[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]





IMPROVING INSURANCE FOR CONSUMERS--INCREASING UNIFORMITY AND EFFICIENCY 
                        IN INSURANCE REGULATION

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                    FINANCE AND HAZARDOUS MATERIALS

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 19, 2000

                               __________

                           Serial No. 106-155

                               __________

            Printed for the use of the Committee on Commerce


                     U.S. GOVERNMENT PRINTING OFFICE
67-117CC                     WASHINGTON : 2000




                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

            Subcommittee on Finance and Hazardous Materials

                    MICHAEL G. OXLEY, Ohio, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     EDOLPHUS TOWNS, New York
  Vice Chairman                      PETER DEUTSCH, Florida
PAUL E. GILLMOR, Ohio                BART STUPAK, Michigan
JAMES C. GREENWOOD, Pennsylvania     ELIOT L. ENGEL, New York
CHRISTOPHER COX, California          DIANA DeGETTE, Colorado
STEVE LARGENT, Oklahoma              THOMAS M. BARRETT, Wisconsin
BRIAN P. BILBRAY, California         BILL LUTHER, Minnesota
GREG GANSKE, Iowa                    LOIS CAPPS, California
RICK LAZIO, New York                 EDWARD J. MARKEY, Massachusetts
JOHN SHIMKUS, Illinois               RALPH M. HALL, Texas
HEATHER WILSON, New Mexico           FRANK PALLONE, Jr., New Jersey
JOHN B. SHADEGG, Arizona             BOBBY L. RUSH, Illinois
VITO FOSSELLA, New York              JOHN D. DINGELL, Michigan,
ROY BLUNT, Missouri                    (Ex Officio)
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)


                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Covington, Hon. J. Lee, Director, Ohio Department of 
      Insurance..................................................     6
    Hillman, Richard J., Associate Director, Financial 
      Institutions and Markets Issues, General Accounting Office.    54
    Mendelsohn, Robert V., Chief Executive Officer, Royal & 
      SunAlliance on Behalf of the American Insurance Association    36
    Milesko, Glen J., President and Chief Executive Officer, Banc 
      One Insurance Services Corporation, on Behalf of the 
      American Bankers Association Insurance Association.........    40
    Nabers, Drayton, Jr., Chairman and Chief Executive Officer, 
      Protective Life Corporation, on Behalf of the American 
      Council of Life Insurers...................................    25
    Smith, Ronald A., President, Smith, Sawyer & Smith, Inc., on 
      Behalf of the Independent Insurance Agents of America......    46
    Turner, John G., Vice Chairman, ING Americas, on Behalf of 
      the Financial Services Roundtable..........................    18
    Urban, Philip H., President and Chief Executive Officer, 
      Grange Insurance Companies, on Behalf of the National 
      Association of Mutual Insurance Companies..................    31
Material submitted for the record by:
    General Accounting Office, responses for the record..........    88
    Mendelsohn, Robert V., Chief Executive Officer, Royal & 
      SunAlliance on Behalf of the American Insurance 
      Association, responses for the record......................    94
    Milesko, Glen J., President and Chief Executive Officer, Banc 
      One Insurance Services Corporation, on Behalf of the 
      American Bankers Association Insurance Association, 
      responses for the record...................................    90
    Nabers, Drayton, Jr., Chairman and Chief Executive Officer, 
      Protective Life Corporation, on Behalf of the American 
      Council of Life Insurers, responses for the record.........    92
    National Governors Association, letter dated September 19, 
      2000.......................................................   107
    Smith, Ronald A., President, Smith, Sawyer & Smith, Inc., on 
      Behalf of the Independent Insurance Agents of America, 
      responses for the record...................................   101
    Turner, John G., Vice Chairman, ING Americas, on Behalf of 
      the Financial Services Roundtable, responses for the record    97
    Urban, Philip H., President and Chief Executive Officer, 
      Grange Insurance Companies, on Behalf of the National 
      Association of Mutual Insurance Companies, responses for 
      the record.................................................    99

                                 (iii)

  

 
IMPROVING INSURANCE FOR CONSUMERS--INCREASING UNIFORMITY AND EFFICIENCY 
                        IN INSURANCE REGULATION

                              ----------                              


                      TUESDAY, SEPTEMBER 19, 2000

                  House of Representatives,
                             Committee on Commerce,
           Subcommittee on Finance and Hazardous Materials,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:14 a.m., in 
room 2123, Rayburn House Office Building, Hon. Michael G. Oxley 
(chairman) presiding.
    Members present: Representatives Oxley, Gillmor, Ganske, 
Shimkus, Towns, Barrett, Luther, Rush, and Dingell, (ex 
officio).
    Staff present: Robert Gordon, majority counsel; Yong Choe, 
legislative clerk; and Bruce Gwinn, minority professional 
staff.
    Mr. Oxley. The subcommittee will come to order.
    The Chair will recognize himself for an opening statement.
    Last July, this subcommittee held a hearing on improving 
insurance for consumers, increasing uniformity and efficiency 
in insurance regulation. We received a statement of intent from 
the National Association of Insurance Commissioners signed by 
all of the insurance commissioners detailing their commitment 
to achieving uniformity. NAIC President George Nichols, who is 
with us today, also committed to following through with 
concrete and measurable steps toward achieving that reform by 
the time of today's hearing.
    On our first panel I am pleased to have testifying a rising 
star in the insurance industry, the Honorable J. Lee Covington, 
Director of the Ohio Department of Insurance. Lee has helped 
spearhead the Commissioner's work to modernize our insurance 
regulatory system and agreed to join us today to report back on 
the NAIC's efforts. By all accounts, the NAIC has in fact made 
significant progress; and I would like to thank in advance both 
Commissioner Lee and President Nichols for their outstanding 
work.
    A reform in Glass-Steagall took Congress over 65 years to 
achieve, and I recognize that modernizing insurance reform will 
not happen overnight. Unfortunately, however, the NAIC in the 
past has too often been accused of talking the talk but not 
walking the walk. While I continue to fully support the NAIC's 
work, I hope that we can keep reform efforts at an expedited 
pace. I don't think the ranking member and I have 65 years to 
invest in that.
    I challenge both the States and the industry to work toward 
December of this year to put into action the first plans for 
achieving uniformity of insurance regulation, with 
comprehensive reform efforts following soon thereafter. This 
will mean the Congress and the State legislatures will have to 
work closely together with the insurance commissioners to forge 
the reforms and to be prepared to act swiftly on implementation 
once a consensus is reached. I hereby commit to doing our part 
in achieving these reforms.
    In addition to uniformity, we must work together on better 
coordination among the regulators. I asked both President 
Nichols and the OCC Chief Counsel Julie Williams last July 
whether coordination had been achieved among the financial 
regulators or if more work needs to be done. Clearly, the 
hoped-for consultations required by the Gramm-Leach-Bliley Act 
is not being sufficiently conducted. Ms. Williams indicated 
that more congressional action may be required to govern the 
flow of information sharing and to protect the confidentiality 
of those reports.
    It is my sincere hope that the agencies will be able to 
work together to report back to Congress on the best way of 
achieving this coordination. If not, Congress will return to 
this issue next year with our own solution. Consumers are not 
being adequately protected by the current system, and follow-up 
congressional legislation on this subject may, in fact, be 
necessary.
    For example, in 1992, Martin Frankel was permanently banned 
by the securities industry for fraudulent activities, and yet 
he was able to secretly control a small securities firm which 
he later used as a platform for conducting the biggest 
insurance scam of the decade.
    If the insurance regulators had a coordinated system with 
the securities regulators to flag fraudulent actors, they would 
have never let Frankel take control of numerous insurance 
underwriters. Conversely, if the securities regulators were 
updated on the continued fraudulent trading activities, both 
pretend and real, of Mr. Frankel, they could have taken further 
action to prevent the abuse of the system.
    In the year 2000 Americans deserve to have an integrated 
financial regulatory system where one hand knows what the other 
is doing. I am proud that we have undertaken and made 
significant progress on an ambitious reform of our insurance 
regulatory system. I thank the witnesses who have agreed to 
join us today to help us understand where we are in this 
effort, how far we can go, how far we have to go, what 
alternatives we should be considering and what Congress can do 
to help better protect consumers and the competitiveness of the 
industry.
    I now turn to the ranking member, the gentleman from New 
York, Mr. Towns, for an opening statement.
    Mr. Towns. Thank you, Mr. Chairman, and also thank you for 
holding this hearing.
    We last visited this issue in the context of Gramm-Leach-
Bliley, a very important piece of legislation that modernizes 
our securities banking and insurance laws. Gramm-Leach-Bliley 
addresses a critical aspect of insurance modernization: the 
harmonization of State insurance regulations. The harmonization 
means more competition as State regulatory systems fall out of 
the way of interstate commerce, raising the standards for 
customer service and product innovation. Consumers will realize 
more choices and lower prices as the insurance provisions of 
Gramm-Leach-Bliley are implemented.
    But, as significant as it is, Gramm-Leach-Bliley is only a 
first step in reforming insurance regulation. Since Gramm-
Leach-Bliley was enacted, those in the industry have been 
diligent in shaping the change. In July, at the first part of 
this year, we heard testimony about what a uniform system might 
look like. Today, we will continue that discussion, hearing 
from more of those who have been and will continue to be 
instrumental in this process.
    I believe something needs to be done to bring uniformity to 
the insurance industry. Just what that something is, is a 
question that we need to have answered before moving forward.
    Some have suggested a Federal chartering system, very much 
like the Federal banking chartering system. Others suggest a 
State-run chartering system or an interstate reciprocal 
recognition compact.
    I said all of that to simply say that it is a difficult 
issue. I am pleased we are having a second hearing to further 
look at options for improving efficiency in the insurance 
industry. I look forward to hearing from our witnesses; and let 
me again thank you, Mr. Chairman, for calling this hearing and 
furthering the dialog on insurance modernization. Thank you.
    Mr. Oxley. I thank the gentleman.
    The Chair now recognizes the gentleman from Illinois, Mr. 
Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman. I will be brief.
    I want to thank you for calling this hearing today. I want 
to thank the panelists, a wide range of people. I think we will 
get--hearings are very important for Members of Congress, 
especially for me, because I like to sit, and I like to listen, 
I like to learn. And this is really a natural addition to what 
we did in the financial services bill. This should not surprise 
anybody that people are now starting to ask these questions 
since the financial--since insurance was the only financial 
institution that still would be under regulation by the State.
    Illinois prides itself on being a tremendous insurance 
State; and my good friend, Nat Shapo, continues to do a great 
job in its regulatory arena. What I like to brag about the 
State of Illinois is that we don't regulate rates, we let the 
market dictate rates; and I think the vast majority of 
Americans would be better served under that type of State 
purview.
    But I look forward to the hearing today. As the ranking 
member mentioned, we have a lot to really learn and discuss as 
we proceed cautiously forward.
    With that, Mr. Chairman, I thank you for this hearing. I 
yield back my time.
    Mr. Oxley. Thank you.
    [Additional statements submitted for the record follow:]
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    I would like to thank the Subcommittee Chairman for his important 
work in putting together this hearing. This Committee has worked in a 
bipartisan fashion on insurance reform throughout the term, and the 
Subcommittee Chairman's efforts have helped pave the way for 
significant reforms.
    Last November, this Congress made history by achieving something 
that no Congress in the previous 66 years had been able to accomplish--
agreeing to comprehensive financial services modernization. The Gramm-
Leach-Bliley Act was a critical first step towards uniformity in 
insurance regulation. It established the first ever uniform privacy 
protections for consumers, and the first ever uniform licensing system 
for insurance agents and brokers. That statute requires regulators to 
begin coordinating with each other.
    These were important steps to begin modernizing the regulation of 
insurance. But they are only first steps.
    In July, I challenged the insurance commissioners to put their 
shoulder to the wheel and begin the process of modernizing insurance 
regulation. I stressed the need for deadlines in implementing plans for 
speed to market, rate filings, and producer licensing reforms. I also 
told the commissioners that we expected significant progress between 
July and today's hearing. We have invited Commissioner Covington to 
join us today to give us a full briefing on the NAIC's activities. By 
all reports, the NAIC has made progress.
    I fully support the NAIC's efforts. I look forward to finalizing 
plans on the more simple reforms by this December, with more 
comprehensive reforms soon to follow. In return, Congress must be ready 
to move forward with any federal reforms needed to help the States 
protect consumers.
    Last July I also emphasized the need for regulatory coordination. 
The General Accounting Office is releasing a report on their 
investigation of Martin Frankel, who committed the single largest 
insurance scandal last decade. A critical GAO conclusion is something 
that our Committee has been stressing throughout--the financial 
regulators need to do a better job of sharing enforcement and 
examination information. Regulatory coordination may not require 
Congressional action. But if the regulators can't do it alone, Congress 
will step in to get the job done right.
    I challenge the regulators to work together on a new data base 
system to share information to prevent fraud. And I challenge our 
industry witnesses here today to work with the States to implement 
uniformity and coordination.
    Congress should expect to see real reforms put together by the end 
of this year, with implementation beginning shortly thereafter. And it 
is my strong hope that the State legislatures will be able to proudly 
stand behind this effort.
    The unfolding of the Martin Frankel scandal demonstrates that much 
work still needs to be done. As I stated last July, ``One way or 
another, insurance regulation will be reformed.'' I hope that we can 
all work together towards fulfilling this effort.
                                 ______
                                 
Prepared Statement of Hon. Bobby L. Rush, a Representative in Congress 
                       from the State of Illinois
    Mr. Chairman, I thank you for taking the time to conduct this 
hearing on the important subject of Improving Insurance for Consumers, 
while Increasing Uniformity and Efficiency in Insurance Regulation. I 
also thank the panel of insurance professionals and administrators who 
will present their testimony of solutions to the problems surrounding 
the coverage and protection of consumers.
    Insurance protection allows members of the public to interact, 
facilitate business needs and promote personal growth and prosperity, 
without the fear of tremendous loss due to mistakes or minimal errors 
in judgement. The insurance industry is responsible for providing a 
safeguard to consumers as well as the business community. This should 
be accomplished without imposing strict regulations that reduce 
consumer protection, erodes consumer trust, and eliminates the 
consumers right to privacy and security.
    The disturbing GAO report entitled ``Scandal Highlights Need for 
Strengthened Regulatory Oversight'' highlights a miscarriage of justice 
which resulted in ``more than $200 million in insurance company assets 
over nearly an 8year period.'' Scams like these induces consumer 
distrust in the insurance industry. I am concerned that individual 
failures by insurance regulators, and legislation which does not do 
enough to strengthen consumer confidence, will have far reaching 
negative impacts in this nations commerce.
    I am interested to hear what steps will be taken or proposed to 
reduce the potential for insurance scams.
    I look forward to hearing from our witnesses testimony on how this 
congress can move forward in a collective effort to mitigate problems 
with consumer protection in the insurance industry.
                                 ______
                                 
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    Mr. Chairman, I want to thank you for holding this hearing on 
improving insurance regulation for consumers. Consumers should be our 
uppermost concern, because in most cases, consumers pay the biggest 
price when regulators fail to do their job.
    We will hear important testimony today about how regulators failed 
to protect consumers in the insurance fraud case of Martin Frankel. 
Taxpayers, and policyholders whose losses are not covered by state 
guarantee funds, will bear much of the burden attributable to Mr. 
Frankel's embezzlement of insurance assets in excess of $200 million. 
Today's General Accounting Office's report, which I requested, 
demonstrates that state insurance regulators were either too blind to 
see, or too unwilling to acknowledge, the scam Mr. Frankel perpetrated, 
openly and fearlessly, over a period of eight years. The simple fact is 
that Mr. Frankel succeeded, not because he was so clever, but because 
state insurance regulators lacked the skill, authority, access to basic 
information, resources, and ``healthy skepticism'' needed to protect 
consumers.
    Perhaps most alarming is the fact that even when Tennessee's 
insurance regulators finally figured out what Mr. Frankel was doing, 
they did not warn the public or regulators in other states. Instead, 
they gave him 60 days to redeposit the assets of Franklin American Life 
Insurance Company in an account in Tennessee. That's like saying, ``I 
know you have been stealing from me, but I'm giving you 60 days to 
steal from someone else so you can pay me back.''
    And that appears to be what happened. During that 60-day period, 
Mr. Frankel bought another insurance company and entered into a 
fraudulent reinsurance scheme, producing additional insurance company 
losses of $5 million in Arkansas and $45 million in Virginia. With 
these two additional frauds, Mr. Frankel was able to accumulate $50 
million of the $57 million Tennessee demanded he put in an account in 
that state.
    Even if state regulators had been more alert, even if they had the 
resources, authority, access to basic information, and all other things 
they currently lack, the actions of regulators in Tennessee raise an 
important question. Does the present system of 50 independent, state 
insurance regulators encourage each regulator to put too high a 
priority on taking care of policyholders in his or her own state, 
instead of exposing a fraud that also affects policyholders in other 
states? Unless what happened in Tennessee can be explained as an 
isolated and abnormal occurrence, one could conclude that, under the 
present system, no one is protecting all insurance consumers against 
fraud.
    Certainly, this case also points out things the states can and 
should do to strengthen their anti-fraud efforts. For example, had 
state insurance regulators bothered even to check with their own state 
securities regulators, the more than $200 million in losses 
attributable to Mr. Frankel's alleged thievery may have been avoided. 
And, had employees of the Mississippi State Insurance Department 
bothered even to talk with each other, the Mississippi department would 
never have approved redomestication of a Frankel-controlled company 
with assets of more than $100 million at the very moment Mississippi 
examiners were close to uncovering Frankel's fraudulent activities.
    I understand that, in response to this case, the National 
Association of Insurance Commissioners (NAIC) has proposed both short- 
and long-term actions that state insurance departments should take. 
Some of these recommendations will require action by state 
legislatures. Others will take development by NAIC committees, as well 
as legislative implementation by the states, and could take several 
years to implement.
    A far more timely response is needed, especially now that the 
Gramm-Leach-Bliley Act lets banks, insurance companies, and securities 
firms engage in each other's businesses. No longer will the fraudulent 
schemes of rogues like Martin Frankel harm only insurance 
policyholders. Instead, investors, banks, and the American taxpayer who 
underwrites bank solvency, may be threatened as well.
    Mr. Chairman, if state regulators cannot do the job insurance 
consumers deserve and require, new regulatory mechanisms must be put in 
place that will.
    I look forward to the testimony of the witnesses.

    Mr. Oxley. The Chair now turns to our first witness, the 
Honorable J. Lee Covington, Director of the Ohio Department of 
Insurance Columbus, Ohio. Mr. Covington, welcome back and look 
forward to your report.

 STATEMENT OF HON. J. LEE COVINGTON, DIRECTOR, OHIO DEPARTMENT 
                          OF INSURANCE

    Mr. Covington. Thank you, Chairman Oxley, members of the 
subcommittee. My name is Lee Covington. I am Director of 
Insurance in the State of Ohio and in that capacity I serve as 
Chair of the National Association of Insurance Commissioner's 
Regulatory Reengineering Task Force and the Electronic Commerce 
and Regulation Working Group.
    Thank you for inviting me here to testify regarding the 
efforts of Ohio and other State insurance regulators to 
implement Gramm-Leach-Bliley and to modernize State insurance 
regulations. Mr. Chairman, I am especially pleased to be here 
because our home State of Ohio is a leading State in 
modernizing our regulatory system to fully meet the needs and 
expectations of insurance consumers and the financial services 
industry.
    Ohio was the first State to adopt reciprocity for agent 
licensing. We implemented just a last year a state-of-the-art 
Internet agent licensing system, and we are piloting the 
National Insurance Producer Registry. I recently adopted 
regulations and will be seeking legislation to speed the time 
for insurance product approvals. I also chair the NAIC 
committee with the goal of facilitating the use of e-commerce.
    Mr. Chairman and members of the committee, I join my 
colleagues in thanking you for your long-standing support of 
functional regulation of insurance by the States and for your 
interest in and support of our efforts to make real progress in 
our regulatory modernization initiatives. Your commitment and 
work in this area is having a real impact in Ohio and through 
our combined efforts will benefit Ohio's consumers and 
insurers.
    A full update of our work to implement GLBA since your July 
hearing is provided in my written testimony.
    With respect to privacy, the NAIC's Privacy Working Group 
completed work on a privacy model just last week, and our full 
membership will vote next week on that model. This model tracks 
GLBA closely and will give insurers clear, uniform guidelines 
to follow. Ohio already has in place privacy laws that meet the 
requirements of GLBA and exceed the requirements of GLBA.
    With respect to multi-State agent licensing under GLBA, 
earlier this month we took another important step toward our 
goal of one-stop agent licensing by launching a pilot of the 
National Insurance Producer Registry in four States, as I 
mentioned before, including Ohio; and we expect all States to 
be operational in 2001. Through NIPR, nonresident agents will 
receive a license on a reciprocal basis within 24 hours of 
submitting an electronic application.
    Mr. Chairman, moving now to our modernization initiatives, 
during the subcommittee's July hearing and, as you mentioned 
this morning, you recognized that insurance commissioners 
through our statement of intent have demonstrated now that we 
can talk the talk. Through our licensing initiatives and wide 
action in other areas, Mr. Chairman, we want to show you that 
we can indeed walk the walk when it comes to implementing 
meaningful reforms.
    I am excited to report that State regulators remain 
strongly committed to our modernization initiatives with 
unprecedented consensus and we have accomplished just what you 
had hoped to see, specific proposals with specific timeframes. 
I applaud the outstanding leadership of NAIC President George 
Nichols, who is here with me today, and the intense work of 
each State insurance commissioner since this law's enactment. 
We have moved forward on our bold set of reforms.
    I want to give you an update on the progress of two of our 
most important initiatives that go far beyond the requirements 
of GLBA.
    First, the Speed to Market Working Group. Regulators agree 
that, under the current system, it takes far too long to 
introduce new insurance products. This is not good for 
consumers, and it is not good for the insurance industry. The 
working group recently announced that it would appoint two 
subgroups to focus its efforts.
    First, the Coordinated Advertising, Rate, and Form Review 
Authority subgroup will develop the details for a single-point 
product filing process through a centralized organization and 
uniform standards where appropriate. A limited launch of 
CARFRA, as we call it, in 10 States is now scheduled for the 
first quarter of 2001.
    A second subgroup, which I chair, will evaluate various 
recommendations for improving other State-based systems, 
including a list of recommendations that includes electronic 
filings, commercial lines deregulation where appropriate, and 
movement toward a more market-oriented regulatory system where 
appropriate. This subgroup was charged with developing 
recommendations by December 2000.
    The second initiative that is one of our most important is 
the National Treatment of Companies Working Group. It is 
charged with establishing regulatory procedures that will treat 
eligible insurance companies the same across the Nation, and it 
has set forth time lines for achieving this goal, including, 
first, adoption of a uniform company application by all States 
before the end of this year; second, development of ``best 
practices'' for regulatory reviews by June, 2001; and, finally, 
full implementation of the complete national treatment process 
from June, 2001, through June, 2002.
    We look forward to the continued positive impact that these 
initiatives will have on our work to protect consumers through 
an efficient and effective regulatory system; and we look 
forward to working with the Congress, our Governors, 
legislatures, and all other interested parties as we continue 
to develop and implement the GLBA required regulations and 
legislation and our State regulatory modernization initiatives.
    Thank you, Mr. Chairman, members of the committee.
    [The prepared statement of Lee Covington follows:]
 Prepared Statement of Lee Covington, Director of Insurance, State of 
                                  Ohio
                              introduction
    Chairman Oxley and members of the Subcommittee, my name is Lee 
Covington. I am the Director of Insurance in state of Ohio and serve as 
Chair of the National Association of Insurance Commissioners' (NAIC) 
Regulatory Re-engineering Task Force, the Electronic Commerce & 
Regulation Working Group, and the Improvements in State-Based Systems 
Subgroup of the Speed to Market Working Group.
    Thank you for inviting me to testify regarding the efforts of Ohio 
and other State insurance regulators, in our own States and through our 
work as members of the NAIC, to implement the Gramm-Leach-Bliley Act 
(GLBA) and modernize State insurance regulation. I am especially 
pleased to be here because Ohio is a leading State in modernizing our 
regulatory system to fully meet the expectations of insurance consumers 
and the financial services industry.
    Mr. Chairman and members of the Committee, I thank you for your 
leadership in working to enact GLBA in the face of changing consumer 
demands and a financial services industry marked by globalization, 
convergence, consolidation, and technological innovation. I join my 
colleagues in thanking you and this committee for your support of 
functional regulation of insurance by the States when enacting GLBA, 
for your continued support of State insurance regulation, and for your 
support of our efforts to make real progress in our regulatory 
modernization initiatives.
    During the Subcommittee's hearing on July 20, 2000, Chairman Oxley 
noted that insurance commissioners, through their ``Statement of 
Intent'', ``have demonstrated now that they can ``talk the talk''; if 
they can also ``walk the walk'', then insurance consumers and producers 
can fully benefit from uniformity without the need for a new federal 
system.'' Chairman Oxley also requested an update ``to assess what 
progress has been made and whether there is a sufficient continuing 
commitment to uniformity.'' Further, Chairman Oxley ``hope[d] that the 
NAIC working groups [would] not only be able to come up with specific 
proposals for achieving their goals, but to attach specific time frames 
to implement those proposals in the 50 States.'' I am excited to report 
that State insurance regulators remain strongly committed to our 
modernization initiatives with unprecedented consensus, and after a 
series of meetings leading to our most recent National Meeting, we have 
accomplished just what you had hoped to see--specific proposals with 
specific time frames. I applaud the outstanding leadership of NAIC 
President George Nichols over the past 10 months and the intense work 
and commitment of each State insurance commissioner as we have moved 
forward on each of our initiatives.
    Today, I would like to make three points about where State 
regulators stand in implementing GLBA and achieving our modernization 
goals--

 First, the NAIC and State insurance regulators are on track to 
        implement all provisions of GLBA, and move beyond its 
        requirements with our own plan to achieve national uniformity 
        and efficiency for agent licensing.
 Second, consistent with the ``Statement of Intent--The Future 
        of Insurance Regulation'' signed by all state Insurance 
        Commissioners in March of this year, the NAIC and State 
        regulators are working with the insurance industry and 
        consumers on several fronts to develop specific programs with 
        specific time frames for implementation that will substantially 
        improve the insurance supervision process while creating 
        regulatory efficiencies and reducing costs for insurance 
        companies and agents.
 Third, I am proud to report that our experience in Ohio 
        provides a good example of the substantial progress being made 
        toward modernizing State insurance regulation.
            state regulators are on track implementing glba
    At the Subcommittee's hearing on July 20, 2000, NAIC President 
George Nichols gave a detailed summary of the steps being taken by NAIC 
and State regulators to implement GLBA. He concluded: ``The NAIC and 
State insurance regulators are well on the way to implementing the 
provisions of GLBA as intended by Congress.'' His statement remains 
true. The NAIC completed several additional steps of our GLBA 
implementation at meetings held in Kansas City and Dallas after 
President Nichols testified.
    My testimony today provides an update concerning State regulatory 
efforts to implement the three basic GLBA mandates identified by 
President Nichols--

a) Coordinating and cooperating with Federal functional regulatory 
        agencies that supervise banks and securities firms;
b) Issuing privacy rules to protect the non-public financial 
        information given by consumers to insurance providers; and
c) Establishing a national licensing system for insurance agents and 
        brokers in order to avoid the creation of the National 
        Association of Registered Agents and Brokers (NARAB).
    I will also update you on two additional areas--national treatment 
of insurers and speeding insurance products to market--where State 
regulators are moving beyond the requirements of GLBA to modernize our 
regulatory system.
             cooperating with federal regulators under glba
    The NAIC continues to believe that establishing sound working 
relationships with Federal regulators is absolutely essential for State 
insurance departments under GLBA. Long-standing efforts to work closely 
with our Federal counterparts are now consolidated under the NAIC's 
Coordinating with Federal Regulators Working Group, which has been 
given broad responsibility to stimulate cooperation at all levels.
    The NAIC's first priority for establishing regulatory cooperation 
is to negotiate and sign written agreements between Federal and State 
agencies laying out the ground rules for sharing information and 
keeping it confidential when necessary. When signed by individual State 
insurance departments and Federal agencies, these comprehensive 
agreements will permit information to be shared regarding financial 
condition, market conduct, and regulatory enforcement matters. At 
present, NAIC is negotiating model regulatory cooperation agreements 
with Federal banking agencies as follows--
    Federal Reserve Board--After four months of joint effort, NAIC has 
recently received the latest version of a draft agreement from the 
Federal Reserve staff. This agreement was distributed last week to 
members of the Coordinating with Federal Regulators Working Group for 
review and comment. We expect to reach final agreement on a model by 
the end of the year.
    Office of Thrift Supervision--NAIC approved a comprehensive model 
regulatory agreement with OTS in June of this year. So far, the 
agreement has been signed by 23 States. This number will rise as more 
States direct their attention to completing Federal cooperation 
agreements.
    Comptroller of the Currency--The OCC says it will soon deliver to 
NAIC a comprehensive draft agreement based upon the OTS model. When 
NAIC receives it, we will distribute it to Working Group members for 
review and comment. Currently, 28 States have signed a more narrow 
consumer complaint sharing agreement with OCC that was approved by NAIC 
in 1999.
    Federal Deposit Insurance Corporation--FDIC is working on a draft 
agreement, and will be sending it to NAIC in the near future.
    The second priority for effective cooperation is to establish 
personal contacts at Federal agencies that will foster open 
communication, mutual understanding, and practical cooperation on 
monitoring and enforcement matters. The process of establishing such 
personal contacts between State and Federal regulators is going very 
well. While we have good initial working relationships with all the 
banking regulators, our contacts with the Federal Reserve and OCC are 
the most advanced due to the immediate demands of handling the 
Citigroup merger and increased insurance activities by national banks.
    Relations with the OCC are a good example of how we are proceeding. 
During the past year, the Coordinating with Federal Regulators Working 
Group conducted a series of day-long meetings with senior OCC 
supervision officials and State insurance experts to exchange views and 
explore general supervision methods. Now, relations are moving forward 
to resolving the important details of developing examination procedures 
that address proper supervision of insurance activities by national 
banks. Through these efforts and continue cooperation and 
communication, we expect to develop an efficient and effective 
framework for implementing functional regulation as required by GLBA. 
We hope to avoid Federal preemption of State insurance laws wherever 
possible. NAIC expects this natural evolution from general policy 
discussions to coordinating supervision details will serve as the model 
for establishing sound working relationships with each of the Federal 
banking agencies during the coming year.
               meeting glba consumer privacy requirements
    Members of the NAIC have been discussing and addressing the privacy 
of personal information, including health information, for more than 20 
years. In 1980, the NAIC adopted the Insurance Information and Privacy 
Protection Model Act, which generally requires insurers to receive 
authorization from individuals (``opt-in'') to disclose personal 
information. In September 1998, NAIC adopted the Health Information 
Privacy Model Act because of the special issues surrounding health 
information. This model treats personal health information as a 
different type of information that receives a higher level of privacy 
protection. NAIC records indicate that 17 States have adopted all or 
part of the 1980 model, while the 1998 health model has not yet been 
adopted by any State. The NAIC believes State privacy regulations based 
upon the 1980 and 1998 NAIC models will exceed GLBA requirements, which 
means they will remain in force under Section 507 of that law.
    To meet the recent challenge of specific GLBA privacy requirements, 
the NAIC's Privacy Issues Working Group moved swiftly to construct 
model insurance consumer privacy regulations that will serve as 
guidance for States that do not presently have regulations satisfying 
the Title V privacy provisions in GLBA. The purpose of these 
regulations is to help State insurance authorities comply with the 
minimum requirements of GLBA quickly while State Insurance 
Commissioners consider whether additional privacy protections are 
needed across-the-board for all consumers of financial services, 
including insurance.
    After six months of public comment and hearings on four separate 
drafts, the Working Group approved a final model privacy regulation 
last week at the NAIC's Dallas National Meeting. Upon approval by the 
full NAIC membership, which is expected during the next month, this 
model will move to the States for consideration. States adopting this 
model will be assured that they meet the minimum requirements of GLBA.
    In drafting the model regulation, the Working Group sought to 
strike a good overall balance between achieving uniformity with Federal 
privacy rules and adequately protecting personal information more 
commonly associated with insurance products. The NAIC model also tracks 
the November 13, 2000, effective date and July 1, 2001, compliance 
deadline set forth in the Federal regulations.
    Some departures from the Federal rules were necessary to reflect 
the special nature of the insurance business and its impact on 
consumers--

1. In the NAIC model regulation, ``consumers'' include not only 
        individuals who have a direct relationship with an insurer, but 
        also other individuals such as claimants, beneficiaries, and 
        persons entitled to coverage under group plans, employee 
        benefit plans, and workers' compensation plans.
2. Because insurance providers typically collect much greater amounts 
        of health information than banks, the NAIC model includes 
        provisions that protect personal health information. The health 
        provisions of the model regulation give health information a 
        higher level of privacy protection than financial information 
        receives under GLBA. In general, insurers are prohibited from 
        sharing protected health information with any other party--
        affiliate or non-affiliate--without the express consent of the 
        consumer to which the information applies (opt in). The 1980 
        NAIC Model adopted by 17 states contains this same general 
        rule, and therefore, insurers in those states are already 
        complying with these provisions. Finally, to promote uniformity 
        and implementation of privacy protections, the health 
        provisions of the draft model regulation will not apply to 
        insurers who are in compliance with the health information 
        privacy regulations promulgated by the Department of Health and 
        Human Services (HHS) pursuant to the Health Insurance 
        Portability and Accountability Act (HIPAA).
                satisfying the narab provisions in glba
    Following passage of GLBA, the NAIC moved quickly to amend its 
Producer Licensing Model Act to comply fully with the NARAB provisions 
in GLBA, and earlier this month, the NAIC launched a pilot of the 
National Insurance Producer Registry (NIPR). The model act is the 
vehicle for States to satisfy the GLBA statutory requirements because 
it fully implements the requirements for licensing reciprocity and 
uniformity among States. Adoption of the model by a majority of States 
by November 2002 will assure that NARAB will not be created. Although 
our immediate goal is minimum compliance with GLBA, our ultimate goal 
is for all 50 States to be operating under a national system of unified 
standards and procedures.
    The NAIC is taking several additional steps to improve agent 
licensing. In partnership with the National Insurance Producer Registry 
(NIPR), a non-profit affiliate of the NAIC, we have been aggressively 
investing over the past three years in modernizing our technical 
infrastructure to develop a more centralized producer licensing 
processing center. As stated previously, earlier this month, NIPR began 
a pilot project with four states participating, including Ohio, and we 
expect to have all states operational in 2001. Through NIPR, non-
resident agents will be eligible to receive a license on a reciprocal 
basis within 24 hours of submitting an electronic application.
    At present, the NAIC maintains a regulatory network and centralized 
database of 2.6 million of the Nation's 3 million producers. This 
information is available to regulators and insurance companies over the 
Internet, and is updated daily by automated processes at the State 
insurance departments.
    Currently, 32 States are online with the Producer Database and the 
target is to have all 50 States contributing to PDB between December 
2000 and June 2001. Because PDB is a mirror of the State licensing 
database, NIPR is creating a single system to automatically process 
appointments, terminations, and uniform non-resident license 
applications on behalf of individual State insurance departments 
against data in PDB within 24 hours of receiving the electronic data 
from an insurance company or producer. Approximately 110,000 producer 
appointments and terminations are being processed by 24 States through 
NIPR monthly right now, and we expect to have the entire system 
operational and all 50 States participating in 2001.
    The next key step in this process will be the implementation of a 
single electronic licensing application. These system improvements will 
bring about regulatory efficiencies that far exceed the expectations in 
NARAB and set the stage for national uniformity.
  going beyond glba and modernizing regulation--national treatment of 
                                insurers
    One key area where State regulators are moving beyond the 
requirements of GLBA is national treatment of insurers doing business 
in multiple jurisdictions. This year, the NAIC established the National 
Treatment of Companies Working Group, and gave it responsibility for 
identifying regulatory procedures that will treat eligible insurance 
companies the same across the Nation. One such procedure involves the 
licensing process for an insurer to obtain a certificate of authority 
to conduct business in a State. Already, 29 states are participating in 
the NAIC's Uniform Certificate of Authority Application (UCAA), and one 
more is in transition. The Working Group's goal is to have all 50 
states and the District of Columbia using the UCAA by December 2000.
    Another goal is standardizing the licensing review process. While 
the UCAA provides a uniform application, the Working Group is looking 
to expand this effort to also include standardized review criteria 
nationwide. NAIC plans to develop a streamlined operating structure 
that would give certain companies ``national treatment'' for regulatory 
procedures related to company licensing, solvency monitoring, holding 
company supervision, approval of mergers and acquisitions, market 
conduct reviews, and corporate re-organizations.
    At NAIC's National Meeting in Dallas last week, the National 
Treatment of Companies Working Group discussed these regulatory 
efficiency goals, and set forth a timeline for achieving them in four 
progressive steps--

1. Obtain commitments from all NAIC members to participate in the ALERT 
        program, using the UCAA, by December 2000, and to achieve 
        active participation by all NAIC members by June 2001. ALERT 
        stands for ``Accelerated License Evaluation Review 
        Techniques'', a program that streamlines regulation by 
        promoting the single license application process, including the 
        application form and review timelines, which is accepted in all 
        participating States.
2. Develop ``best practices'' for reviewing significant holding company 
        transactions and company licensing applications by December 
        2000 and June 2001, respectively, and encourage all States and 
        the District of Columbia to administer such reviews on a 
        consistent and uniform basis.
3. Implement the national treatment process through a memorandum 
        agreement between June 2001 and June 2002, and continue to 
        examine whether additional legislative action is need to fully 
        implement the national treatment initiative.
4. Develop enabling State legislation, if necessary, to provide state 
        insurance regulators with the legal authority to implement a 
        national treatment system by June 2003.
    The Working Group also discussed possible legal options for 
implementing national treatment. Using a model law, memorandum 
agreement, interstate compact, and Federal involvement were all 
considered. The use of a memorandum of understanding was considered to 
be an appropriate vehicle for accomplishing the initial implementation 
of the national treatment process in Goal 3. For the long-term, an 
interstate compact was considered as a possible vehicle for 
implementing national treatment if necessary from a legal and 
implementation standpoint.
                speeding up the product approval process
    The Speed to Market Working Group is responsible for identifying 
one-stop filing procedures and a more efficient process for State 
regulatory approval of insurance products marketed to consumers. State 
regulators recognize that under the current 50-state system, it takes 
far too long to introduce a new insurance product. This is not good for 
consumers or the insurance industry. In Dallas, this Working Group 
appointed two subgroups to focus its efforts on speeding up the product 
approval process.
    The Coordinated Advertising, Rate, and Form Review Authority 
(CARFRA) Subgroup will develop the details for single-point product 
filing. CARFRA is a proposal that will assist insurance regulators in 
reviewing and approving rate, form, and advertising filings by creating 
a new centralized organization specifically tasked with that goal for 
participating States. It will provide insurers with a single point of 
contact and uniform standards for eligible products. For consumers, it 
will speed beneficial insurance products to market while preserving 
high quality regulatory review and effective consumer safeguards. At 
the Dallas national meeting, the Speed to Market Working Group 
announced that a limited launch of CARFRA will occur within the first 
quarter of 2001, and assigned the subgroup the responsibility for 
developing the operational procedures necessary to implement CARFRA.
    A second subgroup, the Improvements in State-Based Systems 
Subgroup, which I chair, will evaluate various suggestions for 
improving State-based systems. It will review a list of suggestions 
that include, but are not limited to:

 Implementation of the System for Electronic Rate and Form 
        Filings (SERFF) in all states. SERFF uses a point-to-point 
        electronic communication tool where filings are sent from 
        insurers over the Internet and routed to a State from a central 
        server;
 Agreement on a uniform approach to filing exemptions for 
        products sold to large commercial policyholders;
 Staffing and training of rate, form, and advertising review 
        units to ensure quality reviews and prompt turnaround time for 
        filings;
 Elimination of any requirements that are not published in 
        statutes, regulations, bulletins or guidelines;
 Evaluation of prior approval requirements and movement toward 
        market-based regulation;
 Improvements to the Market Conduct Examination process; and
 Improvements in consumer education.
    The Speed to Market Working Group tasked the Improvements in State-
Based Systems Subgroup with the responsibility for developing specific 
proposals by the December 2000 NAIC national meeting. The Working Group 
also heard comments from interested parties during its meeting in 
Dallas. Representatives from consumer interests and various sectors of 
the insurance industry provided input and guidance to shape the CARFRA 
proposal and encourage improvements to State regulatory processes. The 
Subgroups have planned a series of meetings during September and 
October, and the entire working group plans to hold another meeting in 
November 2000.
                   facilitating the use of e-commerce
    The NAIC E-Commerce and Regulation Working Group, which I chair, 
developed a resolution adopted by the NAIC earlier this year endorsing 
the Uniform Electronic Transactions Act and issued a self-assessment 
guide for use by the states to identify ten (10) potential barriers to 
the use of e-commerce. Within the next few weeks, the Working Group 
expects to adopt a Model Bulletin for use by the States to implement 
many of the recommendations set forth in the self-assessment guide. The 
NAIC has been progressive in its work to facilitate the use of e-
commerce, recognizing that both consumers and insurers want the cost 
savings and convenience of using the internet to purchase insurance.
       ohio is a leader in modernizing state insurance regulation
    I am proud to report that the State of Ohio has become a leader in 
implementing the policies necessary to implement GLBA and modernize 
state insurance regulation. In Ohio, we are committed to fostering a 
competitive marketplace for the benefit of consumers and the insurance 
industry, and focusing our regulatory resources in priority areas that 
add the most value to our work of protecting Ohio consumers. Through 
our independent efforts and by implementing the NAIC initiatives, we 
are seeing real progress as we continually work to carry out these 
objectives.
    With respect to GLBA implementation, Ohio currently has in place 
privacy laws that exceed the requirements of GLBA, and we plan to 
introduce legislation in the near future to make minor procedural 
changes to the law to fully comply with GLBA. We have also established 
good working relationships with each of our Federal agency counterparts 
through personal meetings involving regional heads of the respective 
Federal agencies. In addition, Ohio participates on the NAIC team that 
regularly meets with representatives of the Federal Reserve Board in 
Washington D.C.
    Most notably, in the area of agent licensing, Ohio has led the 
country. Ohio was the first State that enacted reciprocal licensing for 
non-resident agents, and therefore, was the first State to comply with 
GLBA's NARAB provisions. In addition, last year, Ohio implemented a 
state-of-the-art internet agent licensing system that is regarded as 
one of the best in the country, if not the best. Using this system, an 
agent can submit an application on-line, pay the application fee on-
line, complete the fingerprinting and background check using an 
electronic system, schedule a test on-line, take the test using a 
state-of-the art system, receive the exam results immediately after the 
test, walk out with a license if successful, and obtain a company 
appointment on the same day using our internet appointment process, all 
of which takes less than 7 days. Because of this work, Ohio was 
selected to be one of the four pilot states for the National Insurance 
Producer Registry, which was launched earlier this month. As stated 
previously, NIPR will allow one-stop licensing for non-resident agents 
in all 50 States.
    With regard to insurance regulatory modernization initiatives, Ohio 
is also a leader. Just yesterday, I signed two regulatory bulletins 
that will allow 81% of all property and casualty insurance products to 
be submitted on ``file and use'' basis. I plan to seek legislation that 
will move our product filing system to a file and use system for all 
appropriate products and exempt certain products and rates from the 
filing requirement altogether where appropriate. For example, just 
yesterday, I signed a bulletin that exempted from the filing 
requirements all Special Filings and Excess Rate Consent Filings. To 
support these initiatives, Ohio was among the first--and was the 
fastest--to introduce the NAIC-sponsored System for Electronic Rate and 
Form Filing (SERFF). SERFF will be a vital tool for implementation of 
CARFRA and improving the filing and approval process for products not 
selected for the CARFRA process. Ohio has already received 165 property 
and casualty filings since March 2000, and we believe the new web-based 
version of SERFF, scheduled for release in October 2000, will open the 
door to widespread use among the industry and all of the States.
    As noted earlier in my testimony, as Director of Ohio Department of 
Insurance, I chair the NAIC's E-Commerce and Regulation Working Group, 
the goal of which is to facilitate the use of e-commerce, and the 
Improvements to State-Based Systems Working Group, the goal of which is 
to improve the State-based insurance product approval process.
    We look forward to the continued positive impact these initiatives 
will have on our work to protect consumers through an efficient and 
effective regulatory system.
               congress can help improve state regulation
    Improvements in several Federal laws affecting State insurance 
regulation would help give us all the tools we need to meet the 
challenges of the modern marketplace. During Congressional 
consideration of GLBA, the NAIC suggested several amendments to Federal 
laws that would be useful.
    The primary benefit of making the following changes to Federal laws 
is to achieve uniform regulatory procedures and national enforcement 
quickly by using the existing system of State regulation. The NAIC 
proposes that Congress--

 Provide State insurance regulators with access to the national 
        criminal information database (NCIC) through the NAIC or its 
        affiliates for regulatory purposes and for checking criminal 
        histories as required by the Federal Insurance Fraud Prevention 
        Act. (18 USC 1033)
 Grant Federal immunity from liability for NAIC and NIPR 
        database activities related to creating a national licensing 
        and enforcement system.
 Protect the confidentiality of regulatory communications among 
        NAIC, State regulators, and Federal agencies.
    NAIC and its members will be pleased to provide additional 
information and assist Congress in adopting Federal legislation to 
achieve these goals.
  conclusion--state regulators are meeting the glba and modernization 
                               challenge
    Working together through the NAIC, Ohio and other State insurance 
regulators are well on the way to implementing the provisions of GLBA 
as intended by Congress. More importantly, we have shown real progress 
in our efforts to do far more than Congress or industry representatives 
have asked us to do regarding uniformity, efficiency, and 
modernization. We look forward to working with Congress, our Governors 
and legislatures, and all other interested parties as we continue to 
develop and implement the GLBA required regulations and legislation, 
and our State insurance regulation modernization initiatives.

    Mr. Oxley. Thank you, Mr. Covington.
    The Chair would recognize himself first for a couple of 
questions.
    Let me indicate, first of all, we appreciate the work that 
you and the group have done. There is a lot on your plate. What 
obstacles do you see to achieving uniformity and what can 
Congress do to help you achieve those goals?
    Mr. Covington. Mr. Chairman, certainly there are always 
obstacles in the implementation process. But we feel very 
confident that we have put ourselves the best position to win 
and so we are very optimistic that we can overcome any 
obstacles during the implementation process. I think it will 
take a concerted effort by all interested parties to come 
together and agree on an approach and for moving forward.
    Certainly we have different competing interests between 
insurers, banking, agents and consumer groups. There will have 
to be, as in any public policy, some compromise and some 
consensus as we move forward.
    With respect to how Congress can--well, let me mention also 
that the State legislative process certainly could be an 
obstacle. But we are optimistic that we can implement many of 
these initiatives without--on our own initiative. We will work 
very hard to move forward on those initiatives that we can get 
in place very quickly; and if we need to move forward through 
the State legislation process, we will certainly do so.
    There are a number of----
    Mr. Oxley. Let me interrupt, what specifically would the 
potential problem be with the State legislatures? You mean in 
terms of implementing the reforms or something that would go in 
the opposite direction?
    Mr. Covington. Mr. Chairman, I think a potential obstacle 
could just be time. So the NAIC members have certainly focused 
on initiatives that we can implement on our own, on our own 
without State legislative approval; and we find that we can do 
that in many areas.
    One of the things that I will note is the National Council 
of Insurance Legislatures has been very supportive of our 
efforts. We have worked very closely with them. Again, we feel 
very optimistic that they are on board with these initiatives 
and the need to modernize our insurance regulatory system. So 
we are very optimistic about that process. But we want to move 
forward with the reforms we can make.
    And then, if necessary, let me highlight that if necessary 
and if legally necessary, in some areas, we can work with our 
State legislatures to solidify the framework that we establish.
    Mr. Oxley. So in response, but our--I asked you 
specifically what we could do. The bottom line, as I take it, 
is we need to keep watching what you do. But in terms of 
moving--in terms of legislation, that would not be helpful at 
this point, is that fair?
    Mr. Covington. We don't see at this point that legislation 
is necessary. We do encourage the committee and thank the 
committee for its oversight role, for its monitoring and for 
holding us accountable toward--as we move forward in the 
regulatory processes.
    One thing that Congress may be able to help us do is to 
provide access to the National Crime Information Center, the 
information that is provided through that Center. That will 
certainly help our efforts. We may need help in the area of 
confidentiality, as you mentioned earlier. In addition to that, 
currently States have indemnity under State indemnity laws and 
sovereign immunity; and it may be necessary that the NAIC also 
be granted that type of immunity as we work concertedly through 
that association.
    Those are some specific things that may arise in the 
future, and we will certainly come back and work with this 
committee and the Congress if we need those.
    Mr. Oxley. Thank you.
    Let me now recognize the ranking member, the gentleman from 
New York.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Frankel operated in five different States, and the scams he 
perpetrated went on for 8 years. Doesn't it clearly indicate 
that the failure to detect this fraud is not unique to the 
State of Tennessee but instead a common problem for all of the 
five States?
    Mr. Covington. Well, Congressman Towns, certainly we have 
recognized that there are deficiencies in the system. I must 
admit that, as you know, I came today to testify on our 
modernization initiatives and am not fully prepared to address 
that issue. We did not have the issue in Ohio. I am not a 
member of the ad hoc task force that the NAIC put together. We 
would certainly be happy in the future to provide the 
appropriate person from the NAIC, including President Nichols, 
to provide a full briefing of our activities to address the 
issues that arose in the Frankel matter.
    Mr. Towns. Well, can we--I will move on to another subject. 
I respect that.
    In your statement you asked Congress to provide State 
insurance regulators with access, access to the National 
Criminal Information Data Base maintained by the Justice 
Department. However, the GAO report says Justice officials 
claim that the only reason most State insurance regulators do 
not currently have access to the criminal history data is 
because they lack law enforcement authority. How many State 
insurance regulators have authority to enforce criminal laws 
which Justice says they need to get access to the Federal 
criminal history data base?
    Mr. Covington. Congressman Towns, I do not have the 
specific numbers, but that is correct that many of our States 
do not have law enforcement authority under the current laws. 
That is--I have reviewed the ad hoc report in preliminary 
detail in a preliminary fashion. I do know that is one of the 
recommendations that the ad hoc task force has placed on the 
table, that States pursue law enforcement authority under that 
statute so they can access that data.
    Mr. Towns. Many of the recommendations require further 
development by the NAIC committees and implementation by State 
legislatures and, therefore, could take a long, long time to 
implement. Do you have any idea when you feel this could be 
implemented?
    Mr. Covington. Congressman Towns, I do not have a precise 
estimate on the time that it would take to implement all these 
initiatives. I do know that we are working very hard to 
implement the initiatives that we can, and there are many that 
we can do on our own. We agree that the process today is too 
slow. We are working hard. I think, as we have demonstrated 
over the last 6 to 9 months, we can act quickly; and we look 
forward to addressing those issues in the very near term.
    Mr. Towns. Suppose we get into timetables, and if a State 
fails to implement the recommendations by some point in the 
future would the State lose its NAIC accreditation?
    Mr. Covington. Congressman Towns, again, I am probably not 
the best person to testify on that matter. There is a detailed 
ad hoc report. There is probably--I know what there is another 
person that can address those issues more precisely. I do know 
that a number of those matters are under consideration.
    Mr. Towns. On that note, I yield back, Mr. Chairman. Thank 
you very much.
    Mr. Oxley. The Chair now recognizes the gentleman from 
Iowa, Mr. Ganske.
    Mr. Ganske. Thank you, Mr. Chairman. I would note that Mr. 
Covington is from Ohio and the lead paragraph in our staff memo 
quotes from the Insurance Commissioner of Iowa. It must be just 
a coincidence.
    I think this is an interesting hearing. I have another 
hearing, so I will have to leave after I hear the next panel's 
testimony.
    I am interested in getting educated on the pros and cons of 
some of the proposed solutions for improving the efficiencies 
and sharing of insurance. I would, as a caveat, point out that 
25 years ago Congress passed a law called the Employee 
Retirement Income Security Act that preempted State insurance 
regulation in health care and that we have been dealing with 
the consequences the last 4 or 5 years here in Congress with, 
in my opinion, insufficient oversight of HMO abuses. So when we 
look at such things as a Federal charter I think we will need 
to learn some lessons from the past on that.
    As I look over the request that NAIC is making to Congress, 
for instance, utilizing Social Security numbers for licensing 
purposes, granting exemptions there the Fair Credit Reporting 
Act, providing State insurance regulators with access to 
national criminal data bases, granting Federal immunity from 
liability for data base activities and protecting the 
confidentiality of regulatory communications, all of these 
areas involve privacy issues. And it is the privacy issue which 
I think will be the major issue involving insurance and 
banking, securities, financial services, for the next several 
years. That is a Gordian knot to solve the problem so that we 
protect consumers and yet at the same time provide for ability 
to do research, to utilize those data bases in ways that would 
be useful to protect consumers as well as to potentially affect 
consumers' privacy. So it is useful, I think, to have this 
hearing, but I think at the basic level it is part of a larger 
problem that Congress is going to be dealing with.
    I must admit that I have a--I think the McCarren and 
Ferguson Act has been a good act. As a Republican, I have 
spoken on the floor many times on the benefit of State control 
and local control, whether it is for education or for insurance 
or other things. I think it is correct in that the closer you 
can get to the constituent, the citizen, the person affected 
with your government, the more common sense you tend to see, 
rather than regulations coming out of Washington.
    Finally, I would just add as a warning, for those who are 
thinking that it might be good to have a Federal charter, just 
sometimes be careful for what you wish for. Because you very 
well may end up not with one layer but with two. The political 
process can get very, very messy. And for those in the business 
community who don't want to see additional regulations, I would 
be very, very careful on this issue.
    With that, Mr. Chairman, I will yield back.
    Mr. Oxley. The gentleman yields back.
    The Chair is now pleased to recognize the gentleman from 
Illinois, Mr. Shimkus.
    Mr. Shimkus. I just have one question for Mr. Covington.
    In putting together a uniform licensing system, what steps 
can the regulators take to ensure that their data bases will be 
coordinated with the securities and banking regulator data 
bases to integrate oversight and prevent fraud?
    Mr. Covington. Congressman, we are certainly committed to 
cooperative effort with the Federal agencies, and we have 
ongoing dialog currently with all of our partner Federal 
agencies to achieve just what you have cited, to try to have 
coordination between the information and sharing of that 
information. And it is even more important in this day of 
convergence through Gramm-Leach-Bliley, and we are very 
committed to achieving that objective.
    Mr. Shimkus. Can you explain the Coordinated Advertising, 
Rate, and Form Review Authority?
    Mr. Covington. Congressman, the coordinated advertising 
rate and review authority is a mechanism through which we can 
have a one-stop, single-filing process through a centralized 
facility with uniform standards for application. That is the 
basis of what the CARFRA, as we call it, proposal entails.
    We have appointed just last week a work group to ferret out 
all of the details of that proposal, and will be conducting a 
limited launch of that authority in the first quarter of 2001. 
It may sound like a simple idea, and it is meant to be simple, 
but that is the basics of what CARFRA provides for.
    Mr. Shimkus. Thank you, Mr. Chairman. I yield back.
    Mr. Oxley. The gentleman yields back.
    Mr. Covington, thank you so much for your appearance today. 
And best of luck in your endeavors. We will be watching very 
closely and keeping close contact with you and all the NAIC 
folks regarding this very important issue.
    Thank you very much.
    Mr. Covington. Thank you, Chairman Oxley, and thank you for 
your leadership.
    Mr. Oxley. The Chair would call up our next panel: John G. 
Turner, Vice Chairman of ING Americas from Minneapolis, 
Minnesota, on behalf of the Financial Services Roundtable; Mr. 
Drayton Nabers, Jr., Chairman and Chief Executive Officer, 
Protective Life Corporation, Washington DC, on behalf of the 
American Council of Life Insurers; Philip H. Urban, President 
and Chief Executive Officer, Grange Insurance Companies, 
Columbus, Ohio, on behalf of the National Association of Mutual 
Insurance Companies; Robert V. Mendelsohn, Chief Executive 
Officer, Royal & SunAlliance, Charlotte, North Carolina; Glen 
J. Milesko, President and Chief Executive Officer Banc One 
Insurance Services Corporation, Milwaukee, Wisconsin, on behalf 
of the American Bankers Association Insurance Association; Mr. 
Ronald A. Smith, President, Smith, Sawyer & Smith Inc., 
Rochester Indiana, on behalf of the Independent Insurance 
Agents of America; and Richard J. Hillman, Associate Director, 
Financial Institutions and Markets Issues, GAO, here in 
Washington.
    Gentlemen, thank you all for your appearance. And we will 
begin with Mr. Turner. And if we can, if we have enough 
microphones to go around, Mr. Turner, I would ask of you and 
the panel to keep your statements to 5 minutes so that the 
panel has plenty of time to answer questions and develop the 
issue.
    All of the prepared statements will be made part of the 
record and so ordered.
    Mr. Turner.

 STATEMENTS OF JOHN G. TURNER, VICE CHAIRMAN, ING AMERICAS, ON 
 BEHALF OF THE FINANCIAL SERVICES ROUNDTABLE; DRAYTON NABERS, 
  JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER, PROTECTIVE LIFE 
    CORPORATION, ON BEHALF OF THE AMERICAN COUNCIL OF LIFE 
   INSURERS; PHILIP H. URBAN, PRESIDENT AND CHIEF EXECUTIVE 
OFFICER, GRANGE INSURANCE COMPANIES, ON BEHALF OF THE NATIONAL 
     ASSOCIATION OF MUTUAL INSURANCE COMPANIES; ROBERT V. 
  MENDELSOHN, CHIEF EXECUTIVE OFFICER, ROYAL & SunALLIANCE ON 
BEHALF OF THE AMERICAN INSURANCE ASSOCIATION; GLEN J. MILESKO, 
   PRESIDENT AND CHIEF EXECUTIVE OFFICER, BANC ONE INSURANCE 
    SERVICES CORPORATION, ON BEHALF OF THE AMERICAN BANKERS 
ASSOCIATION INSURANCE ASSOCIATION; RONALD A. SMITH, PRESIDENT, 
   SMITH, SAWYER & SMITH, INC., ON BEHALF OF THE INDEPENDENT 
INSURANCE AGENTS OF AMERICA; AND RICHARD J. HILLMAN, ASSOCIATE 
 DIRECTOR, FINANCIAL INSTITUTIONS AND MARKETS ISSUES, GENERAL 
                       ACCOUNTING OFFICE

    Mr. Turner. Chairman Oxley, Ranking Member Towns, and 
Representative Ganske, I am John G. Turner, Vice Chairman, ING 
Americas, and former Chairman and CEO of ReliaStar Financial 
Corporation.
    ING Americas is part of the Amsterdam-based ING Group. We 
are one of the largest integrated financial services 
organizations in the world, and after acquisition of Aetna 
Financial Services is completed this year, we will have over 
$100 billion of assets in the U.S. Worldwide, ING has over 500 
$billion in assets under management.
    This year marks my 40th year in the life insurance 
business. I can tell you from personal observation over time, 
the forces for change in the regulatory arena have never been 
more compelling.
    The Financial Services Roundtable national association, 
whose membership is reserved for the 100 largest diversified 
financial services firms, including banks, insurance companies, 
and securities firms, very much welcomes this opportunity to 
testify before you on a very major piece of unfinished business 
in the modernization of the American financial system, the 
creation of an optional Federal insurance charter that will 
parallel the national banking charter.
    Let me emphasize at the outset that the Roundtable strongly 
favors effective and efficient regulation, regulation that is 
market based and serves consumer needs in a competitive and 
innovative way.
    Mr. Chairman, there has never been a broader consensus on 
the need for major structural improvement in the regulation of 
insurance. Simply improving the State insurance system given us 
by the past may not be sufficient for those insurers that 
compete directly with other financial services firms on a 
national level. State reform can come, but with 51 regulators, 
interstate reciprocity is unlikely to achieve a uniform 
national platform. Nonetheless, we do strongly support the 
NAIC's very great reform efforts and will continue to work 
closely with President George Nichols and his colleagues.
    Congress should enact a thoroughly modern, market-oriented 
Federal insurance system to promote positive reform in the 
States. The case for reform is compelling.
    First, and most obviously, we now have a truly national 
market for financial services. In each State, to do business, 
an insurer must be separately qualified, its agents separately 
licensed and its products and forms separately reviewed and 
approved under the laws of that State.
    The NAIC has promoted model laws, but 51 distinct 
jurisdictions must enact them. Each State is free to modify the 
model act terms and often does so. Each separate law is then 
separately interpreted by the insurance department and courts 
of that State.
    Legal similarity is, in practical terms, far from legal 
uniformity or certainty. The absence of uniform products and 
rules, the multiplicity of licensing and filing requirements, 
and the resulting inability of insurers to offer uniform 
products in a timely manner in response to market needs 
inevitably add cost and burden to both providers and consumers.
    Second, insurance is a trillion-dollar business that should 
operate a seamless, uniform regulatory structure. A Federal 
functional regulator is an obvious option that deserves serious 
consideration. Insurance touches virtually every household in 
this country. It is thus striking and disturbing that no single 
national agency has overall expertise in insurance.
    An agency with in-depth industry knowledge of insurance 
products would serve a number of important policy goals--
effective consumer protection, strong prudential supervision, 
the prevention and management of financial crises, and the 
fostering of private sector innovation.
    Third, resources are a significant issue in a State-only 
system. Despite the best efforts of the NAIC and the States, 
the quantity and quality of insurance department staff varies 
widely among the States. A Federal insurance regulator would 
have, for example, the resources to be an effective and 
sophisticated regulator of solvency and multinational 
companies.
    Fourth, in regulation, as in the marketplace, lack of 
competition can breed inefficiency and stand-pat attitude. 
Competitive choices promote and enhance innovation, efficiency, 
quality and governmental performance, benefiting both regulated 
companies and customers. A dual Federal-State system produces a 
creative and productive tension that tends to improve the 
quality of regulation and the business options available to the 
private sector. Ending the State monopoly and insurance 
regulation will strengthen the entire system and our economy.
    And finally, in insurance, unlike other financial services 
sectors, there are no legacy systems at the Federal level.
    Consideration of new Federal regulatory framework provides 
a truly unique opportunity. In designing a new Federal 
regulatory framework, we do not have to reengineer or reform. 
We have the opportunity to create a brand-new system, 
responsive to the rapidly changing marketplace.
    In closing, I want to thank you, Mr. Chairman, for holding 
this very important hearing and for your commitment to fully 
explore this issue. We look forward to working with you over 
the coming months, and would be delighted to answer any 
questions you might have.
    [The prepared statement of John G. Turner follows:]
   Prepared Statement of John G. Turner, Vice Chairman, ING Americas
    Chairman Oxley, Ranking Member Towns, and Members of the Committee, 
I am John G. Turner, Vice Chairman, ING Americas. ING Americas is part 
of Amsterdam-based ING Group. We are one of the largest integrated 
financial services organizations in the world with over $400 billion in 
assets under management. ING Americas is composed of ING's integrated 
financial services operations in North America and South America. The 
region consists of more than 25 businesses.
    On May 1, 2000 ING entered into a definitive agreement to acquire 
ReliaStar Financial Corp. The deal was completed on the first of this 
month. I served as Chairman of the Board and CEO of ReliaStar. ING US 
Financial Services offers individuals and institutions: life insurance 
and annuities; employee benefit products and services; life and health 
reinsurance; retirement plans; mutual funds; bank products; and, 
personal finance education.
    My career in the financial services industry spans more than three 
decades. During that time, I have witnessed numerous changes at not 
only my company, but across the entire financial services industry. 
Today, we are at a critical moment in our industry's history.
    The Financial Services Roundtable very much welcomes this 
opportunity to testify before you on a major piece of unfinished 
business in the modernization of the American financial system--the 
creation of an optional federal insurance charter that will parallel 
the national banking charter. Global competition, the integration of 
the financial services industry under Gramm-Leach-Bliley, and the 
emergence of the ``wired'' consumer on the Internet lead to the 
inescapable conclusion that this task is timely--indeed, long overdue.
    The Financial Services Roundtable actively supported enactment of 
last year's Gramm-Leach-Bliley Act. While that was indeed an historic 
achievement, it did not complete the task of financial modernization.
    The Roundtable brings an important perspective to the present 
discussion because it is now a financial services association, not just 
a banking association. Our evolution parallels the emergence of a 
national financial services industry. The Roundtable is a national 
association whose membership is reserved for the 100 largest 
diversified financial services firms, including banks, insurance 
companies, and securities firms. The Roundtable supports the goal of 
pursuing the creation of a modern, national insurance charter while 
retaining and improving the option of insurers to be regulated through 
a state-based system.
    Let us emphasize at the outset that the Roundtable strongly favors 
effective and efficient regulation, regulation that is market based and 
serves consumer needs in a competitive and innovative environment.
    There has never been a broader consensus on the need for major 
structural improvement in the regulation of insurance. Through two 
decades of rapid financial, technological and market changes in the 
financial services industry, reforms in the state system unfortunately 
have failed to provide the consistency and flexibility necessary to 
adequately respond to these changes and consumer needs. The existing 
state system may not be ``broken,'' but it clearly has fundamental 
problems. All the national insurance trade associations recognize this, 
as does the National Association of Insurance Commissioners (NAIC), 
evidenced by its own wide-ranging State Regulation 2000 initiative. 
Efforts to develop a seamless, functionally more efficient state 
regulatory system are underway, and the Roundtable supports these 
efforts.
    However, simply improving the state insurance system given us by 
the past may not be sufficient for those insurers that compete directly 
with other financial services firms on a national level. State reform 
can come, but with 51 regulators, interstate reciprocity is unlikely to 
achieve a uniform national platform. As I stated earlier, we strongly 
support the NAIC initiative and will continue to work closely with NAIC 
President George Nichols and his colleagues.
    Similar to the state/federal banking system, giving insurers the 
option of regulation under either a properly structured optional 
federal insurance charter or a state-based system will optimize their 
ability to serve the economy's future needs by creating a healthy 
competitive environment that fosters innovation and market efficiency. 
The recent action by the American Council of Life Insurers to support 
both reforms takes exactly the right approach, and we applaud them.
    The Roundtable believes that our task is to design an insurance 
regulatory structure consistent with Gramm-Leach-Bliley and the global 
financial services marketplace while maintaining and enhancing consumer 
protections. We have the opportunity to build from scratch a state-of-
the-art, twenty-first century structure to serve the existing, but 
still growing and evolving, financial services industry. To do less 
will compromise the U.S. financial services industry relative to its 
foreign competitors and, more importantly, ill serve American 
consumers.
               the case for the optional federal charter
    Congress should enact a thoroughly modern market-oriented federal 
insurance system to promote positive reform in the states. In the past, 
financial reform has often been impelled by a crisis. There is no 
crisis now, and we should not wait for one. The case for reform is 
compelling.
    First, and most obviously, we now have a truly national market for 
financial services. Of all the financial services companies, only 
insurance is predominantly regulated on a state-by-state basis. In each 
state, to do business, an insurer must be separately qualified, its 
agents separately licensed, and its products and forms separately 
reviewed and approved under the laws of that state. The NAIC has 
promoted model laws, but 51 distinct jurisdictions must enact them. 
Each state is free to modify the model act terms, and often does so. 
Each such law is then separately interpreted by the insurance 
department and courts of that state. Legal similarity is in practical 
terms far from legal uniformity or certainty. Multiplicity and 
inconsistency are inevitable.
    The absence of uniform products and rules, the multiplicity of 
licensing and filing requirements, and the resulting inability of 
insurers to offer uniform products in a timely manner in response to 
market needs inevitably add cost and burden to both providers and 
consumers. Inefficiencies and lack of flexible rules in many insurance 
departments can compound the problem by failing to respond, in an 
adequate and timely fashion, to insurers' innovative attempts to meet 
marketplace demands. This problem is exacerbated by the proliferation 
of complex hybrid products combining elements of securities, banking 
and insurance. This phenomenon will only increase as the Internet and 
other technologies drive the marketplace.
    Gramm-Leach-Bliley has given rise to a striking example of how the 
state system works to the disadvantage of the insurance industry in a 
nationwide financial services economy. This new law includes demanding 
privacy provisions that require all financial services companies, 
including insurance firms, to develop substantial compliance and 
disclosure programs. This major set of tasks will take many companies 
more than a year to complete. In early March, seven federal regulatory 
agencies coordinated to issue essentially the same proposed rules, 
which were then promulgated as substantially identical final rules. The 
federal agencies also have provided practical relief by making 
compliance with these rules voluntary for the banking, securities, and 
other non-insurance financial services firms under their jurisdiction 
between November 2000 and July 2001.
    In contrast, the NAIC in mid-June released a draft model state 
regulation for comment. After the comments have been received and 
digested, a final model rule must then work its way through the NAIC 
committee and board review process before being officially released. Of 
course, final NAIC model rules will not automatically take effect in 
any state. Each of the 51 insurance departments must decide what it can 
issue and when. Each must also decide whether it can and will provide 
compliance relief until July 2001 parallel to what the federal agencies 
have announced and the NAIC has recommended. Obviously, the timetable 
for insurance is going to be much tighter than for any other 
``financial'' services company, all of which already know the rules 
with which they must comply. The failure of the state system to produce 
timely rules has left insurers in regulatory limbo and will give many 
too little time to comply. We cannot wait for them to play catch-up. To 
be sure, the marketplace won't wait.
    Second, insurance is a trillion-dollar business that should operate 
under a seamless uniform regulatory structure. A federal functional 
regulator is an obvious option that deserves serious consideration. 
Insurance touches virtually every household in this country. It is thus 
striking--and disturbing--that no single national agency has overall 
expertise in insurance. To be sure, a number of federal agencies, 
including the Securities and Exchange Commission (SEC), the Labor 
Department, and the Federal Emergency Management Agency (FEMA), 
understand important aspects of the insurance business. However, this 
expertise is fragmented and incomplete.
    This industry and the economy generally would benefit from the 
presence of an agency with in-depth industry knowledge of insurance 
products within the national government. The integration of financial 
services organizations and financial products and globalization of all 
financial markets increases the need for a federal agency expert, if 
not advocate, regarding insurance. As we have seen in banking and 
securities, such an agency serves a number of important policy goals: 
effective consumer protection, strong prudential supervision, the 
prevention and management of financial crises, and the fostering of 
private sector innovation.
    Third, resources are a significant issue in a state-only system. 
Despite the best efforts of the NAIC and the states, the quality and 
quantity of insurance department staff varies widely among the states. 
A federal insurance regulator would have, for example, the resources to 
be an effective and sophisticated regulator of solvency
    Moreover, as American insurers expand internationally to serve an 
increasingly global financial marketplace, they will need a credible 
home country regulator. It will be difficult for states to serve as an 
effective regulator of multi-national companies.
    Fourth, in regulation as in the marketplace, lack of competition 
can breed inefficiency and stand pat attitudes. Competitive choices 
promote and enhance innovation, efficiency and quality in governmental 
performance--benefiting both regulated companies and customers. A dual 
federal-state system produces a creative and productive tension that 
tends to improve the quality of regulation and the business options 
available to the private sector. Indeed, the NAIC's SR2000 initiative 
itself suggests the merits of a dual system, because it clearly 
responds to the movement among insurance companies to develop a federal 
charter option. Ending the state monopoly in insurance regulation will 
strengthen the entire system and our economy.
    In the dual banking system, recent history is replete with 
examples. Without belaboring the point, undoubtedly the healthy 
competition between the Federal Reserve and Comptroller of the Currency 
(OCC) has permitted innovation in the marketplace. ``Wild card'' 
statutes enacted at the state level (which allow state banks to engage 
in all national bank activities without an explicit and specific state 
authorization) further illustrate the point. The prominence of state 
chartered banks in New York and Alabama and the vitality of the state 
banking system across the country five years after national banks 
gained interstate branching authority demonstrate that states can and 
do effectively provide a competitive alternative.
    Finally, in insurance, unlike other financial services sectors, 
there are no legacy systems at the federal level. Consideration of a 
new federal regulatory framework provides a unique opportunity. In 
designing a new federal regulatory framework, we do not have to re-
engineer or reform. We have the opportunity to create a new system 
responsive to the rapidly changing marketplace. We need not, for 
example, perpetuate an outmoded system of rate and form regulation. It 
will be possible to incorporate the best in the state system, and at 
the same time modernize based on a contemporary appreciation of the 
power of market solutions and a full understanding of the implications 
of technology and the innovations that have occurred in the financial 
markets.
    In closing, I want to thank you, Mr. Chairman, for holding this 
important hearing and for your commitment to fully explore this issue. 
We look forward to working with you over the coming months. I will be 
delighted to answer any questions you might have.
    issues in developing a modern federal-state insurance structure
    While the case for a federal chartering option is compelling, we 
have no illusions about the substantive and political difficulty of 
enacting such a law. Gramm-Leach-Bliley demonstrates that reform of the 
financial regulatory structure can occur without a crisis or sense of 
overwhelming problems, but that financial modernization legislation 
takes a long time and is not easy. Experience also suggests that as a 
bill moves through Congress rigorous and spirited debate and the 
crafting of concrete answers will not only improve the bill, but also 
have the salutary effect of stimulating reforms at the state level.
    As we will sketch out briefly, a large number of issues must be 
resolved.
1. Nature of the Federal Charter Alternative
    Perhaps the most basic question is whether the new federal 
insurance system should be completely federal or whether it should 
leave national companies subject to some state law. One suggestion 
might be to couple enactment of a new federal system with amendments to 
the McCarran-Ferguson Act that would provide federal enhancements to 
foster a more seamless state-based system for multi-state insurance 
providers that remain state chartered.
    The answers to these basic questions will establish the outlines of 
the entire system. At this early stage in the debate, the Roundtable 
has not determined its position on this set of issues. At the moment, 
we are inclined to recommend testing the proposition that the immediate 
goal should be a complete, free-standing federal charter system, 
including a federal guaranty arrangement.
    The Roundtable recognizes that the insurance business and insurance 
regulation has considerable commonality across lines (property and 
casualty, health, life) and thus, any proposed alternative charter 
should extend to all lines.
2. A New Federal Regulator
    A number of federal options and models already exist for the 
insurance chartering agency: (1) A new insurance bureau within an 
existing cabinet department; or (2) A new independent agency.
    Related issues are whether it should issue only a single type of 
charter, authorizing the charter recipient to engage in all types of 
insurance activities (including life, health, p&c) or separate charters 
for specified lines of business. Determination of appropriate entry 
standards and requirements for both new charters and changes in control 
will be a critical initial task.
    Further, if a guaranty arrangement applying federal insurance law 
is to be established, should it be independent of the chartering 
agency? An independent agency?
    The possibility of creating a self-regulatory organization (SRO) 
and its scope of responsibility should be considered. Market conduct 
and consumer protection, including the licensing and supervision of 
insurance producers, might be appropriate. Gramm-Leach-Bliley included 
provisions that will lead to the establishment of a National 
Association of Registered Agents and Brokers (NARAB) in three years 
unless a sufficient number of states enact state agency laws permitting 
interstate agency operations on a reciprocal basis. The NAIC's SR2000 
initiative seeks to obviate the need for NARAB by meeting this 
deadline.
    Finally, the issues of which courts will have jurisdiction to 
resolve disputes involving federally regulated insurers and which law 
will be applied must be resolved. Federal courts might be granted 
jurisdiction over federally regulated entities and if so must determine 
what substantive law to apply (i.e. federal law, state insurance law or 
a combination of the two).
3. Consumer Protection Issues
    Consumer protection is an integral part of state regulation and 
strong consumer protections will necessarily be part of a federal 
charter structure. A federal charter offers many benefits to consumers, 
such as nationwide application of the laws and uniformity of 
application across state lines. Additionally, the legislation could 
provide consumers with a list of prohibited insurance sales, 
underwriting, and claims practices. This would give consumers upfront 
confidence that insurers must act properly or face penalties. Further, 
a federal market conduct system could be established which would 
provide periodic marketplace ``check-ups'' to identify inappropriate 
and illegal activities by companies.
4. Solvency Regulation
    A core function of the federal regulator will be solvency 
regulation. A threshold issue is whether the existing state risk-based 
capital regime should be adopted as-is, or rethought. One point of 
reference would be the capital standards of the European countries. The 
question of an early warning system for insurer weakness should be 
considered. The banking ``prompt corrective action'' regime tied to 
capital levels is an option to consider, but may not be the most 
appropriate model.
    Risk-oriented examinations and supervision are being used 
increasingly for major banking organizations, with far less attention 
to the traditional asset-based ``snapshot'' on-site examinations. 
Creation of a federal charter should include a thorough consideration 
of the most appropriate types of examination for each type and size 
category of insurer.
5. Addressing Insolvencies
    Effective solvency regulation should make insolvencies a rare 
occurrence, but should they occur the principal choice is whether 
federally chartered companies should be subject to the guaranty system 
under federal insurance law or state insurance law. If federal 
insurance law is applied, the question then is whether state-chartered 
insurers might participate in it, as an alternative to participation in 
any state arrangement. One possible federal ``backstop'' mechanism 
would be an assessable mutual reinsurance company. Federal solvency 
oversight would presumably follow, as is the case today with insured 
state banks. Another option would be to establish a federal bankruptcy 
regime for federally chartered insurers.
    Proponents of applying federal insurance law argue it makes the 
federal charter more attractive and should serve to enhance the stature 
of federal insurers as they expand internationally. It also would go 
hand-in-hand with the regulation of federal insurers. In view of the 
continuing debate over federal deposit insurance, lender of last resort 
issues, and the possibility of Treasury funds as the ultimate backstop, 
and the potential impact on existing state guaranty systems, this topic 
should be thoroughly analyzed.
    As the Congress debates the merits of creating an optional federal 
charter for the insurance industry I want to underscore the following 
point. There can only be one guaranty structure for the industry. In 
the area of solvency, single supervision and implementation is 
imperative.
6. Holding Company Issues
    The threshold question is whether any federal insurance holding 
company regulation or supervision is needed at all, particularly in 
light of the availability of financial holding company status under 
Gramm-Leach-Bliley or savings and loan holding company status under the 
Home Owners Loan Act.
    Affiliate transaction rules to protect the integrity of an 
insurance company affiliate and the interests of policyholders would be 
necessary. It has also been suggested that an insurance source of 
strength policy be adopted that would parallel the one in bank holding 
company law for the benefit of bank subsidiaries. Neither of these 
require full holding company regulation. If a federal mutual insurance 
company charter is to be created, then a mutual insurance holding 
company statute should be considered as a corollary.
7. A System that Places Maximum Reliance on Competitive Markets
    Insurance is a highly competitive field, and experience has shown 
that reliance on the market is the best way to give consumers good 
insurance products at fair prices that reflect the risks involved. 
However, compared to other financial sectors, insurance is in many ways 
subject to burdensome and time-consuming over-regulation. In banking 
and securities, twenty years ago Congress removed rigid, prescriptive 
regulation that prevented firms from being able to respond to consumer 
needs. These changes benefited consumers through better prices, wider 
product offerings, and more responsive providers. In insurance, 
Illinois has shown the way through a market-based system for 
determining insurance prices and products. That state has one of the 
most competitive, pro-consumer insurance environments in the United 
States. That is a model to be studied in the development of a new 
federal system. We would note that in conjunction with the creation of 
a competitive, market-based federal system, existing federal insurance 
antitrust laws should be reconsidered to determine how best to extend 
certain needed limited antitrust protections to federally-chartered 
insurers.
    If markets are allowed to flourish with rates and coverages 
established by competition, the need for government-mandated 
involuntary or residual markets will be greatly reduced because most 
individuals or businesses seeking insurance will have already obtained 
it in the market. On the other hand, it has been demonstrated that 
politicized (as opposed to risk-based) pricing can destroy the 
voluntary market. If competitively determined actuarially based rates 
are the focus of any federal insurance charter, then residual market 
issues will be minimized.
8. Taxation
    State and federal tax issues must be considered. Federal charter 
reform should be tax neutral as far as the states are concerned.
9. Transition Period
    Implementing these changes will require some time especially with 
respect to issues such as creating the proper backstop mechanism for 
insolvent insurers.
    The Financial Services Roundtable urges the Committee to begin 
actively developing legislation creating a federal insurance charter 
and agency and to modify the McCarran-Ferguson Act to maximize the 
ability of the states to modernize the state insurance regulatory 
system. This is the next major task for financial modernization, and 
the needed legislation must be developed from a financial services 
perspective. The Roundtable with its diverse membership is especially 
well-suited to work with the Committee and other interests to craft 
legislation that we can all be proud of. We stand ready to do so. Thank 
you for your time and attention.

    Mr. Oxley. Thank you, Mr. Turner.
    Mr. Nabers.

                STATEMENT OF DRAYTON NABERS, JR.

    Mr. Nabers. Thank you, Mr. Chairman. The ACLI is the 
principal trade association for life insurance companies. From 
our perspective, your hearing is quite timely, and we very much 
appreciate your interest and involvement.
    My message this morning is simple and urgent. The insurance 
business is a vital component of the U.S. economy. It provides 
a wide array of essential financial and retirement security 
products and services to all segments of the American public. 
However, for our business to remain viable and serve the needs 
of our customers effectively, the present system of insurance 
regulation must become far more efficient.
    Please don't misconstrue our agenda. We are not seeking 
less regulatory oversight. Effective consumer protections are 
absolutely essential to us. So is appropriate regulation of 
company solvency.
    What we are calling for is much more efficient 
administration of the statute's rules and regulations to which 
we are subject. The current regulatory environment is 
unacceptable. That is a consensus within almost all quarters of 
the insurance industry, and it is a consensus that we believe 
is broadly shared by our regulators.
    As the financial marketplace has evolved, our system of 
insurance regulation has not kept pace. The present system was 
instituted at a time when insurance was not even deemed 
interstate commerce. As a consequence, many of the 
underpinnings contemplate companies doing business only within 
the borders of a single State. Today, most life insurers do 
business in multiple jurisdictions, if not nationally or 
internationally.
    The most serious problem we confront is the difficulty in 
bringing new products to market. Life insurance must get new 
products and disclosure statements approved on a State-by-State 
basis. For a product to be introduced nationally, there are 51 
different laws with their accompanying regulations to be 
complied with. The process of getting approvals for national 
distribution is extremely costly, cumbersome and enormously 
time consuming. It can take a year or more to complete, and in 
some instances, considerably longer.
    There are a number of other significant problems with the 
current regulatory system, including agent licensing, company 
licensing and market conduct examinations. These and other 
concerns are identified and prioritized in the material at the 
end of the written statement we have submitted.
    After more than 2 years of study, the ACLI board of 
directors reached a decision in June on how to move ahead with 
its regulatory reform efforts. Its decision was to address the 
issue on two tracks, each with an equal and very high priority. 
Under the first track, the ACLI will redouble its effort to 
work with the States and the NAIC to modernize the State-based 
system. Under the second track, the ACLI will develop draft 
legislation providing for an optional Federal charter of life 
insurers, such as Mr. Turner discussed. No decision has been 
made on how to proceed once that drafting process is completed.
    Let me say a few words about what the ACLI is doing on each 
of these tracks. First, the NAIC must be commended for its 
effort this year to overhaul and modernize the State insurance 
regulation. Over the last year, I have had the singular 
pleasure to work closely with Kentucky Insurance Commissioner 
and NAIC President, George Nichols, who is with us or was with 
us earlier this morning. Commissioner Nichols has been tireless 
and courageous in his efforts to forge a consensus among the 
regulatory community on a comprehensive plan for modernizing 
State regulation.
    The NAIC leadership and many other forward-looking 
regulators, including Commissioner Covington, who spoke to us 
earlier, deserve great credit for recognizing the critical need 
for reform and then taking swift action this year to develop an 
agenda for change. We realize that the NAIC alone cannot make 
regulatory reform happen. Governors and State legislators must 
work hand in glove with their insurance regulators to fashion a 
regulatory system that promotes efficiency across State lines 
and enhances important consumer safeguards.
    We believe State regulation will always be a fundamental 
part of our regulatory framework. We intend to work with the 
States for as long as it takes to see State regulation 
modernized appropriately.
    At the same time, the ACLI board thought it essential to 
give serious consideration to an optional Federal charter for 
life insurers. Many of our companies are convinced that the 
insurance business urgently needs a dual charter system 
analogous to those presently found in the commercial banking 
thrift and credit union businesses.
    At present, well over 200 ACLI and member company 
representatives are working on the details of the optional 
Federal charter legislation. We hope to have the drafting 
process completed by the end of the year, at which time our 
board will consider next steps.
    As the States and the NAIC move forward, they may conclude 
that they need the assistance of Congress to achieve the degree 
of uniformity that they and we seek. The ACLI would support 
that concept, and we ask that you keep an open mind to it. And 
we at the ACLI may conclude that it is necessary to present you 
with a proposal for the creation of an optional Federal charter 
for life insurers. We ask that you keep an open mind to that 
possibility as well.
    Mr. Chairman, I hope our testimony gives you and the 
members of the subcommittee a sense of the importance we place 
on reforming and revitalizing the insurance regulatory system. 
And I reiterate that we are not seeking to weaken insurance 
regulation, but rather to make it operate more efficiently.
    That concludes my remarks. I would be pleased to answer any 
questions which you or members of the subcommittee might have. 
And thank you very much for inviting me.
    [The prepared statement of Drayton Nabers follows:]
 Prepared Statement of Drayton Nabers, Jr., Chairman & CEO, Protective 
   Life Insurance Company on Behalf of the American Council of Life 
                                Insurers
    Mr. Chairman and members of the Subcommittee, my name is Drayton 
Nabers, and I am Chairman and CEO of Protective Life Insurance Company 
and Chairman of the Board of Directors of the American Council of Life 
Insurers (ACLI). The ACLI appreciates the opportunity to appear before 
you this morning to present the views of life insurance companies on 
the subject of insurance regulation and the pressing need to bring our 
system of regulation into line with the needs and circumstances of 
today's marketplace. The ACLI is the principal trade association for 
life insurance companies, and its 435 member companies account for 
approximately 75% of the life insurance in force in the United states.
    My message to you this morning is both simple and urgent. The 
insurance business is a vital component of the U.S. economy, providing 
a wide array of essential financial and retirement security products 
and services to all segments of the American public. However, for the 
insurance business to remain viable and serve the needs of its 
customers effectively, our system of insurance regulation must become 
far more efficient. This is not a call for less regulation. It is a 
call for strong regulation administered efficiently, preserving the 
paramount importance of effective solvency regulation and appropriate 
consumer protections.
    I would like to cover three points this morning. First, why 
regulation is so important to us at this juncture. Second, what the 
ACLI has been doing to assess the current regulatory environment and 
identify areas that are in need of improvement. And third, the options 
for improvement we are focusing on and how we are pursuing them.
              importance of efficient insurance regulation
    As the members of this Subcommittee can appreciate more than most, 
the marketplace environment in which life insurers and other financial 
intermediaries compete has changed dramatically in the past several 
years. Importantly, the role of regulation in this new competitive 
paradigm has increased significantly.
    Historically, life insurers competed only against other life 
insurers. Whatever the inefficiencies of insurance regulation, 
companies incurred them equally. Existing companies had learned how to 
cope with the unwieldy regulatory apparatus, and potential new entrants 
almost always looked to existing companies and charters because of the 
difficulty of creating a new one. The status quo, while often 
frustrating, did not present insurers with serious competitive 
problems.
    Today, the situation is radically different. Life insurers, as 
providers of investment and retirement security products, find 
themselves in direct competition with brokerages, mutual funds, and 
commercial banks. These non-insurance firms have far more efficient 
systems of regulation, often with a single, principal federal 
regulator. Without question, the regulatory efficiencies they enjoy 
translate into very real marketplace advantages. Our system of 
insurance regulation now stands as perhaps the single largest barrier 
to our ability to compete effectively.
    In the context of this new competitive environment, insurers' 
inability to bring new products to market in a timely manner is the 
most serious shortcoming of the current regulatory system. National 
banks do not need explicit regulatory approval to bring most new 
products to market on a nationwide basis. Securities firms typically 
get regulatory approval for new products in several months. By 
contrast, life insurers must get new products and disclosure statements 
approved in each state in which the product will be offered, and 
different jurisdictions often have widely divergent standards, 
interpretations, and requirements applicable to identical products. 
Without question there are individual states that are quite prompt in 
reviewing a company's product form filings. Others are not. And the 
problem, of course, is getting approval in multiple jurisdictions, 
which is extremely costly, extremely time consuming, and can take a 
year or more--and in some instances much longer.
    The advent of Gramm-Leach-Bliley and an increasingly diversified 
financial services landscape will only intensify concerns in this area. 
For example, there is evidence that firms having both insurance and 
securities operations are allocating capital away from the insurance 
unit due largely to the inefficiency of the insurance regulatory 
system. New securities products can be brought to market in a more 
timely and cost-effective manner than their insurance counterparts. 
Over the long run, the implications to insurers and their customers of 
these adverse capital allocation decisions are serious, and they can be 
expected to worsen as consolidation and cross-industry diversification 
continue.
    Even with respect to products such as whole life insurance, which 
have no direct analog in the banking or securities businesses, we face 
competition from other providers of financial services for the 
consumer's attention and disposable income. Moreover, the costs of 
regulatory inefficiency are necessarily borne directly or indirectly by 
the public.
    The present state-based system of insurance regulation was 
instituted at a time when ``insurance'' was not deemed to be interstate 
commerce. Consequently, the underpinnings of that system--which remain 
pervasive today--contemplate doing business only within the borders of 
a single state. Today, most life insurers do business in multiple 
jurisdictions if not nationally or internationally. And, the system has 
been cumulative, with new laws, rules and regulations often added but 
old ones seldom eliminated. In short, our system of regulation has 
failed to keep pace with changes in the marketplace, and there is a 
very wide gap between where regulation is and where it should be.
    For many life insurers, making regulation more efficient is now an 
urgent priority. Companies no longer believe they have the luxury of 
being able to wait for years and years while incremental improvements 
are debated and slowly implemented on a state-by-state basis.
                   acli study of insurance regulation
    By the late 1990s, life insurers had concluded that it was 
imperative for the industry to address the issue of regulatory reform. 
In September of 1998, the ACLI Board of Directors instructed the 
association to undertake a detailed study of life insurance regulation. 
The objective of this study was to pinpoint those aspects of 
regulation--both state and federal--that are working well and those 
aspects that are hindering insurers' ability to compete effectively and 
thus in need of improvement. This study broke life insurance regulation 
down into 35 individual elements (e.g., agent and company licensing, 
policy/contract form approval, solvency monitoring, guaranty 
associations, nonforfeiture). Individual elements were then rated based 
on eight factors (uniformity, speed/timing, cost, objective achieved, 
necessity/relevance, expertise/capacity, sensitivity to industry needs/
views, and enforcement/penalties) and assigned one of four overall 
``scores'' based on the eight factors. The overall scores were 
excellent, good, needs improvement, and unsatisfactory.
    This study was completed in November of 1999 and revealed 
widespread dissatisfaction with the current regulatory system. No 
element of regulation was rated ``excellent,'' 14 elements were rated 
``good,'' and 21 of the 35 elements received negative scores, with 16 
rated ``needs improvement'' and five rated ``unsatisfactory.''
    Taking into account the problems with the present regulatory 
environment identified in the first part of the study, a second phase 
evaluated possible avenues for improvement. While a number of 
regulatory models were considered, only three were viewed as having 
significant potential: improving the state-based system; federal 
(national) standards administered by the states; and an optional 
federal charter. A forth option, regulation by state of domicile, was 
considered in some detail, but was viewed as more problematic than the 
other three. The study drew no conclusions as to which of these options 
should be pursued.
    The study concluded that life insurers generally believe the laws 
and regulations on the books are necessary and appropriate. However, 
these laws are seldom uniform across all states and, even where 
uniform, are frequently subject to divergent applications and 
interpretations. Having to comply with even uniform laws 50+ times is 
costly and time consuming. When those laws differ and when 
interpretations of identical or similar laws differ significantly 
state-to-state, an insurer's ability to do business in multiple 
jurisdictions is severely hindered. Given these considerations, the 
life insurers do not seek diminished regulation. Rather, they seek a 
far more efficient means of administering the laws and regulations to 
which they are now subject.
    A copy of the ACLI report, entitled ``Regulatory Efficiency and 
Modernization: An Assessment of Current State & Federal Regulation of 
Life Insurance Companies and an Analysis of Options for Improvement,'' 
is being made available separately to provide additional background on 
this issue.
                       prioritization of concerns
    The ACLI's efforts to modernize the life insurance regulatory 
system have from the outset been spearheaded by chief executives of our 
member companies. These executives have set the agendas, orchestrated 
the activities, and established the priorities. As the ACLI completed 
its study of regulation, these CEOs concluded that they should 
prioritize the shortcomings identified in the report for two reasons: 
first, to explain more precisely to our state regulators which concerns 
are the most pressing from our perspective, thereby enabling state 
regulators to better set their own agenda for change; and second, to 
assist the ACLI in evaluating its own options for regulatory reform.
    The ACLI surveyed all its member company CEOs late last year to 
identify their most prominent concerns about the current regulatory 
system. Each CEO was asked to categorize all the problem areas 
identified in the report as a ``critical problem,'' a ``major 
problem,'' a ``minor problem,'' or ``not an issue.'' They also selected 
the five elements of life insurance regulation they felt should be the 
ACLI's top priorities for regulatory reform. And finally they selected 
the one element of regulation they felt was the most critical problem 
facing their company.
    The following are the principal conclusions drawn from the survey:

 Policy form/contract approval (speed to market) is clearly the 
        one element of regulation CEOs believe is most in need of 
        reform.
 Although the level of concern regarding other elements did not 
        come close to that of policy form/contract approval, CEOs did 
        identify others as in critical need of reform. Over half of the 
        CEOs found agent appointments, agent licensing, replacements, 
        reserving and valuation actuary opinion, market conduct 
        examinations, company licensing, charter authority, 
        advertising, state taxation of life insurance companies, and 
        statutory accounting to be critical or major problems.
 All elements relating to authority to do business were 
        assigned a fairly high priority among CEOs. Elements relating 
        to financial regulation, on average, were assigned a lower 
        priority.
    The Executive Summary of the CEO survey is appended to this 
statement.
                              acli policy
    In June of this year, the ACLI Board of Directors reached a policy 
decision on how to proceed with its regulatory reform project. Its 
decision was to address regulatory reform on two tracks. Under the 
first track, the ACLI will work with the states and the National 
Association of Insurance Commissioners (NAIC) to improve the state-
based system of insurance regulation. Under the second, the ACLI will 
develop draft legislation providing for an optional federal charter for 
life insurers. Both tracks were given equally high priority and are 
discussed below.
       track one--improving the state-based system of regulation
    Improving a state-based system of regulation has never really been 
an ``option'' for the ACLI: rather, it is a given. While substantial 
changes to the present system must be made, regulation of insurance by 
the states will always be a fundamental part of our regulatory 
environment.
    For this reason, the ACLI Board directed the association to 
redouble its efforts to work with state insurance regulators, the NAIC, 
and state legislators to reform state regulation in a way that 
addresses the shortcomings identified in the ACLI study. The Board made 
clear that there will be no higher priority at the ACLI. This aspect of 
our regulatory reform effort is being overseen by a group of company 
chief executives and is chaired by Sy Sternberg, the chairman-elect of 
the ACLI and Chairman, President and CEO of New York Life.
    This group has worked very closely with the NAIC and its leadership 
as the states have moved forward to implement their agenda for state 
regulatory reform outlined in a document adopted earlier this year 
entitled Statement of Intent: The Future of Insurance Regulation. The 
ACLI and its member companies have been making every effort to provide 
the NAIC with thoughtful and detailed input designed to help implement 
this statement of intent successfully. The focus of our efforts is in 
those areas identified by both the NAIC and the ACLI as particularly 
important, to wit: product regulation (speed to market); producer 
licencing; market conduct examinations; privacy; and so-called 
``national treatment.''
    From the ACLI's perspective, the yardstick for gauging the success 
of regulatory reform in the principal areas where change is necessary 
is quite simple: uniform standards; consistent interpretations of those 
standards; and a single point of contact for dealing with multiple 
jurisdictions. Only in this way will insurers doing a national business 
be able to operate effectively and provide their customers with the 
products and services they are demanding.
    The NAIC and its leadership deserve credit for the way in which 
they have stepped up to the task of developing a strategy for 
implementing meaningful reform. In a very short period of time, they 
have forged a strong consensus among the states for progressive change 
and set forth a conceptual blueprint for action. While the true measure 
of success, of course, will be the actual implementation of appropriate 
reforms, the NAIC has shown strong commitment and effort over the 
course of the last year.
    From the ACLI's perspective, this effort to improve state insurance 
regulation has no set timetable for completion. While we believe it is 
imperative to move quickly, we will pursue the goal of an efficient 
state-based system of insurance regulation regardless of how long it 
takes to implement.
                  track two--optional federal charter
    At the same time the ACLI Board reaffirmed its commitment to 
improve state regulation, it also directed the association to draft 
legislation providing for an optional federal charter for life 
insurance companies. The ACLI Board has not made any decision to seek 
the introduction and passage of such legislation in Congress once the 
drafting work has been completed. That decision will be made at a later 
date taking into account a number of relevant factors.
    The decision to draft optional federal charter legislation reflects 
several different perspectives within our membership. A number of 
companies believe the insurance business is badly in need of a dual 
regulatory system analogous to that presently found in the commercial 
banking, thrift, and credit union businesses. Such a system enables 
institutions to select a state or federal charter based on the 
particular needs and circumstances of their operations. For example, 
companies doing business in multiple jurisdictions might be more 
inclined to opt for a federal charter so that they will have to deal 
with only a single regulator. On the other hand, companies doing 
business in a single state might find a state charter to be far more 
practical and cost-effective. Other companies are skeptical that at the 
end of the day individual state regulators and state legislators will 
be able to cede authority to the extent necessary to implement a system 
of uniform, efficient state regulation. Although motivations might 
differ, there is a strong consensus within the ACLI membership that 
serious consideration of an optional federal charter is a necessary and 
appropriate step at this time.
    As with the effort to improve state regulation, the ACLI's optional 
federal charter project is being overseen by a group on CEOs, and I 
chair that group. A comprehensive drafting process is now under way 
involving well over 200 ACLI and member company representatives. Our 
goal is to have draft legislation in hand by the end of the year for 
further consideration by the ACLI Board.
    The ACLI's efforts in this regard involve only the details of how 
the life insurance business should be regulated. While a federal 
insurance regulator would certainly have the authority to regulate all 
lines of insurance, the ACLI is deferring to the property and casualty 
and health insurance businesses for the specific regulatory 
requirements appropriate to those lines.
                               conclusion
    Mr. Chairman, I hope this statement gives you and your Subcommittee 
a clear sense of the importance we place on reforming and revitalizing 
the insurance regulatory system. The current framework is clearly 
unacceptable, and that fact is generally acknowledged today by 
regulators and regulated alike.
    It is worth reemphasizing that our agenda here is not deregulation 
of life insurers but more efficient administration of laws and 
regulations, particularly for companies doing business on a multi-state 
or national basis. Strong regulation, both in terms of assuring company 
solvency and providing protections to insurance consumers, is in the 
best interests of our business in the short and long term. The ACLI 
fully supports that goal.
    In sum, we would be remiss if we did not fully explore all viable 
alternatives to achieving a more efficient and effective insurance 
regulatory environment. That is why the ACLI is pursing the issue on a 
two-track basis. State regulators are to be commended for the progress 
they are making in addressing the issue. Nevertheless, when achieving 
meaningful reform entails gaining agreement by more than 50 regulators 
and legislatures and who will need to cede administrative 
responsibilities to central decision makers, the challenge is certainly 
daunting.
    As the states move forward, they may conclude they need the 
assistance of Congress to reach the degree of uniformity they seek. The 
ACLI would support that concept, and we ask that you keep an open mind 
to it. By the same token, we may conclude that it is necessary to 
present you with a proposal for enacting legislation creating an 
optional federal charter for life insurers. We ask that you keep an 
open mind to that possibility as well. The need to reform the insurance 
regulatory system is simply too important to foreclose any reasonable 
alternatives.
    Mr. Chairman, the ACLI again appreciates the opportunity to present 
the views of its member life insurance companies on the importance of 
insurance regulatory reform. We would be pleased to provide you and the 
members of the Subcommittee with any additional information that might 
be helpful as your consideration of this critical issue continues.

    Mr. Oxley. Thank you, Mr. Nabers.
    Mr. Urban.

                  STATEMENT OF PHILIP H. URBAN

    Mr. Urban. Good morning. Mr. Chairman and members of the 
House committee, my name is Philip H. Urban. I am President and 
Chief Executive Officer of the Grange Insurance Companies, and 
I am testifying today on behalf of the Alliance of American 
Insurers, the National Association of Independent Insurers, and 
the National Association of Mutual Insurance Companies, which 
together represent more than two-thirds of the property 
casualty insurance industry. I appreciate the opportunity to 
testify on an issue vital to my company's remaining competitive 
in today's financial services marketplace.
    My company and the others who are members of the three 
trade associations have been strong proponents of State-based 
insurance regulation. State regulation is simply the best 
public policy for the business of insurance and for your 
constituents.
    In my own State of Ohio there are regulatory conditions 
that are conducive to competition, but at the same time 
protective of consumers' rights. However, changes in markets 
and technology demand that State-based insurance regulation be 
modernized. The States, working with industry and the NAIC, can 
achieve regulatory modernization. The National Conference of 
State Legislatures, in partnership with the National Conference 
of Insurance Legislators, will soon undertake an evaluation of 
modernization options at the State legislative level.
    At its March 2000 meeting, the NAIC adopted a ``Statement 
of Intent'' which identified nine areas in State insurance 
regulation that need modernization. One objective of this work 
is to make improvements in processes that will result in 
products being more promptly offered to consumers.
    Most States require a property casualty insurer to obtain 
prior approval from the insurance regulator in order to 
introduce a new product or modify an existing one. States could 
resolve this problem today by adopting a market-driven approach 
to rate and form filings.
    The essence of our public policy argument is quite simple. 
Companies doing business across the country or in a single 
State need to be able to serve markets with a minimum of 
difficulty. Open competition regulation would free regulators 
from the onerous task of approving countless rate and form 
filings and would shift the focus to monitoring business 
practices and ensuring that consumers are being adequately 
served.
    Insurers would be able to get new products to markets with 
fewer impediments, while consumer interests would be protected 
through more competitive prices, more product choices and a 
reformed market conduct enforcement system.
    Access to markets is another area that needs modernization. 
The NAIC has a project to create a uniform application form for 
companies to enter the various State jurisdictions. We support 
that plan. We strongly believe that access to markets is a 
desirable State-based regulatory outcome that should be 
available to every company, not just those companies that meet 
a specific size requirement and agree to abide by certain 
operating procedures.
    With respect to consumer protections, a new standard for 
market conduct regulation is an important aspect of a 
deregulated insurance marketplace. The trade associations have 
suggested to the NAIC's Market Conduct Issues Working Group a 
12-point program to improve the market conduct examination 
process. A copy is attached to this testimony.
    These are challenging tasks. In our view, State regulation 
needs to be modernized without the creation of a new 
bureaucracy or a centralization of a regulatory structure that 
could ultimately impose new costs and requirements on insurance 
companies.
    While we embrace the effort to modernize regulation, there 
are some concerns. One of these is the subject of privacy. 
Frankly, we were disappointed by the recent actions of the NAIC 
Working Group on privacy. That proposal, if adopted by the 
NAIC, expands the regulatory requirements of insurers by 
requiring insurance not even mentioned by the Gramm-Leach 
Bliley act in the area of consumer privacy. This does not meet 
the overall policy goal of equal treatment for all market 
participants. We hope that this approach is not one that will 
be adopted in an other areas.
    There is a need for a new paradigm and State regulatory 
action promoting uniformity and consistent treatment. This 
model fails that test.
    A systematic plan for implementation at the State level, 
including regulatory and legislative activity, must be 
established. The NAIC and NCOIL and the NCSL could develop and 
execute that plan jointly.
    The implementation plan should be built around an analysis 
of the legal requirements of each State and should include a 
projected timetable for initiating each step based on these 
State laws. The details of the plan should be public, leaving 
no question in the mind of regulators, industry, consumers and 
the Congress that a true plan to implement reform is ongoing. 
We would expect Congress to continue to monitor progress in the 
States.
    That said, we would point out that we are committed to 
improving the State-based system of insurance regulation and 
are prepared to spend our time working toward implementation of 
these reforms.
    In conclusion, the NAIC State insurance commissioners and 
legislatures should be commended for their work over the past 6 
months in identifying the tasks that need to be done to improve 
State-based insurance regulation. But this is only the 
beginning. While change is called for, it must be done right. 
Congress is rightly watching this process, but should not 
create a stampede toward impractical and unworkable solutions. 
We are ready and willing to assist State regulators in 
achieving modernization of insurance regulation by the States.
    Thank you.
    [The prepared statement of Philip H. Urban follows:]
 Prepared Statement of Philip H. Urban, President and Chief Executive 
   Officer, Grange Insurance Companies on Behalf of the Alliance of 
                           American Insurers
    Mr. Chairman, and members of the House subcommittee, my name is 
Philip H. Urban. I am President and Chief Executive Officer of the 
Grange Insurance Companies, and I am testifying today on behalf of the 
Alliance of American Insurers (Alliance) and the National Association 
of Independent Insurers (NAII) and the National Association of Mutual 
Insurance Companies (NAMIC).
    Grange Mutual Casualty Company is a regional multi-line property 
and casualty insurance company headquartered in Columbus, Ohio. Our 
company is licensed in 11 states; and in terms of premium volume, we 
rank solidly within the top 100 property and casualty insurers in the 
United States. In addition to our property and casualty insurance 
companies, the Grange family of companies includes the Grange Life 
Insurance Company and The Grange Bank, a federal thrift. We offer Auto, 
Home, Business, Life and Banking products exclusively through an 
independent agency distribution system.
    The Alliance represents 325 companies, both mutual and stock, 
writing over $30 billion in annual premiums.
    NAII, of which I currently serve on the Board of Governors, 
represents approximately 675 property/casualty companies in the United 
States that write $92.9 billion in annual premiums representing every 
type of property/casualty coverage, including automobile, homeowners, 
business insurance, workers' compensation and surplus lines.
    NAMIC, of which we are a member, represents nearly 1,300 member 
companies and about 40 percent or about $118 billion of the property/
casualty premium written across the country. NAMIC companies have a 
long record of service to insurance consumers and their communities--
more than half of NAMIC member companies have been in business over 100 
years.
    I appreciate the opportunity to testify today on an issue vital to 
my company remaining competitive in today's financial services 
marketplace: State-based insurance regulatory reforms.
    My company and the others who are members of the three trade 
associations have been strong proponents of state-based insurance 
regulation. In fact, during last year's debate on financial services 
modernization, our industry constantly sounded the trumpet of state-
based insurance regulation. My company has long believed that insurance 
regulators should be closest to the companies they oversee and to the 
consumers they serve. When states regulate insurance, companies enjoy a 
level of access important to the resolution of conflict; and consumers 
benefit from a state regulator responsive to their needs. Working 
effectively, state regulation is simply the best public policy for the 
business of insurance and for your constituents. In my own state of 
Ohio, there are regulatory conditions that are conducive to 
competition, but at the same time protective of consumers' rights. In 
fact, it is the competition that allows my company and other insurance 
companies in Ohio, to offer products to consumers at an affordable 
price.
    However, changes in markets and technology demand that state-based 
insurance regulation would benefit from modernization. Congress has 
already given consideration to an area of modernization when it adopted 
the Gramm-Leach-Bliley Act (GLBA), which rightly reasserted the primacy 
of state regulation.
    My company and the other companies I represent today do not see 
federal regulation as an appropriate approach to modernization of state 
regulation. The states, working with industry and at the National 
Association of Insurance Commissioners (NAIC), can achieve regulatory 
modernization and in fact much activity is being directed to that goal 
under the leadership of NAIC President, George Nichols, Commissioner of 
Insurance of the State of Kentucky. The National Conference of State 
Legislatures (NCSL) in partnership with the National Conference of 
Insurance Legislators (NCOIL) will soon undertake an evaluation of 
modernization options at the state legislative level.
    At its March 2000 meeting, the NAIC, adopted a ``Statement of 
Intent'' which identified nine areas in state insurance regulation for 
which modernization is needed. Although the NAIC is not empowered to 
implement reforms by itself, the associations I represent today were 
pleased that the NAIC recognized the need for change and was committed 
to developing reforms that could be implemented in the states. In the 
last six months, the NAIC has made efforts to follow through on the 
``Statement of Intent.''
    One objective of this work is to make improvements in processes 
that will result in products being more promptly offered to consumers. 
Most states require a property/casualty insurer to obtain prior 
approval from the insurance regulator in order to introduce a new 
product or modify an existing one. In addition to product prior 
approval, rates that determine premiums and rate changes require prior 
approval. States could resolve this problem today by adopting a market-
driven approach to rate and form filings.
    The prior approval process is due for change because it was 
developed in the states at the time the McCarran-Ferguson Act was 
adopted. At that time, the insurance business was more like a cartel 
than a competitive business. Rating bureaus set rates that all 
insurance companies adhered to unless they sought regulatory approval 
for deviation. There was little creativity in products, and regulation 
was more important than competition.
    But today, competition among insurers is fierce and intense. 
Companies compete on price and product. Innovation is key to success in 
the marketplace and also necessary to meet the rapidly changing needs 
of fast moving business, economic, technology, life style and legal 
changes that characterize our economy and society today. This 
marketplace calls for modernized insurance regulation compatible with 
today and not 1946. It calls for competition to set rates and drive 
innovation. The role of the regulator needs to evolve to catch up with 
the evolution of the insurance marketplace.
    One of the benefits of state regulation is that it allows for 
experimentation. One state has experimented with competition as the 
primary regulator. The experiment took place 30 years ago in Illinois. 
The experiment worked and Illinois continues to operate under a 
competitive system with good results. Various analyses show Illinois is 
a highly competitive state. Products are available, innovation is rapid 
and citizens pay fair, competitive prices for insurance.
    While other states have embraced different versions of competition, 
many have not. In some states, the regulatory behavior is not always 
consistent with a commitment to competition. Change is needed in such 
situations, but a ``one-size-fits-all'' approach, centrally 
administered, is not the solution.
    The essence of our public policy argument is quite simple. 
Companies doing business across the country or in a single state need 
to be able to serve markets with a minimum of difficulty. Inability to 
do this disadvantages both insurers and consumers. Prior approval of 
rates and forms frequently takes months to secure, costing insurers 
valuable marketing opportunities and depriving consumers the advantages 
of new and improved risk-sharing products. The length of the prior 
approval process also inhibits the ability of insurers to compete 
successfully with other, less regulated segments of the financial 
services industry.
    ``Open competition'' regulation would free regulators from the 
onerous task of approving countless rate and form filings and would 
shift the focus to monitoring business practices and assuring that 
consumers are being adequately served. Insurers would be able to get 
new products to markets with fewer impediments, while consumer 
interests would be protected through more competitive prices, more 
product choices and a reformed market conduct enforcement system.
    The NAIC Speed-to-Market Working Group has recently proposed a new 
entity, the Coordinated Advertising, Rate, and Form Review Authority 
(CARFRA), to expedite the approval process for the filing of some new 
rates and forms. This proposal has had little exposure, and it is too 
early to fully judge it. But it indicates that state regulators see the 
need to improve the rate and form filing system in many states. The 
process for dealing with rates and forms is determined by state 
statute.
    In addition to NAIC action, the American Legislative Exchange 
Council has adopted a model rate and form law that would modernize 
insurance regulation and allow faster adjustments in the marketplace. 
NCOIL also adopted a model to improve this process. The two 
organizations will work to reconcile their respective models. On the 
issue of model rating laws, the NAIC had a good competitive rating 
model that is no longer in its repertoire of model laws. The Speed to 
Market Working Group intends to consider a model rating law and we 
believe they should consider the work of these legislative 
organizations.
    The NAIC has indicated a commitment to deal with issues relating to 
the culture of state regulation with a goal of educating the insurance 
department staffs toward a competition mind-set. We applaud that 
effort. We think these commitments should provide better responsiveness 
in rate and product market adjustments to meet the demands and the 
needs of consumers, accompanied by cost efficient regulation.
    Access to markets is another area in which modernization is needed. 
The NAIC has a project to create a uniform application form for 
companies to enter the various state jurisdictions. We support that 
plan. We strongly believe that access to markets is a desirable state 
based regulatory outcome that should be available to every company, not 
just those companies that meet a specific size requirement and agree to 
abide by certain operating procedures. We believe that this will help 
maintain a more level ``playing field'' for insurers. Work being done 
in the states to adopt uniformity or reciprocity in producer licensing, 
consistent with GLBA, will also help. The NAIC is looking at other ways 
to moderate or eliminate the state by state burdens of doing business.
    With respect to consumer protections, a new standard for market 
conduct regulation is an important aspect of a deregulated insurance 
marketplace. The NAIC, through its Statement of Intent process, has 
agreed to study market conduct regulation. The trade associations have 
suggested to the NAIC Market Conduct Issues Working Group a 12-point 
program to improve the market conduct examination process. A copy is 
attached to this testimony.
    Hallmarks of the new standards include elimination of duplicative 
market conduct exams, creation of more uniform market conduct laws and 
regulations and adoption of alternative mechanisms to create a more 
efficient market conduct surveillance system.
    Also included is the notion that market conduct exams should be 
``for cause'' only, with remediation as their central purpose. 
Companies should be allowed to cure business practices deemed deficient 
to ensure that the needs of insurance consumers are met. And while a 
``for cause'' exam must be thorough, the cost to a company must not be 
open-ended. Examiners should be subject to reasonable time and cost 
limitations that will encourage the prompt completion of the procedure.
    State regulators are also considering integration of other market 
conduct techniques such as desk audits, limited scope exams and insurer 
self-audits to mitigate against the need for states to regularly 
conduct even ``targeted'' exams.
    These are challenging tasks. In our view, state regulation needs to 
be modernized without creation of a new bureaucracy or a centralization 
of a regulatory structure that could ultimately impose new costs and 
requirements on insurance companies. State regulation can and should be 
done by the states. While barriers to markets and doing business must 
be eliminated, it must not be forgotten that for property/casualty 
insurance products local market conditions affect the product and 
price. A few of the many examples are tort law, the weather, population 
density and traffic congestion.
    While we embrace the effort to modernize regulation, there are some 
concerns. One of these is the subject of privacy. Frankly, we were 
disappointed by the recent actions of the NAIC Working Group on 
privacy. That proposal, if adopted by the NAIC, expands the regulatory 
requirements of insurers by requiring information not even required by 
GLBA in the area of consumer privacy. This does not meet the overall 
policy goal of equal treatment for all market participants. We hope 
that this approach is not one that will be adopted in other areas. 
There is a need for a new paradigm in state regulatory action of 
uniformity and consistent treatment. This model fails that test.
    The key to regulatory modernization is quick implementation of the 
proposals to meet the demands of the marketplace. The best-crafted 
reforms will only be as good as the regulatory and legislative 
strategies to secure their enactment.
    Progress will be recognized when fundamental reforms in rate and 
form regulation, company licensing and market conduct are at work in a 
majority of states. Many of these reforms will have to be enacted by 
state legislatures, a difficult activity to coordinate for which 
results cannot be guaranteed. Other changes to state standards can be 
put into place by regulators using existing authority.
    Either way, a systematic plan for implementation at the state 
level, including regulatory and legislative activity must be 
established. The NAIC, NCOIL and the NCSL could develop and execute the 
plan jointly.
    The implementation plan should be built around an analysis of the 
legal requirements in each state to accomplish them and should include 
a projected timetable for initiating each step based on these state 
laws. The details of the plan should be public, leaving no question in 
the mind of regulators, industry, consumers and the Congress that a 
true plan to implement reform is ongoing. We would expect Congress to 
continue to monitor progress in the states.
    That said, we would point out that we are committed to improving 
the state based system of insurance regulation and are prepared to 
spend our time working toward implementation of these reforms. It is 
simply our belief that a formal and public strategy be adopted by all 
the parties who have a role to play in achieving this goal.
    In conclusion, the NAIC, state insurance commissioners and 
legislators should be commended for their work over the past six months 
in identifying the tasks that need to be done to improve state-based 
insurance regulation. But this is only the beginning. While change is 
called for, it must be done right. Congress is rightly watching this 
process, but should not create a stampede toward impractical and 
unworkable solutions. Speed and good judgement are both necessary to be 
balanced. We are ready and willing to assist state regulators in 
achieving modernization of insurance regulation by the states.
    Thank you.

    Mr. Oxley. Thank you.
    Mr. Mendelsohn.

                STATEMENT OF ROBERT V. MENDELSOHN

    Mr. Mendelsohn. Mr. Chairman, distinguished committee 
members, my name is Bob Mendelsohn. I am Group Chief Executive 
of Royal & SunAlliance Insurance. We are a global company based 
in London. We have been in business since 1710, and we write 
insurance in 130 countries around the world. I am also Chairman 
of our U.S. operation, Royal & SunAlliance. I am testifying 
this morning on behalf of the American Insurance Association, 
an association of over 370 property and casualty companies.
    I moved to London 3 years ago to take on responsibility for 
a worldwide company. Before that, I spent 4 years as chief 
executive of a national insurance company here in the U.S.; 
before that, 20 years with a company working my way up to the 
position of President and Chief Operating Officer of a group of 
companies that were regional and specialty companies, operating 
around the United States. So I have seen the regulatory scheme 
from the viewpoint of a small regional company, from the 
viewpoint of a national company, and now from the viewpoint of 
a global company.
    I can tell you, based on my personal experience, that the 
current regulatory system is broken. It will not serve us well, 
here in America, into the 21st century, and there is no doubt 
that reform is called for. The future of our industry depends 
on a competitive and healthy marketplace, but the regulatory 
regime we operate in discourages the competition and innovation 
demanded by the new economy, and it threatens our 
competitiveness in a world economy. I think fundamental change 
is long overdue.
    The current system single-mindedly focuses on government 
price and product controls separately created and administered 
in each State. This discourages innovation, it discourages 
competition and it leaves insurers at a disadvantage compared 
to federally regulated financial services. A subset of this 
problem is the sheer time it takes here in America to get 
products and forms approved. There are better ways.
    Individual State regulatory requirements are also 
frequently inconsistent with each other. It increases 
compliance costs, discouraging technical innovation and makes 
it difficult for insurers to service customers when we operate 
in different States.
    Individual State regulatory requirements are also 
inconsistent with the growing use of the Internet. I think in 
the technology world the consumers will see the best products 
and prices on offer from companies operating here in the States 
and all over the world, and will insist upon a regulatory 
system that allows them access to the best price and the best 
product.
    American Insurance Association members have long been 
struggling with these issues, and we are convinced that the 
answer rests with market-based approaches to regulation. Our 
efforts have been guided by the end belief that there must be 
an insurance regulatory structure that provides better service 
to the insurers and to the economy and to consumers.
    What should that system look like? Here are our principles 
of reform:
    First, market and consumer demand, not command and control 
regulatory fiat, should dictate the products sold and the 
prices charged.
    Second, companies should have the option to obtain a single 
charter that would allow them to do business nationally.
    Third, insurance companies that operate across State lines 
should be able to count on uniform, one-stop regulation that 
focuses only on those areas where an ongoing regulatory role 
serves the public interest.
    Regulatory requirements should be enforced in a timely, 
impartial and professional manner. Insurance companies should 
be able to operate on a level playing field vis-a-vis the other 
financial services firms that provide similar products to our 
global competitors and the alternative market.
    And finally, the regulatory system should embrace and 
encourage the use of new technologies by insurers in every 
aspect of their business. I think that a regulatory system 
based on those principles will free up government resources, 
will allow State insurance departments to direct their 
attention to where it is most needed, which is effective 
solvency regulation, rehabilitation or liquidation of troubled 
companies and the prevention of frauds, such as the ones 
referred to by Congressman Towns earlier this morning. It will 
free up a tremendous amount of government resources presently 
devoted to rate and form regulation.
    We support the NAIC's efforts. This last March, the NAIC 
overwhelmingly approved forward looking statements of intent on 
insurance regulations. We share their goals to modernize 
insurance regulations to meet the demand of our new 
marketplace, and we applaud the spirit of their effort and have 
provided substantive input. However, we anxiously await that 
State blueprint, perhaps by December of this year, so we can 
measure their recommendations against the AIA principles for 
reform, which I outlined this morning, and to determine whether 
additional State or Federal action is warranted.
    We know the market is not going to wait for us. If we don't 
act soon, we might just find ourselves irrelevant in the future 
marketplace.
    Thank you, Mr. Chairman, for this hearing this morning and 
we would urge you to keep the heat on.
    [The prepared statement of Robert V. Mendelsohn follows:]
 Prepared Statement of Robert V. Mendelsohn, Group Chief Executive of 
                          Royal & SunAlliance
    Chairman Oxley, my name is Robert Mendelsohn and I am Group Chief 
Executive of Royal & SunAlliance, a global insurance group writing more 
than $17 billion in insurance premiums worldwide and employing more 
than 7,000 in the United States. As immediate past chair of the 
American Insurance Association, which represents over 370 property 
casualty insurers, I want to thank you for the opportunity to testify 
before this Committee.
    For AIA members, insurance regulatory reform is, and will continue 
to be, a key concern. The ability of insurers to bring products to 
market in a timely and cost-effective manner, along with uniform 
regulatory treatment regardless of where they are domiciled and where 
they do business, is critical.
    Insurance regulation is not a new topic for this Committee or for 
Congress. Several times in the past, internal industry forces 
(including those surrounding the liability crisis of the mid-1980's or 
the solvency concerns of the early 1990's) led to a review of the 
system at both the state and federal level. What is different now is 
that external forces, including a new era of global markets and 
financial services modernization, are propelling the examination.
    But this isn't just about changes in the marketplace following the 
critical enactment of Gramm-Leach-Bliley, or the specter of federal 
regulation--it is fundamentally about the ability of insurers to 
survive, and thrive, in the 21st century. Insurance industry mergers 
and acquisitions, convergence of the various financial services 
industry sectors, globalization, and technology have altered the 
economic and operational landscape in which AIA members do business. 
Yet, the insurance regulatory environment has remained stagnant or, 
worse, has grown increasingly bureaucratic. For every incremental 
movement toward greater efficiency or uniformity, there are many new 
state-specific regulatory requirements that result in cost, delay, and 
frustration for insurers--with little or no consumer benefit. A 
fundamental change in perspective is long overdue.
    Recognizing that the long-term best interests of policyholders, 
insurers, and the overall economy are served by an efficient, effective 
regulatory system, AIA has spent the last twelve months examining the 
``value chain'' associated with the regulation of insurance companies 
and products and identifying opportunities--based on both domestic and 
international regulatory models--to remove current regulatory 
impediments to competition, thus creating greater value for all 
stakeholders.
    From that discussion and analysis of the current regulatory system, 
several themes emerged:

 An entrenched state focus on government price and product 
        controls, which discourages product innovation and competition.
 In many states, a chronic and growing delay in regulatory rate 
        and form approvals. Other federally-regulated financial 
        services industries have no similar regulatory obstacles to 
        getting products to market quickly.
 Inconsistency among state statutory and legal requirements and 
        the administration of state systems. The need to meet differing 
        regulatory demands in each jurisdiction increases compliance 
        costs, discourages technological innovation, and makes it 
        difficult for insurers to service customers doing business in 
        more than one state.
 Incompatibility of the state-based regulatory system with 
        emerging technologies. A regulatory system dependent on state-
        by-state price and product controls is inconsistent with new, 
        expanding technologies such as the Internet, a medium that 
        recognizes no state or federal boundaries.
    These themes underlie guiding reform principles adopted by the AIA 
earlier this year:
    ELIMINATION OF PRICE AND PRODUCT OBSTACLES. Market forces, rather 
than regulatory approvals, should dictate the products sold by insurers 
and the prices they charge.
    OPTIONAL NATIONAL CHARTERING. Companies should have the option of 
obtaining a single charter that would allow them to do business in all 
regulatory jurisdictions. States must not discriminate against such 
companies in favor of those that obtain licensing on a state-by-state 
basis.
    UNIFORMITY. Insurance companies that operate in multiple 
jurisdictions should be subject to one stop, non-duplicative regulation 
and uniform laws governing only those areas where an on-going 
regulatory role serves the public interest, including market conduct 
activities, agent licensing, claims practices, solvency, and 
liquidation.
    TIMELY AND FAIR ENFORCEMENT. Regulatory requirements should be 
enforced in a timely, impartial, and professional manner, and fines and 
other penalties should be proportional to the violation at issue.
    LEVEL PLAYING FIELD. Insurance companies should be able to operate 
on a level regulatory playing field vis-a-vis other financial services 
firms that provide similar products, global competitors, and the 
alternative market.
    TECHNOLOGY-FRIENDLY REGULATION. The regulatory system should 
embrace the use of new technologies by insurers in every aspect of 
their business.
    Regulation that embraces these principles will benefit consumers, 
insurance companies, and insurance regulators in several ways:
    First, regulatory reform (especially elimination of government 
price and product controls) frees up government resources and allows 
state insurance departments to redirect regulatory attention where it 
is most needed, including effective solvency regulation and 
rehabilitation or liquidation of troubled companies. A sharper 
regulatory focus is particularly important in states under fiscal 
constraints or attempting to downsize their governments. Ultimately, 
consumers also benefit from a streamlined and efficient insurance 
regulatory system that reduces regulatory costs for insurers.
    Second, product innovation will be enhanced if insurers are able to 
bring new coverages to market more quickly because they do not face 
extensive regulatory delays getting those coverages approved by the 
state regulator. Faster product introduction will also allow insurers 
to better serve the changing needs of individuals and businesses. In 
addition, in the new world of Gramm-Leach-Bliley, creative new 
products, representing a more integrated financial services sector, 
will emerge. Lengthy rate and form approval processes that are 
applicable to ``insurance products'' within the scope of the Gramm-
Leach-Bliley Act will hinder insurers' ability to compete effectively 
with banking and securities firms that operate without these 
constraints.
    Third, regulatory reform will make the purchase of insurance easier 
and less costly for policyholders. Further, a streamlined commercial 
lines regulatory system would attract risk financing capital, including 
insurance capital, back to the U.S. from various off-shore 
jurisdictions to which it has migrated due, in part, to less 
restrictive regulatory environments. U.S. insurers will then be able to 
compete more effectively with alternative risk financing mechanisms, 
including securitization.
    Fourth, regulatory reform will encourage more insurance companies 
to enter new markets, enhancing competition and therefore producing 
greater availability and lower prices.
    Recognizing these benefits, AIA has been actively engaged in 
advancing the elimination of government rate and form controls on a 
state-by-state basis for a number of years. Most states are moving very 
cautiously. Due to political opposition from certain local interests, 
regulatory reform efforts have not been as sweeping as the external 
economic environment demands, and there are significant variations 
among states that make it more difficult for regional, national, or 
global insurers to operate on a uniform basis.
    The forces of modernization, industry consolidation, advances in 
technology and globalization are widely acknowledged by industry 
leaders represented on this panel, but they are also acknowledged by 
the industry's regulators. This past March, the National Association of 
Insurance Commissioners overwhelmingly approved a forward-looking 
``Statement of Intent: the Future of Insurance Regulation.'' In 
conjunction with this undertaking, nine new working groups were 
created--five to address implementation issues arising from the Gramm-
Leach-Bliley Act and four to drive the NAIC leadership's regulatory 
reform priorities.
    The Statement of Intent declares that state insurance regulators 
must modernize insurance regulation to meet the realities of an 
increasingly dynamic, and internationally competitive, insurance 
marketplace. NAIC President George Nichols, who spearheaded the effort 
and appeared before this Committee in July, has announced publicly that 
if state regulators cannot meet this challenge within the next year, 
the door may be open to federal regulation. Although there is no 
``official'' NAIC deadline or clear definition of success, various NAIC 
sources have indicated that regulators will produce a blueprint for 
reform no later than December 2000, if not earlier. Indeed, as the 
Committee has heard this morning from Ohio Director Lee Covington, 
progress is being made at the NAIC on these issues. Director Covington 
himself is playing a key role in the speed to market effort.
    AIA applauds the spirit of the NAIC effort, and we have provided 
substantive comments to virtually all of the Working Groups. ``Speed to 
Market''--i.e., the ability to bring products to market in a timely and 
cost-effective manner--and ``National Treatment''--i.e., uniform 
regulatory treatment for national companies--have been focal points of 
our efforts. We will continue to work with the NAIC to produce needed 
regulatory reform in these and other areas.
    As mentioned earlier, AIA favors a market-based approach to 
insurance regulation that does not rely on prior government review or 
approval of prices or products, but permits competitive forces to 
respond to consumer demand. The time to implement this approach is now, 
as financial services modernization is evolving--not later when the 
size, shape and grade of the financial services playing field will 
largely be determined. AIA urges this Committee to hold the NAIC to a 
timetable, to encourage it to move quickly towards a more efficient, 
beneficial, and market-oriented system, and to be prepared to act if 
the state regulatory system fails to modernize itself. AIA also will be 
evaluating the NAIC's blueprint for reform against our own regulatory 
reform principles to determine whether additional state or federal 
action is warranted.
    Many will attempt to define this effort as a debate over state 
versus federal regulation. We reject that. It is not about who 
regulates. It is about real reforms that are necessary if we are going 
to remain a competitive, vibrant industry. The marketplace isn't going 
to wait for us. Inaction and complacency about insurance regulatory 
reform will render the industry outdated and possibly irrelevant.
    Again, I commend the Committee for holding this hearing and I thank 
Chairman Oxley for the opportunity to speak today on an issue that is 
of critical importance to the insurance industry and the constituents 
it serves.

    Mr. Oxley. Thank you, Mr. Mendelsohn.
    Mr. Milesko.

                  STATEMENT OF GLEN J. MILESKO

    Mr. Milesko. Good morning, Mr. Chairman. I am chief 
executive officer of Banc One Insurance Group, and I am here 
today on behalf of American Banker's Associations Insurance 
arm, also known as ABAI. ABAI's members are banking 
organizations engaged in the business of insurance. My own 
company is one of the country's leading bank insurance programs 
that represents over 5 million policyholders nationwide, 
generating annual premium sales in excess of $2 billion, claim 
payments of $75 million, and revenues exceeding $500 million. 
In the time allotted to me this morning, I will explain why 
ABAI supports optional Federal chartering for insurance 
companies and agencies, and I will outline some of the key 
features of our proposal, which is based on the dual banking 
system.
    ABAI supports Federal chartering of insurance companies and 
agencies because we believe that Federal chartering would 
benefit consumers by permitting more uniform policies, greater 
product choice, price competition, and increased product 
availability and mobility. It would stimulate competition in 
the insurance industry to the benefit of the industry and 
consumers. It would enhance the quality of insurance regulation 
while maintaining the integrity of the State system, and it 
would provide more uniform, consistent and comprehensive 
regulation for larger insurance companies and agencies.
    Let us take a closer look at these benefits. Benefit No. 1: 
Optional Federal chartering would enhance the delivery of 
insurance to consumers. While State regulation of insurance is 
a long and commendable history, it imposes many impediments on 
the delivery of insurance. For example, every State has varying 
levels of prelicensing requirements. Every State has different 
customer collateral forms and filing requirements. Most States 
have specific and different rules for each insurance product 
type and distribution method. Existing State regulations also 
inherit the development of new products and e-commerce delivery 
where a real sense of urgency is required. Under our proposal, 
none of these impediments would apply a federally chartered 
insurance company or agency.
    Benefit two, optional Federal chartering would stimulate 
competition in the insurance industry to the benefit of both 
consumers and the industry. Some State insurance laws inhibit 
competition. State anti-rebating laws are an example, so are 
State rate laws. Our proposal would stimulate competition in 
the industry by allowing premium rates to be set by the market 
and by permitting rebates.
    Benefit number 3: Optional Federal chartering would enhance 
State regulation. The dual banking system has resulted in 
healthy competition between State and Federal banking 
regulators. Moreover, that competition has not diminished the 
role of State regulators. Today, State banking departments 
charter and supervise two-thirds of all commercial banks, 
including some of our Nation's largest banks. There is no 
reason to believe that insurance regulators could not 
experience the same competitive benefits that banking 
regulators have experienced.
    Benefit number 4, optional Federal chartering would provide 
for a more uniform, consistent and comprehensive regulation of 
larger and complex insurance firms. Under our proposal, the 
Federal regulator would have the resources, the expertise 
necessary to examine, supervise and regulate large and 
increasingly global insurance firms. Also under our proposal, a 
federally chartered insurance company or agency that is subject 
to supervision by a single Federal regulator would be able to 
comply with the uniform and consistent national regulatory 
structure.
    Now, I will briefly outline ABAI's proposal.
    Our optional Federal chartering proposal calls for the 
appointment of a Federal commissioner to charter and supervise 
Federal insurance companies and agencies. federally chartered 
insurance companies would be subject to a comprehensive set of 
financial regulations, all of which are designed to ensure 
their safe and sound operation. To protect consumers, federally 
chartered insurance companies and agencies would be subject to 
comprehensive, unfair trade practice, patterned after the 
NAIC's model Act, Federal law would govern the terms and 
conditions of insurance policies issued by a federally 
chartered insurance company. The commissioner could not, 
however, regulate the rates charged for insurance or require 
policy forms to be preapproved. Our proposal also calls for the 
creation of a Federal guaranty corporation, patterned after the 
Federal Deposit Insurance Corporation.
    In summary, we believe that ABAI's Federal optional charter 
would be good for consumers, good for the insurance industry 
and the State regulatory system. We also believe that the dual 
banking system offers a reasonable model for optional Federal 
chartering, and we are pleased to see in a statement released 
today that the Council of Insurance Agents and Brokers endorses 
that approach.
    Thank you again for the opportunity to appear before this 
subcommittee.
    [The prepared statement of Glen J. Milesko follows:]
Prepared Statement of Glen J. Milesko on Behalf of The American Bankers 
                   Association Insurance Association
    Mr. Chairman and members of the Subcommittee. My name is Glen 
Milesko. I am the Chairman and Chief Executive Officer of Banc One 
Insurance Group, and I am here today on behalf of the American Bankers 
Association Insurance Association (``ABAIA'').1 My testimony 
today also reflects the views of the American Bankers Association.
---------------------------------------------------------------------------
    \1\ The American Bankers Association Insurance Association is a 
separately chartered trade association and non-profit affiliate of the 
American Bankers Association. ABAIA's mission is to serve as a forum 
for long-term national strategy among banking organizations on 
insurance matters, to propose legislation and regulations that permit 
banking organizations to participate fully in the business of 
insurance, to protect all existing insurance powers of banking 
organizations, and to monitor insurance developments at the state level 
with the support of the nation-wide network of state banking 
associations.
---------------------------------------------------------------------------
    ABAIA's members are banking organizations engaged in the business 
of insurance. My own company, for example, was established in 1990 and 
has one of the country's lead bank-insurance programs. It is comprised 
of a nationally licensed, full line insurance agency with over 3,000 
licensed agents; one credit life and two property and casualty 
reinsurance companies; one multi-state direct credit life insurance 
company; a third party administrator of self-funded company health and 
dental plans; and an international life reinsurance company located in 
Dublin, Ireland. Banc One Insurance Group represents 5 million 
policyholders nationwide, generating annual premium sales in excess of 
$2 billion, claims payments of $75 million and revenues exceeding $500 
million.
    ABAIA appreciates the opportunity to appear before the Subcommittee 
as it examines the regulation of insurance and the issue of an optional 
federal charter for insurance firms.
    A little over two years ago, ABAIA developed its own ``blueprint'' 
for the federal chartering and regulation of insurance firms. While 
Congress considered financial modernization legislation, we put that 
blueprint on the ``back burner.'' Now that financial modernization has 
been enacted, we have made optional federal chartering a priority for 
our Association, and we are in the process of transforming our 
blueprint into a specific legislative proposal.2
---------------------------------------------------------------------------
    \2\ During the past two years, we have discussed our blueprint in 
both private meetings and public forums with many interested parties, 
including major insurance trade associations, representatives of the 
National Association of Insurance Commissioners, representatives of 
consumer groups and the staff of this Subcommittee. We have made 
various revisions to the blueprint based upon those discussions. We 
plan to continue to engage in a dialogue with any and all interested 
parties as we work on our draft bill and once it is complete.
---------------------------------------------------------------------------
    In the time allotted to me this morning, I will explain why ABAIA 
supports optional federal chartering for insurers and insurance 
agencies, and I will outline some of the key features of our proposal.
The Benefits of an Optional Federal Charter
    ABAIA supports optional federal chartering for insurers and 
insurance agencies because, as I will explain, we believe that federal 
chartering would:

(1) benefit the consumers of insurance by permitting more uniform 
        policies, greater product choice, greater price competition and 
        increased product availability and mobility;
(2) stimulate competition in the insurance industry to the benefit of 
        the industry and the consumers of insurance;
(3) enhance the quality of insurance regulation, while maintaining the 
        integrity of the state insurance regulatory system; and
(4) provide more uniform, consistent and comprehensive regulation for 
        larger insurers and insurance agencies.
    Optional federal chartering would benefit many consumers. State 
regulation of insurance has a long, and commendable, history. However, 
as our nation's economy has become more national and international, 
state insurance regulation has been unable to address the needs of 
consumers who seek new and more uniform products.
    Consider the impact of state regulation on insurance policies. 
Today, each state regulates the terms and conditions of an insurance 
policy sold within it's borders. With 50 states, it is not surprising 
that policy requirements vary from state to state. If an insurer sells 
policies in multiple states, the insurer must either sell different 
policies to consumers in different states or use a uniform policy that 
incorporates the requirements of all of the states in which the policy 
will be sold. This means that policies issued in multiple states are 
either not uniform or they are overly complex. In today's mobile 
society, a consumer should be able to receive the same policy 
regardless of where the consumer resides.
    The following demonstrates other examples of how disparate and 
archaic the current process is for national and Internet insurance 
sales.

 Inconsistency in agent licensing. Each state has varying 
        levels of prelicensing education and different methods and 
        education content for ongoing continuing education. With state 
        regulation there is a need to separately apply in each state 
        using different forms with different requirements to obtain a 
        nonresident license, and a need for each agent to be appointed 
        in each state by every carrier he/she represents.
 Inconsistency In Collateral Forms and Filing Requirements. 
        Each state in which sales are made will have different customer 
        collateral forms and filing requirements. If the customer 
        replaces one insurance product with another, for example, each 
        state will have its own form requirement that will vary in 
        content and size, ranging from one page to several pages. If an 
        insurer makes a change to a form, re-filing may be required 
        before it is used. If used on the Internet, filing requirements 
        also will vary with each state.
 Inconsistency in Sales and Advertising Requirements. Most 
        states have specific and different rules for each insurance 
        product type and distribution method. Additionally, many states 
        require sales materials and advertising to be filed before they 
        are used. Most states are currently unclear on advertising 
        requirements for Internet sales and whether filing of sales 
        materials is required.
    Existing state insurance regulations also inhibit the development 
of new insurance products. Currently, the states review, to varying 
degrees, the introduction of new insurance products. If an insurer 
plans to offer a new product in every state, this review process can 
take months, even years. Such time delays rob consumers of product 
innovations and product choice. Additionally, e-commerce delivery 
cannot be encumbered, long-term, through state-by-state differences. 
Most companies, including other financial services firms, are able to 
introduce new products to meet the needs of consumers as those needs 
change.
    Under our proposal, a federally chartered insurer or insurance 
agency that is supervised by a single federal regulator could meet the 
changing needs of consumers by offering uniform products nationwide and 
by introducing new products and services without any governmental 
review.
    Optional federal chartering would stimulate competition in the 
insurance industry to the benefit of both consumers and the insurance 
industry. A basic tenet of our economy is that free and fair 
competition builds strong and efficient companies that are responsive 
to the needs of their customers. Currently, however, some state 
insurance laws inhibit competition in the insurance industry to the 
detriment of consumers and the industry. State anti-rebating laws are 
an example of anti-competitive state laws. Anti-rebating laws prohibit 
an insurer or insurance agent from rebating premiums to a consumer as 
an inducement to purchase a policy. Rebates are a legitimate form of 
price competition that can reduce costs for consumers. Many other 
industries, such as the automobile industry, use rebates to lower costs 
for consumers.
    State rate laws are another example of anti-competitive state 
insurance requirements. These laws set the price for certain forms of 
insurance, such as auto insurance. There is, however, little 
justification for price controls in an industry in which there is 
relative ease of entry, such as the insurance industry. New entrants 
can serve to lower rates that are artificially inflated. Furthermore, 
the elimination of such price controls can, over time, lower the cost 
and increase the availability of insurance.3
---------------------------------------------------------------------------
    \3\ Support for this view can be found in a recent study authored 
by Scott Harrington for the AEI-Brookings Joint Center for Regulatory 
Studies. That study, entitled ``Insurance Deregulation and the Public 
Interest,'' found that auto insurance is less costly and more available 
in 14 states that do not require prior approval of rates than in 27 
other states that do require prior approval.
---------------------------------------------------------------------------
    Our optional federal chartering proposal would stimulate 
competition in the insurance industry to the benefit of consumers and 
the industry by allowing premium rates to be set by market forces and 
by permitting federally chartered insurers and agencies to engage in 
price competition through rebates.
    Optional federal chartering would enhance state insurance 
regulation. Since 1863, commercial banks have been free to choose to be 
regulated by either a state or the Federal Government. This dual 
chartering option for banks, commonly referred to as the dual banking 
system, has resulted in a healthy competition between state and federal 
banking regulators.
    Competition between state and federal banking regulators has 
stimulated the development of new products and services for consumers. 
Decisions by federal banking regulators have permitted banks to sell 
annuities, expand securities and mutual fund activities, and certify 
the security of Internet transactions. Other innovations, like variable 
rate mortgages and NOW accounts, which pay interest on transaction 
balances, first appeared in banks subject to state regulation.
    Competition between state and federal banking regulators also has 
fostered better supervision of banking organizations. Permitting 
institutions a choice of regulators forces a regulator to update and 
improve examination techniques and examiner training.
    Importantly, the competition between state and federal banking 
regulators has not resulted in a ``race to the bottom'' through the 
relaxation of basic safety and soundness standards, nor has it 
diminished the role of state regulators. Today, state banking 
departments charter and supervise approximately two-thirds of all 
commercial banks, including some of the nation's largest banks, and 
state-chartered banks hold approximately 42 percent of the nation's 
total banking assets.
    There is no reason to believe that insurance regulators could not 
experience the same competitive benefits from optional federal 
chartering that banking regulators have experienced under the dual 
banking system.4
---------------------------------------------------------------------------
    \4\ We recognize that the National Association of Insurance 
Commissioners is engaged in an effort to enhance the quality and 
responsiveness of state insurance regulation. ABAIA strongly supports 
that effort. However, we believe that the NAIC's efforts and the 
creation of an optional federal insurance charter are NOT mutually 
exclusive and, in fact, very much complement one another.
---------------------------------------------------------------------------
    Optional federal chartering would provide for more uniform, 
consistent and comprehensive regulation of larger and complex insurance 
firms. It is a challenge for any single state regulator, especially one 
with limited resources, to supervise an insurance firm that is active 
in many different jurisdictions. Under our proposal, the federal 
insurance regulator would have the resources and expertise necessary to 
examine, supervise and regulate large, and increasingly global, 
insurance firms.
    Many insurance firms, like my company, are engaged in the business 
of insurance in every state, and in other countries around the globe. 
Needless to say, complying with different rules and regulations in more 
than 50 different jurisdictions is both difficult and costly. Under our 
proposal, a federally chartered insurer or insurance agency that is 
subject to supervision by a single federal regulator would be able to 
comply with a regulatory scheme that is uniformly and consistently 
applied throughout the United States and abroad.
ABAIA's Proposal
    I will now outline the key features of our optional federal 
chartering proposal. Not surprisingly, the fundamental elements of our 
proposal are patterned after the dual banking system. Given the banking 
industry's positive experience with that system, this was a natural 
choice for us. We realize, however, that there are differences between 
the business of banking and the business of insurance. For that reason, 
our proposal melds features of the dual banking system with some 
features of state insurance law. We also realize that there may be 
better ways to provide for an optional federal charter for insurance. 
Nonetheless, we hope that by outlining our proposal--even though it is 
not in final form--we can further the dialogue on this issue.
    Office of the National Insurance Commissioner. Our proposal calls 
for the creation of a new bureau within the Treasury Department--the 
Office of the National Insurance Commissioner. The head of this office, 
the National Insurance Commissioner, would be a Presidential appointee, 
who would serve a five-year term. The National Insurance Commissioner 
would have the power to charter, supervise and regulate insurers and 
insurance agencies. Fees paid by federally chartered insurers and 
insurance agencies would finance the operations of the Office of the 
National Insurance Commissioner.
    The proposed Office of the National Insurance Commissioner is 
patterned after two existing Treasury bureaus, the Office of the 
Comptroller of the Currency, which charters national banks, and the 
Office of Thrift Supervision, which charters federal thrifts.
    An obvious alternative to a new bureau within the Treasury 
Department (or a new bureau in some other federal department) is the 
creation of a new independent regulatory authority. We have no 
objection to this alternative. Our selection of a bureau within the 
Treasury is based upon our desire to parallel the structure of the dual 
banking system. It also reflects our belief that a single Commissioner 
can be a more effective regulator than an agency managed by a 
commission or a board.
    Two New Federal Entities. The National Insurance Commissioner would 
have the power to charter two new federal entities: ``National 
Insurers,'' which could underwrite insurance, and ``National 
Agencies,'' which could broker or sell insurance. National insurers 
could be organized in either mutual or stock form, and they could be 
owned by mutual or stock holding companies. Federally chartered 
insurers could underwrite all forms of insurance. However, like a state 
insurer, a federally chartered insurer could not underwrite both 
property and casualty insurance and life insurance within the same 
company.
    The Commissioner could not issue a federal charter to an insurer 
that did not meet minimum capital requirements or that lacked the 
management or financial ability to operate in a safe and sound manner. 
We do not view a federal charter as a means to evade more stringent 
state regulation, nor do we intend to give federally chartered firms 
any unfair competitive advantage over state insurers on the basis of 
solvency regulation.
    Financial and Operational Regulations. Federally chartered insurers 
would be subject to a comprehensive set of financial and operational 
regulations, all of which are designed to ensure their safe and sound 
operation. These regulations would include: (1) minimum paid-in capital 
requirements; (2) risk-based capital requirements; (3) reserve 
requirements equal to actual and estimated claims; and (4) investment 
limitations.
    Additionally, to ensure accountability and transparency of 
operations, federally chartered insurers would be: (1) subject to 
generally accepted accounting principles (not regulatory accounting); 
(2) required to establish a comprehensive system of internal controls; 
(3) required to create an audit committee composed entirely of outside 
directors; and (4) required to undergo an annual audit and actuarial 
analysis by outside auditors and actuaries. Similar requirements were 
imposed upon banking organizations after the savings and loan crisis.
    Consumer Protection. Federally chartered insurers and insurance 
agencies would be subject to unfair trade practice standards, patterned 
after the NAIC's model unfair trade practices act. Among other matters, 
those standards would prohibit: (1) the misrepresentation of benefits; 
(2) false and misleading advertising; (3) defamation; (4) boycott, 
coercion and intimidation; (5) false statements; (6) unfair 
discrimination; and (7) unfair claims practices. Furthermore, the 
Federal Insurance Commissioner would have the power to adopt other 
market conduct regulations as needed. Federally chartered insurers and 
insurance agencies also would be subject to the provisions of the 
Gramm-Leach-Bliley Act governing the sharing of personal financial 
information and to a prohibition on the sharing of medical information 
without the affirmative approval of a customer. State privacy laws 
would not apply to federally chartered insurers or insurance agencies.
    Insurance Policies Issued by a Federally Chartered Insurer. In 
order to allow federally chartered insurers to issue uniform insurance 
policies, federal law, not state law, would govern the terms and 
conditions of insurance policies issued by a federally chartered 
insurer. The Commissioner would be directed to issue regulations 
implementing this requirement. The Commissioner could not, however, 
impose any regulation on the rates charged for insurance or require 
policy forms to be pre-approved.
    We believe that, over time, the elimination of price controls would 
lower the cost and increase the availability of those forms of 
insurance that have been subject to rate regulation. To help ensure 
this result, we would make the federal anti-trust laws applicable to 
federally chartered insurers. Also, we would require federal insurers 
to share their rates and policy forms with the Commissioner once they 
are in use so that consumers could compare prices and policy terms.
    Supervision of Federally Chartered Insurers. As a general rule, the 
Commissioner would be required to conduct annual, on-site examinations 
of each federally chartered insurer. An exception to this general rule 
would apply to insurers that are adequately capitalized and fully 
reserved. They would be subject to a bi-annual examination cycle. 
Another exception would be for the largest, most complex insurers, 
which would have examiners located on-site on a permanent basis. 
Failure to cooperate with an examination would subject an insurer to 
civil money penalties.
    The Commissioner also would have the authority to take an 
enforcement action against any federally chartered insurer or insurance 
agency that violated applicable federal law or regulations. These 
actions would include cease and desist penalties and civil money 
penalties patterned after those applicable to banking institutions.
    National Guaranty Corporation. Our proposal calls for the creation 
of a federal guaranty corporation, the National Insurance Guaranty 
Corporation, to guarantee insurance policies issued by federally 
chartered insurers.5 The Corporation would be patterned 
after the Federal Deposit Insurance Corporation (``FDIC''). A five-
person board of directors would govern the Corporation. The board would 
include the Federal Insurance Commissioner, the Chairperson of the 
Securities and Exchange Commission, the Chairperson of the FDIC and two 
individuals appointed by the President, one of who would be the 
Chairperson of the Corporation. The Corporation would establish two 
separate funds, one for life and health policies and another for 
property and casualty policies. The type of policies covered by these 
funds and the scope of coverage would be patterned after NAIC model 
laws.
---------------------------------------------------------------------------
    \5\ The current version of our proposal also would permit a state 
insurer to apply for membership in the Corporation. State insurers that 
did so would be subject to a limited oversight by the Corporation.
---------------------------------------------------------------------------
    Insurers whose policies are protected by the Corporation would be 
subject to semi-annual, risk-based assessments. Until such time as 
those assessments would cover the operations and potential liabilities 
of the Corporation, the Corporation would rely upon a line of credit 
from the Treasury Department to cover its operations and liabilities.
    The proposal would limit exposure to losses by empowering the 
Corporation to take corrective actions against insurers that fail to 
meet applicable capital and reserve requirements. These corrective 
actions escalate in severity as an insurer's condition deteriorates. 
Ultimately, they require the Corporation to place an insurer into 
receivership or conservatorship before it exhausts its capital and 
reserves. This ``taxpayer protection'' provision is based upon powers 
given to the federal banking regulators after the savings and loan 
crisis.
    We recognize that the creation of a federal guaranty corporation 
may be one of the more controversial features of our proposal. However, 
we believe that pre-funded guaranty funds patterned after the deposit 
insurance funds would provide the best protection for the consumers of 
insurance. Also, a federal corporation is consistent with our desire to 
have two independent, and complementary insurance regulatory systems.
    Taxation. Finally, our proposal would not alter state tax laws, 
including state premium taxes.
Conclusion
    In conclusion, ABAIA believes that an optional federal charter 
would be good for consumers, the insurance industry and the state 
regulatory system. We also believe that the dual banking system offers 
a reasonable model for optional federal chartering.
    Thank you again for the opportunity to appear before the 
Subcommittee.

    Mr. Oxley. Thank you, Mr. Milesko.
    Mr. Smith.

                  STATEMENT OF RONALD A. SMITH

    Mr. Smith. Thank you, Mr. Chairman, committee members. I am 
Ron Smith. I am an insurance agent from a small town in 
Indiana. I am here on behalf of the Independent Insurance 
Agents of America. We represent some 300,000 agents and 
employees across the country. We are the oldest and largest 
agent association in America. Much has been said by the 
panelists to date, and I will try and be brief in my comments, 
but I would like to touch on a few things specifically.
    We all admit that we do have a changing market. There is no 
question about that, but we have long been supporters of State 
regulation and we continue to have that position. As I say, 
that I do believe that we have to fix some of what State 
regulation is all about right now, and I think the 
commissioners have started down that path. Their statement of 
intent has really made a difference, and they have been moving 
much more rapidly than they have in the past. I think Congress 
has helped make sure that that has happened.
    I would like to specifically talk about four things that 
are particularly important to us: agent producer licensing 
privacy, product regulation and consumer protections.
    First, in the agent producer licensing arena, as a small 
agent in a small town, I would tell you that I operate and have 
licenses in 16 States. The current licensing model is rather 
inefficient, time consuming and frustrating to me as a 
particular producer. I would tell you that a model licensing 
bill, model licensing law that the insurance commissioners have 
been working on is one that our association supports. We have 
had discussions as late as Friday with some revisions that we 
think need to take place in that model law. We will probably 
have some more discussions in the next week or 2. If we can get 
that model law, I think we will have 50 State associations 
working very hard to clear a lot of the log jams in our current 
licensing process. It is, trust me, a time-consuming and 
expensive endeavor for an agency like ours.
    No. 2, privacy. Privacy, we believe, is something that is 
extremely important. For years, we have protected the privacy 
of our clients. As the financial services industry is evolving, 
I believe that we as agents also have to disclose more and more 
things to our clients. Our belief is that we make--we have to 
make sure that there is a level playing field. All people 
providing financial services must meet the same privacy 
standards and must be guided by the same set of standards or we 
will have confusion across the States.
    Part of regulation. Our Association is on record as being 
in favor of commercial lines, rate deregulation. We believe 
that the marketplace can indeed determine rate regulation as 
long as we have and continue to maintain a competitive market. 
We think the NAIC can oversee that procedure and we believe 
that we can enact some of the pieces that will let companies 
bring products to market quicker. We believe that, indeed, is 
an essential piece as we move forward in the process of getting 
product to our consumers.
    And last but not least, consumer protections. Through all 
of what we are doing, we as agents have been very mindful of 
consumer protections and how important they are. We think the 
proper place to enforce consumer protections for insurance 
industry is with the NAIC. We think the various commissioners 
know their constituents on a broad basis and know exactly what 
they want and what they demand, and we believe that the NAIC is 
the place to have that continue to take place.
    We see the financial services arena as changing very 
rapidly. We as an association, as a group of agents, are 
committed to working with the NAIC to pushing them into 
furthering their efforts, their speed to market, their various 
statements of intent that they have made. I would tell you as a 
personal note, as an agent, I have now been attending the NAIC 
meetings over the course of the last 3 years. There is a sense 
of urgency at the NAIC that has not been demonstrated before. I 
believe they understand the pressures that they are under. I 
believe that they are implementing the framework that they need 
to move forward into the 21st century and to continue to 
regulate insurance properly. Thank you very much.
    [The prepared statement of Ronald A. Smith follows:]
   Prepared Statement of Ronald A. Smith, President, Smith, Sawyer & 
                              Smith, Inc.
    Good morning. My name is Ron Smith. I am President of Smith, Sawyer 
& Smith, Inc., an insurance agency located in Rochester, Indiana. I am 
the current State Government Affairs Chairman and a Past President of 
the Independent Insurance Agents of America, the country's oldest and 
largest national association of insurance producers, representing more 
than 300,000 independent insurance agents and employees. IIAA's 
membership is composed of large and small businesses that offer 
consumers a wide array of products, ranging from property, casualty, 
life, and health insurance to employee benefit plans and retirement 
programs.
    I appreciate the opportunity to testify this morning on a topic of 
great interest and critical importance to independent insurance 
agents--the future of insurance regulation.
                            i. introduction
    I should note at the outset that we have been ardent supporters of 
state regulation of insurance throughout our more than 100-year 
existence. Our national board of directors has repeatedly affirmed our 
support for state regulation--for all participants and all activities 
in the marketplace.
    For 200 years, states have successfully accepted and performed the 
role of insurance regulation, nearly uninterrupted. When a 1944 Supreme 
Court decision produced uncertainty about the scope and preeminence of 
state regulation, Congress swiftly reacted by passing the McCarran-
Ferguson Act the following year. That act ``restore[d] the supremacy of 
the States in the realm of insurance regulation'' and its statement of 
federal policy could not be more clear: ``The business of insurance, 
and every person engaged therein, shall be subject to the laws of the 
several States which relate to the regulation or taxation of such 
business.''
    We do not believe there is sufficient justification for abandoning 
this traditional policy approach. The states have a historical 
expertise in the realm of insurance regulation, and there is an absence 
of any such expertise at the federal level. State regulators have been 
the virtually exclusive protectors of such interests since the creation 
of an insurance industry in this country. We hope to ensure that their 
authority and expertise in the regulation of the business of insurance 
is not overturned or undermined, even as other industries become more 
heavily involved in providing insurance services.
    Despite our longstanding support for state regulation, we recognize 
that the current regulatory system does not always operate as 
efficiently as it should. Agents, like other industry players, 
sometimes become frustrated with state regulation, and there are 
certainly areas where the existing system can be enhanced, streamlined, 
and made more uniform across state lines. Changes in the marketplace in 
recent years, combined with advances in technology and a new set of 
emerging realities, make such improvements necessary, and we are 
committed to working with policymakers and our colleagues on these 
issues.
    While it may not always be perfect, the current system is working. 
The entire body of state insurance law--statutes and regulations--is 
frequently revised and updated to address evolving issues and to ensure 
comprehensive consumer protection. Preservation of the applicability of 
these state regulations is essential because no comparable regulations 
exist at the federal level and no federal regulator has expertise in 
this arena. By their regulation, the states ensure that those who 
engage in the business of insurance are qualified to do so, remain 
appropriately qualified, offer sound insurance products, and comply 
with reasonable safeguards for the protection of consumers. Given the 
important role that insurance plays in our lives, this is essential.
    Over the last several months, the National Association of Insurance 
Commissioners (NAIC) has aggressively considered and debated how the 
current regulatory regime might be modified and improved. This effort 
began with the adoption of the ``Statement of Intent,'' a document 
which outlines a framework of principles through which the country's 
insurance regulators have begun to address the challenges and 
opportunities confronting state regulation. The statement is 
essentially a blueprint of issue-specific goals that the NAIC intends 
to tackle in the immediate future. These objectives relate to issues 
that must be addressed quickly, such as the implementation of the 
Gramm-Leach-Bliley Act (GLBA), and those issues that will take longer 
to resolve, such as the state response to globalization, the emergence 
of technology, and the call for reform of the current regulatory 
system.
                    ii. agent and producer licensing
    One area of insurance regulation that has drawn warranted criticism 
is the manner is which states license insurance agents. Our agent and 
broker members increasingly operate in multiple states and obtain 
growing numbers of nonresident licenses, and they struggle to stay on 
top of the required paperwork and clear the logistical and bureaucratic 
hurdles that are in place today. Staying in compliance with the 
distinct and often idiosyncratic agent licensing laws of every state is 
no easy task. It is an expensive, time-consuming, and maddening effort 
for many agencies, and a dedicated staff person and tremendous 
financial resources are often required to manage an agency's compliance 
efforts. These opportunity costs and wasted man-hours could be better 
spent working on behalf of our customers. Many of our members are 
frustrated because they are trapped in a licensing system full of 
antiquated, duplicative, unnecessary, and protectionist requirements. 
Adding to the frustration is the fact that these inefficiencies exist 
at a time when advances in technology have encouraged society to expect 
ease, efficiency, and speed--even from government agencies and state 
insurance departments.
    The problems associated with the current system can be divided into 
three main categories: (1) the disparate treatment that nonresidents 
receive in some states; (2) the lack of standardization, reciprocity, 
and uniformity; and (3) the bureaucracy generally associated with agent 
licensing. The NARAB provisions contained in the Gramm-Leach-Bliley Act 
ensure that these three problem areas will be addressed soon--either by 
the automatic implementation of the provisions themselves or by the 
enactment of preemptory reforms at the state level.
Elements Required to Forestall NARAB's Creation
    The ``NARAB provisions'' contained in Subtitle C of Title III of 
the Gramm-Leach-Bliley Act offer the promise that effective licensing 
reform may finally be imminent. NARAB, the National Association of 
Registered Agents and Brokers, is an entity that does not exist today 
but is one that would be created if the states cannot on their own 
reach the licensing reform goals outlined by Congress. In essence, the 
NARAB provisions put the ball in the states' court. The new licensing 
agency will only be established if the states fail to take the steps 
necessary to forestall its creation. In this way, the threat of NARAB 
creates a strong incentive for the states to reinvent and streamline 
the current multi-state licensing process.
    The GLBA is clear about what it is required to prevent the 
establishment of NARAB. The creation of the new ``agency'' will only be 
averted if a majority of states (defined by virtue of the statute as 29 
states or territories) do not achieve the specified level of licensing 
reciprocity or uniformity. The Act is specific about the reforms that 
are necessary, and it gives the states two options--licensing 
uniformity or licensing reciprocity.
    Reciprocity is the easier test to satisfy, and it is the initial 
goal of state policymakers. To achieve reciprocity, the Gramm-Leach-
Bliley Act requires that a majority of states license nonresident 
agents and permit them to operate to the same extent and with the same 
authority with which they operate and function in the resident state. 
This sounds simple, but every state will need to make statutory and 
regulatory changes in order to meet the level of reciprocity required. 
The reciprocity standard in the NARAB provisions essentially requires 
each qualifying state to meet a 3-part test:

 First, states may not impose any unique licensure requirements 
        on nonresidents and may only require a nonresident to submit 
        (1) a license request; (2) proof of licensure and good standing 
        in the home state; (3) the appropriate fees; and (4) an 
        application.
 Second, states must offer continuing education reciprocity to 
        any person who satisfies his/her home state requirement.
 Third, states must not ``impose any requirement . . . that has 
        the effect of limiting or conditioning [a] producer's 
        activities because of its residence or place of operations,'' 
        excluding countersignature requirements.
    In short, to satisfy the NARAB test, states must offer full 
reciprocity to nonresident agents--without imposing any additional 
obligations or requirements. In order to be ``NARAB-compliant,'' a 
state must be willing to accept the licensing process of a producer's 
home state as adequate and complete. No additional paperwork or 
requirements may be required--no matter how trivial or important they 
may seem.
    The states collectively have three years to achieve the required 
level of reciprocity. If 29 states fail to offer reciprocity to 
nonresidents by November 12, 2002, the NAIC will begin the process of 
establishing NARAB, as provided by the statute. The law requires that 
the new entity begin operation within two years of the initial 
deadline. It is unlikely, however, that NARAB will ever come into 
existence. IIAA believes the states will meet the level of reform 
required by Congress and create a licensing system that is in fact 
superior to that offered by the NARAB provisions.
Recent Reform Activity / NAIC Producer Licensing Model Act
    Even before the passage of the Gramm-Leach-Bliley Act, efforts were 
underway to reform and streamline the existing licensing system, and 
some significant strides had already been made. The NAIC, for example, 
had developed a national application form for agents, established the 
Uniform Treatment Initiative (an initial step toward reciprocity), and 
developed groundbreaking regulatory tools such as the Producer Database 
and Producer Information Network. In addition, many states have 
recently taken action to eliminate longstanding discriminatory 
barriers, such as countersignature laws, residency requirements, and 
solicitation restrictions. The focus on agent licensing reform, 
however, has clearly intensified since the enactment of the GLBA.
    The most critical response has been the development of the 
``Producer Licensing Model Act,'' a model law adopted by the NAIC. The 
hope is that every state legislature will consider and adopt the 
proposal, thus providing much needed uniformity to the current 
licensing system. We believe the Producer Licensing Model Act will be 
the starting point for agent licensing reform in every state, and we 
commend the NAIC for the hard work and dedication associated with its 
development.
    The model was initially adopted in January, and revisions to the 
existing product will be considered by the NAIC in early October. The 
adoption of the amended model in the coming weeks will be the 
culmination of more than two years worth of effort by state 
policymakers and many in the private sector. We are particularly proud 
of the pivotal role that IIAA played in the development of the 
proposal. Early in the process, we assumed a leadership role by 
bringing together all of the various private sector groups to discuss 
many of the issues that had divided the insurance industry. Our efforts 
to broker consensus were successful in a number of key areas and helped 
enable the NAIC to proceed quickly with its consideration of the model.
    The proposed revisions to the model are significant and will lead 
to the adoption of the model in the states. As this subcommittee knows, 
IIAA and its membership had some concern with the original version of 
the model. One ambiguously worded licensing exemption would have 
created a loophole that would have allowed unlicensed and unqualified 
individuals to offer advice and guidance, discuss policy options with 
unknowledgeable consumers, and materially revise existing policies and 
insurance contracts. IIAA encouraged the NAIC to delete the unnecessary 
exemption, and the NAIC's NARAB Working Group, the committee with 
jurisdiction in this area, recommended on Friday that the provision be 
deleted altogether. To its credit, the NAIC has now taken steps to 
eliminate the potential for conflicting interpretations, avoid the need 
for judicial interference, and most importantly, protect insurance 
consumers.
    The NAIC Producer Licensing Model Act addresses a wide range of 
issues and will result in unprecedented uniformity among the states. 
Among other items, the model includes the following:

 A requirement that any person ``selling,'' ``soliciting,'' or 
        ``negotiating'' insurance be licensed and a prohibition against 
        unlicensed individuals performing these same functions without 
        a license--regardless of the context;
 Definitions of the major lines of insurance;
 The recognition of a uniform process for obtaining a resident 
        license;
 The creation of a common set of requirements for obtaining 
        nonresident licenses;
 The recognition and acceptance of a common national 
        application--for both residents and nonresidents;
 Uniform standards for agent/insurer appointments;
 The establishment of true licensing reciprocity; and
 The elimination of discriminatory licensing requirements.
    The NAIC model will bring uniformity to the licensing process in 
many ways that are not required under the NARAB provisions of the 
Gramm-Leach-Bliley Act. The bill does, however, contain the provisions 
necessary for a state to become ``NARAB-compliant'' by establishing the 
requisite level of reciprocity.
    While the model law offers many important benefits, the NARAB 
deadline is still the focus of significant attention. States will have 
no more than two legislative sessions to address this issue, so timing 
is certainly critical. Despite the challenge, we are committed to 
working with the states to achieve agent licensing reform and forestall 
the creation of NARAB by the November 2002 deadline. In fact, our 
members and state organizations are already working closely with state 
departments of insurance and the industry to lay the groundwork for 
legislative action in 2001. We believe many states will take action on 
this issue beginning in January, and we are optimistic that the NARAB 
threshold of 29 states may even be cleared by the end of 2001--nearly 
one year ahead of the timeframe established in the GLBA.
    NAIC President George Nichols, NARAB Working Group Chair Terri 
Vaughan, and the leadership of the NAIC have made it clear, however, 
that they will not settle for uniformity and reciprocity in 29 states 
alone. While clearing that 29-state hurdle is all that is required 
under the GLBA, the insurance regulators are pushing for ``national'' 
reform. We wholeheartedly support the notion that effective reform must 
be national in scope and commend them for their hard work in this 
regard. The NAIC has made it clear that simply reaching the bare 
minimum required by federal law is not enough, and their words have 
been supported with actions and leadership.
National Insurance Producer Registry
    The NAIC's vision for reinventing agent licensing--a vision that we 
share--does not end with the ultimate state adoption of the Producer 
Licensing Model Act. The licensing process will be further 
revolutionized by the work and continued development of the National 
Insurance Producer Registry (NIPR), a non-profit affiliate of the NAIC. 
NIPR is the private-public partnership directed by a nine-member Board 
of Directors. The Board is composed of four regulators, a NAIC 
representative, three insurer representatives, and one agent/broker 
representative.
    Today, NIPR is responsible for developing and maintaining the 
Producer Database (PDB) and the Producer Information Network 
(PIN).1 Once the necessary statutory changes are implemented 
at the state level, NIPR will utilize technology and its existing 
services to create a simpler and cost-effective licensing environment 
for agents. NIPR recently unveiled a detailed plan that will ultimately 
lead to the development of a system through which agents will obtain 
nonresident licenses in multiple states by using a single on-line point 
of entry. In the near future, a person licensed and in good standing in 
their home state will have the ability to obtain licenses in other 
states by submitting a single license application to NIPR, along with 
the payment of both state and NIPR fees. Upon receipt, NIPR will 
perform an automated verification to ensure that the producer holds an 
active resident license and will then issue, at the direction and on 
behalf of the state(s), the appropriate nonresident licenses.
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    \1\  PDB is an electronic database consisting of information about 
producers and includes information about a producer's licensing status, 
appointment history, and disciplinary actions. PIN is an electronic 
communications network that links state insurance regulators with the 
entities they regulate in order to facilitate the electronic exchange 
of producer-related information.
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    IIAA currently sits on NIPR's Board of Directors, representing the 
interests of the producer community with regard to these important 
initiatives, and we are very encouraged by the progress that the NAIC 
and NIPR have made to date. Given the importance of NIPR's mission to 
the agent and broker community, we have proposed that the makeup of the 
Board be reconsidered. Specifically, we have proposed adding two new 
producer representatives to the board (thus establishing parity between 
the insurer and producer communities) and adding two additional 
regulator representatives (thus preserving the balance between the 
private and public sectors). While we commend NIPR for opening its 
meetings to an expanded audience, we believe the reconstitution of the 
Board is critical. The decisions of the Board directly impact the agent 
and broker community, and we believe that perspective should have an 
equal voice in the development of NIPR policies and services.
Regulator and Industry Access to the NCIC Database
    An area in which significant reciprocity is lacking is the manner 
in which states investigate the criminal histories of potential license 
holders and verify the information submitted on license applications. 
States today have a variety of different requirements and processes for 
doing this. Some states simply ask an applicant whether they have a 
criminal history or if they have committed some act that would preclude 
them from licensure. Other states require applicants to submit a 
criminal background report with their application. There are also those 
states that take a proactive role in this process and may even require 
applicants to submit fingerprint cards so that an individual's record 
can be checked thoroughly. Whatever the actual process, states 
typically impose their own individualized background check requirements 
on nonresident applicants--regardless of whether the applicant's 
criminal background has already been reviewed by any other state.
    There is concern that the wide disparity in requirements and trust 
among the states in this area could undermine the effort to achieve 
licensing reciprocity. A state with strong background check 
requirements is naturally uncomfortable licensing an individual who has 
not previously gone through the same rigors and background review that 
the state would otherwise require. However, under the NARAB provisions, 
a state could arguably have to license such an individual.
    One possible solution is to centralize this function, develop a 
common process, and require only one background check for every 
producer, which could be updated on a periodic basis and/or whenever a 
new nonresident license is sought. This could perhaps be facilitated by 
providing NIPR with limited and clearly defined access to the National 
Crime Information Center (NCIC) database. Similar processes exist in 
other contexts, and we believe it is a model worth considering. The 
NAIC has asked Congress to authorize NCIC access, and we continue to 
support this concept.
    Given the sensitivity of the information contained in the NCIC 
database, however, any grant of access must be thoughtfully considered 
and properly constructed. This issue raises serious privacy concerns, 
and the proper balance must be obtained. IIAA, in conjunction with 
other insurance industry associations, has already developed a proposal 
that would provide insurance regulators with access to the database so 
regulators can effectively and proactively perform their licensing 
responsibilities. The proposal would also provide limited access for 
employers who wish to perform personnel checks on employees or 
potential employees. In our view, there is no public policy 
justification for providing unlimited and unqualified access to these 
files to anyone that might request them.
                              iii. privacy
    State policymakers are also taking action to satisfy the Gramm-
Leach-Bliley Act's Title V privacy requirements. There is perhaps no 
more important topic in politics today than ensuring that the private 
information of individuals remains just that--private.
    This is also an area where uniformity of regulation and enforcement 
is critical. Privacy regulations and requirements should be uniform 
both among the states and with the requirements that will be imposed on 
banks and other financial services providers by the federal banking 
agencies, the Securities and Exchange Commission and the Federal Trade 
Commission. This uniformity is essential to ensuring that the ``level-
playing field'' aspirations of the GLBA are fully realized. If the 
obligations are not uniform, then consumer protection will be 
undermined and competition among financial services providers will be 
negatively affected--likely to the detriment of state-regulated 
insurance providers. It also is necessary to ensure that insurance 
agents that also are subject to the jurisdiction of a federal 
regulator--such as a life insurance agent that also is a registered 
securities broker--are not subject to conflicting or inconsistent 
privacy obligations.
    In order to provide national uniformity in the regulation of 
consumer privacy, the NAIC is developing a model regulation. This 
model, which is intended to be promulgated as a regulation by state 
insurance departments, addresses the privacy of financial information 
(as required by Title V of the GLBA) and the privacy of health or 
medical information. We are fairly satisfied by the approach the NAIC 
has taken on the financial side, and we believe the model regulation is 
consistent with the federal regulations. We have some concerns with the 
structure of the health information piece and continue to vet the 
latest draft with our members. We have been pleased, however, by the 
NAIC's willingness to discuss and debate the scope and nature of its 
proposal.
                         iv. product regulation
    The NAIC's reform agenda also calls for a review of how states 
regulate the development of insurance products and their introduction 
into the marketplace. As part of the ``Speed to Market'' initiative, 
the NAIC is considering the manner in which states regulate policy 
forms and rates and is identifying ways to improve the multi-state 
system. IIAA recognizes that the NAIC is tackling this issue even 
though not compelled to do so by any federal mandate, and we commend 
the organization for making this a priority.
    Today, while each state's particular approval mechanism may differ, 
rates and policy forms are subject to some form of regulatory review in 
nearly every state. While most insurance codes provide that rates shall 
not be inadequate, excessive, or unfairly discriminatory and that 
policy forms must comply with state laws, promote fairness, and be in 
the public interest, there are a variety of ways in which states 
currently regulate rates and forms. These systems include prior 
approval, flex rating, file and use, use and file, competitive rating, 
and self-certification. The manner in which rates and forms are 
approved and otherwise regulated can differ dramatically from state to 
state and from one line to the next. These requirements are important 
because they not only affect the products and prices that can be 
implemented, but also the timing of product and rate changes in today's 
competitive and dynamic marketplace.
    The current system is too often inefficient, paper intensive, time-
consuming, arbitrary, and inconsistent with the advance of technology 
and the regulatory reforms made in other industries. Many argue that 
regulation of insurance and the cost of regulation exceeds what is 
necessary to protect the public, particularly in the area of commercial 
insurance. It is hard to disagree with the call for rate and form 
modernization when considering that it often takes two years or more to 
obtain regulatory approval to bring new products to market on a 
national basis. Cumbersome inefficiencies can create lost opportunity 
costs, and the regulatory regime in many states is likely responsible 
for driving many consumers into alternative market mechanisms.
    IIAA is optimistic that the NAIC's Speed to Market initiative will 
lead states to review and revise their laws to ensure that new 
products, coverages, forms, and plans can enter the marketplace in an 
efficient, timely, and responsive manner. We are strong believers in a 
free and competitive market, and we support efforts to enhance 
competition and product innovation. We must be careful, however, to 
strike a proper balance between free enterprise innovation and consumer 
protection and not take actions that place consumers at risk. 
Improvements can be made in the area of product regulation, but this 
effort should not result in an abdication of regulatory oversight. 
Instead, we hope this modernization effort will bring about 
enhancements to the review process, allow the industry to introduce 
products more efficiently, and permit insurers and agents to be more 
responsive to the needs of the public.
    As part of its Speed to Market initiative, the NAIC recently 
unveiled a proposal to create the Coordinated Advertising, Rate, and 
Form Review Authority (CARFRA). The plan to establish this new 
organization was only recently released, and there are many issues and 
questions that must still be addressed. The NAIC is now moving quickly 
to consider the details of this new concept, and it may be that CARFRA 
offers a viable mechanism for coordinating and standardizing the rate 
and form approval process. In addition to creating the CARFRA proposal, 
the NAIC has established a subgroup to develop a series of 
recommendations aimed at further improving state-based filing and 
review procedures. This subgroup is composed of five regulators, two 
insurer representatives, two consumer advocates, and an agent/broker 
representative. We are pleased to sit on this committee and believe it 
is an excellent way to facilitate dialogue among the parties affected 
by product regulation.
                        v. consumer protections
    Perhaps most importantly, the NAIC's modernization agenda does not 
forget about consumers. In fact, consumer protection is the leading 
principle and highest priority guiding the NAIC's activities. The 
NAIC's Statement of Intent begins by saying: ``Our primary goal is to 
protect insurance consumers, which we must do proactively and 
aggressively.'' Although the NAIC has established a new Consumer 
Protections Working Group dedicated to discussing specific statutory 
protections and promoting the adoption of safeguards in the states, the 
emphasis on consumer protection affects all of the NAIC's efforts.
    Unfortunately, the NAIC's focus on consumer protection has been 
challenged and undermined in recent months. In three separate 
instances, the Office of the Comptroller of the Currency (OCC) has been 
asked by banking industry groups to toss aside state level insurance 
sales consumer protections. Specifically, these groups have asked the 
OCC to preempt consumer protections previously enacted in 
Massachusetts, Rhode Island, and West Virginia.
    An ill-advised OCC preemption opinion issued in response to these 
requests could disrupt regulatory activities in the more than 30 states 
that have substantively identical insurance sales protection provisions 
in place. This is especially troubling because--virtually without 
exception--these consumer protections were enacted with the support of 
consumer advocates as well as both the banking and insurance industries 
in each state.
    The West Virginia experience is illustrative of this concerning 
trend. There, the local banking association that petitioned the OCC 
actively negotiated the parameters of the law that they have asked to 
be preempted, and they endorsed enactment of that legislation. Over two 
dozen banks are actively selling non-credit forms of insurance in the 
State of West Virginia and their efforts do not appear to be hampered 
in any way by the challenged provisions. Any allegation that the West 
Virginia provisions at issue should be preempted because those 
provisions ``prevent or significantly interfere with'' the ability of 
banks to engage in insurance agency activities thus appears to be 
completely unwarranted.
    A large and diverse group of parties wrote to the OCC during two 
public comment periods to question the agency's authority to consider 
these questions and to encourage the agency to preserve the challenged 
protections. This group included the NAIC; the National Conference of 
Insurance Legislators (NCOIL); the National Conference of State 
Legislatures (NCSL); members of Congress; individual state legislators, 
attorneys general, and insurance commissioners; and consumer advocates 
(including the Consumer Federation of America).
    We have urged the OCC to not deem any of the challenged consumer 
protection requirements preempted for two overarching reasons. First, 
it is clear the OCC does not have the power to determine whether state 
insurance regulations are preempted by Section 104 or by any other 
federal law. The GLBA makes clear that the states are empowered to 
regulate the insurance activities of everyone, including national 
banks. The only limitation on that authority is Section 104, but the 
OCC has absolutely no authority to interpret the parameters of that 
provision. Second, even if the Comptroller did have the authority to 
pass on such preemption questions, it is clear that state insurance 
sales consumer protection provisions like the challenged requirements 
do not ``significantly interfere'' with the ability of banks and bank-
affiliates to engage in insurance agency activities in any way. The 
challenged provisions were enacted to address serious insurance 
consumer concerns, and none violate the preemption standards 
established in Section 104.
    The manner in which the OCC proceeds will have a dramatic effect on 
the future of insurance regulation. We are concerned because we believe 
that preemption of these state laws by the OCC would undermine the 
functional regulation framework that is at the core of the Gramm-Leach-
Bliley Act.
                             vi. conclusion
    By enacting the Gramm-Leach-Bliley Act, Congress in some ways threw 
down the gauntlet to state policymakers. In the 10 months since the 
law's historic passage, state insurance regulators have proven that 
they are up to the challenges at hand. Not only are they fulfilling the 
obligations created by the GLBA, they are also reforming insurance 
regulation in other crucial ways. State legislators are also proving 
that they are prepared to modernize and enhance state regulation of 
insurance, and legislative groups such as NCOIL and NCSL are engaged in 
these discussions and working closely with the NAIC. In the weeks and 
months to come, we will continue to work closely with the NAIC, state 
legislators, our member agents, and other interested parties to achieve 
meaningful reform on a national basis.
    IIAA appreciates the opportunity to comment and present our views 
on the state and future of insurance producer licensing. As you 
continue to consider these issues, please know that we are happy to 
provide any further assistance or information that this subcommittee 
might deem appropriate and helpful.

    Mr. Oxley. Thank you, Mr. Smith.
    Mr. Hillman.

                 STATEMENT OF RICHARD J. HILLMAN

    Mr. Hillman. Mr. Chairman and members of the subcommittee, 
I am pleased to be here today to discuss with you our report on 
insurance regulation that is being released today. This report 
requested by Congressman Dingell presents our evaluation of 
insurance regulatory oversight and information sharing 
triggered by a highly publicized insurance investment scam 
allegedly masterminded by Martin Frankel. My testimony today 
focuses on three issues.
    First, I will briefly describe how the alleged investment 
scam operated. Second, I will describe some of the information 
sharing and regulatory weaknesses exposed by the scam. Finally, 
I will discuss the crucial importance of enhancing regulatory 
information sharing going forward in the new era under Gramm-
Leach-Bliley.
    Martin Frankel is under indictment for allegedly embezzling 
more than $200 million in insurance company assets over nearly 
an 8-year period. Mr. Frankel, a former securities broker who 
was banned from that industry in 1992, with assistance from 
others, allegedly obtained secret control of entities in both 
the insurance and securities industries. In 1991, he allegedly 
exercised secret control over a small securities firm called 
Liberty National Securities. The same year, he allegedly 
anonymously established an entity known as Thunor Trust using 
the names of nominee grantors as the apparent sources of the 
money.
    Between 1991 and 1999, Mr. Frankel operating through 
fronts, allegedly used Thunor Trust to purchase seven insurance 
companies in six States. After purchasing these companies, the 
companies' assets were sold and apparently replaced with 
government bonds purchased on the insurer's behalf by Liberty 
National Securities. These securities firms then allegedly 
provided monthly statements to each insurance company detailing 
an active and profitable bond trading strategy that were, in 
fact, fabrications.
    It appears that the securities transactions never happened 
as reported, and Federal authorities allege that Mr. Frankel 
actually stole the insurers assets and used the funds to 
perpetrate the investment scam and support his lavish 
lifestyle. After operating for nearly 8 years, the scam began 
to unravel as insurance regulators placed more scrutiny on the 
insurers asset custody arrangements. Federal and State 
authorities now have criminal and civil cases pending against 
Frankel, and others allegedly connected to the scam. Mr. 
Frankel, while being held by German authorities and facing 
extradition to the United States, has not yet been convicted 
for any of the actions that are attributed to him. As yet, the 
whole story has not been told.
    Weaknesses associated with insurance regulatory tools and 
inadequate oversight and coordination activities contributed to 
delays in detecting the investment scam for years. We observed 
regulatory weaknesses in each of three key phases of regulatory 
oversight, namely, approval and change on insurance company 
ownership, routine financial analysis and onsite examinations. 
Table 1, in my prepared statement today, summarizes the 
weaknesses we identified in each of the phases of regulatory 
oversight.
    In some cases, the identified weaknesses involved a lack of 
the appropriate policies and procedures for identifying 
problems in the Thunor Trust insurers. At other times, State 
insurance regulators failed to follow existing policies 
procedures or recommended practices. Overall, however, 
regulators did not act in response to red flags raised by the 
actions of Thunor Trust, insurance companies or Liberty 
National Securities. These red flags did not necessarily rise 
to the level of illegality but individually, and certainly 
collectively, they should have led regulators to ask more and 
harder questions, the answers to which very likely would have 
uncovered the scam much sooner.
    We believe that all financial regulators, including State 
insurance regulators, have a positive responsibility to act 
with professional skepticism. It is clear that for many years 
in this case, insurance regulators did not.
    I was pleased to find that the insurance regulators working 
with NAIC have recognized the weaknesses we have identified, 
and while much more needs to be done, they have begun 
addressing them to help reduce the industry's vulnerability to 
fraud.
    The final topic I want to briefly mention is the importance 
of regulatory information, sharing particularly in the area of 
Gramm-Leach-Bliley. At nearly every stage of the scam I 
describe d for you today, regulators could have exposed the 
fraud sooner and limited the damage if there had been better 
and more consistent sharing of regulatory information. 
Insurance regulators will need to apply the lessons learned 
from this scandal and effectively share regulatory data between 
themselves and their banking and securities counterparts.
    Going forward, all financial regulators will need to 
consider regulatory data from other financial vectors to 
properly oversee the business relationships and transactions 
between institutions in different financial sectors. While it 
is too early to fully assess regulatory oversight coordination 
efforts emanating from Gramm-Leach-Bliley, I am pleased to 
report that there are signs that Federal and State regulators 
recognized the need to improve coordination and are taking the 
first steps to formalize coordination mechanisms.
    Mr. Chairman, this concludes my statement and I would be 
pleased to respond to any questions that you or the members may 
have.
    [The prepared statement of Richard J. Hillman follows:]
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    Mr. Oxley. Thank you, Mr. Hillman.
    Let me begin a line of questioning with Mr. Turner.
    Mr. Turner, in your testimony you state that simply 
improving the State insurance system may not be sufficient for 
those insurers that compete on a national level, and you also 
note you fully support the ongoing efforts of the NAIC on the 
reform efforts. Could you give us a threshold of what you 
believe constitutes sufficient reform over the next several 
years by the States to obviate the need for an optional Federal 
charter?
    Mr. Turner. Let me--I will answer the question, but I don't 
think we have even a few years. I think this is an issue that 
needs to be addressed very quickly in less than a few years, 
but as others have mentioned, the two key areas that absolutely 
require improvement and uniform treatment are product approval 
and agent licensing, and there has to be very significant 
changes in the way those areas are dealt with, I think, really 
across all lines of insurance.
    Having said that, I just want to point out an inherent 
problem in the current system and one we are dealing with right 
now, and that has to do with the privacy regulations in Gramm-
Leach-Bliley where the banks and securities firms already know 
the regulations that they are going to be having to comply with 
next July where the insurance industry, because of the 
regulatory process, has no such knowledge and that--the limited 
time we have to respond to the regulations promulgated in each 
State really puts us at a competitive disadvantage, and this is 
a problem inherent in the system that really is difficult to 
deal with.
    Mr. Oxley. Thank you.
    Mr. Nabers, should the efforts by the NAIC at some point 
fizzle out and Congress is unable to act to fill that void, 
what effect do you see on your industry, both short term and 
long term?
    Mr. Nabers. Well, the effect would be absolutely enormous. 
There is no issue confronting our industry that is more serious 
or compelling than regulatory reform, and many in our industry 
consider it as a viable issue. We are moving in markets that 
are moving forward at breakneck speed. The Internet is 
contributing to this. Gramm-Leach-Bliley is contributing to 
this. To be in an industry where a new product cannot be 
marketed nationally in less than a year is an enormous 
handicap. So if efforts to reform the regulatory system fizzle 
out, I would imagine that life insurers, and really insurers 
throughout the country, would be at an enormous competitive 
disadvantage, and you might see the industry become irrelevant.
    Mr. Oxley. Let me move on. I want to follow that up later, 
but I want to ask Mr. Urban, as you know, you heard Mr. Smith 
testify that our current State system for rate filing is 
``inefficient, paper intensive, time consuming, arbitrary and 
inconsistent with the advance of technology in the regulatory 
reforms made in other industries.'' Do you agree with that 
statement, and how would that affect your customers?
    Mr. Urban. Mr. Chairman, with all respect as a 
businessperson, I could make a case that all regulation is 
inefficient, paper-intensive, time-consuming, and arbitrary and 
inconsistent at times. So I think the notion that one form of 
regulation is superior to another form of regulation because it 
removes those might be a fallacy. The fact is, what we have 
today is a system that in the property and casualty side of the 
business, we understand how it works. Probably the worst thing 
that I could imagine would be to make a quick decision to do 
away with State regulation, impose a Federal regulation and 
instead, what you do is you, in effect, turn upside down a 
multi-hundred billion dollar industry that arguably impacts 
every consumer, every constituent in the United States who 
needs to buy insurance.
    It seems to us that there would be some effect to consumers 
if you lost State regulation, and I think the effect would be a 
negative one. Right today, in the State level of regulation, it 
is very much a one-to-one, one-on-one sort of a process 
relative to the consumers interest. You think about a consumer 
sitting in a small town, say, upper Sandusky, Ohio, who has a 
problem with his or her insurance, it is very easy for them to 
pick up the phone and call the State insurance department and 
have a very intimate discussion about how to solve that 
problem.
    Our concern with doing away with State regulation going to 
a Federal model would be that it would just be that much more 
difficult for every person to ever get their local one-on-one 
issues ever addressed, so in our minds, we really strongly 
favor a coordinated unified--I heard a couple of words I like. 
I liked ``harmonized'' I heard earlier today, those seem very 
good words, but within the context of State regulation as 
opposed to Federal.
    Mr. Oxley. Mr. Mendelsohn, regarding disaster insurance, 
you testified that the streamline commercial lines regulatory 
system would bring insurance capital back into the United 
States. Can you elaborate on this and discuss how this might 
help consumers get better disaster insurance coverage?
    Mr. Mendelsohn. I think the issue is not so much disaster 
insurance coverage as relating to the point Mr. Urban made, the 
availability of capital to support the insurance business in 
the United States. And there is no question that whether the 
regulation is Federal or State, whether it is commercial lines 
that are deregulated or personal lines as well, what is 
necessary is a different system, one that allows the government 
to spend its money wisely on the areas that will maximize the 
impact on consumers. Our view is that the regulation of form 
and the regulation of rate, whether on the commercial side or 
on the personal side, is creating disincentives for investment 
in the American insurance industry, because it raises our costs 
and gets in the way of speed to market of the products that are 
being developed elsewhere in the world.
    So I think an efficient regulatory system where Federal or 
State is the important issue, and that is why we support the 
NAIC's efforts to streamline State regulation. But on the other 
hand, if it does not appear that that is going to happen 
quickly enough, I think we have to have an alternative 
solution.
    Mr. Oxley. Thank you. The chairman's time has expired. The 
gentleman from New York.
    Mr. Towns. Thank you, Mr. Chairman. Let me begin by asking 
you, Mr. Smith, you mentioned that you are licensed in 16 
States, I think it is.
    Mr. Smith. Yes, that is correct.
    Mr. Towns. And you talk about it is time consuming and 
expensive. Now, could you sort of describe that in terms of 
renewal process to every so many years you have to have your 
license renewed?
    Mr. Smith. Yes, I do. I have to apply to the State. The 
NAIC, about 2 years ago, adopted a uniform license application. 
Unfortunately, not all States are using that uniform license 
application. So you can't submit that to every State for your 
license. The other issue that arises then is whether or not a 
given State will accept the continuing education that I have 
imposed on me in Indiana as sufficient for my license. We are 
getting closer. I don't mean to be disparaging. I am trying to 
be factual. The NAIC, I think, has recognized that they do have 
a problem in licensure and they are trying to streamline it. 
That is why we have been working so hard on this model Act, and 
we think that if we can get this model Act to a point where 
everyone agrees on it, that we might very well be able to 
accomplish the reciprocity, and we are still confident that 
that will happen, and indeed, the requirements for Gramm-Leach-
Bliley will be met.
    But the process, it just takes a while. I have a secretary 
that does this, and it is her favorite thing to complain to me 
about. It is just something that takes a while to do, pure and 
simple.
    Mr. Towns. Mr. Mendelsohn, I think it was you, you 
indicated--used the phrase, and I would like for you to expound 
on it a little further, ``operating on a level playing field.'' 
What do you mean by that?
    Mr. Mendelsohn. Well, Congressman, essentially, in the post 
GLB era, we have securities firms, investment ban, insurance 
companies, both life and property and casualty, commercial 
banks, mutual fund organizations, all looking at how to deliver 
financial products to the consumer, products that will meet 
particular consumer needs. We have all of those different 
industries now starting to come together to compete for the 
consumer dollar, offering the consumer new products, new 
services, the technology lets you do. The concern of the 
industry has always been that all of the various components of 
that financial services business, banks, insurance companies 
and so on, all have the same economics affecting the production 
of their products and services and have the same opportunity to 
offer those products and services to the consumer. So that is 
the level playing field that we have been talking about.
    Mr. Towns. Thank you very much. Let me go over to you, Mr. 
Hillman. It is true that only 12 of the 50 States have either 
the authority or access to the data needed to enforce the 
Federal prohibition against convicted felons working in the 
insurance business.
    Mr. Hillman. The NAIC has reported to us that it is, 
indeed, yes, just a handful of insurance departments.
    Mr. Towns. We have a lot of problems here. I noticed in 
terms of the discussion, in terms of whether we should do it in 
Federal level or State level or whatever, but let me ask the 
question here. How many feel that establishing a Federal 
commission would be a solution to the problem? I know you do 
Mr. Milesko, you just said you might as well raise your hand. 
Yes.
    Mr. Milesko. Mr. Congressman, I think what is clear, and 
there is a consensus here today, is that everybody thinks the 
current system needs to be fixed. And what we are really 
proposing is, let us fix the current system of State 
regulation, but in addition, let us offer an alternative in 
terms of optional Federal chartering just as we have in the 
banking, and let us let the companies and the agencies make 
their choice as to which would work best for them.
    Mr. Towns. Let me just go back to this. I think with Mr. 
Urban, I am trying to keep up with these names here. You talked 
about a timetable. Now, if the timetable is not met, or what do 
you consider an adequate timetable, and if it is not met, what 
should happen? First, what is an adequate timetable?
    Mr. Urban. Congressman, I don't have a timetable that says 
by date certain X should have happened. It has taken a long 
time for the industry to get where it is today. It is a huge 
industry, many participants and constituencies to be involved. 
I can't imagine a quick solution is the right solution. So my 
timetable would be more along the lines, along steady 
reasonable progress, which, by the way, I think is happening.
    My perspective today is the industry is far more energized 
toward the notion of gaining uniformity, getting consistency 
across States than it has, in my experience, in the business. 
At the NAI board level, there is actually working groups 
working very diligently on the same subjects that the NAIC is 
working on, looking for common solutions for uniformity outside 
of Federal regulatory solution. So my mind, is the processes to 
improve and to gain uniformity, to knock down some of the 
barriers that we have heard described here this morning? That 
ball is already rolling down the hill. That process has already 
been started.
    I would like to make the point that I think that it should 
be given a chance to work. The energy is there. I see the 
commitment there. Many of the industry associations are working 
together in a way that they haven't in the past, and I think 
the end result will be a productive one. It is going to take 
some time, which I think it rightly should, considering the 
size of the industry and the impact on consumers and 
constituents. So I don't think that there is a short timeframe 
answer to this, and rightly shouldn't be.
    Mr. Towns. The only thing I guess which would be my concern 
is that if, for any reason, a State doesn't comply what kind of 
penalties should be, I think that is the concern, because you 
have a lot, you are dealing with a lot of things, Governors, 
State legislation, you are dealing with a lot of things, so if 
the State doesn't comply what do you do, what do you recommend?
    Mr. Urban. I am not an expert on what you do if a State 
doesn't comply. It seems to me that gets to be a State rights 
issue, and I don't know who penalizes the State. I mean, who is 
the ``who'' in that penalizing the State discussion. So I 
really don't know the answer to that. I do know that there is 
pressure within every State to the insurance departments from 
the industry to get on board with some uniformity and some 
modernization, so it would be maybe at an insurance 
department's peril to ignore that sort of pressure. So it is--
maybe it is not a perfect answer, but the fact is there is 
pressure everywhere to reform and improve the insurance 
operation.
    I don't think anybody would argue that what we have today 
is perfect. Certainly the reform movement and the modernization 
movement is underway independent of any sort of Federal 
solution.
    Mr. Oxley. Gentleman's time has expired. The Chair is 
pleased to recognize the gentleman from Illinois, Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman. Following up on Mr. 
Urban, does State regulation of insurance add value to your 
product?
    Mr. Urban. Yes. It adds value to the product in several 
ways. Insurance, in most cases, is such a personal product to 
buy, you are insuring your automobile or your life or your 
property or your home, and the need to have local understanding 
of the markets, of the weather, of population densities, of the 
local State laws or whatever it happens to be, I really think 
that the State regulatory process brings value to the consumer. 
Yes, it costs a little bit because of the need to have multiple 
State understanding. We do have to add to our expenses and some 
of the activities that we have to do to deal with that, but 
that is really a minor component of our cost structure, if we 
suddenly did away with all of that, wouldn't have a tremendous 
impact on the way our company operated, but it could have a 
tremendous impact, a negative one, I might add, to the 
consumers.
    Mr. Shimkus. Following up on that, and you ended up with 
the consumer, which is a lot of the focus of my questions today 
is do the consumers feel that there is value added?
    Mr. Urban. Well, I think so. I happen to read every 
insurance department complaint that we get, I wish we got none, 
but we do get them and the consumer truly, they all sort of 
read like this, Mr. Commissioner, I have a problem, please help 
me. And I think that is a very much rubber-meets-the-road kind 
of situation where the consumer does believe that they get a 
value out of having that local State relationship, and it 
really works pretty effectively, because we know the 
regulators, they know us, much better than we could ever have 
possibly in some sort of a Federal regulatory environment.
    Mr. Shimkus. Same question for Mr. Mendelsohn.
    Mr. Mendelsohn. Opposite answer.
    Mr. Shimkus. Surprise, surprise.
    Mr. Mendelsohn. People in other parts of the world insure 
their lives and their homes and their automobiles. Other 
systems have been proven to be as effective for the consumer in 
those other parts of the world as our State regulatory system. 
In the UK where there is a single regulator, there are local 
ombudsmen, so that if the insured has a problem, instead of 
contacting the regulator, he contacts an insurance ombudsman, 
an advocate for the consumer. So there are different systems in 
different parts of the world.
    What we are finding in the technology world is that a good 
idea for a product or service that is developed in Australia or 
is developed in Canada or is developed in the U.S., we can move 
around the world because of technology, and in jurisdictions 
that don't have prior product and prior price approval, you 
implement that product right away. Here in the United States, 
we commence a year-long process of negotiating with 50 separate 
regulators for what is a product that can be introduced in 
Australia or Canada or the U.S. or the UK much quicker.
    So I think there are other ways of doing it. Whether those 
other ways are uniform State regulation or uniform Federal 
regulation to me is not as important as achieving the goal of 
speed to market and transparency for the consumer, but you can 
look after the consumer in different ways than we do here in 
the US.
    Mr. Shimkus. This is really an amazing hearing coming on 
the heels of the Bridgestone/Firestone issue, State Farm 
obviously had been a credible company in Illinois, and one of 
its analysts tried to send information to the NHTSA too, and he 
did three times, well before a lot of the casualties had 
occurred. And so part of the debate is how do we provide a 
better clearinghouse for information? This does fall into this 
debate, though. Because with 50 States voluntarily sending 
information to NHTSA or the consumer product safety commission, 
how does it get sorted through, and is there a better way? 
Maybe NAIC can address that in some of their debates as they 
are trying to uniformly address other issues.
    I don't want to get too far off on that, but it is timely 
with current events that we have seen in other hearings that 
have taken place.
    Mr. Mendelsohn, I wanted to ask--no, let me see, I am 
sorry. I wanted to ask Mr. Milesko, you mentioned a product 
being developed if there was a national chartering, or I get 
the terminology wrong, but also a government secured, similar 
to the FDIC product that we offer for financial institutions, 
but you failed to mention another federally insured product 
that we no longer have, which is FSLIC.
    Aren't we--is there not some concern that taxpayers, based 
upon fraudulent or misguided investment opportunities, would 
have to, in essence, bail out nationally chartered or sponsored 
insurance companies as they did with the savings and loans?
    Mr. Milesko. Well, I think Congress has learned a lot 
through the savings and loan crisis, and I think what we have 
tried to do and would hope to do is to apply that learning as 
we develop, you know, a national guaranty fund that would be 
very similar to the FDIC, which was established in 1933, and we 
would have a line of credit that would be put out that the 
companies would have to participate in. And I think it can 
work, the FDIC works fairly well today, but it would have to 
have oversight and it would have to be watched.
    Mr. Oxley. Gentleman's time has expired. Gentleman from 
Wisconsin, Mr. Barrett.
    Mr. Barrett. Thank you, Mr. Chairman. Thank you for holding 
this hearing and I want to welcome all the people here today, 
Mr. Milesko especially from Wisconsin. It is nice to have you 
here. I certainly understand the drift of the conversation that 
with the changes in the financial world, that there is a need 
for a larger playground and that the State-by-State 
demarcations might be somewhat outdated. So I can see the 
attraction to some sort of oversight at a different level.
    At the same time, I am a little taken aback because from my 
days as a State legislator and coming here, I always thought it 
was unspeakable to, in any way, disturb a caring person and 
that the State regulation of insurance was like the 11th 
commandment, and that it was nothing that we should ever get 
involved with here at the Federal level. So hearing some of the 
comments today, again, takes me by surprise a little bit, and I 
wonder if part of it is the frustration with regulators in 
general, and maybe a little bit of the grass is greener on the 
other side, which I would caution you against, but also just 
the desire to try to have the dual system, and so I want to 
understand a little bit better the dual system that is 
perceived.
    Mr. Mendelsohn, you seem to be one of the most aggressive 
advocates for it. Is this a situation, as you have sort of 
foreseen this, would a company make a decision to become a 
federally chartered company, or would it be done on a product-
by-product basis? What are you looking for?
    Mr. Mendelsohn. Well, first of all, I should be clear that 
from the American Insurance Association standpoint, we are, at 
present, not advocating dual chartering. We are supporting the 
NAIC's effort to reform State regulation but suggesting, as Mr. 
Milesko has suggested, that in the event the States don't get 
their act together, there be this alternative available. That 
would be company chartering, that is, the ability to do 
business in the 50 States of the United States under a single 
Federal charter, similar to what the banks operate.
    Mr. Barrett. That would take you out of the State system 
entirely for every single product that that company----
    Mr. Mendelsohn. Well, no, that is what licensing of the 
company, the ability to do business within the State, 
obviously.
    Mr. Barrett. But in materials of all the oversight that you 
would then cast your lot with the Federal regulations, whatever 
they may be.
    Mr. Mendelsohn. Yes, I would say that would be, if we went 
down that route, that would be true in terms of the chartering, 
and the oversight of the company would be at the Federal level. 
We would advocate rate-informed freedom as well as letting the 
consumer and the marketplace dictate the prices at which 
products are sold so that the States then could turn their 
regulatory effort to looking over the anti-fraud solvency 
liquidation, those sources of issues. I think that it is the 
way it might work.
    Mr. Barrett. How big is the form issue?
    Mr. Mendelsohn. It is huge. If you look at any of the 
companies represented at this table, the number of people that 
we have working solely to file forms with the States, if you 
want to change a provision within a policy, you have got to go 
and file all over the place to get approval for that change. In 
the electronic world, that is simply not a system that makes 
much sense. So the approval of forms is what prevents product 
innovation. In the E-world, we see these people developing 
products and services that are sold 2 weeks later. Some succeed 
in the marketplace, some fail, but it is marketplace forces 
that decide. The concept of sitting down as we do with our E-
partners and saying okay, well, that is a great idea, and we 
will be able to bring it to market 18 months from now; it is 
just, it is yesterday's world, not tomorrow's, so actually it 
is important.
    Mr. Barrett. You said it could take your company up to a 
year to get a prior time market. Is it because of the year? 
When you say it takes a year, what are you specifically 
referring to? Give me an example, please.
    Mr. Nabers. Let us just say that we want to introduce a 
life insurance policy, a permanent life insurance policy. We 
would have to file that, we do business in 50 States, we would 
have to file that in each of the 50 States, and in each of the 
50 States they had different requirements with respect to a 
manila insurance policy. So we would make a filing that would 
try to comply with requirements of each of those States 
ordinarily, and at least a dozen or more of the States there 
will be correspondence that will take place over the 6, next 6 
to 12 months on this particular policy, maybe marketing 
materials relating to it.
    So you may get approval in 35 or 40 States in the 6 months, 
but if you are a national company, you are going to do national 
advertising, you still need to wait for the rest of the States 
to come into line, so maybe at the end of 12 months you have 
approval from 48 States and you launch. If they are innovative 
features related to that policy something that regulators 
haven't seen before, you can be talking about 18 months before 
that policy is approved because now you are corresponding with 
30 or 40 States with respect to the new features, and that has 
to be worked out. You send the States a letter, it takes maybe 
a month or so before you get response, then you try to comply 
with the requirements the State has imposed, so it is a very 
cumbersome procedure as it is currently set up.
    Mr. Barrett. If I could indulge for one follow up question, 
please.
    Mr. Ganske [presiding]. Without objection.
    Mr. Barrett. When I was a State legislator, I was one of 
the uniform law commissioners for our State, and that was a 
group that got together to try to make sure all the State laws 
were comparable and would work together. How active in the 
insurance field is the attempt by the States to work together 
to have uniform insurance laws throughout the country?
    Mr. Nabers. Well, as a number of us have commented today, 
there is a sense of urgency within the NAIC to create 
uniformity within the current system. So right now there is a 
lot of activity to lean toward a uniform approach to product 
approval and whatnot. Previous to the year 2000, it was more a 
piecemeal approach, and sometimes if they adopted a uniform law 
and would make modifications to it, generally uniform laws were 
not adopted in all 50 States.
    Mr. Barrett. Thank you, Mr. Chairman.
    Mr. Ganske. I guess it is my turn. I have an interesting 
book here, the Optional Federal Chartering and Regulation of 
Insurance Companies edited by Peter Wallison, and there is a 
chapter in here by Robert Hunter, Consumer Federation of 
America, and I just think it might be interesting to read part 
of what he says.
    Should there be minimal standards for all States to meet? 
Should Congress take over certain aspects of regulation? Which 
ones? How do we ensure that there is not a perverse competition 
from market share between a State charter and a Federal charter 
through lax regulation between States and Federal Government as 
there is between some States right now? Should the antitrust 
exemption be maintained? Could certain efficiencies in money 
and time be achieved by centralizing certain functions? And I 
would add to that, while efficiency is important, I think 
security is important also for the industry.
    He goes on, Congress has to consider the Federal history 
with respect to insurance regulation, which can be summed up in 
three words: ``what, me worry?'' The Federal Government's total 
lack of capacity to understand insurance is troubling. Consider 
these examples. When Mr. Hunter testified before Congress 
during the last liability crisis, he appeared on the same 
morning as the chairman of the FTC. The chairman had no 
prepared statement. When he was asked to explain what the FTC 
thought was causing the crisis, he answered he did not know, 
and if he did know, he would be breaking the law. That was 
because Congress had taken away the FTC's right to study 
insurance in 1980. It seems that the FTC had been punished for 
having had the audacity to tell consumers that whole life 
insurance was not a good deal. That should give pause to those 
who think that a Federal role would automatically be better, 
whichever side you are on that one.
    And then he goes on to say, the Supreme Court has ruled 
that ERISA preempts State insurance regulation. That ruling has 
created a regulatory black hole wherein consumers can fall to 
their death. As bad as State regulation has been, it has never 
allowed an insurer to change the rules after a claim occurs. 
Yet the United States Supreme Court allowed an insurer to lower 
AIDS coverage from $1 million to $5,000 after a man became ill 
with the disease.
    He concludes, as Congress considers the possibility of some 
Federal role in insurance, it should not fall into the 
``either/or'' trap as some might say. The Federal role might be 
an optional one, partial one, minimal standards, technical 
assistance, or some other new approach.
    Before asking you to comment on that, we have had testimony 
here before the National Conference of Insurance Legislators, 
and they had this in their testimony. The essential question is 
this: Is there a way to preserve the system of State-based 
regulation, and at the same time, accommodate the need for 
national licensing, or as some have called it, national 
chartering, and they think there is a way. That way is through 
interstate compacts. Under a compact, a State could enact 
licensing or chartering rules that would have full force of law 
in each of the compact jurisdictions across State lines.
    The establishment of an interstate compact for insurance 
regulation would require a single uncomplicated legislative Act 
in each compacting State. States that wish to join the compact 
would enact that legislation. It would provide for 
establishment of a compact agency that would act through a 
governing body. The governing body would include insurance 
commissioners from each compacting State. The compact agency 
would have legal standing in State laws and courts, and it 
would be accountable to the governments of the compacting 
States.
    My question is this: What do you think of NCOIL's proposal, 
should we be pushing for State compacts?
    Mr. Urban. And if you want to comment on the statement by 
Mr. Hunter, feel free.
    Mr. Urban. First of all, on compact, I am not an expert on 
that. That sounds like an interesting concept. It doesn't sound 
so different from the notion of the industry working with the 
members of the NAIC to come up with common rules of 
modernization and uniformity. So within that arena, seems like 
it might be a reasonable approach.
    On the Bob Hunter comments, I find myself in sort of an 
uncomfortable position, frankly, for the first time in my 
professional life. I might actually agree with Mr. Hunter on 
some of his points. I can't imagine a worse environment for an 
insurance company and consumers than having a company be able 
to choose to be regulated at the State level or to be regulate 
d at the Federal level. There would be an almost intense 
pressure for the two to have different regulatory approaches to 
the same industry. So you would have companies operating side 
by side in the same States selling to the same consumers 
regulated in a different fashion. I can't imagine how that is 
good for consumers, certainly know that wouldn't be good for 
companies. And my view of regulation, probably the worst 
outcome would be the dual option, Federal regulation would be 
slightly less onerous.
    Mr. Ganske. Mr. Nabers, you probably don't agree with that, 
but would you comment on the NCOIL's proposal?
    Mr. Nabers. Yes. The NAIC is studying quite intensely the 
use of interstate compacts that create the kind of uniformity 
that we in the industry seek, and the NAIC wants to give, and I 
think that is probably the best route for the NAIC to take in 
achieving the kind of uniformity that we seek, and I am 
certainly no expert on interstate compacts. I do know that they 
have been used successfully in the banking field with respect 
to bank regulation or State regulation of banks.
    So I certainly think that it is an idea that needs to be 
pursued, though your statement says the legislation that would 
be enacted in the various States is simple legislation. That is 
true. The seeding of authority from legislative bodies to 
insurance commissioners and insurance commissioners to a 
central regulatory group is something that is going to take a 
lot of thought and political understanding to accomplish. But 
the concept, I think, is a sound one, and the NAIC is studying 
it.
    Mr. Ganske. Mr. Mendelsohn, does the AIA have a position on 
interstate compacts? Do you think this is a good way we ought 
to look at going?
    Mr. Mendelsohn. Well, obviously, we, like the other 
associations, are studying all of the alternative ways and have 
not yet taken a public position on that. I think that the one 
common thread that I see in all of this is a recognition that 
the current way of doing business of the 19th century 
regulatory system is not working in the 21st century, and all, 
regardless of the political point of view that we bring to the 
table, agree that radical change is necessary in how we work.
    Whether that is by way of compact, by way of the States, 
voluntarily working together or the Federal Government having 
to take a role, my personal view is it is very difficult to get 
50 State legislatures or 50 State insurance commissioners to 
radically change the way they do business, and therefore, there 
is going to have to be some central Federal prodding along of 
the process. And I think that, the difference of views that you 
have heard this morning is about how we fix the existing 
system. There is not a tremendous amount of debate about 
whether the existing system needs to be fixed.
    Mr. Ganske. I thank you, and looks like I have used up my 
time. So the gentleman from Minnesota, Mr. Luther.
    Mr. Luther. Well, thank you, Mr. Chairman and first, I want 
to welcome Mr. Turner from Minneapolis here, very nice to see 
you. And thanks for sharing your expertise with the committee. 
I just want to ask a question, Mr. Turner, and perhaps any 
others, too, just to really to inform the committee, on the 
whole issue of State privacy laws, if you could comment, give 
us your thoughts on State privacy law, the impact of the 
Financial Services Modernization Act and the OCC on those laws, 
and whether you would support any additional Federal 
legislation, and perhaps others that have thoughts can join in 
too. But I would appreciate your thoughts on that.
    Mr. Turner. Well, privacy is a very important subject for 
us, and for really all Americans, and I guess our position 
currently is, it is appropriate to move toward the 
implementation of the Gramm-Leach-Bliley criteria for privacy 
regulation at the State level. That is a good starting point to 
put all financial services industries on an equal basis. And we 
certainly support as an industry moving in that direction. 
Obviously, there are elements of the privacy debate that 
probably go beyond the Gramm-Leach-Bliley criteria, and those 
are issues that will have to be dealt with over time but I 
think certainly, job one is to effectuate or implement the 
Gramm-Leach-Bliley ground rules.
    Mr. Luther. If there is anyone else that wishes to comment, 
and on that whole issue then of the preemption, that preemption 
issue, the OCC, any further comments or thoughts that you or 
others would have on that issue?
    Mr. Turner. Can you clarify the nature of the preemption 
issue?
    Mr. Luther. Well, just, I think the issue being whether 
that, the State model that Minnesota and some other States have 
enacted, how that, the effect of that in view of the passage of 
the legislation, and whether or not that would be preempted by 
the Federal legislation, or if additional legislation would be 
needed from your point of view.
    Mr. Turner. I am not familiar enough with the subject.
    Mr. Smith. The Independent Insurance Agents of America 
would believe that, indeed, those State laws should not be 
preempted, that the States had the right to enact those laws, 
they have enacted those for their consumers, their State has 
done that and we believe that those laws should remain as they 
are and not be preempted by the OCC.
    Mr. Luther. Any other comments from any of the panelists on 
that issue? Okay. Thank you. Thank you, Mr. Turner, nice to 
have you here. I yield back, Mr. Chairman, thank you.
    Mr. Oxley. The gentleman from Illinois, Mr. Rush.
    Mr. Rush. Thank you, Mr. Chairman. I want to thank the 
panelists also for their testimony, and I want to get right to 
my question. Mr. Mendelsohn, you and I see eye to eye on the 
fact that the collective effort needed between Federal and 
States for this reform, but I think we differ in that on the 
question of whether it would have a market-based approach to 
insurance regulation without prior government review or 
approval of prices or products, which I think would be 
beneficial to the consumers. Can you suggest how a market-based 
approach would permit competitive companies to provide 
services, product, that is, in the best interest of the 
consumers?
    Mr. Mendelsohn. Certainly. The innovations in products and 
services that we are seeing around the world today are being 
driven in large part by the market, changes in technology, 
changes in the ability to offer financial products, blended 
financial products, risks being covered in different ways than 
they have before. And it is true that in many jurisdictions 
today, the ability to introduce those products takes a very, 
very long time.
    In a system in which rate and form is unregulated, then 
essentially innovation, the best products win in the 
marketplace. The consumer will buy the product that delivers 
the best value to them, and what we see in other countries and 
certainly in the UK when a good idea comes up and a company 
starts selling a product, if it is successful in the 
marketplace because it meets consumer needs, other companies 
then copy it, drive down the costs.
    My view is that the whole by-product of the electronic 
world is the customer becomes truly the king, the customer can 
go on the Internet and see what products and services are on 
offer anywhere in the world, and ultimately, it is they, not 
we, who are going to drive reform. They are going to demand 
access to these products and services. And they do work in 
other places.
    When we look at the advance here in the United States now, 
we have prior approval of rate in some States, open rating in 
others. Clearly the open model is a much faster and more 
flexible model, and as long as one of my other panelists said 
this morning, as long as we have a competitive marketplace, and 
my goodness, here in the U.S. with thousands of insurance 
companies, we have a competitive marketplace, people compete to 
offer the best product at the lowest price. And it is my belief 
that the prior approval of the nature of the products slows 
that process down. Bureaucrats, with all due respect, react to 
things that are different from what they saw before by slowing 
the process down instead of letting those products go to the 
marketplace and succeed or fail, based on their own merits. 
That is my personal view.
    Mr. Rush. Thank you. I want to ask Mr.--maybe you can take 
a shot at this one, too. My constituents are mostly concerned 
not only in terms of the strength and viability and 
competitiveness of the industry, but they are also concerned 
about insurance abuses, particularly such as redlining, and 
frankly, I am encouraged by that the OCC, and now that it is 
engaged in agreements with several State insurance departments 
in an effort to share information concerning consumer 
complaints. My question is, aside from simply collecting of 
data of consumer complaints, should there be more of a 
proactive search for data on insurance abuses, such as 
redlining?
    Mr. Mendelsohn. Well, I think that again, whether we have 
Federal regulation or State regulation, it is incumbent upon 
the regulator to make sure that there is a level playing field 
for the consumer, just as we are asking for a level playing 
field among the financial institutions.
    And, again, I don't view that issue as being one that 
depends on what kind of regulation we have. The regulator, the 
ombudsman, whatever we call the person responsible for products 
and services provided, has to ensure that they are provided on 
a level playing field. So I don't really see that as a Federal 
versus State issue, Congressman. I think that's incumbent--it 
is in the industry's best interest that we treat the consumers 
on a level playing field and I think it is in the government--
whether it is State or Federal's best interest to make sure 
that the regulator looks at us and makes sure that that is 
happening.
    Mr. Oxley. The gentleman's time has expired. The Chair is 
pleased to recognize the ranking member of the full committee, 
the gentleman from Michigan, Mr. Dingell.
    Mr. Dingell. Mr. Chairman, first of all, I thank you. 
Second of all, I commend you for these hearings. Third of all, 
I note that as Yogi Berra used to say, ``This is deja vu all 
over again.'' It seems like every time we read about the States 
and insurance regulation, we find that it is written about in 
connection with some massive rascality which has gone on 
uncaught by the State regulators.
    So I have a few questions here for Mr. Hillman.
    Mr. Hillman, do you think it is fair to characterize the 
performance of State insurance regulators and this Frankel case 
as a travesty?
    Mr. Hillman. Certainly a travesty of effective insurance 
regulation, Congressman.
    Mr. Dingell. Now, had State insurance regulators checked 
with State securities regulators about Liberty National 
Securities, the firm Frankel said he had been using to invest 
insurance company assets would they have been alerted to the 
fact that fraud was underway?
    Mr. Hillman. Yes. There are a number of inconsistencies 
that such a check would have revealed, and caused regulators to 
ask additional questions. For example, the address of the real 
Liberty National Securities registered with the securities 
regulators did not match addresses on the account statements of 
insurance companies. Second, the officers of the real Liberty 
National Securities did not match the names of individuals 
signing the asset confirmations being sent to the insurance 
companies and to regulators.
    Finally, the real Liberty National Securities had reported 
assets of less than $100,000. Certainly that level of assets 
couldn't support the massive trading activity that that 
securities firm said they were conducting.
    Mr. Dingell. The scam began in 1991. If insurance 
regulators had checked with securities regulators as early as 
1991, would it not have been possible for the regulators to see 
that fraud was going on; and if not, would it not have been 
detected much earlier?
    Mr. Hillman. Yes, it would be possible to detect a fraud 
much earlier. For example, if the insurance regulators had 
access to information that the securities regulators had from 
their CRD system, they may have found that one of the grantors 
showed a disciplinary record. Upon further review and 
discussions with that grantor, they would have learned that 
that grantor actually wasn't putting up the funds. And through 
questioning such as this, they may have been able to uncover 
this much sooner.
    Mr. Dingell. Is there any reason why State insurance 
regulators cannot and did not check with state securities 
regulators in this matter?
    Mr. Hillman. No, there is no reason why they couldn't check 
with securities regulators.
    Mr. Dingell. Your report says that Tennessee regulators 
performed four, four onsite examinations of Frankel-controlled 
insurers and did not find any material weaknesses, even though 
Frankel had already embezzled insurers' assets before the 
examinations were conducted. How is it possible for insurance 
examiners to miss the fact that a company's assets were no 
longer there?
    Mr. Hillman. Mr. Congressman, our report says that, as you 
say, that there were four onsite examinations conducted. They 
weren't all done in Tennessee. One was done in Oklahoma, 
Tennessee, Missouri. Better enforcement procedures, better 
enforcement of existing procedures is certainly a method that 
could have been used. NAIC has a model law, I believe it is 
number 295, where companies are only supposed to accept 
statements from national banks or State banks or trusts and 
hold those assets in those organizations. In our review, and in 
this instance, those were held by a securities firm which is 
inconsistent with this model law.
    Mr. Dingell. Why didn't they find the fraud?
    Mr. Hillman. In our view, it was simply a lack of 
professional skepticism.
    Mr. Dingell. Now, in your statement you noted that the 
Frankel Insurance Company's assets were reported to be invested 
in government securities, that in many cases the total assets 
of the company were completely turned over every business day. 
Can you think of any legitimate business strategy that would 
justify these high turnover ratios, and why didn't State 
regulators question the high levels of reported trading 
activity? In the stock markets, this would be call churning.
    Mr. Hillman. Exactly. I see no legitimate reason for these 
high asset turnover ratios, particularly in an insurance 
company. In our view, the reasons State regulators didn't 
question this activity included a couple of factors. First, the 
lack of securities-related expertise to assess risks, and 
second, a lack of guidance available by NAIC to flag a high 
asset turnover ratio and a risky practice such as this.
    Mr. Dingell. Were the profits that Frankel reported as 
investments in government securities typical of what 
investments in other government securities were earning?
    Mr. Hillman. The reported earnings were often higher than 
normal market returns.
    Mr. Dingell. Wouldn't that constitute a warning to anyone 
who did an audit?
    Mr. Hillman. It certainly should.
    Mr. Dingell. Now, when an examiner for the Tennessee 
Department of Commerce and Insurance determined on February 1, 
1999, that it was a possibility that Mr. Frankel's insurance 
company, ``had been looted of its assets,'' the Tennessee 
department did not warn the public or other State regulators, 
did it?
    Mr. Hillman. During our review we found no evidence that 
the information was proactively shared with other State 
regulators to help prevent the possibility of a potential scam 
from spreading.
    Mr. Dingell. If that warning had been sent out, would it 
not have alerted both other regulators and the public at large 
to the fact that this company was being looted?
    Mr. Hillman. It could very well have.
    Mr. Dingell. Is it your understanding that instead of 
alerting regulators in other States, the State of Tennessee 
chose to ask Mr. Frankel to redeposit the assets of Franklin 
American Life Insurance Company in a qualified bank account 
within 60 days?
    Mr. Hillman. Yes, to the best of my knowledge.
    Mr. Dingell. Isn't this a little bit like saying I know you 
have been stealing from me but I am giving you 60 days to steal 
from someone else so that you can pay me back?
    Mr. Hillman. I can't speculate on their motives. However--
--
    Mr. Dingell. Did Franklin during this period of time 
purchase an additional insurance company in Arkansas for $5 
million and enter into a fraudulent reinsurance scam with 
Settler's Life in Virginia that gave him another $45 million?
    Mr. Hillman. He did indeed.
    Mr. Dingell. Now, the money that Mr. Frankel used to 
deposit in an account in Tennessee came from money stolen then 
from two other insurance companies during the 60-day period the 
Tennessee regulators gave him; is that correct?
    Mr. Hillman. That is correct.
    Mr. Dingell. Now, did regulators in Arkansas or Virginia 
contact Tennessee's regulators, or did Tennessee's regulators 
contact the regulators in those two States asking for 
information about the activities of Franklin American and those 
who control it?
    Mr. Hillman. We found no evidence documenting such 
communication. However----
    Mr. Dingell. Do you believe that in fraud cases of this 
type, the present state of 50 independent State insurance 
regulators makes each regulator put too high a priority on 
taking care of policies in his or her own State instead of 
exposing fraud that affects policyholders in other States?
    Mr. Hillman. We believe there is little incentive on the 
part of State insurance departments to tell another State about 
problems with a domestic insurer, principally because that 
could exacerbate those problems as other States act to protect 
their own policyholders.
    Mr. Dingell. Would I be fair in inferring that only 12 of 
50 States have either the authority or access to data needed to 
enforce Federal prohibition against convicted felons working in 
insurance businesses?
    Mr. Hillman. According to the NAIC, only a handful of 
States have the ability to access criminal history data.
    Mr. Dingell. So an adequate enforcement authority at the 
State level is a problem here, is it not?
    Mr. Hillman. Yes, it certainly is. Right now the States and 
NAIC indicate that they do not currently have a mechanism to 
obtain criminal history data that would allow them to identify 
persons with a criminal record that are trying to enter the 
insurance business.
    Mr. Dingell. Now that Gramm-Leach-Bliley has become law, 
fraud in one financial section, like insurance, can affect 
banks and securities firms as well. Is it true that Connecticut 
is the only State to have a memorandum of understanding with 
the Federal Reserve providing for the sharing of information in 
cases where banks and insurance companies are affiliated?
    Mr. Hillman. That is true. To date, the Federal Reserve has 
one MOU with the State of Connecticut as a result of the 
Citigroup merger involving Travelers Insurance Company, though 
additional MOUs are anticipated. We also are aware that the OTS 
and OCC have entered into MOUs with a number of States.
    Mr. Dingell. Isn't it fair to observe that the inability or 
the failure of the reluctance to share information creates 
serious problems for regulators in both industries?
    Mr. Hillman. Yes. It may be a serious problem if regulators 
do not share regulatory information on affiliates across 
industry sectors or regulatory information on undesirables to 
prevent the migration of rogues from one industry to another.
    Mr. Dingell. Mr. Chairman, you have been overly generous 
with time. I thank you. I have other questions but I will wait 
for another time.
    Mr. Oxley. I thank the gentleman. The Chair would indicate 
that written questions may be posed to any of the panel 
members.
    Mr. Dingell. With the permission of the Chair, I will 
submit additional questions for the record of Mr. Hillman, and 
I want to thank him and the panel, but I particularly want to 
thank you for your courtesy to me.
    Mr. Oxley. Without objection.
    We thank all of our panel for an excellent discussion. Some 
very, very pressing issues. The subcommittee stands adjourned.
    [Whereupon, at 12:22 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
General Accounting Office Response to Questions From the Honorable Tom 
               Bliley, Chairman, House Commerce Committee
    Question 1. Now that Congress allowed private-sector financial 
integration with the enactment of the Gramm-Leach-Bliley Act, what 
should we do to integrate the financial regulators, and what are the 
most critical areas that should be coordinated?
    Response. We would like to highlight two critical coordination 
issues. First, regulators need to share supervisory information about 
those institutions that choose to affiliate across sectors in the 
financial industry. This need is addressed in Gramm-Leach-Bliley for 
bank and insurance regulators, but securities regulators were not 
included. While it is too early for definitive answers, our work shows 
a desire to improve coordination on the part of all regulators. 
However, securities regulators have been less active in looking for 
mechanisms to improve interindustry coordination. Difficulties remain 
in successfully sharing supervisory information among regulators. For 
example, in some states, confidentiality laws exist that preclude 
sharing of examination workpapers, even with other insurance 
regulators. Second, in order to inhibit the migration of rogues from 
one industry to another, there needs to be sharing of information about 
the history of individuals who have been subject to disciplinary 
actions in banking, securities or insurance. The mechanism for sharing 
this type of information needs to be easy enough to make both adding 
information and cross-checking routine for all regulators.
    Question 2. If the States fail to act on the NAIC's proposed 
reforms, and no alternatives are forthcoming from Congress, what would 
the costs be to the American consumers?
    Response. We have not reviewed ongoing uniformity initiatives being 
developed by NAIC and the states. If the Committee desires, we could 
discuss future work in this area. However, if insurance regulation 
remains in its present form, one cost to the American consumers would 
be unnecessary vulnerability to frauds such as that allegedly 
perpetrated by Martin Frankel.
    Question 3. According to your report, ``At nearly every stage of 
the scam that we have described for you today, regulators could have 
exposed the fraud sooner and limited the damage if there had been 
better and more consistent sharing of regulatory information.'' 
Congress mandated better coordination among the agencies in Gramm-
Leach-Bliley, but there appears to be some resistance. Can you describe 
the critical avenues of communication that you believe should be taking 
place?
    Response. Improved regulatory communication needs to occur at all 
levels, including between state and federal financial regulators, 
between state financial regulators of different industries, and between 
insurance regulators in different states. The barriers to effective 
communication, in most cases, are not legal but rather institutional 
and cultural. In the Frankel matter, had state insurance regulators 
accessed basic information from state securities regulators, the scam 
could have been uncovered much sooner. Furthermore, when suspicions of 
fraud finally surfaced, a proactive alert to other insurance regulators 
could have prevented the scam from spreading further and limited the 
damages.
    Question 4. If the NASD and NAIC databases performed automatic 
checks on unfavorable incidents of matching names, or if review of 
insurers trading activities and the condition or location of securities 
traders were coordinated between the SEC and NAIC, could we have 
stopped Martin Frankel earlier?
    Response. Yes, we believe so if such checks were routinely done. In 
the Frankel case, regulators did not access broker-dealer information 
until 1999, or many years after the scam began in 1991. Early checks 
would have revealed discrepancies about the size of the broker-dealer 
(Liberty National Securities), its location, and its trading activity. 
Had regulators followed up on the discrepancies at an early stage, we 
believe it is much more likely the fraud would have been detected. 
Regarding name checks, Frankel never used his real name in the 
insurance industry so such checks would not have helped in this case. 
However, name checks of the grantors of Thunor Trust would have 
revealed unfavorable incidents with one of the grantors in the 
securities industry. Additional scrutiny by the regulators of the 
grantors and their sources of funds may have led to earlier detection 
of the scam.
    Question 5. If the State insurance commissioners implemented 
uniform solvency regulation through a centralized system, could Martin 
Frankel have been stopped sooner?
    Response. It would depend upon what was included in a uniform 
system. For example, we believe Frankel could have been stopped sooner 
if the system had included such things as (1) routine background checks 
of insurance company principals across financial industry sectors, (2) 
routine intra and interstate information sharing among all financial 
regulators and (3) appropriate laws, regulations, and processes to 
safeguard and verity insurer's assets that are not in the physical 
possession of the insurer.
    Question 6. The SEC says that they are prevented by statute from 
using regulatory information from insurance regulators to discipline 
brokers. But couldn't they use the information to put brokers on their 
watch or investigation lists?
    Response. It seems reasonable to us that disciplinary information 
from both insurance regulators and from bank regulators could be used 
in this fashion. However, SEC, in commenting on our report, did not 
indicate this ability.
    Question 7. Do you believe that the financial regulators will 
coordinate their efforts on their own without further oversight or 
pressure from Congress?
    Response. We believe some coordination would occur. However, 
continued active oversight by Congress should increase the likelihood 
of more substantive progress. For example, on Page 50 of our report we 
suggest Congress may want to request that NAIC periodically report to 
Congress on the implementation of its corrective actions in order to 
encourage and monitor progress by regulators. We specifically suggest 
that such a report to Congress include efforts and agreements between 
insurance regulators and banking and securities regulators.
    Question 8. If we don't ensure better coordination between our 
insurance, banking and securities regulators, could Martin Frankel 
happen again?
    Response. Yes. Even with better coordination, fraud still can 
happen. Improved coordination among regulators makes earlier detection 
of fraud more likely.
    Question 9. What does Congress need to do to enable the State 
regulators to coordinate with the Attorney General in performing 
criminal background checks to prevent fraud?
    Response. This is an area that needs continued attention. However, 
it is clear to us that state insurance regulators need to be on par 
with their counterparts in the banking and securities industries to 
perform routine criminal history checks on individuals seeking to enter 
the insurance industry. Some state insurance regulators, per their own 
state statutes, have the ability to conduct criminal background checks 
on industry applicants while others do not. Justice officials agreed 
with the NAIC that most state insurance regulators do not have legal 
access to nationwide criminal history data. Congress could solve this 
problem by providing a legislative basis for giving state insurance 
regulators the right to obtain the results of nationwide criminal 
history background checks on individuals, similar to those currently 
performed by the FBI for banking and securities regulators.
                                 ______
                                 
         American Bankers Association Insurance Association
                                                    October 2, 2000
The Honorable Thomas J. Bliley, Jr.
Chairman
Committee on Commerce
United States House of Representatives
2125 Rayburn House Office Building
Washington, D.C. 20515-6115
    Dear Chairman Bliley: Thank you for your questions regarding my 
testimony on improving the uniformity and efficiency of insurance 
regulation, which I presented to the Subcommittee on Financial 
Hazardous Materials on September 19, 2000, on behalf of the American 
Bankers Association Insurance Association (ABAIA). My responses to your 
questions appear below. In each case, I repeat your question then 
provide a response.
    Question 1: How much progress has the NAIC made in the last two 
months on achieving uniformity, and how much faith should we be placing 
in their efforts?
    Response: ABAIA applauds the NAIC's efforts to achieve greater 
uniformity of state insurance regulation and hopes that it is 
successful in those efforts. However, we have serious doubts about the 
NAIC's ability to achieve this goal. In order to be successful, the 
NAIC must not only obtain the agreement of 50 state insurance 
commissioners, but also the agreement of 50 state legislatures. The 
NAIC has a good record in developing model laws and regulations. 
However, its record in having those model laws and regulations actually 
adopted by all states is not so successful. In many cases, the NAIC has 
been unable to have its model laws adopted uniformly by the States.
    Question 2: What are the minimum results we should insist on from 
the NAIC effort, and what sort of time-lines can Congress reasonably 
expect for implementation?
    Response: At a minimum, the States should focus on uniform 
licensing requirements, product consistency, speed to market and 
privacy. Anything less than complete uniformity in these areas will 
continue to deny new products to consumers and will continue to impose 
unnecessary regulatory costs on the industry. Time is of the essence. 
Consumer needs and technological changes, especially changes brought 
about by the Internet, demand the immediate elimination of regulatory 
inefficiencies.
    Question 3: What can Congress and the industry do to help the 
States achieve uniformity?
    Response: ABAIA believes that the enactment of an optional federal 
charter for insurance companies and insurance agencies is the best way 
to achieve uniform regulation of insurance. Concurrent with the 
enactment of such a proposal, we urge the Congress to continue to press 
the States on uniformity. In the early 1990s, Congressional oversight 
on solvency issues forced many useful changes in state regulation.
    Question 4: If the States are unable to make progress in 
implementing uniformity reforms over the next year, what alternatives 
should Congress consider?
    Response: Again, we believe that the enactment of an optional 
federal charter is the answer to uniform regulation. Dual chartering 
has worked well in the banking industry for over 135 years, and, as we 
explained in our testimony, it would benefit consumers, the industry 
and state regulators.
    Question 5: What are the easiest issues for the States to achieve 
before moving on to the more comprehensive uniformity issues?
    Response: The two most pressing issues are uniform licensing and 
product approval. Conflicting licensing requirements are a clear 
impediment to the delivery of insurance products to consumers. 
Similarly, delays in approval of products rob consumers of product 
choice and innovation. The average life of a new product is six months, 
yet it can take eighteen months or more to get a new product approved 
by the various states.
    Question 6: Now that Congress has allowed private-sector financial 
integration with the enactment of the Gramm-Leach-Bliley Act, what 
should we do to integrate the financial regulators, and what are the 
most critical areas that should be coordinated?
    Response: Information sharing among state regulators and between 
state and federal regulators is critical, especially the sharing of 
information regarding problem agents and companies. Also, to the extent 
possible, it would be useful to have joint examinations and periodic 
meetings between regulators.
    Question 7: If the States fail to act on the NAIC's proposed 
reforms, and no alternatives are forthcoming from Congress, what would 
the costs be to the American consumers?
    Response: The current regulatory structure is overly complex and 
inefficient. This makes it difficult for consumers to compare 
alternative products and it increases the cost of insurance for 
consumers. Uniform regulation through an optional federal charter would 
permit the development of uniform policy forms, ease the distribution 
of insurance, permit consumers to more easily compare policies, and 
introduce greater price competition for products.
    Question 8: According to your written testimony, ``Most States are 
currently unclear on advertising requirements for Internet sales and 
whether filing of sales materials is required.'' Since the Internet is 
by nature a global entity without State borders, how can insurers 
comply with 50 different State laws for the same advertisement without 
a Federal or national regulatory system?
    Response: This is a good example of the problems insurers and 
agents face under the current state system. The Internet is an 
efficient means for insurers to market insurance and for consumers to 
purchase insurance. However, as the States impose different 
advertising, licensing and disclosure requirements on Internet 
insurance transactions, the industry and consumers cannot fully take 
advantage of the Internet.
    Question 9: You testified that the dual chartering option for banks 
has not resulted in a race to the bottom, but has instead created a 
healthy competition between state and federal banking regulators. What 
kind of benefits might consumers expect from this healthy competition?
    Response: Some of the consumer benefits that would flow to 
consumers as under an optional federal charter include greater product 
uniformity, better product distribution, greater product innovation and 
more price competition.
    Question 10: You testified that a consumer should be able to 
receive the same policy regardless of where the consumer resides. But 
Mr. Urban testified that local market conditions can affect the product 
and price in the property/casualty industry, with local concerns such 
as tort law, weather, population density and traffic congestion 
affecting the product regulation. Can you comment on this?
    Response: The various states require that property and casualty 
policies include various provisions, not all of which are the same. A 
federally chartered insurance company would be able to issue policies 
subject only to the terms and conditions required by the federal 
insurance commissioner, not the various state commissioners. Also, with 
respect to the applicable rate for such a policy, it would be possible 
for a federal insurer to develop a blended rate that is based upon 
national risks, just as insurers develop rates based upon state risks 
today.
    Question 11: You testified that the proposal from the ABAIA would 
prohibit the new Federal regulator from imposing any rate requirements 
or policy pre-approvals. You also quoted a recent study which found 
that auto insurance is less costly and more available in the 14 states 
that do not require prior approval of rates than in the 27 other states 
that do require prior approval. Why do the states have rate approval 
requirements, and is ABAIA's proposal politically feasible?
    Response: Rate regulation was originally intended to ensure that 
companies did not jeopardize their solvency through mispricing. Today, 
there are other, more direct ways, to supervise solvency. Furthermore, 
several states have moved to reduce or eliminate rate regulation. 
Illinois is an example, and Mr. Urban, who appeared before the 
Subcommittee on behalf of the National Association of Mutual Insurance 
Companies, told the Subcommittee ``Illinois is a highly competitive 
state. Products are available, innovation is rapid and citizens pay 
fair, competitive prices for insurance.''
            Sincerely,
                                        Glen J. Milesko    
                          President and Chief Executive Officer    
                            Banc One Insurance Services Corporation
                                 ______
                                 
                          American Council of Life Insurers
                                                    October 2, 2000
The Honorable Tom Bliley, Chairman
Committee on Commerce
U.S. House of Representatives
Rayburn House Office Building
Washington, DC 20515-6115
    Dear Mr Chairman: I appreciate your interest in increasing the 
uniformity and efficiency of the insurance regulatory system. As I 
indicated in my written statement before the subcommittee, this issue 
is now a matter of great urgency for our business.
    My answers to your questions follow. If there are any additional 
questions you have or if I can provide you or your staff with any 
additional information, please do not hesitate to contact me.
    Question 1. How much progress has the NAIC made in the last two 
months on achieving uniformity, and how much faith should we be placing 
in their efforts?
    Response 1. The NAIC has made exceptional progress in developing a 
conceptual framework for making the state-based system of regulation 
more efficient. Of course, some aspects of the changes the NAIC and 
life insurers seek may necessitate legislation, and state legislatures 
will have to cooperate with state insurance regulators and the NAIC to 
bring about needed reform in a uniform manner. One area where the NAIC 
is making significant progress involves agent licensing. The NAIC has 
just completed a two-year effort to develop a model agent licensing law 
which, if enacted by the states on a uniform basis, will establish the 
foundation upon which a national agent licensing system can be built. 
However, if states insist on retaining their own unique requirements 
and adopt the model law with material deviations, the uniformity needed 
to support a national licensing system will never materialize. In 
short, the open question is whether the NAIC and the states will 
ultimately be able to translate concept into actual regulatory 
efficiency, and do so to the extent necessary to meet the demands of 
today's insurance marketplace.
    Question 2. What are the minimum results we should insist on from 
the NAIC effort, and what sort of time-lines can Congress reasonably 
expect for implementation?
    Response 2. From the outset, the ACLI has set a clear objective for 
an efficient state-based system of life insurance regulation: uniform 
standards, consistent interpretations of those standards; and a single 
point of contact for dealing with multiple jurisdictions. The more this 
objective can be achieved in the critical areas identified in the ACLI 
study of regulation and in the CEO survey appended to our statement, 
the greater the NAIC's measure of success. Though time is of the 
essence, the ACLI has not set a timetable for this task. Since we 
believe state regulation will always be an important component of the 
insurance regulatory landscape, we will work to make it more efficient 
regardless of how long it takes.
    Question 3. What can Congress and the industry do to help the 
States achieve uniformity?
    Response 3. The states may conclude that they need assistance from 
Congress (e.g., something conceptually akin to NARAB in Gramm-Leach-
Bliley) to achieve the degree of uniformity necessary to put in place a 
modernized system of insurance regulation. The ACLI would be supportive 
of such a concept.
    Question 4. If the States are unable to make progress in 
implementing uniformity reforms over the next year, what alternatives 
should Congress consider?
    Response 4. This question and Question 11 raise an important point. 
Understandably, the NAIC views its progress toward an efficient system 
of regulation as having a direct bearing on the need for Congress to 
consider alternatives, including an optional federal insurance charter. 
And there are certainly those in the insurance industry that share that 
perspective. Others, however, do not directly link improvements to a 
state-based system of insurance regulation to the question of whether 
an optional federal charter or some other avenue to regulatory 
efficiency should be pursued. For example, many life insurers simply 
believe there should be a dual charter system for insurers. They want 
both an efficient state charter option and a workable federal 
alternative, and believe both should be aggressively pursued at the 
same time.
    Question 5. What are the easiest issues for the States to achieve 
before moving on to the more comprehensive uniformity issues?
    Response 5. As noted in the answer to Question 1, the NAIC has made 
significant progress in the area of agent licensing. A model law has 
been completed, and the NAIC has developed the infrastructure that will 
support a centralized, automated agent licensing system. This issue is 
farther along in the development stage than many other important 
issues, due in large part to the pressure applied on the states by the 
NARAB provisions of the Gramm-Leach-Bliley Act. In fact, many believe 
that the degree of uniformity achieved by the states in this area will 
be predictive of the overall success of the NAIC's regulatory reform 
agenda. We have also developed recommendations for improving the 
timing, scope and coordination of the multi-state market conduct 
examination process, which can be implemented quickly and without the 
need for legislation while a long-term solution to this issue is 
devised. Additionally, the company licensing process (for authority to 
do business in a state) could be markedly improved in the short-term if 
states participate in the NAIC's ALERT initiative and agree to uniform 
company admission standards. Finally, while the multi-state product 
approval process is one of the more complicated issues to address, a 
comprehensive solution is urgently needed for insurers to compete 
successfully in rapidly changing markets and to help correct the 
growing competitive imbalance between life insurers and other financial 
services providers.
    Question 6. Now that Congress has allowed private-sector financial 
integration with the enactment of the Gramm-Leach-Bliley Act, what 
should we do to integrate the financial regulators, and what are the 
most critical areas that should be coordinated?
    Response 6. Communicating relevant information between and among 
the various financial service functional regulators is imperative. As 
firms increasingly diversify, this coordination will be even more 
important. Beyond that, the ACLI would not support merging functional 
financial service regulators. We believe the regulatory needs of 
insurers, banks, mutual funds, and securities firms are quite different 
and necessitate unique regulatory expertise. We believe functional 
regulators dedicated to the particular needs and circumstances of the 
firms and markets they oversee are necessary, particularly in an 
increasingly complex financial services environment.
    Question 7. If the States fail to act on the NAIC's proposed 
reforms, and no alternatives are forthcoming from Congress, what would 
the costs be to the American consumers?
    Response 7. We believe the costs would be substantial. For example, 
our inability to bring new products to market effectively denies 
consumers innovative new products and services. Competing financial 
service firms will rapidly occupy this space in the marketplace if we 
are slow to meet consumer demands, especially in the critical area of 
retirement security. We are already seeing evidence of diversified 
firms allocating capital away from insurance and into banking or 
securities due to the inefficiency of the insurance regulatory system. 
As firms diversify further, these adverse capital allocation decisions 
would likely increase. Inefficient regulation also imposes higher costs 
on insurers, and these costs are in whole or in part passed along to 
consumers. Companies have squeezed efficiencies out of their own 
operations, but to date have had little success in moving toward a more 
efficient and cost-effective regulatory system. Taken together, 
concerns of this nature could seriously damage the insurance industry 
and impair the ability of insurers to provide valuable financial and 
retirement security products to consumers.
    Question 8. What are the costs to consumers of State regulation, 
and why do you believe that national treatment or an optional federal 
charter might decrease those costs?
    Response 8. The unnecessary hard and soft costs associated with the 
redundancies and inefficiencies of state regulation are enormous. These 
costs are passed along to consumers. Many believe that only by putting 
in place a federal charter alternative will the states have sufficient 
impetus to achieve significant improvements in efficiency (e.g., 
witness the steps the Conference of State Bank Supervisors has put in 
place). More generally, many of the major problems of the current 
system involve doing business in multiple jurisdictions. Having 
``national treatment'' under a state-based system of regulation or a 
federal charter option with a single federal regulator would achieve 
(hopefully) the objective the ACLI outlined in response to Question 2: 
uniform standards; consistent interpretations of those standards; and a 
single point of contact for dealing with multiple jurisdictions. 
Matters such as policy form approval and company licensing would not 
have to be done 50+ times, often pursuant to non-uniform standards and 
administrative interpretations. By doing these things once on a uniform 
basis, regulatory protections can be maintained while the huge costs 
attributable to the duplicative and redundant oversight are 
substantially reduced.
    Question 9. If the current State reform efforts fizzle out, and 
Congress does not respond with strong federal action, what would the 
effect be on the long term viability of the insurance industry?
    Response 9. As with our answer to Question 7, we believe the 
consequences would be severe. The marketplace is far less tolerant 
today of inefficiency than it once was, and market developments are 
much more rapid. Consumers now demand efficiency, and tools such as the 
Internet give them enormous ability to seek and find value on a global 
basis. From a broader perspective, the markets reward efficiency and 
penalize inefficiency. If insurers cannot become more efficient and 
cannot respond to market developments quickly, they will risk becoming 
irrelevant in the dynamic financial services marketplace. The 
consequences to the economy would be extremely adverse.
    Question 10. If Congress were to move forward with an optional 
federal charter, should we consider an approach similar to NARAB which 
gives the States a statutory deadline in which to act, with failure 
meaning the creation of a potentially state-run system with certain 
Federally imposed standards?
    Response 10. The ACLI believes that approaches such as NARAB should 
be considered as part of the overall effort to make a state-based 
system of regulation operate more efficiently. Such approaches may at 
some point prove necessary--or they may not. The concept is certainly 
one avenue toward ``national treatment'' within the context of a state-
based system of regulation.
    Question 11. At what point should Congress start considering an 
optional federal charter? Aren't the States making significant progress 
right now towards uniformity without federal interference?
    Response 11. As explained in answer to Question 4, many believe 
that an optional federal charter should exist along side of an 
efficient state-based system of regulation. The two systems of 
regulation are complementary, not mutually exclusive. Putting in place 
a dual charter system for insurance analogous to that found in the 
commercial banking, thrift, and credit union business is an issue that 
Congress should seriously consider, and many believe that it is 
imperative for that consideration to be undertaken immediately.
    Question 12. How do you respond to the argument that an optional 
Federal charter would disadvantage smaller producers that don't want to 
subject themselves to Federal regulation?
    Response 12. Two points are relevant here. First, if a small 
insurer, perhaps one doing business in a single state, determines that 
state regulation is more advantageous, that insurer would simply not 
elect the federal charter option and would remain state regulated. 
Under a dual charter concept, companies are not forced to become 
subject to a regulatory scheme they conclude would be disadvantageous. 
The optional federal charter is just that--an option. Second, for small 
insurers doing business in multiple jurisdictions, an optional federal 
charter may be even more beneficial than for larger companies. Small 
companies do not have the same resources (human and financial) as their 
larger competitors to get products approved in all jurisdictions. And 
they do not anticipate the same volume of sales as larger companies out 
of which they can recoup their capital outlays. Consequently, it is a 
smaller company doing business in multiple jurisdictions that has much 
to gain from a federal charter option.
            Sincerely,
                                                Drayton Nabers, Jr.
                                 ______
                                 
Responses for the Record of Robert Mendelsohn, Chief Executive Officer, 
 Royal and SunAlliance, on Behalf of the American Insurance Association
    Question 1. How much progress has the NAIC made in the last two 
months in achieving uniformity, and how much faith should be placed in 
their efforts?
    In March 2000, the NAIC unanimously approved its ``Statement of 
Intent: the Future of Insurance Regulation.'' Since March, nine NAIC 
Working Groups have been meeting regularly in an effort to develop a 
blueprint for needed reforms to the state-based system. This blueprint 
is expected to be published in December. At that time, AIA will 
evaluate the progress that has been made, and have a better sense of 
how much faith should be placed in the NAIC's on-going efforts.
    Question 2. What are the minimum results we should insist on from 
the NAIC effort, and what sort of time-lines can Congress reasonably 
expect for implementation?
    Last spring, the AIA Board of Directors ratified a set of ``guiding 
principles'' for regulatory reform. These principles could be achieved 
in either a state- or a federally-based insurance regulatory system. As 
such, we believe they are the appropriate standards for assessing the 
NAIC's blueprint for regulatory reform. The principles are as follows:

 A Market-based System. Market forces, rather than regulatory 
        approvals, should dictate the products sold by insurers and the 
        prices they charge--thus, the critical importance of rate and 
        form deregulation. AIA is willing to consider scaling back the 
        McCarran-Ferguson antitrust exemption in exchange for a market-
        based system that eliminates the type of command and control 
        regulation that has been repealed for so many other industries 
        in the U.S.
 National Treatment. Companies should have the option of 
        obtaining a single charter that would allow them to do business 
        in all fifty states. States must be prohibited from 
        discriminating against such companies in favor of those that 
        obtain licensing on a state-by-state basis.
 Uniform Regulatory Requirements. Insurance companies that 
        operate in multiple jurisdictions should be subject to one 
        stop, non-duplicative regulation and uniform laws governing 
        market conduct activities, agent licensing, claims practices, 
        solvency, liquidation, and other areas where an on-going 
        regulatory role is in the consumer interest. In these areas, 
        regulations should focus on the issues that really matter to 
        the insurance buying public, and not impose excessive and often 
        meaningless requirements that remain in place long beyond 
        whatever limited benefit they purported to provide at the time 
        they were promulgated.
 Timely and Impartial Implementation. Enforcement of regulatory 
        requirements should be timely, impartial, and professional, and 
        fines and other penalties should be proportional to the 
        violation at issue.
 Level Playing Field. Insurance companies should be able to 
        operate on a level regulatory playing field vis-a-vis other 
        financial services firms that provide similar products, global 
        competitors, and the alternative market.
 Technology for the 21st Century. The regulatory system should 
        embrace the use of new technologies by insurers in every aspect 
        of their business.
    AIA recognizes that regulatory reform, whether at the state or 
federal level, will take some time to implement, but we should expect a 
blueprint by the end of this year that should include the principles 
stated above. That blueprint should include meaningful implementation 
timetables that place responsibility on individual states to improve 
their systems. Recognizing that this is a long-term project, 
implementation efforts that include changes to individual state systems 
should be well underway by mid-2001.
    Question 3. What can Congress and the industry do to help the 
states achieve uniformity?
    Within the context of a state-regulated system, federal legislation 
can help the states achieve uniformity by preempting state requirements 
that impede effective commerce, such as government price controls; the 
development of national standards that preempt conflicting state 
requirements (e.g., the new e-signature law); creation of a single 
port-of-entry licensing system (e.g., the Risk Retention Act); or a 
NARAB-type approach. All of these can be done within the context of a 
system of state regulation, without establishing a system of either 
mandatory or optional federal regulation. By contrast, national 
standards that do not preempt conflicting state requirements (e.g., 
Title V of Gramm-Leach-Bliley) do not facilitate uniformity.
    The insurance industry can help the states to achieve uniformity by 
either supporting the aforementioned Congressional actions, or by 
advancing ``model'' laws or regulations in the states. AIA, for 
example, was active in the development of the NAIC's new model Gramm-
Leach-Bliley privacy regulation, and we will work to achieve its 
adoption in the states.
    Question 4. If states are unable to make progress in implementing 
uniformity reforms over the next year, what alternatives should 
Congress consider?
    Optional federal chartering, which was discussed at length during 
the September 19 hearing, is an alternative that would merit serious 
consideration in this situation.
    Question 5. What are the easiest issues for the states to achieve 
before moving on to the more comprehensive uniformity issues?
    As a result of the NARAB provisions of Gramm-Leach-Bliley, states 
already have a head start on the agent licensing issue.
    Question 6. Now that Congress has allowed private-sector financial 
integration, with the enactment of the Gramm-Leach-Bliley Act, what 
should we do to integrate the financial regulators, and what are the 
most critical areas that should be coordinated?
    Gramm-Leach-Bliley affirmed the concept of ``functional 
regulation,'' through which insurance, bank, and securities regulators 
all maintain regulatory authority over their respective sectors. AIA 
believes that functional regulation is the only viable approach in a 
regulatory structure through which some sectors (banks and securities 
firms) are regulated at the federal level, while insurance remains a 
state-regulated business. As such, statutory integration should not be 
considered unless Congress chooses to consider a federal approach, such 
as optional federal chartering. Gramm-Leach-Bliley does establish a 
consultative relationship between the federal reserve and state 
insurance regulators on solvency matters. It is AIA's understanding 
that a number of discussions among federal functional regulators and 
the NAIC have occurred.
    Question 7. If the states fail to act on the NAIC's proposed 
reforms, and no alternatives are forthcoming from Congress, what would 
be the costs to the American consumer?
    For AIA members, the ability to bring products to market in a 
timely and cost-effective manner, along with uniform regulatory 
treatment regardless of where they are domiciled and where they do 
business, could determine their survival in the 21st century. But 
consumers also will suffer if the system is not reformed.
    Examples of benefits that will flow to consumers from regulatory 
reform are as follows:

 Consumers are likely to have more product options;
 Insurance markets will better keep up with fast-paced change 
        in the economy and the financial needs of individuals, 
        businesses and families;
 In those state insurance markets where strict regulation of 
        pricing has kept insurers out of the market, new competitors 
        will enter or re-enter the market.
 Consumers should realize savings in insurance costs as the 
        market becomes more efficient, competitive, and the costs of 
        unnecessary regulation are squeezed out of the system.
 Regulatory reform should also increase the availability of 
        insurance in areas that sometimes experience shortages of 
        carriers willing to provide insurance, including areas subject 
        to natural disasters. Although prices may rise in such areas to 
        adequately cover the true risk, product options like 
        deductibles and discounts for loss mitigation would also 
        increase.
 Regulatory reform will reduce subsidies that lower-risk 
        consumers often provide to those with higher risk 
        characteristics (e.g., high risk drivers).
    Question 8. What are rate and form approvals, how do they affect 
consumers, and how does that regulation differ from other industries?
    Property-casualty insurance is one of the nation's last major 
industries still shackled by heavy regulation of prices and products 
(rates and forms). All 50 states, the District of Columbia, and the 
various U.S. territories regulate the insurance industry separately. 
Pricing of insurance products typically must be submitted, reviewed and 
approved by state regulators, often even if an insurance company wants 
to reduce prices. Both routine and innovative new products (insurance 
policies and endorsements) currently have to be reviewed and approved 
by dozens of states before they can appear in the marketplace on a 
nationwide basis. This causes delays in launching these new products 
and sometimes creates enough roadblocks that new property-casualty 
insurance products are not launched at all, an indication that the 
market is not working efficiently for consumers.
    Over the past two decades, key American industries--including 
railroads, airlines, trucking, energy, telephone, banking, and 
securities--have seen deregulation of pricing, products and entry into 
new markets. Moreover, for insurers headquartered in other nations that 
are key U.S. trading partners and competitors in the global 
marketplace, much less restrictive regulation helps foster innovation 
and competition.
    Question 9. You testified that a streamlined commercial lines 
regulatory system would bring insurance capital back to the U.S. Can 
you elaborate on this, and discuss how this might help consumers get 
better disaster insurance coverage.
    The alternative (non-regulated) market for commercial insurance has 
grown from an estimated 21% in the early 1980s to approximately 35% 
today. Much of that growth has come in the form of captive insurance 
companies formed by large U.S. corporations to provide insurance for 
the company's own property, liability and other related risks. A large 
majority of captive insurers are domiciled offshore. Bermuda alone 
accounts for 34% of the total, followed by the Cayman Islands (24.4%), 
and Guernsey (8.5%). Luxembourg, Barbados, and the Isle of Man are 
other leading locations for captive insurers, while Vermont is one of 
the few locations in the U.S. to have a significant concentration of 
captive insurers. With the exception of Vermont and a few other states 
with relatively small number of captive insurers, this has meant a flow 
of insurance capital and jobs away from the U.S.
    While companies form captive insurers for several reasons, 
including tax advantages, freedom from the inflexibility and the 
complexity of dealing with very different regulatory systems in 50 
states, is another important reason. Large, national corporations with 
multi-state operations and their insurers find it particularly 
difficult to deal with often slow, complex and non-uniform state-based 
regulatory systems. Streamlining commercial regulation in the United 
States would be one factor in helping to keep insurance jobs and 
capital in the U.S.
    Restrictive rate and form regulation in the homeowners' insurance 
line have led to availability problems in a number of catastrophe-prone 
states. However, the natural catastrophe problem is a complex issue 
that is not directly related to commercial lines deregulation.
    Question 10. You testified that the need to meet differing 
regulatory demands in 50 different states increases costs and 
discourages technological innovation. Can you elaborate on this?
    Inflexible state requirements specifying exact data record layouts 
and formats for electronic transmission of data make it more difficult 
and less economical for carriers to incorporate new technologies and 
standards into their information systems. This has been a major 
challenge for carriers as states move toward electronic filing systems 
that are not necessarily uniform in layout, format, or data reporting 
requirements.
    Question 11. You testified that the AIA has focused on speed to 
market for insurance products and national treatment for companies. Why 
are these the first stepping stones for uniformity, and how will 
achieving these goals help in reaching more comprehensive uniformity.
    Speed to market--the ability to bring products to market in a 
timely and cost-effective manner--is critical to the insurance 
industry's ability to serve its customers and to compete with the 
myriad other risk management alternatives that are available in an 
environment of increasing globalization and convergence. AIA favors a 
system where competition in the marketplace, not actions of insurance 
regulators, determines price and product. A market-based system would 
provide the greatest possible uniformity because the demands of the 
marketplace do not stop at state borders, nor do they distinguish 
between federally- and state-regulated institutions.
    AIA also recognizes that there are some issues for which the market 
may not be an appropriate surrogate for regulation, such as licensing, 
solvency regulation, market conduct oversight, and so forth. In these 
areas, national treatment is the goal. The NAIC's National Treatment 
Working Group is focusing on a single licensing system, but the NAIC 
leadership recognizes that the broader issue of national treatment 
involves uniform across-the-board regulatory treatment regardless of 
where a company is domiciled and it does business.
                                 ______
                                 
Responses for the Record of John G. Turner, Vice Chairman, ING Americas 
             on Behalf of the Financial Services Roundtable
    Question 1. How much progress has the NAIC made in the last two 
months on achieving uniformity, and how much faith should we be placing 
in their efforts?
    Answer: I am certainly encouraged by the efforts of George Nichols 
and the NAIC. I think he has done an admirable job of identifying many 
of the problems in the current state-based regulatory structure. I 
would add, though, that in light of the extraordinary and rapid changes 
in the marketplace, reforms have to come soon. Otherwise, insurers will 
continue to operate at a competitive disadvantage, and will get left 
behind.
    Question 2. What are the minimum results we should insist on from 
the NAIC effort, and what sort of time-lines can Congress reasonably 
expect for implementation?
    Answer: I would hesitate to impose an arbitrary deadline, but will 
again say that significant and substantial reform and modernization 
cannot wait any longer. As you know, Mr. Chairman, no matter how 
meritorious NAIC model laws and regulations may be, they are non-
binding on the states and must be separately proposed and ratified in 
51 jurisdictions. Each state is free to modify the model act terms, and 
often does so. Each such law is then separately interpreted by the 
insurance department and courts of that state. Achieving uniformity 
this way is a task likely to take years, if at all.
    Question 3. What can Congress and the industry do to help the 
States achieve uniformity?
    Answer: Congress can continue to serve a vital role by holding 
hearings and gathering information to highlight the problem insurers 
face in the current system, notably in the areas of licensing, product 
approval, and privacy. It is my view that the specter of congressional 
action is a strong and visible incentive for the states to implement 
long overdue changes.
    Question 4. If the States are unable to make progress in 
implementing uniformity reforms over the next year, what alternatives 
should Congress consider?
    Answer: S. 900 was a great first step in financial modernization. 
The NARAB provisions contained in that Act serve a useful purpose in 
promoting uniformity reforms by the NAIC. The Roundtable believes that 
an optional federal charter would be the most effective way to achieve 
a seamless and uniform regulatory structure. I cannot overstate the 
myriad redundancies in a 51 jurisdiction regulatory structure.
    Question 5. What are the easiest issues for the States to achieve 
before moving on to the more comprehensive uniformity issues?
    Answer: That question may be better directed to the NAIC, but I 
will say this: Both industry and the regulators have articulated the 
problems with the status quo on a number of issues--agent licensing, 
speed to market, and privacy. I am willing to continue working with the 
NAIC on constructive solutions to these urgent problems.
    Question 6. Now that Congress has allowed private-sector financial 
integration with the enactment of the Gramm-Leach-Bliley Act, what 
should we do to integrate the financial regulators, and what are the 
most critical areas that should be coordinated?
    Answer: This is an important question. The umbrella supervision 
established by S. 900 represents a tremendous advancement in the 
regulatory structure. There is no question that coordination among the 
regulators is essential. A streamlined, uniform regulatory matrix would 
benefit both industry and consumers.
    Question 7. If the States fail to act on the NAIC's proposed 
reforms, and no alternatives areforthcoming from Congress, what would 
the costs be to American consumers?
    Answer: The costs would continue to be significant. Studies have 
estimated that complying with burdensome, duplicative, and inconsistent 
rules and regulations in 51 jurisdictions costs consumers hundreds of 
millions per year. There is no question that increasing uniformity 
would dramatically reduce these costs.
    Question 8. In your testimony, you state that ``simply improving 
the State insurance system . . . may not be sufficient for those 
insurers that compete . . . on a national level.'' You also note that 
you fully support the ongoing efforts of the NAIC to reform the State 
system. Give us a threshold of what you believe constitutes sufficient 
reform over the next few years by the States to obviate the need for an 
optional Federal charter.
    Answer: Yes, the Roundtable supports, encourages, and applauds the 
NAIC's reform efforts. At the same time, we have a healthy skepticism 
that simply improving the current system will address all of our 
concerns--or that it can be achieved in a timely manner. Let me offer 
one striking example which, I think, illustrates the problems insurers 
face today: It takes an average of 45 days to bring a securities 
product to market. In stark contrast, it takes 9-18 months for a 
similar insurance product to reach the consumer. An unlevel playing 
field forces insurers to operate at a competitive disadvantage relative 
to other financial services companies and poorly serves the insurance 
consuming public.
    Question 9. If Congress established an optional federal charter for 
insurers, how would the resulting competition between the federal and 
state regulators help consumers?
    Answer: The Roundtable believes that competition between the 
regulators would produce better, more effective regulation. For 
instance, we believe that products would get approved in a much more 
timely fashion if we had a dual insurance system. Addressing this speed 
to market problem is vitally important. The dual banking system has 
been effective in reducing the amount of time it takes for banking 
products to be approved. We can only assume that a dual insurance 
system would produce the same efficiencies.
    Question 10. Would an optional federal charter work equally well 
for all lines of insurance, or would it be easier to achieve in certain 
lines of business?
    Answer: The Roundtable believes that an optional federal charter 
would work equally well for all lines of insurance. We believe 
increased competition, greater choices and lower costs for consumers, 
and better regulation would be the hallmarks of an optional federal 
charter system.
    Question 11. If the current state efforts begin to falter, should 
Congress consider a NARAB type approach which would give the States a 
certain period of time to achieve key goals, with failure to do so 
resulting in the creation of Federally imposed nationwide treatment run 
by the States with Federal involvement as a backstop if the States 
refuse to comply?
    Answer: NARAB was a positive development. But I am not sure that we 
have the time to consider another NARAB type approach. The marketplace 
is not going to wait for insurers who have to play catch up due to a 
non-uniform, multi-state regulatory structure. Remaining at a 
competitive disadvantage is no longer an option.
    Question 12. Can you explain the difference between ``politicized 
pricing'' and ``risk based pricing'' of insurance products?
    Answer: Risk based pricing, unlike politicized pricing, is 
competitively determined and takes into account the actual risks 
involved. As Congressman Shimkus pointed out, Illinois has a market-
based system for determining insurance prices and products that would 
serve as a useful model in the development of a new federal system. 
Experience has shown that reliance on the market is the best way to 
give consumers good insurance products at fair prices that reflect the 
risks involved.
    Question 13. You testified that many State insurance departments do 
not have the same quality or quantity of staff resources that a federal 
regulator would have. If an optional Federal charter were created, 
wouldn't that deplete the resources of those State Departments even 
more, or could the states then group together into a state-run 
centralized system?
    Answer: I believe that an optional federal charter would make state 
regulation more effective. Competitive choices promote and enhance 
innovation, efficiency and quality in governmental performance--
benefiting the regulated entity but more importantly, the consumer. A 
dual-federal state system produces a creative and productive tension 
that tends to improve the quality of regulation and the business 
options available to the private sector. Indeed, the NAIC's SR2000 
initiative itself suggests the merits of a dual system, because it 
clearly responds to the movement among insurance companies to develop a 
federal charter option. Ending the state monopoly in insurance 
regulation will strengthen the entire system and our economy.
                                 ______
                                 
   Responses for the Record of Philip H. Urban, President and Chief 
Executive Officer Grange Insurance Companies on Behalf of the Alliance 
                          of American Insurers
    Question 1. How much progress has the NAIC made in the last two 
months on achieving uniformity, and how much faith should we be placing 
in their efforts?
    Response. In the past two months, the NAIC has adopted a privacy 
regulation and made changes to its producer licensing model act. The 
regulators also have moved closer to defining more uniform standards 
for company licensing and rate and form filings. The NAIC has made some 
progress, but it is too early to be able to fully evaluate their 
proposals. There is, however, concern that state insurance regulators 
are not moving toward a market-based regulatory approach. If 
modernization of state insurance regulation is to be a success for all 
parties, that needs to be the case. In the final analysis, state 
legislatures will appropriately play a key role in the improvement of 
state regulation.
    Question 2. What are the minimum results we should insist on from 
the NAIC effort, and what sort of time-lines can Congress reasonably 
expect for implementation?
    Response. In terms of minimum results, the complexity of insurance 
regulation precludes an easy answer. Given the fact that the states are 
sovereign, the process for improving and modernizing state regulation 
will necessarily take some time. The process can be facilitated by the 
NAIC if it does good work in developing model laws and in giving 
guidance to the states in their operations.
    In relation to the property and casualty industry, because of 
different tort law and other local factors that affect rates, forms, 
and claims handling, such as weather, catastrophe exposure, population 
density and traffic congestion, we should not seek to achieve a one-
size-fits-all uniformity. In the areas of producer licensing, company 
admissions to do business in a state, privacy requirements and various 
other aspects of insurance regulation, more uniformity would be 
preferable. The timeline for uniformity in producer licensing has been 
set by Congress with respect to the provisions in the Gramm-Leach-
Bliley Act (GLBA) that creates the National Association of Registered 
Agents and Brokers (NARAB). The Accelerated License Evaluation Review 
Techniques (ALERT) program concerning admissions to do business in a 
state is under rollout. How the states will approach privacy regulation 
for insurance companies is an open question. The National Conference of 
Insurance Legislators (NCOIL) is considering its own model law.
    One area that needs improvement by the states in order to address 
the need for a more competitive marketplace is the reform of state rate 
and form regulation. The property and casualty industry has urged the 
NAIC to consider improvements in the way those filings are handled 
today. Those improvements would not require changes in state law and 
thus could be accomplished with relative speed.
    In addition to the regulatory structures and processes, states need 
to concentrate on the culture of regulation. We do not believe that a 
bad regulatory culture will produce a better result because it is in a 
different structure. We think it is premature to put a precise 
timetable on these improvements. We believe Congress should 
periodically seek input from the industry to determine if reasonable 
progress is being made at the NAIC.
    Question 3. What can Congress and the industry do to help the 
States achieve uniformity?
    Response. The interest that Congress has shown in state insurance 
regulation is healthy. It is partly responsible for the energy and 
focus now seen at the NAIC on the issue of modernizing insurance 
regulation. More time is needed in the process at the NAIC and in the 
states to see what can be achieved. It is our conclusion at this time 
that there is not any clear litmus test that will indicate a clear 
failure of state regulation.
    Question 4. If the States are unable to make progress in 
implementing uniformity reforms over the next year, what alternatives 
should Congress consider?
    Response. As indicated in the answer to question #3, it is too 
early to consider any litmus test and therefore too early to consider 
alternatives that should be put before the Congress.
    Question 5. What are the easiest issues for the States to achieve 
before moving on to the more comprehensive uniformity issues?
    Response. States should first satisfy the GLBA requirements 
(producer licensing and privacy), and then work on reforms to rate and 
form filings, company licensing and market conduct examinations.
    Question 6. Now that Congress has allowed private-sector financial 
integration with the enactment of the Gramm-Leach-Bliley Act, what 
should we do to integrate the financial regulators, and what are the 
most critical areas that should be coordinated?
    Response. The NAIC has taken the initiative to reach out to federal 
regulators and determine what is required in the way of integration. 
Four of the nine task forces created by the NAIC are working on issues 
of coordination of regulation under GLBA. We understand from NAIC 
reports and representations from individual insurance commissioners 
that there is a lot of exchange of information and conversation taking 
place between the state and federal regulators.
    One critical area for coordination would be solvency regulation. It 
will be important to preserve the separation of accounts and funds of 
the affiliated financial entities. Fraud investigation and prevention 
as well as protecting consumers from improper practices such as tying 
are other critical areas for coordination.
    Question 7. If the States fail to act on the NAIC's proposed 
reforms, and no alternatives are forthcoming from Congress, what would 
the costs be to the American consumers?
    Response. We do not know how to answer the question on costs to 
American consumers. There is a benefit to consumers from state 
regulation, which has worked well. State regulation has helped create a 
competitive marketplace. It responds to local needs. It is close to the 
consumer. It is our belief that state regulation can work well in the 
future.
    Proposals for federal regulation or a greater role for the NAIC 
also have a price tag. These proposals will need to be weighed against 
issues such as costs in dollars, benefits of political and fiscal 
accountability in state regulation and more.
    Question 8. Mr. Smith testified that our current state system for 
rate filing is ``inefficient, paper intensive, time-consuming, 
arbitrary, and inconsistent with the advance of technology and the 
regulatory reforms made in other industries.'' Would you agree with 
this statement, and how does this affect consumers?
    Response. As a businessman, I believe that any type of regulation, 
be it at the federal, state, or local level, can be classified in the 
burdensome terms used by Mr. Smith to describe the current state-based 
insurance regulatory system. They are broad terms that are used to 
describe practically every kind of regulation, and in my opinion should 
not be reserved only for state insurance regulation.
    With that said, there are clearly faults in the rate filing 
process. That is why a market-based system of rate-setting is 
preferable to cumbersome prior approval processes. In Illinois, as I 
mentioned in my testimony, the 30-year experience with competitive 
rating without regulatory intervention has proved a great success.
    As mentioned in the response to question #2, it is just as 
important for states to concentrate on the culture of regulation as it 
is on regulatory structures. A bad or deficient regulatory culture will 
not produce a better result simply because it is part of a different 
structure. The Department of Housing and Urban Development (HUD) 
venturing into insurance regulation with total disregard for actuarial 
and underwriting principles is a clear example. We would consider that 
type of federal regulation to fit all of the criticisms that Mr. Smith 
leveled at the current system for rate filings in the states.
    Question 9. If we want to forestall an optional federal charter, 
how can we encourage the States to adopt more uniform regulations, and 
how can industry best assist these efforts?
    Response. Perhaps the best way to forestall an optional federal 
charter is to involve state legislative organizations in this debate. 
To that end, the insurance industry already has been actively involved 
with NCOIL and with the National Conference of State Legislators 
(NCSL). Overtures also need to be made with the National Governor's 
Association (NGA).
    Question 10. You testified that progress towards uniformity in key 
areas may require legislative enactments by State legislatures, which 
you suggested would be difficult. How can we make sure that the State 
legislators are included in this process and support uniformity 
efforts?
    Response. As the answer to the previous question suggests, Congress 
and the industry need to fully engage state legislators in this debate 
so they understand the desirability of taking action to reform state-
based insurance regulation. In the final analysis, state legislators 
will determine the scope and shape of the modernization of state 
insurance regulation.
    Question 11. If the States can ensure a non-discriminatory system, 
which issues should be the first candidates for national treatment?
    Response. For the property and casualty industry, the areas of 
regulation that deal with rates, forms, underwriting and claims reflect 
true local market conditions and are not necessarily candidates for 
uniformity. They are, however, candidates for improved regulatory 
practices and procedures. On the other hand, the areas of access to 
markets such as licensing a company, licensing an agent and various 
corporate matters, standards for electronic commerce and privacy are 
probably best treated uniformly.
    But the question as to candidates for ``National Treatment'' begs 
the questions of what kind of National Treatment, possible redundant 
regulation or expense, and costs vs. benefits. However, Congress has 
already determined that producer licensing should be the subject of 
uniformity or reciprocity.
    Question 12. You testified that the NAIC's privacy models ``do not 
meet the overall policy goal of equal treatment for all market 
participants.'' Can you elaborate on this, and suggest how equal 
treatment can be achieved?
    Response. The NAIC privacy regulation contains a health information 
privacy provision that goes beyond the financial privacy regulation 
promulgated by federal regulators for the banking industry as well as 
the provisions of GLBA. As a result, insurers will be put at a 
potential marketing disadvantage, and the different disclosure notices 
they will receive from the different financial institutions will 
confuse consumers.
    Question 13. What do you believe should constitute the minimum 
level of acceptable implementation of uniformity within the next year?
    Response. The level of complexity and the fact that the discussion 
at the NAIC has just gotten to the solution stage would make it 
premature to determine what should happen within a year. Additionally, 
as I indicated, uniformity in and of itself is not necessarily 
appropriate as to all aspects of property and casualty insurance 
regulation. Finally, the costs and benefits of any regulatory scheme 
have to be considered together. The values of state regulation have to 
be measured against some potential inefficiencies. As improvements and 
modernization in state regulation are achieved, the picture will become 
clearer as to what is an ``acceptable'' level of implementation of 
regulatory modernization in the states.
    Some standards are more clear than others. A majority of states 
(29) should adopt the reciprocity option described in the NARAB 
requirement under GLBA. All states should adopt a privacy regulation. 
All states should make a commitment to implement the uniform company 
licensing application and a uniform company licensing process. 
Regulators also should agree to work toward rate and form filing 
reforms, although if any changes necessitate legislative action, that 
could take several years.
                                 ______
                                 
                    Independent Insurance Agents of America
                                                    October 2, 2000
The Honorable Thomas J. Bliley
Chairman, Committee on Commerce
United States House of Representatives
2125 Rayburn House Office Building
Washington, DC 20515-6115
    Dear Chairman Bliley: Thank you for your letter dated September 22, 
2000. I was honored to testify recently before the Subcommittee on 
Finance and Hazardous Materials, and I appreciate the leadership that 
you and Chairman Oxley have exhibited in the area of insurance reform. 
The Independent Insurance Agents of America (IIAA) recognizes your 
dedication on this front, and we look forward to continuing to work 
with you in the future. Per your request, I have also responded to your 
written questions, and each is addressed on the pages that follow.
    Please feel free to call upon me or the IIAA if we can be of any 
additional assistance. We are prepared to assist you in any way you 
deem appropriate.
            Very truly yours,
                                            Ronald A. Smith
                                               Past President, IIAA
cc: The Honorable Mike Oxley
   Chairman, Subcommittee on Finance and Hazardous Materials

    Question 1. How much progress has the NAIC made in the last two 
months on achieving uniformity, and how much faith should we be placing 
in their efforts?
    Response. Over the last several months, the National Association of 
Insurance Commissioners (NAIC) has aggressively considered and debated 
how the current regulatory regime might be modified and improved. This 
effort began with the adoption of the ``Statement of Intent,'' a 
document which outlines a framework of principles through which the 
country's insurance regulators have begun to address the challenges and 
opportunities confronting state regulation. The statement is 
essentially a blueprint of issue-specific goals that the NAIC intends 
to tackle in the immediate future. These objectives relate to issues 
that must be addressed quickly, such as the implementation of the 
Gramm-Leach-Bliley Act (GLBA), and those issues that will take longer 
to resolve, such as the state response to globalization, the emergence 
of technology, and the call for reform of the current regulatory 
system.
    Question 2. What are the minimum results we should insist on from 
the NAIC effort, and what sort of time-lines can Congress reasonably 
expect for implementation?
    Response. In a recent white paper, the NAIC stated the following:
        ``While some may argue that regulation dampens competition or 
        promotes the interests of one particular interest group over 
        another, insurance regulation represents a series of 
        compromises between competing interest groups. Some insurance 
        regulation is decidedly pro-consumer, while other facets of 
        insurance regulation may be characterized as pro-insurer or 
        pro-third party. The business of insurance regulation must 
        involve a continuous rebalancing of benefits to competing 
        interest groups. To the extent that regulators are successful 
        in their balancing efforts, a vigorously competitive 
        marketplace can co-exist with reasonable controls designed to 
        protect consumers and other parties to insurance 
        transactions.''
    As the NAIC suggests, the appropriate barometer for measuring 
whether the States are effectively regulating the industry is whether 
(1) the insurance marketplace is competitive, and (2) whether consumers 
are adequately informed, protected, and represented. We believe this is 
the fairest and most appropriate criteria for judging State reform 
efforts. We have already seen significant progress in recent months, 
and we expect more of the same in the weeks and months to come.
    Question 3. What can Congress and the industry do to help the 
States achieve uniformity?
    Response. One way in which Congress can help the States achieve 
agent licensing uniformity is by providing insurance regulators with 
limited and well-defined access to the National Crime Information 
Center (NCIC) database. I know your committee is already discussing 
this possibility, and we believe that regulator access could promote 
both uniformity and consumer protection.
    Given the sensitivity of the information contained in the NCIC 
database, however, any grant of access must be thoughtfully considered 
and properly constructed. This issue raises serious privacy concerns, 
and the proper balance must be obtained. IIAA, in conjunction with 
several other insurance industry associations, has already developed a 
proposal that would provide insurance regulators with access to the 
database so regulators can effectively and proactively perform their 
licensing responsibilities. The proposal would also provide limited 
access for employers who wish to perform personnel checks on employees 
or potential employees. In our view, there is no public policy 
justification for providing unlimited and unqualified access to these 
files to anyone that might request them.
    Question 4. If the States are unable to make progress in 
implementing uniformity reforms over the next year, what alternatives 
should Congress consider?
    Response. Even before the NAIC outlined its ``Statement of Intent'' 
agenda, the States were successfully revising insurance regulation in 
numerous ways. Over the last couple of years, many states have 
eliminated discriminatory barriers to interstate commerce, made it 
easier to bring insurance products to market, and provided numerous 
other regulatory reforms. The States also proved that they were up to 
the challenge of regulating e-commerce, and nearly one-half of the 
States enacted the Uniform Electronic Transactions Act (UETA) in the 
single legislative session since its adoption by the National 
Conference of Commissioners on Uniform State Laws. In fact, the 
recently enacted Electronic Signatures in Global and National Commerce 
Act was, in large part, based on this state-developed solution.
    These steps, combined with the NAIC's recent actions, suggest to us 
that the current system can work. For this reason, we believe it is 
premature to be considering alternatives to the current state 
regulatory system.
    Question 5. What are the easiest issues for the States to achieve 
before moving on to the more comprehensive uniformity issues?
    Response. This is a difficult question to answer. The States have 
already begun to address the reform issues that are easy to address and 
are now shifting their focus to tougher challenges. Although insurance 
reform will not be an easy task, it is apparent that State policymakers 
are committed to tackling the challenges ahead.
    Question 6. Now that Congress has allowed private-sector financial 
integration with the enactment of the Gramm-Leach-Bliley Act, what 
should we do to integrate the financial regulators, and what are the 
most critical areas that should be coordinated?
    Response. We are watching with great interest how the various 
financial regulators will work cooperatively in the weeks, months, and 
years to come. On the insurance side, the NAIC and individual state 
regulators have begun to work closely with their counterparts in a 
variety of ways, and we have been generally satisfied to date with how 
this has worked.
    We are very concerned, however, by certain actions taken by the 
Office of the Comptroller of the Currency (OCC). In three separate 
instances, the OCC has been asked by banking industry groups to toss 
aside state level insurance sales consumer protections. Specifically, 
these groups have asked the OCC to preempt consumer protections 
previously enacted in Massachusetts, Rhode Island, and West Virginia. 
An ill-advised OCC preemption opinion issued in response to these 
requests could disrupt regulatory activities in the more than 30 states 
that have substantively identical insurance sales protection provisions 
in place. This is especially troubling because--virtually without 
exception--these consumer protections were enacted with the support of 
consumer advocates as well as both the banking and insurance industries 
in each state.
    Our concerns with the OCC's recent actions are further outlined in 
my written testimony. I should note again, however, that it would 
undermine efforts to achieve regulatory coordination if this federal 
agency begins to preempt state consumer protection laws. We also fail 
to see how that would serve the American public in any way.
    Question 7. If the States fail to act on the NAIC's proposed 
reforms, and no alternatives are forthcoming from Congress, what would 
the costs be to the American consumers?
    Response. As noted in my responses to these questions and in my 
formal written testimony, we believe the States have taken considerable 
steps in recent months to achieve regulatory reform. We expect that the 
States will continue to act upon meaningful reforms, provided the 
proposals are truly in the best interests on consumers.
    Question 8. You testified that your members are frustrated because 
``they are trapped in a licensing system full of antiquated, 
duplicative, unnecessary, and protectionist requirements.'' Can you 
elaborate on that, and discuss how the Gramm-Leach-Bliley Act might 
help address some of those frustrations?
    Response. One of the most important responsibilities facing state 
regulators of insurance is the duty to properly license agents to 
conduct the business of insurance within a given state.
    Advances and changes in the marketplace have led increasing numbers 
of agents and brokers to operate in multiple states, which means that 
they must obtain more and more licenses. For example, my agency is a 
relatively small one, yet we are licensed in over a dozen states. It 
can be difficult and confusing to stay on top of the required paperwork 
and to clear the logistical and bureaucratic hurdles that are in place 
today. Staying in compliance with the distinct and often idiosyncratic 
agent licensing laws of every state is no easy task. It is an 
expensive, time-consuming, and maddening effort for many agencies, and 
a dedicated staff person and tremendous financial resources are often 
required to manage an agency's compliance efforts. These opportunity 
costs and wasted man-hours could be better spent working on behalf of 
our customers.
    Conflicts and differences between States over continuing education, 
licensing, and paperwork requirements have created an entire new 
industry dedicated to helping agents decipher and comply with the 
layers of complex regulations. In essence, the problems associated with 
the current system can be divided into three main categories: (1) the 
disparate treatment that nonresidents receive in some states; (2) the 
lack of standardization, reciprocity, and uniformity; and (3) the 
bureaucracy generally associated with agent licensing.
    However, the NARAB provisions contained in the Gramm-Leach-Bliley 
Act ensure that these three problem areas will be addressed soon--
either by the automatic implementation of the provisions themselves or 
by the enactment of preemptory reforms at the state level.
    Question 9. If the States are unable to make significant progress 
towards uniformity on speed-to-market and national treatment, could 
Congress consider another NARAB approach to help encourage the process?
    Response. This is a difficult question to address at this time. We 
believe the States should have an adequate opportunity to address these 
issues. If the NAIC and the States are forced to move too hastily, it 
may result in recommendations and solutions that are not in the best 
interest of consumers.
    Question 10. How can the National Insurance Producer Registry be 
used to help the NAIC coordinate their efforts with the securities and 
banking regulators and combat fraud?
    Response. It is our understanding that the NAIC and individual 
states are today working closely with other functional regulators to 
combat fraud, and we encourage these efforts. However, the National 
Insurance Producer Registry (NIPR) only addresses producer licensing 
and producer appointments, so its impact on fraud prevention is 
naturally limited. Other industry players generate far more consumer 
complaints and are the subjects of greater numbers of enforcement 
actions, and any public policy effort to address fraud must be 
considered with this fact in mind. Individual states and the NAIC 
apparently maintain databases with this type of complaint information, 
but we are unaware of any plans to share this information with other 
regulators or to make it public.
    NIPR, however, does have the potential to drastically improve the 
manner in which agents and brokers obtain licenses. We are very pleased 
by the progress that this effort has made in recent months, and we are 
particularly happy to report that NIPR is in the process of becoming 
compliant with the Fair Credit Reporting Act.
    My written testimony also describes the producer community's 
efforts to reconstitute the makeup of NIPR's Board of Directors. As 
noted above, NIPR's mission is limited solely to agent and broker 
licensing and appointment issues, yet producers have only one 
representative on the Board. In contrast, there are three insurer 
representatives on the Board.
    Given the importance of NIPR's mission to the agent and broker 
community, we have proposed that the makeup of the Board be 
reconsidered. Specifically, we have proposed adding two new producer 
representatives to the board (thus establishing parity between the 
insurer and producer communities) and adding two additional regulator 
representatives (thus preserving the balance between the private and 
public sectors). While we commend NIPR for opening its meetings to an 
expanded audience, we believe the reconstitution of the Board is 
critical. The decisions of the Board directly impact the agent and 
broker community, and we believe that perspective should have an equal 
voice in the development of NIPR policies and services.
    Question 11. How can we best conduct uniform background checks on 
agents to combat fraud, and what issues do we need to be concerned 
about?
    Response. Any public policy response to insurance fraud should not 
be limited to or focused on insurance agents. Most complaints received 
by state insurance departments are in fact generated by consumers 
following encounters or experiences with insurers or their employees. 
While it is essential that the industry work to identify and remove 
rogue agents from the system, it is important to recognize that agents 
are not the cause nor the subject of most consumer complaints.
    One way to facilitate the effective use of background checks would 
be to provide insurance regulators with limited and well-defined access 
to the National Crime Information Center (NCIC) database, a possibility 
which your committee is apparently already considering. At the same 
time, we strongly believe that any grant of access to the NCIC database 
must be thoughtfully considered and properly constructed. This issue 
raises serious privacy concerns, and the proper balance must be 
obtained. As you know, IIAA (in conjunction with other industry trade 
organizations) has already developed a proposal that would provide 
insurance regulators with access to the database so regulators can 
effectively and proactively perform their licensing responsibilities. 
Our Washington representatives are prepared to work with you and your 
committee on this issue and to address it thoughtfully and with due 
consideration.
    Question 12. How much progress has the NAIC made on establishing 
uniformity for insurance agent licensing, and what are the lessons to 
be drawn from this effort that could be applied to other uniformity 
efforts?
    Response. We commend the NAIC for its efforts to reform the agent 
licensing process, forestall the creation of NARAB, and strengthen 
state regulation. Our members know firsthand the burdens, costs, and 
bureaucracy associated with the current system, and they look forward 
to realizing the promise of a reciprocal and more uniform multi-state 
licensing system. It is also our hope that reform of the agent 
licensing system will preserve state regulation--without reducing 
consumer protection or creating competitive disadvantages for certain 
insurance providers.
    The licensing of insurance producers is a critical component of 
state regulation. Licensing statutes impose minimum eligibility and 
consumer protection requirements to ensure that a licensed individual 
or firm is qualified for the activities in which they are engaging. 
Laws regulating the licensing of insurance producers protect the 
insurer/insured relationship by attempting to ensure that prospective 
policyholders obtain reliable insurance that is adequate for their 
needs. As the United States Supreme Court has recognized, licensing 
laws embody a
        series of regulations designed and reasonably adapted to 
        protect the public from fraud, misrepresentation, incompetence 
        and sharp practice which falls short of minimum standards of 
        decency in the selling of insurance by personal solicitation 
        and salesmanship. That such dangers may exist, may even be 
        widely prevalent in the absence of such controls, is a matter 
        of common knowledge and experience.
    Licensing laws are therefore designed to increase the likelihood 
that insurance purchasers will obtain from qualified persons products 
that best meet their needs--and that the insurance they purchase will 
be reliable and appropriate for their purposes. Demonstrating 
competence to sell insurance products and being subject to an 
appropriate set of consumer protection requirements and state 
enforcement mechanisms are still absolute necessities. The licensing 
process constitutes the primary mechanism by which regulators can stop 
unscrupulous actors and intervene to protect the public. Without 
licensing, there is little practical way for states to effectively 
supervise and regulate the qualifications and actions of insurance 
providers.
    The NAIC's primary response to the Gramm-Leach-Bliley Act and 
answer for agent licensing reform is the Producer Licensing Model Act, 
a model law that attempts to achieve a number of goals. Perhaps most 
significantly, the model provides the level of licensing reciprocity 
required for a state to become ``NARAB compliant.'' While most of the 
model's provisions do not affect a state's ability to satisfy the NARAB 
requirements, many of them bring greater uniformity to the multi-state 
licensing process. Our members generally support the model's core 
reciprocity and uniformity provisions, and we believe the adoption of 
these provisions will simplify and streamline the licensing process and 
make the creation of NARAB unnecessary.
    One of the issues unrelated to NARAB compliance that is addressed 
by the model is the ``scope of licensure'' issue. The act purportedly 
requires a person to be licensed if he/she performs any of three 
defined activities or functions--selling, soliciting, or negotiating 
insurance. While it might appear at first blush that the model requires 
anyone selling, soliciting, or negotiating to be licensed, one must 
also consider the model's licensing exemptions. An individual or entity 
satisfying one of the exemptions need not be licensed. Throughout the 
development of the model law, we consistently pointed out our concerns 
with the model's licensing definitions and exemptions and proposed 
numerous alternatives. The NAIC, however, chose not to address these 
issues during the model's initial development.
    Despite the model's ambiguous and imprecise drafting, it is clear 
that the regulators who drafted the model intended to prohibit 
unlicensed individuals from engaging in insurance sales or 
solicitations and from providing advice, counsel, or recommendations to 
consumers--regardless of whether the consumer is a new or existing 
customer. In fact, the Co-Chairman of the NAIC Agent Licensing Working 
Group described the intent by saying that the model was not meant to 
authorize unlicensed individuals ``to sell, solicit or negotiate other 
insurance or additional coverage or provide quotes for expanded 
coverage on an existing policy.'' We believe this is the proper public 
policy. In our view, existing policyholders should be secure in knowing 
that individuals offering advice or recommendations are as qualified, 
competent, and accountable as those who would offer the same services 
to a new customer. While we take comfort in the fact that the NAIC 
appears to agree with us on the underlying policy question, we are 
concerned that the intent of the model law is not adequately expressed 
in its text.
    Given growing concerns about the model's ambiguity on the ``scope 
of licensure'' issue, we have asked the NAIC to revise the act to make 
clear that unlicensed individuals may not legally solicit the sale of 
insurance, offer advice or recommendations, cross-sell products, or 
otherwise act in the capacity of someone who should be licensed--
regardless of whether these activities occur in connection with an 
existing policy. We have urged the NAIC to help eliminate the potential 
for conflicting interpretations, avoid the need for judicial 
interference, and most importantly, protect insurance consumers. The 
adoption of appropriate clarifications would greatly enhance the 
model's prospects for passage in a uniform manner nationally, and none 
of the suggestions being considered alters or conflicts with the intent 
of the regulators involved in the drafting process.
    To its credit, the NAIC's NARAB Working Group recently took action 
on this issue and unanimously recommended that Section 4(b)(8) be 
deleted from the model. This was one of the clarifying suggestions that 
we offered to the NAIC, and we are pleased that it was adopted so 
overwhelmingly by the committee with jurisdiction over such issues. The 
NAIC's Executive Committee and Plenary body are scheduled to consider 
the deletion of this unnecessary provision on October 4, and we are 
hopeful that the regulators will approve this clarification. We believe 
this is the proper public policy position, and it is consistent with 
the NAIC's stated intent. If this modest step is not taken, the NAIC 
will be making a serious misjudgment that threatens its efforts to 
obtain licensing uniformity and forestall the creation of NARAB.
    During its recent consideration of these issues, the NAIC's NARAB 
Working Group also developed a series of guidelines that outline the 
intent of the regulators in addressing the scope of licensure issue. A 
copy of these guidelines is attached for your review.
    The NAIC has the opportunity to prove that the states can modernize 
state regulation while also protecting consumers and preserving the 
high standards of licensure. We hope the NAIC will grasp this 
opportunity and prove that these objectives are not mutually exclusive. 
The NAIC has said that the primary goal of its reform agenda is to 
protect consumers proactively and aggressively. Clarifying the model's 
``scope of licensure'' provisions is consistent with this overarching 
principle, and we continue to encourage them to do so.
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