credit scores would no longer
correlate to insurance claims.
Credit scoring classifications raise prices for the poor and
minorities. Insurers fought to keep Florida from adopting a regulation
that would have simply made it improper to use a class that the insurer
could not certify did not have a disparate impact on prohibited classes
of people.
Before the use of credit scores became widespread, insurer
classifications were transparent, with the data in insurers' rate
filings showing any correlation. Just as important, the traditional
segmentation of classes of consumers who paid different rates was
predicated upon a legitimate thesis that was later tested and confirmed
as data became available. For example, the thesis for charging higher
rates for those with poor driving records would be something like ``By
demonstrating poor driving behavior in the past, consumers who have had
accidents and received tickets, are likely to be poor drivers in the
future.'' The data confirm this particular thesis. But there is no
comparable legitimate thesis for the use of credit scoring to set
rates, just a data-mined ``correlation'' that may not even be valid and
which is not available to the public to confirm.
What is absolutely clear is that the insurers' explanation for a
relationship between credit scores and insurance claims is without
merit. Insurers argue that a good credit history leads to a good credit
score, a good credit score probably means a consumer is fiscally
responsible and a fiscally responsible consumer is likely to a good
manager of other risks. This argument fails at every point. A good
credit history does not necessarily equate to a good credit score as
the scoring models penalize consumers who:
live in low-income communities
are more likely to experience an unexpected economic or
medical emergency
whose credit information in a particular credit bureau is
incomplete
who shops around for the best deals
who doesn't use credit very much
Should a victim of a hurricane, an earthquake or a job layoff due
to outsourcing be charged more for insurance because of events such as
these? Should low-income people, who tend to live paycheck to paycheck,
be penalized for falling ill and falling a bit behind on credit card
payments? Are people in these situations really irresponsible? What
makes them worse drivers or homeowners when tragedy strikes?
Question 5. In some states, insurance commissioners are elected
and, in some states, they are appointed. From the perspective of
protecting consumer's interests, does it make a difference in how an
insurance commissioner enters his or her office?
Answer. Elected commissioners are generally more responsive to
consumer needs than appointed commissioners. An extraordinary number of
appointed commissioners come from the insurance industry prior to
becoming commissioner and return to industry after serving, often for a
year or two, as commissioner. This is not the case with elected
commissioners. But there is a caveat regarding elected commissioners
that I must raise. We have seen some very anti-consumer elected
commissioners who use insurance industry money to get elected. The best
system would be elected commissioners with solid campaign finance rules
that reduced or eliminated contributions from the regulated parties.