[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
INSURANCE PRODUCT APPROVAL:
THE NEED FOR MODERNIZATION
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE, AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON
FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
JUNE 21, 2001
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-28
U.S. GOVERNMENT PRINTING OFFICE
73-741 WASHINGTON : 2001
____________________________________________________________________________
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
Chair PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska MAXINE WATERS, California
RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
ROBERT W. NEY, Ohio JAMES H. MALONEY, Connecticut
BOB BARR, Georgia DARLENE HOOLEY, Oregon
SUE W. KELLY, New York JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
CHRISTOPHER COX, California GREGORY W. MEEKS, New York
DAVE WELDON, Florida BARBARA LEE, California
JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin HAROLD E. FORD, Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSELLA, New York JOSEPH CROWLEY, New York
GARY G. MILLER, California WILLIAM LACY CLAY, Missiouri
ERIC CANTOR, Virginia STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
Terry Haines, Chief Counsel and Staff Director
Subcommittee on Capital Markets, Insurance, and
Government Sponsored Enterprises
RICHARD H. BAKER, Louisiana, Chairman
ROBERT W. NEY, Ohio, Vice Chairman PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut GARY L. ACKERMAN, New York
CHRISTOPHER COX, California NYDIA M. VELAZQUEZ, New York
PAUL E. GILLMOR, Ohio KEN BENTSEN, Texas
RON PAUL, Texas MAX SANDLIN, Texas
SPENCER BACHUS, Alabama JAMES H. MALONEY, Connecticut
MICHAEL N. CASTLE, Delaware DARLENE HOOLEY, Oregon
EDWARD R. ROYCE, California FRANK MASCARA, Pennsylvania
FRANK D. LUCAS, Oklahoma STEPHANIE TUBBS JONES, Ohio
BOB BARR, Georgia MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, North Carolina BRAD SHERMAN, California
STEVEN C. LaTOURETTE, Ohio GREGORY W. MEEKS, New York
JOHN B. SHADEGG, Arizona JAY INSLEE, Washington
DAVE WELDON, Florida DENNIS MOORE, Kansas
JIM RYUN, Kansas CHARLES A. GONZALEZ, Texas
BOB RILEY, Alabama HAROLD E. FORD, Jr., Tennessee
VITO FOSSELLA, New York RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
GARY G. MILLER, California RONNIE SHOWS, Mississippi
DOUG OSE, California JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania STEVE ISRAEL, New York
MIKE FERGUSON, New Jersey MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
MIKE ROGERS, Michigan
C O N T E N T S
----------
Page
Hearing held on:
June 21, 2001................................................ 1
Appendix:
June 21, 2001................................................ 53
WITNESSES
Thursday, June 21, 2001
Blum, James A., CPCU, Chairman and President, Brotherhood Mutual
Insurance Company; Chairman, National Association of Mutual
Insurance Companies, on behalf of the National Association of
Mutual Insurance Companies..................................... 40
Covington, Hon. J. Lee II, Director, State of Ohio Department of
Insurance, on behalf of the National Association of Insurance
Commissioners.................................................. 8
Fisher, William B., Vice President and Associate General Counsel,
Massachusetts Mutual Life Insurance Company, on behalf of the
American Council of Life Insurers.............................. 12
Fitzgerald, Hon. Frank M., Commissioner, Department of Consumer
and Industry Services Office of Financial and Insurance
Services, State of Michigan, on behalf of the National
Association of Insurance Commissioners......................... 7
Gowdy, Robert C., President and CEO, OneBeacon Insurance Group;
Chairman, American Insurance Association, on behalf of the
American Insurance Association................................. 36
Hunter, J. Robert, Director of Insurance, Consumer Federation of
America........................................................ 42
O'Connor, Philip R., Ph.D., President, PROactive Strategies,
Inc., former
Director of Insurance, Illinois Department of Insurance........ 44
Parke, Hon. Terry, Illinois State Representative; President,
National Conference of Insurance Legislators, on behalf of the
National Conference of Insurance Legislators................... 10
Zeman, Robert L., Vice President and Assistant General Counsel,
National Association of Independent Insurers, on behalf of the
National Association of Independent Insurers and the Alliance
of American Insurers; accompanied by Rita Nowak, Assistant Vice
President, Alliance of American Insurers....................... 38
APPENDIX
Prepared statements:
Baker, Hon. Richard H........................................ 54
Oxley, Hon. Michael G........................................ 57
Kanjorski, Hon. Paul E....................................... 59
Blum, James A................................................ 142
Fisher, William B............................................ 85
Fitzgerald, Hon. Frank M.; Covington, Hon. J. Lee II, joint
statement.................................................. 61
Gowdy, Robert C.............................................. 114
Hunter, J. Robert (with attachment).......................... 151
O'Connor, Philip R........................................... 174
Parke, Hon. Terry............................................ 81
Zeman, Robert L.............................................. 125
Additional Material Submitted for the Record
Page
Baker, Hon. Richard H.:
Acting Commissioner of Insurance, J. Robert Wooley, prepared
statement.................................................. 56
Covington, Hon. J. Lee II:
State of Ohio Department of Insurance letter, July 23, 2001.. 78
Fisher, William B.:
CEO Survey of Regulatory Reform Priorities, Executive
Summary, February 2, 2000.................................. 102
Final Report of the ACLI Task Force on Product Regulation,
Executive Summary.......................................... 111
Regulatory Efficiency and Modernization, Executive Summary... 113
Council of Insurance Agents and Brokers, policy statement........ 194
Independent Insurance Agents of America, National Association of
Insurance and Financial Advisors, National Association of
Professional Insurance Agents, joint policy statement.......... 197
INSURANCE PRODUCT APPROVAL:
THE NEED FOR MODERNIZATION
----------
THURSDAY, JUNE 21, 2001
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance,
and Government Sponsored Enterprises,
Committee on Financial Services,
Washington, DC.
The subcommittee met, pursuant to call, at 2:00 p.m., in
room 2128, Rayburn House Office Building, Hon. Richard H.
Baker, [chairman of the subcommittee], presiding.
Present: Chairman Baker; Representatives Shays, Oxley,
Biggert, Hart, Rogers, Kanjorski, Bentsen, J. Maloney of
Connecticut, S. Jones, Capuano, Sherman, Meeks, Inslee, Moore
and Lucas.
Chairman Baker. I would like to call this hearing of the
Capital Markets Subcommittee to order and invite all of our
witnesses to please take seats at the witness table. I'm
advised that Members are on their way to the hearing and in
order to facilitate progress, we'll go ahead with opening
statements at this time.
Today marks the second in a series of hearings the
subcommittee has undertaken with regard to reform of insurance.
Our current hearing focuses on the need to modernize
product approval processes. Unlike the rest of the financial
services industry, insurers are subject to a patchwork quilt of
State regulatory requirements.
In many States, insurance products are not only subject to
prior approval of the form language, but also to strict
regulation of the price and the appropriate rate. These result
in time delays in form and rate approvals that vary widely from
State to State.
A national rollout of a new product across all 50 States
can literally require many years. Why should consumers have to
wait for the lowest common denominator in order to have access
to a new and desirable product?
Consumers in all States are being harmed, in my opinion, by
this excessive regulatory bureaucracy; and in the worst States,
such as the unfortunate case of Louisiana, it makes it
difficult to get approvals at all.
In fact, I would like to enter into the record, at this
point, a letter from my own Acting Commissioner in Louisiana,
and quote just a couple of lines:
``The bottom line is that insurance companies are leaving
Louisiana because of the prior approval system that is overseen
by a politically appointed board. The system is clearly slowing
down the speed with which companies can respond to the
marketplace and the system must be changed.
``This is why the Louisiana Department of Insurance has
worked with the industry and consumers to develop a move to a
file-and-use system. Such a system adds speed to the ability to
market approval of product and services.
``We, at the Department of Insurance, are committed to
continuing our efforts to remove barriers and the restrictions
to competition in the Louisiana insurance marketplace.''
[The information referred to can be found on page 56 in the
appendix.]
And I suspect that the Acting Commissioner's perspectives
are not unique. In a review of data of approval times required
on a particular product line, unfortunately Louisiana's
approval timeline was the worst in the country.
I am also told that approximately 16 companies during the
first 6 months of this year have withdrawn from the Louisiana
market because of the product and form approval delays.
One company doing business in the State has reported an
average approval delay amounting to 305 days for a new
liability insurance product. That's really unacceptable.
A bill reforming product regulation is currently moving
through the legislative process in Louisiana, and I'm hopeful
of its passage.
In New Jersey, just last week, the biggest automobile
insurer, State Farm, decided to pull out of that market because
the rate reviews had become so onerous and, in their opinion,
politicized.
It's reported that since September of 1999, State Farm lost
almost a quarter of a billion dollars cutting the company's net
worth there in half. Just this week, one of the largest
insurers in the world, AIG, also decided to exit the New Jersey
market due to the regulatory environment.
As a result of these decisions, in excess of one million
New Jersey drivers will need to find new coverage in a very
difficult market. That is more than one out of every five
drivers in the State.
Today, the fourth largest writer of automobile insurance in
New Jersey, Liberty Mutual, is also talking about abandoning
the automobile market. That would add an additional half
million drivers to the uninsured list.
In fact, according to figures provided by the American
Insurance Association, 27 States with very stringent price
controls were the most expensive States for the auto insurance
consumer with annual expenditures averaging well in excess of
$600.
The States are not without some success stories, however.
Colorado and Michigan are known for their efficient review and
approval of new and diverse products.
Illinois has been successful. In Illinois there are more
insurers competing for business, giving consumers more choice
at relatively low cost and there are fewer uninsured motorists.
Wisconsin has also had similar results.
Of course this begs the question: Why are those States not
being used as models for reform? I am anxious to hear how the
National Association of Insurance Commissioners and the
National Conference of Insurance Legislators have reviewed this
matter, and what are their findings.
The bottom line, as we all know and recognize, is that
reform is dramatically needed. I would like to express my
appreciation to both panels of witnesses here who are appearing
today for their willingness to come forward. I have reviewed
the testimony, and I believe it gives excellent insight into
the significance of this problem.
I would also express my appreciation to Chairman Oxley for
his leadership in this subject matter. He has joined us here
today.
I recognize Mr. Kanjorski at this time for his opening
statement.
[The prepared statement of Hon. Richard H. Baker can be
found on page 54 in the appendix.]
Mr. Kanjorski. Thank you, Mr. Chairman, for the opportunity
to comment before we begin the hearing on the insurance product
approval process and the need for modernization.
I commend you and your continued interest in the current
issues affecting the insurance industry and your commitment to
educating the Members of our subcommittee about these matters.
Presently, a tangled web of regulations often slows the
ability of insurance companies to introduce new products
nationwide, to the pace of baby steps. This sluggishness in new
product and rate approval by insurance regulators frequently
creates competitiveness concerns for insurance companies.
The insurance industry has consequently contended, for a
number of years, that we need to design and implement a new
regulatory system to straighten out the regulatory maze, better
the quality and timeliness of filing reviews, and improve
competition.
If sensibly put into practice, these actions should
ultimately benefit consumers by increasing their choice of and
lowering their rates for insurance products.
The National Association of Insurance Commissioners has
created its ``Speed To Market Working Group'' to respond to
these concerns.
This group, as I understand, is seeking to develop and
implement State-based uniform standards for policy, form, and
rate filings for appropriate product lines.
The NAIC hopes that this initiative will shorten the length
of the prior approval process and lower the cost involved in
reviewing and improving rates and policy forms in the States
and territories.
As part of the initiative, the NAIC has divided its work
among two subgroups. They are the Improvements To State-Based
Systems subgroup, and the Coordinated Advertising Rate and Form
Review Authority subgroup, otherwise known as CARFRA.
CARFRA is working to streamline the review process for
rates and forums, particularly for life and health products.
CARFRA hopes one day to provide insurers with single point of
product filings and establish a coordinated regulatory review
process among insurance regulators.
Currently, ten States, including my own State of
Pennsylvania, are piloting a CARFRA project and NAIC hopes to
launch the system nationally by May of next year.
In my view, the need to update and streamline our Nation's
insurance regulations and laws have become increasingly
apparent, especially in the wake of the 1999's law to modernize
our national financial services industry.
Not surprisingly, our current insurance regulatory system,
with more than 50 separate jurisdictions, often delays the
nationwide introduction of new products.
Executives at some insurance companies have previously
noted that it can take 18 months or longer to obtain the
necessary approvals to sell a new insurance policy or annuity
on a national basis.
In our dynamic economy, rare is it that the slow are
rewarded. The insurance industry is certainly no exception to
this rule.
We should consequently work to improve the efficiency and
effectiveness of the regulatory system for insurance in the
months ahead. I will therefore continue to keep a watchful eye
on NAIC's speed to market initiative and examine its effects on
both companies and consumers.
We may additionally need to pursue complementary reforms in
the insurance industry at the Federal level.
It is also my sincere hope that as we continue in our
efforts to modernize insurance regulation, we will work to
provide adequate and appropriate safeguards to protect the
interests of individual consumers.
In closing, Mr. Chairman, I believe it is important that we
learn more about the views of the parties testifying before us
today and, if necessary, work to further refine and improve the
legal structures governing our Nation's insurance system.
[The prepared statement of Hon. Paul Kanjorski can be found
on page 59 in the appendix.]
Chairman Baker. Thank you, Mr. Kanjorski.
Chairman Oxley.
Mr. Oxley. Thank you, Chairman Baker, and thanks for
holding this important hearing today on speed to market issues.
I'm pleased that this subcommittee is reviewing the need
for modernization and reform in our current system of insurance
product approval.
Insurers are subject to the jurisdiction of over 50
different State regulators, each with its own set of rules and
regulations. Companies have to navigate their way through a
mind-numbing maze of conflicting regulatory requirements to
offer products to consumers.
The current patchwork system for insurance regulation
imposes significant unnecessary costs on insurers and results
in unnecessary delays in getting new products to market.
Ultimately, the consumer bears the cost of this
bureaucratic morass facing higher prices and product
unavailability.
Other financial industries in the United States, such as
banking and securities, do not face significant delays. Those
products get approved either immediately or for some securities
products, within a few months.
In contrast, companies trying to plan a nationwide rollout
for new insurance products have sometimes faced delays of up to
2 years. That is simply unacceptable.
Over the last several years, I've asked the National
Association of Insurance Commissioners to focus on this glaring
problem. By all accounts, the NAIC has made some progress and I
applaud their efforts.
In particular, I'd like to thank the director of insurance
for my home State of Ohio, Lee Covington, who has been a great
leader for the NAIC on State-based reform of the product
approval process.
I would also like to commend Commissioner Fitzgerald of
Michigan. Both Commissioners have agreed to join us today to
report back on the NAIC's efforts.
Make no mistake about it, true reform is clearly necessary.
It is my hope that our State legislators and insurance
commissioners can enact such reform.
If not, Congress will return to this issue with our own
solution.
While the NAIC has moved ahead with two initiatives, one
for life insurance and one for property casualty insurance, the
jury is still out on the effectiveness of these programs.
In fact, we will hear from a number of witnesses today who
will say these initiatives don't go far enough and are a long
way from reforming the system.
Mr. Chairman, I appreciate your continued leadership on
this subcommittee to help us understand the problems facing the
insurance industry and insurance consumers.
I look forward to the subcommittee's continued work in this
area and I yield back the balance of my time.
[The prepared statement of Hon. Michael G. Oxley can be
found on page 57 in the appendix.]
Chairman Baker. Thank you very much, Mr. Chairman.
Mr. Bentsen or any other Member.
Mr. Bentsen. Thank you, Mr. Chairman.
Mr. Chairman, I want to thank you for holding these
hearings. This is my seventh year on this subcommittee and I
can remember when I was first on this subcommittee and we
struggled with the battles between the insurance industry and
the banking industry, and I think as we see, with the passage
of the Gramm-Leach-Bliley Act, along with the continued
integration of the American economy and the disintermediation
of the American financial sector as it relates to consumers,
that these types of issues are going to continue to rise to the
top.
And I think that this subcommittee is going to find itself
confronted more quickly, or sooner rather than later, with some
need to balance both a Federal uniform standard, whether it is
bringing product to market, or how regulation comports with
other Federal financial regulators, and what the State
regulators are able to do in the structure they have under the
NAIC.
And I would also say that we will find ourselves, as we
have in the past, struggling to balance protecting what
remnants there are of McCarran-Ferguson, and ensuring that
there is sufficient consumer regulation and parity at the State
level, at the same time, in trying to achieve those uniform
standards.
I know the Chairman and the Ranking Member are well-versed
and have been through many of these battles as has the Chairman
of the Full Committee, and what is, I think, most interesting
and perhaps maybe most telling in what action we take, is that
these battles used to be fought across the hallway and now
you've got Members of both Committees sitting on the dais here
today, and that hopefully will hasten us to find the most
appropriate approach to trying to address this continually
vexing problem that this subcommittee, at least the predecessor
subcommittee, has tried to deal with.
And I thank the Chairman for calling the hearings.
Chairman Baker. Thank you, Mr. Bentsen.
Ms. Biggert.
Mrs. Biggert. Good afternoon and thank you, Chairman Baker,
for holding this hearing. Globalization, rapid technological
change and comprehensive financial services reform all have
conspired to change dramatically the marketplace for insurance
products in the United States.
In light of these changes, I think we can all agree that
it's time to bring insurance regulation into the 21st century
to ensure continued product innovation, enhance competition,
and better serve the customer.
Insurance rate deregulation, in my home State of Illinois,
is an example of a system that has worked well, not just for
regulators and insurers, but most importantly for the consumer.
Let's look at what a system with no rate regulation has
produced. Illinois has a very small residual market and
significantly more auto and homeowners insurers competing for
business than States with stringent regulation.
The premiums and loss ratios in Illinois are well below
most other States with large populations, allowing State
regulators to initiate other innovative safeguards, such as
early warning systems and computerized market conduct exams.
In short, let me put all parochial interests and personal
bias aside and objectively state that Illinois has one of, if
not the most, efficient systems in the country.
Rate regulation works in Illinois and it has worked very
well for nearly 30 years. My hope is that Illinois can serve as
a model for other States that want to serve consumers better.
On the subject of form regulation, Illinois is not quite as
special, and no matter how special any State may be, the
problem is that there are 50 of them and that continues to
present challenges for insurers servicing customers in multiple
States.
Each State has its own set of rules, procedures, and
interpretation for whether a new insurance form or policy can
pass.
The consequences often hurt the consumers most. Consumers
should have access to new products, competitive prices and
choice, and we must modernize the current regulatory system to
ensure that they do.
Today's hearing provides a great opportunity to highlight
what works and what doesn't work. I think all the witnesses
here today, and especially my fellow Illinoisans, State
Representative Terry Parke, the President of the National
Conference of Insurance Legislators; Ms. Rita Nowak, Alliance
of American Insurers; and Mr. Phil O'Connor, the former
Illinois Director of Insurance.
Thank you, Mr. Chairman. I yield back the balance of my
time.
Chairman Baker. Thank you, Mrs. Biggert.
Mr. Capuano, did you have a statement?
Mr. Inslee.
Mr. Shays.
Mr. Shays. Thank you.
Just to welcome our witnesses. I appreciate them being here
today. And thank you for calling the hearing.
Chairman Baker. Mr. Rogers.
Mr. Rogers. Thank you, Mr. Chairman.
I appreciate the opportunity.
I want to thank Frank Fitzgerald, Michigan's Insurance
Commissioner. I had the great privilege to serve with Mr.
Fitzgerald in the State legislature where he distinguished
himself, and continues to do so in the role of Insurance
Commissioner in Michigan.
We appreciate it. He hass led the charge for modernizing
pricing and regulation of commercial lines, and I look forward
to your comments today, sir.
Michigan is leading the way under your leadership and the
leadership of John Engler in Michigan, and we certainly
appreciate your being here today and the work you're doing in
Michigan.
Thank you.
Chairman Baker. Thank you very much.
We would like to now call on our first tag team. I
understand by prior agreement, we have a division of time
between the two distinguished commissioners, the Honorable
Frank Fitzgerald, Commissioner of the Michigan Insurance
Bureau, Office of Financial and Insurance Services, and the
Honorable Lee Covington, Director, Ohio Department of Insurance
on behalf of the National Association of Insurance
Commissioners.
We would recognize each of you for 3 minutes to make
opening statements. Please be aware, all witnesses, your full
statement will be incorporated as part of the record.
Feel free to summarize and we would like to, as best
possible, have the statements of the other witnesses be under 5
minutes to allow Members to have as many questions as possible.
Thank you for appearing here today.
Mr. Fitzgerald.
STATEMENT OF HON. FRANK M. FITZGERALD, COMMISSIONER, MICHIGAN
INSURANCE BUREAU, OFFICE OF FINANCIAL AND INSURANCE SERVICES;
CHAIR, NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS
FINANCIAL SERVICES MODERNIZATION TASK FORCE
Mr. Fitzgerald. Mr. Chairman, thank you and thank the
Members for holding this hearing today and giving the National
Association of Insurance Commissioners an opportunity to
discuss the very important reform steps that have been taken
over the past 15 months.
Chairman Baker. If I could just trouble you to pull the
mike a bit closer, we can hear you a little better.
Mr. Fitzgerald. Thank you.
It was in March of 2000 that the NAIC adopted the Statement
of Intent: The Future of Insurance Regulation. At that time,
nine working groups were established and I was asked, along
with Commissioner Diane Copland of Pennsylvania, to co-chair a
working group entitled ``Speed to Market''.
How could products, the rates, and the forms come to market
more quickly, but with sufficient consumer protections in place
and hopefully at less cost for the companies and ultimately for
the consumers.
This is a big challenge, but it's one that I believe that
we are meeting. In the past 8 months, the NAIC has established
the Coordinated Advertising Rates and Forms Review Authority or
CARFRA, in a limited launch phase, to show that, in fact, the
States can come together, develop national standards for
products, list where there are deviations under State law from
those national standards and work to eliminate those, and allow
a company to come to CARFRA, enter a single door literally
through a computer, and within 45 days, come out of that door
and be able to use that product in all of the States that
participate in CARFRA and that participated in the approval of
that product.
We, on May 1st, began the operation of CARFRA. We have
received our first filing under CARFRA, and through the course
of the summer expect to receive more.
Although we have only ten States and three products
involved at the current time, that was done purposefully,
because what we want to do is know that the procedure can work,
and we believe very much that it will, and then, beginning this
fall, expand the number of States and expand the number of
products that are involved.
So that approximately a year from now, we would have a
working CARFRA mechanism that would allow all 51 jurisdictions
in the United States, including the District of Columbia, to
participate.
This will dramatically speed the delivery of products to
the marketplace, will reduce the cost that goes into getting
the products there and, at the same time, will allow consumers
to receive the highest possible oversight.
This is an unprecedented step in the over 130-year history
of State regulation of insurance. It's the first time that
national standards have been developed, the first time that we
have a coordinated State approach to this sort of approval.
We believe that over the coming months, we will, as
insurance regulators, demonstrate that this will work. We have
the support, especially of the life insurance industry, which
has very much asked for this. We will work forward to include
all States and the District of Columbia in this process.
We thank the subcommittee for the opportunity to talk about
this, and I look forward later to the questions that the
Members might have.
Thank you.
Chairman Baker. Thank you very much. We appreciate your
courtesy, sir.
Mr. Covington.
STATEMENT OF HON. LEE COVINGTON II, DIRECTOR, OHIO DEPARTMENT
OF INSURANCE; ON BEHALF OF THE NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS
Mr. Covington. Chairman Baker, Members of the subcommittee,
I serve as Chair of the Speed To Market Improvements, a State-
based systems working group.
As the subcommittee has recognized in its opening
statements, insurance regulators also recognize that
historically it has taken far too long to introduce new
insurance products in all 50 States. This is not good for
consumers, it is not good for the industry.
Commissioner Fitzgerald just talked about the CARFRA
proposal. The Improvements To State-Based Systems initiative
addresses speed to market for products not reviewed by CARFRA,
including most property and casualty products at this point.
The Improvements To State-Based Systems plan, adopted in
December, calls for a 30-day period of time for an introduction
of products on a nationwide basis, and 60 days under
exceptional circumstances.
And also implementation of what is most commonly referred
to as an informational or competitive rating system for most
commercial lines' rates.
The plan squarely addresses most, if not all, concerns
relating to product filing procedures by adopting three major
best practices or operational efficiencies currently used by
many States.
First, the creation of review standard checklists by every
State in a common format that will be accessible to the NAIC's
central website.
The State of Colorado estimates that after institution of
review standards checklist, over 90 percent of their insurance
products complied, were filed with the department, complied
with the law, and were able to be introduced within a 30-day
period of time, up from 20 percent compliance before the
implementation of these review standard checklists.
In just 5 months since release of the plan, it was adopted
in December, a common format was created in over 28 States
representing 60 percent of the United States' insurance
property and casualty market. These States report 100 percent
completion of the checklist, and those checklists will be
completed by the end of June to mid-July.
And we continue to receive reports that additional States
will be completed by that time period.
Particularly it is important to note that 14 of the 17
largest States have reported that they will be completed by
mid-July.
New Jersey, the ninth largest insurance market, is over 50
percent complete at this point. We are well on our way to our
goal of having all States completed in 2001.
In addition to that, the plan calls for implementation of
an electronic filing system in all States. We call it the
System for Electronic Rate and Form Filing (SERFF) system.
Currently, the NAIC's plan calls for active filing status in at
least 41 States by the end of the year, with remaining States
to be added in 2002.
Twenty-four States are accepting filings currently and 23
States are in the testing phase.
SERFF will allow us to be able to monitor the performance
of States and of insurance companies. And finally we want to
work to create greater uniformity.
I've already talked about the commercial lines area, the
plan for that. And in addition to that, this year we are
working on personal lines, and have already had one meeting
where we had 18 panelists testify before the NAIC, and we will
continue that work throughout the summer and through the
remainder of this year.
Thank you, Mr. Chairman, for the opportunity to be here,
and I'll be glad to answer any questions.
[The prepared joint statement of Hon. Frank M. Fitzgerald
and Hon. J. Lee Covington II can be found on page 61 in the
appendix.]
Chairman Baker. Thank you very much. We appreciate your
testimony, sir.
Our next witness is the Honorable Terry Parke, Illinois
State Representative, and President of the National Conference
of Insurance Legislators, who is here on behalf of the National
Conference of Insurance Legislators.
STATEMENT OF HON. TERRY PARKE, ILLINOIS STATE REPRESENTATIVE;
PRESIDENT, NATIONAL CONFERENCE OF INSURANCE LEGISLATORS, ON
BEHALF OF THE NATIONAL CONFERENCE OF INSURANCE LEGISLATORS
Mr. Parke. Thank you Chairman Baker and Members of the
subcommittee.
Again, I am State Representative Terry Parke. It is my
privilege to serve as President of the National Conference of
Insurance Legislators or NCOIL. NCOIL is a organization of
State legislators whose primary public policy concern is
insurance and insurance regulation.
Since its inception more than 30 years ago, NCOIL has
supported State regulation of the business of insurance as
authorized by Congress in the McCarran-Ferguson Act.
The States have established a strong record under that
organization. Insurance markets have grown and have become
increasingly competitive in terms of price and products.
NCOIL legislators are ready to do what it takes to build
upon that record. NCOIL recognizes that there is no escape from
the fact that powerful technological and competitive forces
challenge the State-by-State system of insurance regulation.
NCOIL supports the efforts of the National Association of
Insurance Commissioners to bring about needed efficiencies in
the State-based system.
NCOIL supports the NAIC Statement of Intent of March 2000,
which outlines a plan for the future of insurance regulation
under the Gramm-Leach-Bliley Act of 1999.
That statement and the NAIC's efforts since then have
addressed, among other things, the need to speed and synergize
the State-by-State process of policy form and rate approvals,
the need for speed to market, and that is the focus of this
hearing.
The NAIC has conceived and put into motion a voluntary plan
to facilitate one-stop shopping for price and product
approvals. The NAIC has initiated a trial run or limited launch
of the plan, known as the Coordinated Advertising Rate & Form
Review Authority, or CARFRA, in ten States.
NCOIL could support efforts to take this laudable NAIC
effort one important step further. That step would overcome the
fact that CARFRA is voluntary, that its opinions are advisory,
and that it allows individual States to retain their own
authority.
NCOIL could support efforts aimed at a totally independent
State-based regulatory facility. Its purpose could be to decide
on policy form and rate approvals.
Such an entity would have absolute authority, take its
authority directly and totally from State governments and be
totally State-based and State-funded.
Its strength would lie in its power to make fast, effective
and final decisions. Its success, we recognize, may require
some ceding of State authority, possibly through an interstate
compact or other means.
NCOIL has long advocated interstate compacts. But your
subcommittee, Congress, and all interested parties should view
a compact not as an end in itself, but rather as a tool to
achieve a greater goal. That of course would not be the only
option.
Among other options would be to let the market prove itself
as a regulator. Any such move would, of course, require the
presence of adequate solvency safeguards to protect against any
self-destructive or overly competitive behavior. It would also
require aggressive policing of the insurance marketplace with
adequate punishment of any abusive sales and claims-paying
practices.
A market approach can work. I am proud to say that Illinois
has put its faith in the market since 1971. Illinois consumers
have benefited from overall premium rate levels that are below
most other States with high populations and heavy traffic.
Auto insurance is readily available in the private market
in Chicago. The residual market is small. Nationwide surveys
indicate that the percentage of uninsured motorists is below
the average of other populous States.
Other studies show that more auto and homeowner insurers
are competing for business in Illinois. Illinois has more than
doubled the number of competing insurers than States like
Massachusetts and New Jersey, States that have price controls.
States have begun moving toward a market solution. NCOIL
has adopted a commercial lines deregulation model act in 1999.
Since 1995, 22 States have instituted some form of commercial
lines are and form filing deregulation.
Less than one month from now, NCOIL will consider a
comprehensive deregulation bill that would establish a
competitive use and file system in States that adopt the
measure. It would cover personal as well as commercial lines.
Solvency safeguards are already up and running and they
have been for some time. State adoption of NAIC model uniform
laws aimed at monitoring the financial strength and claims-
paying ability of insurers through an NAIC accreditation
program greatly reinforced and improved upon those safeguards.
The fact of it is that for more than a century, the record of
State insurance regulation compares most favorably with that of
the regulation of other financial service institutions.
Significant steps toward improved regulation in the
insurance marketplace have begun. NCOIL commissioned a study
which identified areas where States need to improve the market
conduct examination process. NCOIL is monitoring the process of
the NAIC today and the coordination of multi-State market
conduct exams, the training of market conduct examiners, and
the validity of self-policing.
NCOIL will mark progress in that regard when it holds its
public hearing in Chicago on July 12th.
Illinois introduced market conduct examinations in 1970 in
tandem with its move to competitive regulation in Illinois.
Market conduct examinations evaluate underwriting, advertising,
agency operations, marketing, and claims practices.
NCOIL believes that State regulation has served the needs
of the families and businesses that buy insurance and has
fostered a strong market of financially sound competitive
insurers.
Now NCOIL recognizes the need to respond to new challenges
and modernize State-based insurance regulation.
NCOIL is more than willing to work with all interested
parties to make that happen.
I'm ready to answer any questions, Mr. Chairman.
[The prepared statement of Hon. Terry Parke can be found on
page 81 in the appendix.]
Chairman Baker. Thank you very much. We appreciate your
appearance here.
Our last witness on this panel is Mr. William Fisher, Vice
President and Associate General Counsel for the Massachusetts
Mutual Life Insurance Company, on behalf of the American
Council of Life Insurers.
Welcome, Mr. Fisher.
STATEMENT OF WILLIAM B. FISHER, VICE PRESIDENT AND ASSOCIATE
GENERAL COUNSEL, MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY,
ON BEHALF OF THE AMERICAN COUNCIL OF LIFE INSURERS
Mr. Fisher. Thank you, Mr. Chairman.
I am appearing today on behalf of the American Council of
Life Insurers, ACLI, which has 426 members who account for over
80 percent of the life insurance in force in the United States.
Speed to market is the ability to bring products to the
marketplace in a timely and efficient manner, but without
sacrificing consumer protections. This is unquestionably one of
the most important matters confronting our business.
Chairman Baker. Mr. Fisher, I'm sorry, could you pull the
mike a little closer and we can hear you much better.
Mr. Fisher. In late 1999, the ACLI completed a
comprehensive study of the current state of life insurance
regulation, which identified speed to market as a highly
pressing issue.
I have a copy of that report which I would like to submit
for the record.
[The report referred to can be found on page 85 in the
appendix.]
Concern about speed to market was reinforced by a February
2000 survey in which ACLI CEOs identified this issue as being
the single most important issue in need of reform.
Today, life insurers compete directly with non-insurance
financial services institutions, such as banks and mutual
funds. The national banks do not need explicit regulatory
approval to bring products to market on a nationwide basis, and
can be in the marketplace in a matter of weeks.
Securities firms typically get regulatory approval from the
Securities and Exchange Commission in a matter of 3 to 4
months. In contrast, life insurance product approvals from all
50 State insurance departments take anywhere from 6 months to 2
years to complete.
The product approval process also involves application of
differing State laws, and even where the laws are uniform,
differing interpretations, standards and requirements.
Mass Mutual's experience helps to illustrate the problem.
In the 52 jurisdictions in which we do business, we have 41
different State versions of our basic universal life product.
For our individual life insurance products, it takes
approximately 4 weeks for an experienced person working full
time simply to put together a single product filing for all
States.
And I have with me the instruction manual that that area
uses. It's three inches thick and I think it really
demonstrates the problem.
Delays in the product approval process also result in lost
opportunities. We estimate that for last year alone, we lost at
least $80 million in sales measured by premium due to the
inability to get products to market quickly.
This is not however just an insurance company problem.
Consumers suffer, because the inability of companies to bring
products to market quickly also means that it translates into
consumers' inability to obtain the best price or most favorable
product features that a company can offer.
Last November, the ACLI released a report entitled ``An
Optimal Approach To Insurance Product Regulation.'' The basic
points of the optimal structure are: establishment of uniform
national standards for products, establishment of a single
entity with sole jurisdiction over products, filing of products
with a single entity on a file and use system rather than the
current prior approval system.
Consumer protection would be continued because filing would
require certification of compliance with applicable standards,
and enforcement of compliance would be through market conduct
examinations. I have copies of that report which I would also
like to submit for the record.
Commissioner Fitzgerald and Director Covington have just
described the NAIC CARFRA initiative, and let me give you the
ACLI view of CARFRA.
While CARFRA, in its initial phase, does not achieve many
of the objectives set forth in the ACLI report, the ACLI
believes that CARFRA is a significant NAIC accomplishment and a
very good first step toward the realization of a broader
solution.
Creation of a single point of filing, coupled with a 45-day
approval time, is very encouraging. At this point, however,
there are a number of practical considerations that limit the
benefit of CARFRA.
This pilot phase of CARFRA involves ten States and two
products of interest to the ACLI. One important issue relative
to the uniform national standards still remains unresolved.
And finally, even with an effort to produce national
standards, CARFRA currently involves over 200 deviations per
product in the ten pilot States.
That being said, the ACLI recognizes that CARFRA is in a
very early stage and making it a success is clearly a long term
process. Success will be measured by participation by all
States and achievement of true uniform national standards.
This will be a very challenging task, which will require
the continued dedicated efforts of NAIC members as well as
changes in State legislation.
The ACLI is committed to working with regulators and
legislators to achieve that result.
In sum, the financial services marketplace has changed very
dramatically in the past years, and our system of insurance
regulation has not kept pace.
Immediate and substantial reform is necessary to assure the
long-and short-term well being of our business.
I appreciate this opportunity to appear today, and will be
happy to answer any questions.
[The prepared statement of William B. Fisher can be found
on page 85 in the appendix.]
Chairman Baker. Thank you very much, Mr. Fisher. We
appreciate your participation here today.
I'd like to start with the observation that I think each of
you are in agreement that the current model or process presents
problems not only to the business interests marketing products,
but to consumers who depend on the products for various and
sundry reasons.
The issue should be, how do we move more quickly to resolve
the problem, and what methodology should be utilized.
For example, the CARFRA 10-State experiment on limited
product lines appears to have enjoyed some success, but as Mr.
Fisher has just pointed out, there still are an extraordinary
number of exceptions to the CARFRA requirements since it, one,
is voluntary, and two, the States tend to be protective of
their particular orientation on a given matter.
Representative Parke, you indicated that your organization
had some concerns about the progress that could be achievable
under CARFRA, but does the organization have a model of its own
that it sees as responsive in a timely way or an improvement to
CARFRA that you might suggest?
Mr. Parke. Well, Mr. Chairman, I might point out that under
the Gramm-Leach-Bliley Act, which was just passed last year,
there are a number of triggers that said the States had a
responsibility to do it and one of those was the agents
licensure where you said that you needed, by November of 2002,
to have 29 States pass some meaningful uniform and reciprocity
agents' licensing.
I am proud to say that through the NAIC efforts and through
the Agents Association, and through NCOIL, we now have exceeded
those 29 and are ready.
The NAIC is looking and using CARFRA as an answer. It could
be the answer, but we are looking, working with them, trying to
figure out other ways to do it. We've talked about interstate
compact, which is in many ways similar to what CARFRA is.
What you have to remember is that we now have the
responsibility to meet your triggers, which you've established
under GLBA. I think we're doing it.
I think if you give the States the opportunity to continue,
have hearings, put the pressure on us, we will continue to
respond and I think through that, we will come up with the
answers that'll be both good for the industry and good for the
consumer.
Chairman Baker. Let me follow up on that point. With regard
to the 29 States approval, that doesn't represent a significant
portion though of premium dollars written or agents licensed,
because we have still have not yet broken into the large
insurance markets.
Given that and the subcommittee's attempt to set a trigger
that would be acceptable and achievable at the State level, I
think there is the recognition on my part that we very much
appreciate and have sensitivity to State regulation and
enforcement, but that structure has a very difficult time of
being totally justified when you have such enormous disparity
in local approval requirements, you know, having to have
something typed in a certain place facing a certain way.
That is almost back to monastery-type days in handwriting
style.
Representative Parke, you seem to indicate that additional
hearings would be helpful.
Given the seriousness of this, do we really need to just
have hearings, or do we really need to contemplate steps a
little more aggressive, or wait until next fall and just see
how it all falls out?
Mr. Parke. I might respectfully say you've set the
guidelines. You've told us what the States are expected to do.
Now let us do it. Give us the time lines that you've
established and say, all right, fine. Let it work, and I
believe that the States will respond.
I'm pleased to tell you that on the Governor's desk right
now in Illinois, is the agents licensure. We're the fifth or
sixth largest insurance producer in the United States. I
believe that the Commissioner from Michigan can also speak to
it, but I think they are very close.
So we see that there are definitely a couple of major
States, Florida, New York, and California, which are large
producers of insurance, that are still working on it. We are
hopeful that they also will be able to come to the table and
pass some meaningful insurance legislation that complies with
the GLBA.
Chairman Baker. Thank you.
Commissioner Fitzgerald, there is significant difference
between standardization of forms and reciprocity and then the
higher standard of uniformity.
In order for us to have a market that works sensibly, isn't
uniformity what we really have to get to?
Mr. Fitzgerald. Uniformity, or a very high level of
standardization, I think, is the goal not only of
Commissioners, but certainly of the industry, and would benefit
the consumers of this country.
One of the great benefits of CARFRA is that, for the first
time, we now have a common agreement as to not only what
constitutes appropriate national standards for the products
that we've begun with, but also what the differences are across
the ten States, and that will of course be expanded then to
include the other States.
We have felt all along that CARFRA will help serve as a
cleansing mechanism for the State legislatures. To see that, in
fact, there are many of those, such as the ``i'' is not dotted
in the proper place. Requirements on the book that do not serve
to protect consumers nor benefit the companies can be removed,
will be removed.
I believe that over the coming several years, we're going
to see a very high level of standardization occur for those
products that are a part of the CARFRA process, but
importantly, it will also make legislators across the country
far more sensitive to the fact that you can have this sort of
nationalized system occur and that they can comfortably let go
of many of the old rules that in the year 2001 and beyond
simply serve no purpose.
Chairman Baker. Thank you. I have exhausted my time.
Mr. Kanjorski.
Mr. Kanjorski. Thank you, Mr. Chairman.
I'm impressed with the success and the movement of NAIC.
What I am worried about though is two things; enforcement,
since I understand it is voluntary at this point, and so there
really isn't any enforcement mechanism.
But more than that, let me break out, how do you anticipate
the rates to operate? Is there going to be a national or a
State-by-State rate?
How will this happen?
Mr. Fitzgerald. We think, Congressman, that initially forms
will be the area in which the greatest benefit can be had. That
over time, I think that through the legislative process, the
rate issue is really going to take care of itself.
We are moving in the direction of a much more open rating
system where, similar to Illinois, companies can simply go
ahead, use rates and allow the marketplace to regulate. And the
marketplace can, very efficiently, regulate rates.
The consumer protection that needs to be afforded comes on
the forms side, and even Illinois continues to review forms.
And that's where we believe, in the long term, the CARFRA
concept can best work.
Mr. Kanjorski. And I agree. I think that in getting uniform
policies and processes that are going to work, you are well on
your way, and I think we're going to make this not only in the
29 States, but the big ones are going to eventually come in as
well.
I'm more interested in what the National Association has
done. They put together a great working group and a great
organization, but it turns over and it is hardly representative
of the people.
It is, in most instances, appointed insurance commissioners
of whoever occupies the governor's office at that precise
moment, and then on the other end, some are elected. So we have
sort of a mishmash. The underlying structure of the
organization, is it one-man/one-vote, or one commissioner/one
vote?
If 29 of the small States get together, can they order the
other 21 larger States to conform to something?
Mr. Fitzgerald. The NAIC does operate on a one State/one
territory.
Mr. Kanjorski. So it's even worse than the Senate?
Mr. Fitzgerald. It operates on a one-person/one vote
system. And so, yes, indeed, as you have turnover occur,
changes can occur in direction of that organization.
However, I think over the past 15 months, the reform
direction that we have launched is so well-established, and the
interest of the Congress is so high, that there is simply no
going back, and that we will see an acceleration of reform
occurring through the NAIC.
And as Representative Parke has testified, I think you're
going to find the State legislators beginning to work very
actively in this reform and standardization movement.
Mr. Kanjorski. Let me throw out something that I've been
interested in in the last couple of Congresses. We have
something kicked around up here known as ``catastrophic
insurance.''
And catastrophic insurance is to cover hurricanes,
earthquakes, and tornadoes. I think we leave floods out,
because they are too expensive for some reason.
But if you look at where catastrophic insurance is
covering, it's covering Florida, Texas, California, and a few
of the Midwestern States.
The theory is that we would create a fund, a secondary
insurance fund, that would be underwritten by the Federal
Government to make the rates sufficient to encourage buyers in
these States that are at high risk.
Not a bad policy, but the question is, why should somebody
in Kokomo, Indiana, underwrite a hurricane survivor in Miami?
But more than that, the thing that disturbs me is that
drive toward uniformity. Sharing the risk conflicts with,
sometimes, the free market system of where investments should
be made.
If we allow a property risk in Honolulu to be the same as
Kokomo, Indiana, and if you're going to invest your dollar, the
likelihood of making a profit will be in Honolulu much faster
than in Kokomo, Indiana.
In fact, we know from prior experience, hurricanes and
other things, the base underwriters of insurance are going to
be in Kokomo, Indiana. They're really picking up the additional
rate.
What mechanism do we have in the NAIC to cover that problem
when it eventually emerges? I know it isn't there yet, but as
you go into the ring here, it definitely will occur where there
will be people who are picking up the cost of insurance.
I'll throw another quick one out. A recent study indicates
that heart conditions are experienced in higher proportions in
Appalachia than in other States, having some correlation with
economic conditions.
Are we going to end up with a national rate for heart
conditions, or we going to have an exclusion if you live in
Appalachia, or a higher premium?
So it goes to health insurance, it goes to property damage,
and in what way do you envision the NAIC to come to grips with
those problems?
Mr. Fitzgerald. I think you've identified a very important
point. That is that property and casualty insurance tends to be
a much more local undertaking.
In Michigan, we are not much concerned about hurricane
protection or earthquake protection. Flooding can be important
and ice damming in the winter resulting from heavy snows is
very important to us, but not in Florida.
That is why ultimately I think we will probably see a
movement across the States toward true deregulation of rates as
they pertain to property and casualty insurance, and let the
marketplace bear that burden and that risk, so that you don't
have somebody in Kokomo, Indiana picking up the tab for a
hurricane that has occurred in Southern Florida, for example.
Life insurance, to a great extent, has become deregulated
on price, more of a file and use system across the country.
There you can have a far greater standardization of rate than
with property and casualty products that are more dependent on
local activity.
So again, Congressman, I think what we will see is a very
fast evolution of State laws that will take into account
exactly what you have identified as an issue facing us, and
that is how do we have those who face a risk bear that risk
most appropriately from a rate standpoint.
Chairman Baker. If I may, Mr. Kanjorski.
Mr. Parke. Just one comment, if I may. Congressman I may
say that when I get a call on an insurance problem with my
constituents, fortunately Congress doesn't deal with it, that's
the responsibility of the State. So they call their State
representative or State senator. It does not make any
difference whether that Commissioner is elected or appointed.
When I have a problem and I can't get the liaison in the
insurance department to handle that problem, I'll go directly
to the commissioner. I don't care how he got there, he's the
source of the answer. And I expect those answers to come from
those insurance commissioners. And if I can't get the right
answers on a consistent basis, then I go to the governor or the
people and try to figure out a way to remove that person so we
can get the right person in there.
So to me, it doesn't make any difference if they are
elected or appointed. As a legislator, my responsibility is to
my consumer who has a problem.
Mr. Kanjorski. I understand and I agree, but I've been
watching some of the States and I notice that very often
insurance commissioners who stand for an election tend to take
more populist views; sometimes that doesn't comport with the
best of sharing the risk.
Chairman Baker. If I may, Chairman Oxley.
Mr. Oxley. Thank you, Mr. Chairman.
Director Covington, welcome.
Could you explain to us desk drawer rulings? Indeed, even
in a case where you have uniformity of laws, isn't the
interpretation of that law critical to try to find some kind of
reasonable solution to the issue?
Mr. Covington. Chairman Oxley, we do have a problem with
desk drawer rules and what I call ad hoc determinations by
departments across the country today.
One of the goals of the review standards checklist that I
talked about earlier is to eliminate those desk drawer rules.
That's the first step in creating greater uniformity across the
country.
In fact, much to my chagrin, we found one desk drawer rule
in Ohio and we're going to eliminate that desk drawer rule.
But many States have many desk drawer rules, so it is an
issue. The plan that we adopted in December addresses that
issue.
Mr. Oxley. If Congress sets a goal of 3 to 4 years for
achieving comprehensive uniformity by NAIC for product
approval, do you and Mr. Fitzgerald feel confident you can meet
that goal?
Mr. Covington. Chairman Oxley, I think we've got to meet
that kind of goal. As we said before, the current system is not
good for consumers, it's not good for insurance companies. We
must meet that goal.
And I think that we've set in action a plan that will do
that. In just over a year, we set a vision for modernizing
insurance regulation. We established a plan for doing that. And
now we're quickly, at an extraordinary pace, implementing that
plan, so I think that's a reasonable timeframe.
Mr. Oxley. Mr. Fitzgerald.
Mr. Fitzgerald. I agree with that. I think a 3 to 4 year
horizon is appropriate for the governors, the legislators, the
insurance regulators of this country to work together. We've
very clearly identified the issues. We now need to have some
time to be able to address those.
If, over the next 2 to 3 years, you haven't seen
significant progress, then I think there need to be questions
raised about whether we can effectively, at the State level,
solve the problems that you have helped identify and that we
are identifying.
Mr. Oxley. Representative Parke, during the testimony back
when we were considering Gramm-Leach-Bliley, one of the most
effective pieces of testimony came from Illinois in describing
the Illinois system. I understand you haven't had re-regulation
now for some 30 years in the life insurance side of things, and
it's worked quite well for consumers and the industry.
If that is the case, and I assume you would agree that
that's the case, why haven't other States adopted that model?
Why hasn't NAIC sought to adopt the Illinois model?
Mr. Parke. I think that what we have found is that this is
a blast across the bow. I believe the insurance commissioners
understand now, under GLBA, that you mean business. And quite
frankly it's still something that the State legislators in some
States have to understand that you mean business.
And I think that many times it's easier to just continue to
do what we've done before, there's no need to change, and so
therefore many of the regulators and their departments have
been there for a long time. They haven't had to do it.
I've gone to any number of NAIC meetings, and I've watched
and listened and it's non-stop work from morning till night.
And I think that their desire to make sure that the speed in
the market is something that really happens, and I think that
they have the will and desire. I know the State legislators
that are members of NCOIL and we try to bring in the chairmen
of the various State insurance committees to educate them on
insurance.
I think we're going to get the attention of the legislators
in the various States that we mean business, and if we don't do
it, then Congress is going to do it for us.
Mr. Oxley. Thank you for your testimony. I was an original
member of what we called the Conference of Insurance
Legislators (COIL) back then in the 1970s, and clearly, the
organization has come a long, long way, providing great
leadership from the State legislative side of the issue and you
are to be congratulated for your efforts.
Let me just ask our two Commissioners what their take is on
the Illinois model and whether it's being considered in the
overall context of the NAIC proposals.
Mr. Covington. Chairman Oxley, as I testified previously
with regard to commercial lines insurance, the plan that we
adopted in December clearly sets forth a move to a competitive
rating system for most commercial lines insurance products.
Right now, there are four States that have a system that is
very similar to that plan. Fifteen States had the discretion of
their legislative statutes in order to move forward with that
plan.
The remainder of States will need legislation.
With regard to personal lines, it does become more
complicated, even in Illinois. Even in Illinois, where they do
not regulate the rate, they do regulate the classification
system. When you look at a product in the rate, there's the
rate, there's the classification, and there's the product.
Even in Illinois, they regulate the classification system.
So that's one of the issues that we are studying currently as
to how to best and most efficiently regulate that
classification system, or whether we should regulate it at all.
And that's what we are endeavoring to do this year as we
look at personal lines. So the plan has not gotten so far as to
the personal lines area, but that's an issue we're working on
this year.
Mr. Fitzgerald. Mr. Chairman, my belief is that, in fact,
as I've stated earlier, the marketplace can very effectively
regulate and protect consumers on the issue of rates for
commercial lines. And I also believe it can do so in personal
lines.
But there needs to be, I think, a recognition on the part
of everyone, citizens as well as legislators, that, in fact,
taking this step, while it may seem to be walking off a cliff
when it comes to the ability to protect consumers, ultimately
will bring greater benefit to consumers of an extremely
competitive personal lines market, as well as the ability of
companies to compete very openly within States.
Now I state that not as an NAIC position, but as one that I
hold as the Commissioner for the State of Michigan.
I think you may hear more about this as a part of the
second panel today on the property casualty side.
Chairman Baker. If I may, we just got an announcement. We
have three votes pending. We have about 7 or 8 minutes
remaining. I don't know, Mr. Bentsen, it's your option. Would
you care to be recognized now?
Mr. Bentsen. With the Chairman's indulgence.
Chairman Baker. Absolutely. It would be my intent--oh, I'm
sorry, Chairman Oxley? All right, it would be my intent to
recess the subcommittee pending Mr. Bentsen's comments and we
would be in recess for about 15 minutes and return as quickly
as possible.
Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman.
I get the impression from looking at the testimony, Mr.
Fisher, that the ACLI is appreciative of the speed to market
initiative of the NAIC, but is concerned that it maybe doesn't
go far enough in providing I guess what would be an insurance
blue sky for purposes of speed to market.
Is that a correct interpretation?
Mr. Fisher. I think we are certainly more than
appreciative, we're very supportive of it.
But you are correct, as I said in my testimony, in
identifying the fact that it does not really meet all of the
objectives that we see as the optimal system of regulation, and
specifically it does have a single point of filing, but there
are still individual State approvals within that single point
of filing.
We are looking for a single point of filing with
jurisdiction over products for all States and acting on behalf
of all States. That is one big difference.
Mr. Bentsen. And Representative Parke, in your testimony,
you state the idea I believe for the concept of perhaps a
State-run national organization, but very separate from the
Federal Government.
I guess my question to the entire panel is, one, with the
speed to market initiative, is there a legal need at some point
for a Federal uniform standard to provide some legal certainty?
And second of all, what would something like a Federal blue
sky, which otherwise does not impose upon State consumer
regulation, and I realize that's broad assumption, would that
be something that NAIC or Representative Parke, your
organization would be in favor of or is that something that you
think would work.
I realize that securities and insurance really are
different animals in many respects. Insurance products are not
necessarily as uniform as a lot of securities products. But it
seems to me that that might be an answer to your problem and
perhaps to Mr. Fisher's organization's problem.
Is that something that you all see as achievable, and do
you think you need some Federal uniform standard at some point.
Mr. Parke. If nobody's going to jump in, I will.
I believe that giving the NAIC the time, their commitment
is there to solve that problem. We have worked well with them.
They've shown an interest in making sure that the State
legislators have input into developing that kind of a system.
I'm confident the NAIC and the insurance industry can work
together to find an answer to that problem, and I do not
believe that the Federal Government has a role in solving that
problem.
Now, if we can't, then I think that you have a
responsibility to the citizens of this Nation to find an answer
that works, and to the insurance industry, because we need
products that consumers can use in a short period of time,
because the interest sensitive nature of the product or the
competitive nature with other institutions is necessary, so an
answer has to be found.
Mr. Fisher. I'd just like to point out it's an intriguing
idea and theoretically I guess it could work. I think product
regulation is a far more difficult issue to work with than say
agent licensing.
And as it was, there was certainly opposition from many
States to the NAREC proposal. So I'd like to be optimistic that
the approach you're talking about would not encounter
opposition.
I'm not quite as positive on that.
But in addition, I think if you're talking about
congressional action, there may be other solutions to the
problem that would have to be examined, and I think we'd want
to be very sensitive to looking at the same Congress perhaps
pursuing different solutions at the same time.
Mr. Fitzgerald. The greatest degree of competition that
insurers face today with the other financial services
marketplaces is really on the life and annuity products, not so
much the property and casualty products.
And I would concur with Representative Parke's earlier
statement that the use of the interstate compact is a mechanism
that the State legislatures and governors can very effectively
use to create the nationalized, but State-based system that
take the elements of CARFRA and makes CARFRA the place to go
for whatever product approval or rate form approval that might
have to occur.
It is voluntary today, but the States that are a part of
it, if they are going to become a part of it, basically say
that we will go along with what the CARFRA decision is.
So what you propose would certainly be an intermediate step
between the system that we have today and having, for example,
a Federal regulatory system in place.
But again, I think that the States can demonstrate over the
coming 3 to 4 years that, in fact, that step might not even be
needed.
Chairman Baker. Mr. Bentsen, we're under 3 minutes. I'm
told that we will have another vote in about an hour, so the
good news is, when we get back, we may be able to finish with
this panel.
I'm told that Members do have additional questions. We'll
return as soon as possible. Thank you.
[Recess.]
Chairman Baker. I'm informed that we will expect another
vote on the floor somewhere around 5:00. It would be my hope
that we could proceed to conclude today's business before being
interrupted with that vote.
I recognize Mrs. Biggert at this time for questions.
Mrs. Biggert. I want to direct this question to my friend
and former colleague in the Illinois House, Representative
Terry Parke.
Terry was and still is known by all his colleagues in the
Illinois General Assembly as the insurance guru, so I'm happy
that he is here to enlighten us today.
Representative Parke, do you think that the Illinois rating
law, which uses a market-oriented approach provides less
protection for consumers than other laws of other States?
Mr. Parke. Congresswoman, I would say that people seem to
think because we let the insurance industry go about their
business that there's no oversight. Quite frankly, it's
completely the opposite.
Under our market conduct examinations, we probably are more
stringent than the majority of the States to make sure that
solvency and marketing and all the other ways of checking the
quality of an insurance company is there. And they review those
insurance policies that are offered up.
So there seems to be a misconception that because we have
no rating law that it's wide open and wooly. It's not. Our
insurance department is known as one of the best insurance
departments in the United States, and that's because we have a
professional staff that reviews all those products, reviews the
companies, make sure that they are operating properly and that
we protect the consumers.
Mrs. Biggert. Well, then, if the consumers are protected
under the Illinois system, wouldn't uniformity be most easily
achieved if we moved towards a file-and-use, or a use-and-file
system rather than a prior approval system in the marketplace
for all the States?
Mr. Parke. Well, I've served in the Illinois House 17
years, and during that time, I think the last time there was
any legislation presented in the Illinois House to change what
we have in Illinois may have been 10, 12 years ago.
Since then, even our most liberal and consumer-oriented
legislators have come to the realization that what we have in
Illinois works to protect consumers. If it wasn't, we would
have all kinds of legislators introducing legislation to change
what we're doing. It is not happening.
The consumer in Illinois is well protected and we believe
we're doing a good job. If we're not, the legislators will come
in and try and change it.
Mrs. Biggert. Thank you. I think that's probably true with
a number of bills that are introduced each year in the Illinois
legislature. If you can find something to tweak, it's done.
Thank you.
Then, Mr. Fisher, if a consumer, say in Massachusetts,
wants to buy disability insurance from you that you're selling
in New York, can they do that if Massachusetts' insurance
department is still delaying approval of your product?
Mr. Fisher. No. It's a State-based system and I think that
regulators and certainly companies would frown upon individuals
crossing lines and companies participating in that type of
activity.
So if a product is not approved in a given State, it really
means you should not be marketing that product to the residents
of that State.
Mrs. Biggert. So this really does affect your ability to
roll out a new product if some States have approved it and some
haven't, and if they are neighboring States in particular.
Mr. Fisher. It most definitely does, I can tell you, having
been in the home office of Mass Mutual for 30 years. Mr. Parke
and I were talking a few minutes ago. He's a former Mass Mutual
agent. He was probably the guy who was calling us on the phone
some years ago and we didn't have a product in Illinois.
There are tremendous pressures when we roll out a product
and we can't roll it out in all States. And that's the norm, by
the way. We will usually go for 35 to 45 States in our initial
rollout.
The remaining States are a problem, and in some cases we do
not have products in some States and have just not been able to
get them approved, and you finally give up, or the requirements
are so different from other States that you have to totally
reprice the product, and then you have to do a basic cost/
benefit analysis.
And in many cases, we have just concluded that a product is
just not going to be available in a given jurisdiction.
Mrs. Biggert. Thank you.
Just one other question to Representative Parke.
NCOIL has not endorsed the Illinois model. Have you tried
to bring that up to them, or is this something that you
presented to your group, or has your organization endorsed any
of such models?
Mr. Parke. You're talking about the NCOIL? Are you saying
NCOIL is not?
Mrs. Biggert. Yes.
Mr. Parke. I'm sorry?
Mrs. Biggert. I just wanted to state, have you discussed
with the other members of NCOIL, the State legislators, the
Illinois model and how that could work in their State?
Mr. Parke. Absolutely. We have done that, and it's also
been discussed at the NAIC meeting. I've been at meetings where
it's been brought up. Our insurance commissioner has made a
point for us to go. He's also made a point to make sure that
whenever I discuss the Illinois experience, that we tell them
how the insurance industry is highly checked and rechecked
under our market conduct programs, to make sure that they
understand it.
Yes, we've talked about it and there is interest from other
States. I've gotten requests for our legislation, so yes, there
is, and we see that some of them are starting to move that way.
But again, I will reemphasize that GLBA has really been the
shot across the bow of the States to say, hey, it is time for
you to reevaluate the product lines, how fast it is to get
approval on products, because the consumers need these products
and you're going to have to provide the services to the
companies and to the consumers.
Mrs. Biggert. Thank you.
Thank you, Mr. Chairman.
Chairman Baker. Thank you, Ms. Biggert.
I want to return to the topic one more time before we
release our witnesses, make another run at it, maybe this time
with the prior admonition I was a State legislator for 15 years
before losing my mind and coming to Congress.
So I have great regard for State regulation and State
authority, but there is a point at which we have to say, let's
take a look at this.
There are bank products, swaps, fixed income annuities,
others that are not called insurance products under banking
law, but it's a pretty fuzzy line.
And then there's clearly securities products which are, you
know, hedges that are basically insurance product in
consequence, although not regulated that way.
So we have two industries under Gramm-Leach-Bliley,
securities and banking, that have the ability to go to market
without individual prior approval from the States that are
competitive to the other component in the market.
That in itself is an imbalance which we feel some
responsibility to address, because we have created the ability
for the others to form these new structures.
Second, the consumer interest in this matter is the most
important, and facilitating access to the best product at the
lowest price would result, I believe, from this effort.
To that end, you've suggested that, don't do anything else
right now. We're in good faith, we're moving fast, and only act
if we don't get it done.
My difficulty with that approach is 3, 4 years from now, if
we haven't got it done, then we've got to start then. It would
seem appropriate to suggest this.
How about legislation, near term, next year, that says 3
years from the passage of that bill, if you haven't adopted
nationally the standards in CARFRA, maybe the National
Association of Registered Agents and Brokers (NARAB), some
standard, if you want to just call it CARFRA as the model, then
in 3 years hence that becomes the method of implementation, as
opposed to some who share grave concerns about saying the words
``national charter.''
What's your reaction to that, so that we don't get to a
point of meltdown, assuming the worst. If you're correct,
triggers don't matter because you're going to achieve the
uniformity that is desirable.
But let's not wait till we get to the train wreck to start
talking about controlling the traffic flows.
What's your response.
Mr. Fitzgerald. I think that taking that sort of a step,
similar to what was done with NARAB, for example, perhaps
strikes the appropriate balance between the interests of the
Congress and the ability of the States to, I believe, best
execute the regulation that occurs.
It would also have the advantage, of course, of keeping in
the process the State's governors and legislatures.
We are showing through CARFRA that the States can come
together, so if the members felt that sort of a step was
appropriate, I think that would be far superior to taking the
bigger leap of creating a regulatory option of either Federal
or State regulation. It would keep the best balance in place
right now, and I think ultimately for the consumers of this
Nation, allow them the greatest access to the regulators, those
of us at the State level.
And I do have the advantage of being not just the chief
regulator for Michigan for insurance, but also for banking,
credit unions, consumer lending, as well as for securities. And
so I'm seeing the entire spectrum.
It's an interesting challenge, but it's one that I think
demonstrates where we are going in the future. And that is the
markets are coming together. The regulators ultimately probably
have to come together too to be able to do the best job, and
ultimately there probably needs to be some partnership between
the Federal and the State systems with the State systems still
having the predominant role in execution of regulation.
Chairman Baker. Does anyone want to express a concern about
it?
Please?
Mr. Covington. Mr. Chairman, I just might comment. I think
Commissioner Fitzgerald's comments relate primarily to life
insurance products. With regard to property and casualty
products, I will concede that based on political pressures, in
a number of States, that it will be an uphill battle to
implement some of the property and casualty reforms that we're
seeking.
We could probably, I don't want to get into naming names
today, but you've talked about your own challenges in your home
State. And I would not be fair if I did not recognize that and
concede that there are going to be enormous challenges to
getting that done.
And that's the only thing that I would share. I don't want
to get into the details of how we accomplish that. It's hard
from a philosophical approach to give up the State regulation,
but I do think I need to share that with the subcommittee, that
there are a number of large States, significant States where
consumers, I think, are being hurt because they don't have a
good market because of over regulation today.
And we're seeing that. And we've seen pullouts in States.
We've seen good Ohio companies, we have a lot of good property
and casualty companies who will not go into certain States
because of rate oppression and in the end, that hurts
consumers.
Chairman Baker. Thank you, sir.
Mr. Parke. Mr. Chairman, as I said earlier, I've been in
the legislature 17 years and I sometimes try to read between
the lines. And it's been my impression that Congress may have
had the will to do more with GLBA than they probably would
have.
I think that the intent, as an outside observer not knowing
the facts, but the intent was that this is the opening volley.
This is something that must be complied with. The intent is to
be understood and you mean it, and to not let it work, I think,
is not the intent of the legislation.
Many times my colleagues will say, let's not move any
further until we see if it's working. We have shown in the
States that we are working, we are achieving the goals that you
established.
Certainly that's why you are having a hearing here today is
to try to say, we expect more, not just the minimums. And we
hear that.
Chairman Baker. I was really playing back your words that,
if we can't get it done, then maybe it's appropriate for
Congress to act.
I'm trying to find a middle ground here, if we set some
time line. If it's not 3 years, then maybe it's 5 years. But
some limit which reasonable people can agree, well, if we can't
get it done by then on these sets of standards, then maybe it
is appropriate for the Congress to act in some additional
manner.
And if it's not CARFRA in 3 years, I'm just asking this,
you know, maybe you don't have to give me the specifics today,
but think about it. What would that box look like.
I will confess I was involved, to some small extent, in
Gramm-Leach-Bliley and you'll be shocked to learn there was a
considerable bit of political discussion ongoing in that room,
and sometimes that tends to limit what the sausage will look
like when it's finished.
So I can assure you from my perspective there were those
who were a great deal more enthusiastic about going a lot
further than just getting us up to 1990. Some of us actually
would have liked to have gotten the law up to about 2001, but
we're going to work on that.
In order to facilitate this and not have the hanging
contingent of people in your capacity feeling like the Congress
is going to act recklessly, and without regard for your
responsibility, we, on the other hand, want to feel like we're
getting it done at a level sufficient to make markets work, and
some agreement between those two positions to establish CARFRA,
NARAB, you pick' em, in some timeframe appears to me not to be
that irresponsible, rather than wait and find out well, we just
didn't get it done. Now we're going to start looking at it.
And that's really the purpose of these hearings. How do we
move forward with the assurance at some point reasonably in the
future, we establish a market principle that makes sense for
everybody. And that doesn't require a response. I just want to
communicate that in the best way I can.
Yes, sir, Mr. Fisher, did you want to comment?
Mr. Fisher. Mr. Chairman, I guess I would have to express a
slightly different viewpoint from that of my fellow panelists.
One potential concern we have, aside from any
constitutional issues that might be lurking out there on that
type of proposal, is that if, in fact, things could not get
done, then an awful lot of time has been lost in the process.
And we have grave concerns about that. You heard about the
loss of sales that my company alone is experiencing. If you
multiply that by the number of insurance companies doing
business, and I'm just talking life insurance, it greatly ups
the ante.
The ACLI, as you know, is looking at different options and
pursuing different options currently, although a final decision
has not been made on one of them, for improving regulation of
insurance, life insurance.
Assuming that a decision is made to pursue the other
option, other than the State's option, we believe that it might
be appropriate to pursue both options concurrently.
If the States are capable of proving that they can achieve
the efficiencies, then it may well be that Congress would want
to look and maybe we should discontinue the pursuit of the
other option.
But we do have concerns about the time involved.
Chairman Baker. Well my point for initiating the question
was, we don't want not to be cooperative in allowing the
commissioners, the legislators, and the States to engage in
what they believe to be responsible for their consumers. But at
some point, we have to establish we can't wait any longer.
And I'm merely trying to get a date by which reasonable
people can agree we can't go past this. And at that point, we
would then have a requirement, that we could also agree would
be reasonable, that makes whatever the next modest step that's
agreed to automatically implemented.
The concern we have is that we don't take any near term
action, that we find ourselves 3 years hence with still partial
implementations and disparities, particularly in property and
casualty, and that there is indeed great pressure to act very
quickly as opposed to a more studied approach that is more
responsive to the States.
And that's my point, and I appreciate your testimony.
Mr. Sherman, I believe you're next for recognition.
Mr. Sherman. I would think that prompt approval of new
insurance products could have a couple of advantages to the
consumer. Either you're in a State where there's a particular
type of insurance that might fit your needs and it's not
available, or several companies that could offer that type are
not allowed into your State, and you're stuck choosing from
only one or two companies without perhaps the requisite level
of competition.
I come from a big State, California. I've been dazzled and
occasionally confused when presented the entire smorgasbord of
available insurance products. And I'm surprised to be here at a
hearing that seems based on the idea that there might be more
insurance products that my constituents need to buy that
somehow they're not being offered.
Can one or two of the panelists identify a type of product
that isn't available in a major State or a contour of that
product that isn't available in California or some other major
State, that you could explain to me, that my constituents would
be better off buying if only they could?
Mr. Covington. Mr. Sherman, I do have an example of a
product. A good company in our State of Ohio, Nationwide Life
Insurance Company, introduced or tried to introduce a product a
few years ago, a long-term care product, coupled with an
annuity, so that you had both a savings component and a
protection component for the central long-term care needs.
And I know your State probably has a lot of seniors, a
large senior population.
Mr. Sherman. And an awful lot of interest in long-term
long-term care insurance, although I guess you could buy these
separately, I don't know if there's a shortage of annuity
policies, for example.
Mr. Covington. This product was a unique product that
served a particular marketplace. We know today that the company
was not able to get that product approved in six of the largest
12 States. That's not good for consumers, it's not good for the
company that's trying to compete with other financial services.
Mr. Sherman. I mean, I can go to a store and buy
toothpaste, I can go to a store and buy socks, I've never seen
an opportunity to buy the two packages together. I never needed
that opportunity. I just buy them separately.
Is there anything about this product that's any different
than simply purchasing separately at a competitive price, a
retirement home coverage policy on the one hand, and an annuity
on the other. Other than the fact that the two are packaged
together, was there anything special about this policy?
Mr. Covington. There were differences. I'm certainly not a
product expert, but as the product was explained to us, we
thought it was innovative, we thought it treated a particular
market in our State. We approved the product very quickly in
Ohio, and we think it benefited consumers.
Mr. Sherman. Why in those other States did they face a hang
up except for the fact that nobody had seen that particular
combination?
Mr. Covington. That's a great question and I don't have an
answer for you.
Mr. Fisher. I can help to answer that question,
Congressman. First of all, with respect to the question about
whether it is better to have and can't you do it through two
products rather than through one. I'm not an actuary, but it is
important to understand that there are some basic loads or fees
associated with the product just to cover the cost of issuance
and administration, so you lose out.
It's cheaper to have something combined in one product than
two.
Mr. Sherman. But, I mean, we could always posit the idea
that maybe there's somebody who needs boat insurance and, you
know, coverage for their stamp collection from theft. And I'm
sure that you can't buy those two policies together.
What I'm saying in effect is I'm looking for a product that
isn't available in major States, not just a unique combination
of two products that can probably be purchased separately.
Otherwise, there would be a dazzling array of combos that
aren't available.
Mr. Fisher. Not necessarily. One product would certainly be
cheaper. When you're talking about the long-term care arena
combining some of these products, that is a newer type of long-
term care product on the street. It is a very efficient
product.
Going partly to your question about what about the other
States, why, I can speak to one of those States. There's a law
on the books that was literally over 100 years old and said you
can't combine two lines into one. That was it. That was the
sole reason for that jurisdiction's proper refusal to approve
the product. They did not have the regulatory authority.
That law was changed, by the way.
Mr. Parke. Congressman, I might flip this around another
way, in looking at it and say that some products should not be
approved and speed to market is not the ultimate goal.
Protecting the consumer from the product that is marketed to be
there when the consumer needs that product is another.
I want my insurance departments to be deliberative and make
sure that they take time to review and make sure that policy--
--
Mr. Sherman. I understand that argument. Kind of the
underlying hearing here is that we're going to have, as I
understand it, the possibility of two avenues to get a product
approved. And if you feel that we've got to make sure that bad
products aren't approved, if anything, we should stick with the
present system.
If the goal is to make sure that good products are approved
and approved quickly, then we might need to change the law.
What I'm trying to explore with my questions here is, is
the present system of saying the only way to sell a product to
a Californian is to go through the California Insurance
Commissioner's office who may, for a variety of reasons, not
let you sell that product.
Is that a problem, or is this a solution in search of a
problem?
Chairman Baker. Mr. Chairman, if I might, I'm sorry, you've
exhausted your time by a small measure.
And just a line response, if I might. I'll use my own State
as an example. On average it takes in excess of 300 days a year
to get any new product approved.
We have significant withdrawal from our market in large
measure and I have a statement from my current acting
commissioner, our former commissioner has other difficulties--
--
[Laughter.]
Chairman Baker. ----Indicating that it would be of great
help to have form uniformity to expedite delivery of
appropriate products to consumers. And the purpose of the
hearing is not really to establish a national charter issue,
which is underlying the statement I think the gentleman was
asking.
Mr. Sherman. If it wasn't a national charter, is the focus
of this hearing some sort of Federal system to approve products
more quickly.
Chairman Baker. No, really it was to have the commissioners
report on the progress with the voluntary initiative known as
CARFRA, which involves ten States on limited product line, and
also to have others comment on whether or not they viewed a
problem in the market.
And all these four gentlemen have indicated they perceive
there is a problem that might be difficult to resolve with
State initiatives. They are optimistic they can do so, but they
understand the Congress' interest and intent to see it resolved
in a timely basis.
Mr. Sherman. So our focus here is to see whether the States
in combination are doing a good job, with the possibility of
some Federal role?
Chairman Baker. I'm the last person to explore or suggest
that another Federal regulator is a good thing in Washington,
but I will say that despite the best efforts of the States, if
we can't have uniformity and approval forms marketing, there is
a consequence to consumers as a result of that, and this
hearing is to have their report, make assessments as to that
progress, and at some later time determine if additional action
by the Congress may be warranted.
Mr. Sherman. I commend the Chairman for holding these
hearings and I yield back the entire balance of my time.
[Laughter.]
Chairman Baker. Thank you very much, and as usual, we're
always on the same page.
Ms. Hart, did you have a question?
Ms. Hart. I do, Mr. Chairman, but I'll be brief.
First I want to thank the panelists for being here. I
served in the State legislature for 10 years and I served on
the banking and insurance committee in Pennsylvania, so I dealt
with a lot of these issues, and one of the things that I think
is most interesting is that, without the Federal Government
taking over control of insurance regulation, we can somehow
assist the States in coming to some common ground. And that's
what I believe we're looking for here.
I have a couple of people from different States before me.
My question is how far should we go when it comes to us playing
a role, and I know some of you may have answered some of these
questions because I wasn't here the whole time, but if you
would just humor me.
I'm interested in knowing right now, I know you go through
your associations, the NAIC and I guess some of the
professional associations as well to try to make everybody as
uniform as possible.
But when it comes to our role, do you see us being involved
in some kind of way, and what would that be?
Is it oversight?
Is it just shaking your hand and being friendly?
Is it beyond that?
Mr. Fitzgerald. Friendliness is always good. I think the
role that this subcommittee and this Committee is playing in
oversight is a very appropriate one. The commissioners know
legislatures clearly are learning that the Congress does take a
great interest in the insurance system of this country.
I think that a continuation of this oversight and an
indication of the interest is going to keep the pressure on
certainly for us to continue bringing about the reforms that
are necessary.
I would hope that ultimately that is the only role that the
Congress would have to play, that the States can prove
themselves capable of bringing about the reforms that will move
us over the coming years and put the insurance industry in the
position it needs to be viz a viz the other financial service
industries, to allow them to compete effectively and allow the
consumers in this Nation to have the quality products and the
appropriate degree of oversight and regulation that is
necessary to best protect them.
So my ultimate hope is that this sort of hearing on an on-
going basis would be the role that the Congress can best serve.
Mr. Parke. I might also point out that GLBA has given us
the guidelines with time triggers, saying you must achieve
these goals.
The States are working toward that and we are achieving
those goals. So I think that you have played a role of
establishing in the minds of all people in the insurance arena
that Congress is going to watch.
You've already established those guidelines. Now let us
work toward solving those guidelines. And if you see that we're
not hitting the triggers, then I think you do have a
responsibility to come back and revisit some form of GLBA with
new triggers and maybe those triggers would be appropriate in
other areas than you've already dealt with.
Mr. Fisher. I certainly agree with Representative Parke,
but GLBA really addresses an agent licensing issue, but only in
part. I don't think it's addressing the speed to market issue
from the ACLI's standpoint. As I mentioned, we are pursuing a
track right now, assuming there is an ultimate decision to
pursue the track other than the State track.
I think we would be looking to Congress to carefully
evaluate that option. It's not a question of taking regulation
away from States, it's a question of setting up a system that
is comparable to that which the banks enjoy.
Ms. Hart. Right now, if you had to assess cooperation among
the States, would you say that since Gramm-Leach-Bliley,
cooperation has improved and that the insurance regulators are
working together more, or do you think that it really hasn't
changed from before that?
As a constituent service person, I spend a lot of time,
unfortunately, trying to contact other States trying to get
somebody a license to help somehow get a product that might
have been coming out of a Pennsylvania company into another
State.
We have all kinds of problems, and there seems to me to be
just really no consideration for another State among some of
the States' insurance regulators.
Has that changed?
Mr. Fisher. I think it's fair to say that through the NAIC
especially, the State regulators have always worked with one
another. I think Gramm-Leach-Bliley and the changing
marketplace have really heightened that concern, especially
because I think regulators have a better understanding of the
regulated industry's concerns.
However, the other side of that is that nobody should
underestimate the daunting challenge ahead of the State-based
systems in terms of achieving uniformity for speed to market,
because you are talking about major changes to a wide array of
laws in a large number of States, and you're really going right
up against the question of State sovereignty.
Chairman Baker. Thank you, Ms. Hart. Your time has expired.
Ms. Jones.
Ms. Jones. Thank you, Mr. Chairman, for holding this
hearing.
I would like to particularly welcome Mr. Covington from
Ohio--I'm from Ohio, just in case you didn't know that, Mr.
Covington--to our hearing.
Previously, our subcommittee did not have the
responsibility for insurance. There was probably not much
reason for us to get to know each other, but now that there is,
it'll be fun to get to know you. I look forward to having the
opportunity to work with your staff and mine, as we walk down
this road.
I left my glasses on my desk.
You're Mr. Fisher to the far right? Is that correct? Is
that you?
Mr. Fisher. Yes.
Ms. Jones. My question, Mr. Fisher, when I first came to
banking, which was last term, and we were discussing handling
HR 10, the opinion I got from everywhere around the world was
that the insurance industry did not want to be regulated,
please leave us alone, and so forth, and so forth, and so
forth.
Was it that I didn't get the right signal by this new
legislation, let me just put it like that.
Mr. Fisher. Are you talking about the regulators or the
industry?
Ms. Jones. Regulators.
Mr. Fisher. You might want to address that question to the
regulators.
Ms. Jones. I know what they think. I'm asking you, Mr.
Fisher.
[Laughter.]
Ms. Jones. Have I put you on the spot?
Mr. Fisher. This seat is getting a tad hotter than it was a
minute ago.
I think it is fair to say, on a more serious note, Gramm-
Leach-Bliley was really addressing the question of functional
regulation and who should regulate what.
That is getting into the question of, to some extent, turf,
to use the term bluntly.
I think that there certainly was some opposition to it, and
Gramm-Leach-Bliley ultimately passed.
What we're talking about today is really not a question of
functional regulation and who should regulate what, but what
efficiencies should be built into the system of insurance
regulation.
Ms. Jones. That was a great answer, but it didn't answer my
question. My question is what was your personal position with
regard to whether or not there should be some Federal
regulation greater than currently exists on the industry, the
insurance industry?
Mr. Fisher. Again, I think the Gramm-Leach-Bliley was not
getting into the question of whether there should be Federal
regulation.
Ms. Jones. Again, you know, I got accused of being one of
these terrible examiners, because I made people answer my
question. Answer my question, please.
What's your opinion, it's either a yes or a no, or
something.
Mr. Fisher. Of whether?
Ms. Jones. Of whether or not there should be greater
regulation by the Federal Government on insurance in the
States, and it should be removed from State insurance
regulators?
Mr. Fisher. Assuming that the ACLI pursues the two tracks
that it is currently pursuing, the ACLI would not favor
elimination of State regulation. There are many ACLI member
companies who would want to continue to be regulated by the
States.
However, companies which might have an interest in an
optional Federal charter, assuming that decision is made, I
think the ACLI would want to pursue that track.
Ms. Jones. Mr. Covington, do you want to tackle that for
me? A similar question. If this is a hot question. We'll go on
to the next question.
Mr. Covington. If you could restate the question?
Ms. Jones. During the course of the debate over Gramm-
Leach-Bliley, or HR 10, which is a lot easier to say, there was
the whole discussion that the State insurance industry or
regulators or the like were not interested in being included in
some revamping of your responsibility, that much of the
regulation should be left to the State insurance agencies as it
currently existed.
What's your position?
Mr. Covington. What I can speak to is what the State
regulators' position was, and that was that we supported
functional regulation at the State level.
I can't speak to the industry's position.
Ms. Jones. I guess I have to wait till I get me an industry
panel then.
Can you answer this about whether the insurance industry
finds itself at a disadvantage as compared to the foreign
insurance industry with regard to the delay in product
approval?
Mr. Fisher. I don't think that's really an issue, because
if the foreign insurance industry is doing business in this
country, it is subject to State regulations, so it would be
subject to the same issues. The competitive disadvantage, there
is some within the industry, is because if I can't get my
products to market, I may be behind one of my insurance
competitors.
However, a large amount of the competitive disadvantage is
viz a viz other financial services sectors, such as banks and
mutual funds, who can get their products to market more
quickly.
Ms. Jones. And I'm out of time, darn it. I guess I'll just
have to yield.
I was getting ready to get to you, Mr. Fitzgerald. Maybe on
another occasion.
Chairman Baker. Mr. Meeks.
Mr. Meeks. Thank you, Mr. Chairman, and I will be brief. I
happened to have a meeting with some of the industry on this
question just this past week.
Also, there was a meeting that we had, a report that came
by from the Consumer Federation of America and unfortunately I
didn't get the chance to hear the testimony, so I don't know
whether or not you addressed this or not.
But they seemed to have some concerns recently that in an
effort to satisfy our concerns with delays for new products and
rates, that the State commissioners will make some
recommendations that will roll back some of the consumer
protections that had been won on the State level.
So I guess I was wondering, especially with reference to--
and I guess I'll address this to Mr. Covington--the NAIC's
speed to market working group. What did you put in, or was
there anything put in there to appropriately protect consumers
from the reforms that are being proposed?
Mr. Covington. Congressman, we just received in the last
week-and-a-half, the Report from the Consumer Federation of
America, and have not had an opportunity to review it in full.
We will be having meetings where that report will be
presented to the National Association of Insurance
Commissioners and considered by us during the process.
As we testified, for commercial lines insurance, the plan
calls for an informational filing or a competitive rating
system.
We believe that this protects consumers better because you
don't have artificial price suppression which impacts the
availability and choice for consumers in the marketplace, and
that exacerbates some problems in the marketplace.
With regard to personal lines insurance, we have just begun
the process of evaluating the best regulatory system for
personal lines, and we've had one medium where we've had 18
panelists testify before the subcommittee, and we will continue
that work throughout the year.
Mr. Meeks. Let me just make sure that I understand, because
I understand that in the industry right now, there is a lot of
artificial pricing where a number of insurance groups have
given so-called discounted prices, knowing that in just 3, 4
years, the price is so cheap that ultimately they're going to
have to charge a much higher premium 3, 4 years down the line,
and therefore putting the companies, some of these same
companies, in financial difficulty.
And again, I'm just trying to see if there's anything
specifically being put in place right now, as we're working on
this reform, that specifically says or specifically talks about
how we're going to take care of the consumers to make sure
their protection's in place.
Mr. Covington. Well, let me just comment, Congressman, with
regard to the financial solvency of the companies.
The NAIC has instituted a financial accreditation program,
and in that program, there's a financial analysis. And one of
the things that will be looked at is the adequacy of rates to
support the business. So there is adequate consumer protection
from a financial solvency perspective.
In addition to that, most State laws already say that rates
cannot be excessive, unfairly discriminatory or inadequate, so
that is a protection in and of itself as well.
So there are adequate protections in the consumer plan that
was adopted by the National Association of Insurance
Commissioners.
In addition, the plan calls for greater consumer
information so that they can price shop more effectively, which
we think we should encourage all consumers to do. There is
enormous competition in this marketplace, and consumers should
shop better.
We can assist them in that effort by providing better price
information.
Mr. Meeks. Mr. Fitzgerald, what about CARFRA?
Mr. Fitzgerald. I think the most significant point is that,
as we have worked on the speed to market program over the last
15 months, both for CARFRA which is directed right now more
toward life, as well as the improvements to State-based
systems, we are not removing any consumer protections.
In fact, doing things that have not been done before. For
example, the review panels for CARFRA. We have established
standards for those examiners who will serve on those panels to
make sure that they are experienced, have the appropriate
training, as well as experience, to provide the highest quality
review.
Those are the sorts of things that we are doing to ensure
that into the future, we will have the consumers of this
country protected when it comes to insurance products.
But at the same time, we have to look for steps where we
can speed the process so that products, quality products, can
become available more quickly.
And from an industry standpoint, on a similar standard to
what's happening with banking and securities products, so
everybody can ultimately benefit.
Mr. Fisher. Congressman, if I could also just respond from
a life insurance viewpoint. Rate regulation is not an issue
that pertains to the life market. It's really a property and
casualty issue. If that is a concern for anybody, it's not one
that applies to the life side of the house.
As Commissioner Fitzgerald suggested, we are not talking
about elimination of consumer protections, we are just talking
about more uniform but strict product requirements.
Chairman Baker. Thank you, Mr. Meeks, your time has
expired.
I'd like to express appreciation to this panel for your
participation. Members will reserve the right to formally
submit questions that they may advance to you at a later time.
We do appreciate your courtesy in appearing here today.
Thank you very much.
I'll call our second panel up.
Let me make this advisory. We really need to try to get our
testimony concluded and potential questions asked somewhere
around 5:00 o'clock, because I'm told we could have the final
vote of the day on the floor somewhere around 5:00.
So as you're getting settled, there is a potential to
summarize your statements as you proceed on this next panel.
Since we have five different individuals presenting
testimony, it will be difficult unless we expedite statements
as much as practicable.
[Pause.]
Chairman Baker. I'd like to introduce our first witness in
the hearing this afternoon, Mr. Robert Gowdy, President,
OneBeacon Insurance Group, Chairman, American Insurance
Association, (AIA), on behalf here today of the AIA.
Welcome, Mr. Gowdy.
STATEMENT OF ROBERT C. GOWDY, PRESIDENT, ONEBEACON INSURANCE
GROUP; CHAIRMAN, AMERICAN INSURANCE ASSOCIATION, ON BEHALF OF
THE AMERICAN INSURANCE ASSOCIATION.
Mr. Gowdy. Thank you, Chairman Baker. My company writes
both personal and commercial and property and casualty
insurance----
Chairman Baker. And pull that mike really close. They're
not very sensitive, sir.
Mr. Gowdy. Thank you.
We write property and casualty insurance throughout most of
the United States so we certainly know firsthand the challenges
of operating with 50 different regulators.
Today, I am appearing on behalf of the American Insurance
Association, which represents over 370 major property casualty
insurers. And on behalf of that entire membership, I'd like to
thank you for the opportunity to testify before this panel.
Speed to market or the ability to bring products to market
in a timely and cost-effective manner is a fundamental and
longstanding concern of the AIA and its entire membership.
I will focus my verbal comments today on three things: the
costs imposed by our current regulatory system, the challenges
in today's operating environment that necessitate speed to
market reform, and the benefits that such reform would provide.
Over the past two decades, most sectors of the financial
services industry have undergone regulatory reform to
facilitate speed to market for the introduction of innovative
products that have certainly reshaped our financial landscape.
I think customers have benefited greatly through lower
prices, and certainly expanded product and service options.
Against that backdrop of increasing reliance on marketplace and
competition dynamics in the other financial services, the
property casualty insurance industry stands out as an
exception.
We remain one of the most heavily regulated industries with
respect to both price and product controls. Each of the 50
States, the District of Columbia, and the various U.S.
territories impose their own substantive and procedural
filings, review procedures, approval requirements.
The costs imposed by our archaic State regulations are
systemic. A major problem is a process known as form
regulation, which you talked about before. Simply put,
excessive form regulation prevents insurers from developing
innovative new products to serve their customers better.
Each State has its own set of rules, procedures,
interpretation, idiosyncracies, regarding whether a new
insurance form or policy passes muster. Identical issues are
treated differently from State to State.
As an example, my own company launched a new combined auto
and homeowners insurance product for customers aged 49 and over
called ``Prime Time.'' Based on the results that we had had in
Canada and our own internal studies, we wanted to provide a
premium reduction and extra coverage. It was a clear winner for
consumers.
We started the filing process in 1998 and despite our best
efforts, 3 years later, we still don't have approval in five
popular States. This is just one example of the excessive form
regulation that creates enormous difficulties bringing quality
products to the market and allowing local insurers to receive
the benefits and the economies of a national operation, and
even more difficult, to serve a commercial customer operating
in multiple States.
In addition to discouraging innovation, the extensive
delays in new product approval are tantamount to a hidden tax.
According to Professor Richard Butler of Brigham Young
University, the loss of consumer welfare due to lengthy delays
in product approval and launch amounts to an average
countrywide hidden tax for new products of about 9 percent.
This implicit tax is borne by both commercial and personal
lines customers.
Rate regulation, or more specifically I should say, price
controls, impede an insurance company's ability to adjust
prices up or down. The result, consumers are hurt in several
ways and here are a few.
First, States that have stringent price controls have long
had the most expensive auto insurance costs in the Nation. In
contrast, as you heard earlier, jurisdictions that have adopted
a market-based approach have given consumers the lowest auto
insurance prices.
Second, lower risk policyholders, for example, safe
drivers, are forced to subsidize those who present a greater
risk. By encouraging riskier activities, such subsidies drive
up total system costs and may result in unfair redistribution
of income.
Chairman Baker. Can you give me a summary, because we've
exhausted our 5 minutes, if you can.
Mr. Gowdy. OK. In the States that have addressed the issue
of rate regulation, consumers, I think, benefit. Illinois is
the one State that does not have property casualty insurance
price controls of any kind and consumers clearly benefit.
Because of population, traffic density, the presence of a
large metropolis, and other factors affecting losses, Illinois
normally would be expected to rank among the top ten States for
auto insurance costs. However, Illinois is right in the middle,
runs 24th, 25th, or 26th, among States for auto insurance
prices, and I think competition has been the key factor.
There are significantly more auto insurance companies
competing in Illinois than in similar urbanized States such as
New Jersey or Massachusetts that have strict price controls.
One more example, if I have the time?
Chairman Baker. Very quickly, please.
Mr. Gowdy. That's right here in the District of Columbia,
which historically has been I think identified with heavy
regulation, bureaucracy, and high insurance costs. It is
another real world example of how speed to market reform can
dramatically improve and rejuvenate a sluggish insurance
market.
Since the District eliminated price controls, rates have
declined. DC. Director of Insurance Larry Morella, has said
publicly that many people have been pleasantly surprised at the
number of companies, even small companies who now are willing
to enter and sell policies in DC., which is a relatively small
market, as a result of the change in regulation here.
In closing let me just quickly revisit the benefits, based
on what's happened in Illinois, DC., and Michigan is another
example, savings in insurance costs, more product options and
insurance markets that are better equipped to keep up with
fast-paced change in our economy, new competitors entering or
re-entering the market, and a reduction in the subsidies that
lower risk consumers often have to provide to those of higher
risk characteristics.
In closing, I would like to thank the subcommittee and
specifically you, Chairman Baker, for holding these hearings.
Thank you again for the opportunity to speak today on an issue
I think is of critical importance for our industry, and how we
compete against the other financial services industries.
Thank you.
[The prepared statement of Robert C. Gowdy can be found on
page 114 in the appendix.]
Chairman Baker. Thank you.
I'm going to restate that everyone's full statement will be
made part of the record, and in the time you have, try to
summarize, because I think the questions from the Members will
be particularly helpful to your various interests.
Our next participant is Mr. Robert L. Zeman, Vice
President, Assistant General Counsel, National Association of
Independent Insurers, and on behalf of the National Association
of Independent Insurers and the Alliance of American Insurers,
and you are accompanied today by Ms. Rita Nowak, Assistant Vice
President, Alliance of American Insurers.
Welcome, Mr. Zeman.
STATEMENT OF ROBERT L. ZEMAN, VICE PRESIDENT AND ASSISTANT
GENERAL COUNSEL, NATIONAL ASSOCIATION OF INDEPENDENT INSURERS,
ON BEHALF OF THE NATIONAL ASSOCIATION OF INDEPENDENT INSURERS
AND THE ALLIANCE OF AMERICAN INSURERS, ACCOMPANIED BY MS. RITA
NOWAK, ASSISTANT VICE PRESIDENT, ALLIANCE OF AMERICAN INSURERS
Mr. Zeman. Thank you, Mr. Chairman, and subcommittee
Members as well. We appreciate the opportunity to testify on
this important issue. Together, our organizations represent
over one thousand property casualty insurance companies.
Support for the ability of insurers to compete in the
marketplace has been the hallmark of our organizations from
their inception.
We are hearing now though, from our members, unprecedented
levels of concern regarding the regulation of rates and forms
in many States and how that is hurting competition. And you've
heard many examples today. We won't belabor that.
As you've also heard, there is significant diversity across
the States on how property and casualty rates and forms are
regulated.
Many States have grossly outdated laws that impede
competition, and those include the prior approval laws. In our
written statement, we cover the spectrum of rate regulatory
laws, and we won't belabor the details there.
But there are States that take more competitive approaches
and our members, in an array of academic studies, have found
that the more competitive approaches have real value for
consumers as well as industry and regulators.
Both of our organizations have conducted surveys of our
members on a State-by-State basis regarding speed to market,
that is, the filing of rates and forms and how they are
treated.
And we received some very positive feedback regarding some
States with good examples including lesser forms to complete
and a clear process.
But we did find in other States, members' comments that
they found impediments to approvals in the rate and/or form
filing process.
Examples of the barriers to speed to market are listed in
our written statement as well.
I'll just point to two key ones.
Number one, they were concerned about slow review, even
acknowledgement of filings in a number of States, and unwritten
standards or desk drawer rules, which have already been
referred to in this proceeding.
Now some of these hurdles can be at least partly
ameliorated by implementing operational reforms at the
insurance department level, things that can be done right now
without statutory or regulatory changes.
However, in other States, there is a need for a public
policy change, a change in the law away from the prior approval
system toward a more competitive perhaps file and use system.
Now in constructive fashion, we are following up with each
and every State to discuss the results of the survey with each
State regulator, and having very valuable discussions.
What we have found is many States are indeed moving and
implementing some of these reforms. Now we mentioned that we
have found, our members have found great value in competition
across the States.
Our statement covers, and I won't begin to belabor here,
but I want to emphasize there is a growing and very current and
new body of academic evidence that confirms the value of the
more competitive systems across the States and the benefits
that they can have for consumers.
For example, through less subsidization, greater
availability of products. Those are clear benefits for
consumers in the more competitive environments.
And Illinois has been discussed already today, but we want
to make it clear, a number of other States, including
Wisconsin, South Carolina, and others, have taken more
competitive approaches so it has been shown that the States can
rise to the task.
Now our organizations support a model approach which also
we won't belabor here, but it's balanced with consumer
safeguards. Yes, it brings the benefit of competition in the
marketplace, but balanced with consumer safeguards including
making provisions to assure that consumers have adequate
information.
Part two of the solution, in addition to the public policy
or law changes, involves changes at the insurance department
levels, making them more efficient.
Now there are early signs in the State legislatures over
the past few years and even during this round of State
legislative sessions. A number of States did at least look at
this issue, and we worked of course as well with a number of
the State legislative groups, including NCOIL, who is here
today.
But the American Legislative Exchange Council has already
produced a model law on this subject. We hope NCOIL will do the
same for personal lines as it has done for commercial lines.
Of course, the National Conference of State Legislatures,
along with the NAIC have looked at this issue. And I've
shortened my testimony obviously. But the NAIC has been the
leader in driving the operational efficiency reforms at the
State level.
But again, in summing up, we need reform on two fronts;
changes in laws in the States where needed, and changes in the
operational efficiencies where needed.
Now we do see some signs of progress out there in the
States through the activities at the NAIC, adoptions by the
individual States of the recommendations of NAIC, studies by
the State legislative groups that I mentioned, and action in a
limited number of State legislatures thus far.
Clearly, however, there is a need for more reform in the
States, no question about it and the time has come for truly
unprecedented and more meaningful cooperative dialogue among
State regulators and legislatures, and us in the industry,
consumer representatives and other interested parties. We
pledge our assistance in doing all we can to help reach the
goal of modernization including better speed to market all
consistent with the vision of Gramm-Leach-Bliley.
I went a little over time. Thank you very much.
[The prepared joint statement of Robert L. Zeman and Ms.
Rita Nowak can be found on page 125 in the appendix.]
Chairman Baker. Thank you, Mr. Zeman.
Our next witness is Mr. James A. Blum, CPCU, Chairman and
President, Brotherhood Mutual Insurance Company, Chairman,
National Association of Mutual Insurance Companies, on behalf
of the National Association of Mutual Insurance Companies.
Welcome, sir.
STATEMENT OF JAMES A. BLUM, CPCU, CHAIRMAN AND PRESIDENT,
BROTHERHOOD MUTUAL INSURANCE COMPANY; CHAIRMAN, NATIONAL
ASSOCIATION OF MUTUAL INSURANCE COMPANIES, ON BEHALF OF THE
NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES
Mr. Blum. Thank you, Mr. Chairman and subcommittee Members.
My company writes in 30 different States, but I'm here today
particularly in my capacity as Chairman of the National
Association of Mutual Insurance Companies--or NAMIC--today.
Companies doing business across the country or in a single
State need to be able to enter a new market or establish prices
with a minimum of difficulty.
The NAMIC Board has adopted a pro-competition model for
commercial and personal lines of insurance similar to the
regulatory framework used in Illinois.
NAMIC believes a pro-competition model is the most
effective public policy to achieve speed to market.
Illinois discontinued prior approval requirements 30 years
ago, as was mentioned earlier today, for rates, and
consistently their rates are below other States with similar
demographics.
There is more competition among homeowners and automobile
insurers in Illinois than in any other State. After the South
Carolina legislature modernized auto insurance ratemaking
practices in 1997, South Carolinians benefited from the choices
provided by almost twice as many insurers.
To refute what I have said in favor of competition, some
will refer you to what has been written about California's
celebrated passage in 1988 of Proposition 103.
Auto insurance rates have fallen and complaint volume at
the California Department of Insurance is low. However, it was
a series of explicit public policy choices to limit the cost of
insuring drivers, not the institution of prior approval, that
has caused prices to go down in California.
Then there is New Jersey. New Jersey of course was spoken
of today as well. Prior approval is one of many regulatory
obstacles that drive up costs in the State, and six of the ten
largest auto insurers do not do business in New Jersey.
And we heard about State Farm and AIG today.
Obviously, there will be even less incentive to lower rates
among those companies left in the New Jersey market.
Holding the NAIC solely accountable for enacting insurance
regulatory reforms is not a realistic expectation. Individual
regulators clearly have a role to play in their States to raise
the profile of and enlist support of these important market
reform issues.
Given the non-binding nature of the NAIC, I would submit
that the more powerful players in any struggle for State
regulatory modernization are the State legislators.
Working closely with State legislative organizations like
NCOIL, the NAIC has been able to coordinate enactment of the
necessary legislation for accreditation in nearly every State
across the country in the 1990's.
This example underscores the type of action that we all
seek to achieve for speed to market reform.
Property casualty markets are structurally competitive.
There is no apparent benefit to companies or consumers in a
system where rates must be approved prior to their
implementation.
NAMIC supports model legislation to be adopted by each
State to establish competition as a matter of State law,
relieving all commercial writers from prior approval
requirements and allowing personal lines writers to set the
price of their product without government approval.
One academic study has concluded that in States with the
strictest regulatory approval process, entry to the market can
take almost 90 percent longer than it does in States with fewer
approval requirements.
There are also widespread industry complaints about the use
of so-called desk drawer or non-statutory regulatory
requirements. In other words, regulatory decisions are being
based on rules with no basis in law.
These hearings are helpful to the reform process and we
welcome them. They keep all parties engaged in the discussion
of how competition can be enhanced in all segments of the
financial services industry.
No insurance company and no State will be unaffected by the
outcome of this debate.
The NAIC did well to develop its statement of intent in
March 2000, focusing its attention on the most pressing market
reform issue, speed to market.
But this is a preliminary, critical step of an important,
but nonetheless voluntary organization. Ultimately, the
accountability for reforming insurance regulation is with State
legislatures. We believe they are up to the task.
Thank you for this opportunity to appear today, and I tried
to stick closely to the text.
[The prepared statement of James A. Blum can be found on
page 142 in the appendix.]
Chairman Baker. Thank you very much, Mr. Blum, we certainly
appreciate your testimony here today.
Our next witness is Mr. J. Robert Hunter, Director of
Insurance, Consumer Federation of America.
Welcome, Mr. Hunter.
STATEMENT OF J. ROBERT HUNTER, DIRECTOR OF INSURANCE, CONSUMER
FEDERATION OF AMERICA
Mr. Hunter. Thank you, Mr. Chairman.
I am Bob Hunter, Director of Insurance for the Consumer
Federation of America, and I served as Federal Insurance
Administrator under Presidents Ford and Carter, and as Texas
Insurance Commissioner.
First, I would like to tell Congress that these hearings
and other activities by Congress have been used by the
insurance companies to try to push the States and NAIC into
submission to cut away vital consumer protections, not just to
get rid of the fat, but to go beyond that, to cut into
protections what we need.
I just have a few comments. I'll try to stay within 5
minutes.
Consumers do not want speed to market for bad products.
There is no evidence that consumers are clamoring for insurance
products, nor any evidence that there are products that are not
available.
There's certainly no pressure for speed to market coming
from the victims of life insurance company vanishing premium
abuses or churning abuses, or race-based premiums.
Deregulation does not assure more competition or beneficial
competition. For instance, deregulated policy forms can make
price competition impossible. That's why Illinois regulates
policy forms.
Competition is not always beneficial for consumers. Some
forms of competition are absolutely harmful to consumers. For
example, competition that leads to insolvency. Nobody proposes
getting rid of that regulation.
Reverse competition in credit insurance, where competition
is for the bank or car dealer and the competition drives up
rates to allow bigger kickback commissions. Fine print
competition where insurers would hollow out the coverage with
clever policy language to offer low rates, but with no
coverage, and selection competition, such as redlining in our
cities.
These are competitions that should not be allowed. Just
enacting deregulation without making competition effective will
not produce good results. Prior approval rate and form
regulation intelligently coupled with the repeal to many of the
State anticompetitive laws, such as antitrust laws not imposed,
works best.
Consumers do not care if the Federal Government or the
States regulate insurance. We only care that the protections be
acceptable and excellent.
Consumers do not favor a system where the regulator gets to
choose who regulates them. This is a sure prescription for a
race to the bottom in insurance regulation.
Consumers support many of the changes that the NAIC has
underway. We identified many of the ways States could shorten
the regulatory process. We supported a 30-day limit on final
action. We supported getting rid of the desk drawer rules.
What we don't support is mindless deregulation, which we
say is just stopping regulation to make competition happen.
That is not the way to make competition happen. States have not
fared well in controlling unfair and deceptive policies and
practices. MetLife, John Hancock, Prudential, all those abuses
were raised first in private litigation.
We fear that mindless deregulation, as proposed by the
insurers, will result in a bonanza to class action lawyers as
it is certain that worse products will be in the market if
deregulation occurs.
Regulation is also needed to ensure that consumers have
access to information. In my written testimony, I listed eight
consumer principles and standards for regulation that consumers
use to determine if a State or Federal bill meets consumer
needs.
The NAIC has moved fast to deregulate, since nothing
motivates like the fear of loss of turf. However, we think
they've gone too far in commercial insurance since small
businesses, being not sophisticated, should have regulatory
protections that now they have eliminated.
In personal lines, forms must be regulated, as I said, and
rates, particularly risk classifications, should be regulated.
These have profound impacts on people.
For example, a consumer's credit history now carries more
weight in determining auto insurance premiums than driving
record.
Another class being tested is global positioning satellites
in autos. And what's next? Certainly health and life insurers
will use the human genome to rate risks if they're not
regulated.
One State stands out as having the best auto insurance
regulation. Our study shows that California rates have fallen
12 percent since 1989, while in a typical State rates rose by
40 percent, and the profits for insurers were excellent,
presents the best method.
So we ask Congress to carefully consider all the proposals
you see before you to see if principles and standards that
we've set out for consumer protection are part of any action
you take. We would like to work with you, Mr. Chairman, on
helping set those standards if, in fact, that is your desire.
[The prepared statement of J. Robert Hunter can be found on
page 151 in the appendix.]
Chairman Baker. Thank you very much, sir.
Mr. Philip R. O'Connor, President, PROactive Strategies,
Inc., former Director of Insurance, Illinois Department of
Insurance.
Welcome, Mr. O'Connor.
STATEMENT OF PHILIP R. O'CONNOR, Ph.D., PRESIDENT, PROACTIVE
STRATEGIES, INC,. FORMER DIRECTOR OF INSURANCE, ILLINOIS
DEPARTMENT OF INSURANCE
Mr. O'Connor. Thank you, Mr. Chairman, and thank you to the
subcommittee, and especially thank you to your staff. They've
put in a lot of hard work getting this hearing together very
quickly, and I hope it is not unappreciated.
You know, this is probably the longest discussion that's
ever been held anywhere on the Illinois system.
And I find it particularly interesting, because the
Illinois system is not well-known and is not well-understood.
When I came to the Illinois Department of Insurance in 1977 as
the Director of Research, that was only 6 years into the
process for the system that we have in Illinois today.
All that time, I undertook to conduct some research that
was the first research of its kind to compare, as a group,
competitive States with prior approval States. And similar
research has been conducted now many times over in the
subsequent years.
The academic conclusion of the research is pretty clear.
There are really no benefits that flow from prior approval that
you can't otherwise get, and there are actually a lot of
opportunities for unintended consequences.
However, I'm going to admit to something here. In those
early years of the Illinois system, I would say for the first
10 years, we were actually a little embarrassed by it. We felt
a little bit like we were going to the NAIC meetings and our
mothers had dressed us funny.
We were the only ones that really had no law dealing with
property and casualty insurance rates.
And after I did my research, and after I served as
director, I gradually did come to the conclusion that there was
really no point in the entire ritual that was being engaged in
around the country.
That is really the benefit of the Illinois system. We can
go into more detail later as to what all the different features
are that prevent consumer abuse in Illinois, but the basic
thrust of it is that we rely on the antitrust laws, we rely on
competition, we rely on strong market conduct and solvency
regulation. In Illinois there is a focus on directing
regulatory resources in a way that is more productive.
Virtually every important innovation in solvency regulation
in this country has come out of Illinois in the past 25 to 30
years. We can go into that in more detail.
Let me comment briefly on Bob Hunter's reference to
California.
Many of us have seen the Consumer Federation of America
paper that Bob did, and I have no doubt that the conclusions in
it are held by him and CFA very sincerely.
I have to disagree though on an important point. Everyone
agrees the situation today in California is substantially
better than it was in 1988 when Prop 103 passed. The question
is how come?
The ``how come'' that I provide to you is that there have
been a number of things in California that have gone directly
to the underlying loss costs in the system that have come down.
These include the decision just before Prop 103 by the
California Supreme Court to eliminate bad faith lawsuits by
third parties. We've seen a variety of other things, whether
it's California being the first State to go to primary
enforcement of seatbelts, much more aggressive drunk driving
enforcement and so forth.
So what's really happened in California in the last 10
years, after Prop 103, is it's taken about 10 years to get
California pretty much back to its ranking a little bit higher
than the middle of the pack in this country on auto insurance
rates, just where it was about 5 or 6 years before Prop 103.
They had a terrible run up in costs in California. The
public reacted. I think it was an incorrect diagnosis. But the
issue deserves a lot of analysis and a lot of research.
One final point about California. There is a problem in a
system when, for 10 years on a sustained basis, the return on
net worth, that is the profit level in auto liability, is twice
the national average.
Now I'm not against profits, but there is a difficulty
there. That difficulty probably is a manifestation of the
reluctance of the insurance companies to lower their rates
voluntarily, when loss costs have come down, out of fear that
once having lowered them, if costs go back up again, it will be
a real problem trying to raise them to match those costs again.
And that's one of the inadvertent, unintended consequences
of prior approval, whether it's in California or anywhere else.
It creates so much uncertainty that it actually tends to drive
up the cost of capital and makes companies more reluctant to do
that which they would otherwise do in a competitive system.
So I would recommend that people look very closely at the
Illinois system. It could fit on about two pages, both the
statutes and the regulations that are associated with it. But
over 30 years it's worked extraordinarily well.
[The prepared statement of Philip R. O'Connor can be found
on page 174 in the appendix.]
Chairman Baker. Thank you very much, Mr. O'Connor, and I do
take great interest in the model and do wish to explore further
an understanding of how it has functioned for consumer
interest.
I do wish to have better in-depth understanding of the
California model and the ramifications there, given the claims
made by Mr. Hunter.
I'm going to facilitate this a bit, so that the other two
Members might choose to pursue a couple lines of questions.
I have a couple of statements for anyone who chooses to
respond in writing at a later time relative to my inquiry on
the progress made to date by the State-led effort and the
suggestion that we take CARFRA, CARFRA/NARAB, or some unknown
standard yet to be determined, and establish that as the goal
in some duration, 3 years, 4 years, 5 years, based on the
presumption that earlier witnesses' testimony are correct. At
least on the property and casualty side, there may be
difficulties in moving toward more uniformity. Is there any
advisability to that approach versus some, as another member
suggested earlier in the hearing, is this really all about a
national charter?
No, it's not. It is an attempt to find out how, I believe
for consumer benefit, we standardize offerings and forms so you
can compare product and see what prices really look like, which
sometimes is complicated and difficult to do today.
And also, it is to expedite the entry of new products into
the marketplace and not unreasonably restrain development of
those products.
And if you would just get that back to us at your
convenience, but obviously the sooner the better.
And then, Mr. Hunter, I want to let you know that I read
everybody's testimony in advance of the hearing, and I read
every line. I have some concerns, not as to your principal view
nor the claims made with regard to the effort to unreasonably
deregulate at the cost of the consumers' interest.
Mine goes more toward the statements concerning the
subcommittee and NAIC. Page 2: ``With regard to this hearing,
consumers do care that insurers have been blatantly using the
threat of congressional interest, including this hearing, to
bludgeon the NAIC and the States into submission.''
That parallels sort of the opening line of your testimony
today. That would seem to indicate to me you think that, for
whatever reason, I'm in some insurance agent's back pocket.
I don't expect a response. On page 5, I see: ``NAIC had
ample opportunity, after its own studies indicated a problem,
to move in the direction of protecting consumers, but retreated
when the industry threatened to cut off database funding, a
primary source of NAIC funds.''
If there's evidence of that, I want to know about it.
Third, page 7: ``It is unfortunately clear that the NAIC
approach is leading toward mindless deregulation.''
I'm the last person in America to defend an insurance
commissioner, given Louisiana's history, but I have to State on
the record that I find that claim with regard to the 50 State
regulators to be somewhat troublesome that they would be viewed
as moving without any concern for consumers at all.
And then finally: ``We ask Congress not to allow the
industry to continue to use you as a threat to gain the
mindless deregulatory changes they propose.''
My point here is not to engage in a tit for tat kind of
exchange with you at all. I just find these comments with
regard to our process here and our intentions, particularly
given the scope of your membership, to be problematic.
I do want to engage with consumer associations, all of
them, not for the purpose of disenfranchising anyone to protect
profits. I think other Members can assure you I have weighed
into a number of topics of considerable controversy with
perhaps a degree of enthusiasm that some Members have not
enjoyed.
I will weigh into this one in the same manner, but I do not
want the public record to have, on the face of it, a statement
unanswered that appeared to go at the heart of our motivation,
and I would yield to the gentleman if he should choose to
respond.
Mr. Hunter. I'll be happy to send you a letter with all the
quotes that are being used by the industry. I never implied
you, sir, or the subcommittee. I said the industry was using it
that way, and I will be happy to send you the quotes.
Chairman Baker. I would appreciate it. If I'm being used by
somebody, I'm either stupid or I'm not aware of my
circumstances. I yield back my time.
Ms. Jones. Thank you, Mr. Chairman. I will attempt to be
brief. Mr. Hunter, I wanted to give you an opportunity, in my
short amount of time, because you are the consumer advocate on
this panel of wonderful insurance industry folks.
I don't mean to disparage anybody, but I want to give you a
chance to respond to any of the statements by the other people
that testified, Mr. Hunter.
Mr. Hunter. Sure, there are a couple. I don't think we've
been able to identify any products that haven't been able to
get to market. I think there are probably very good reasons why
a combined homeowners auto policy and for people over 49 years
old was disapproved in a few States, but it could very well be
discriminatory against poor people and younger people. And so I
don't think that we've identified a product that hasn't gotten
to market that maybe should have. I've heard a lot about 2-year
delays and 3-year delays.
We've done some research on that. A lot of the delays are
like this. A filing comes in. Thirty days later, some questions
are asked. A year later the company responds, and then it's
approved. Then the company complains it took over a year to
approve a product. Well, it was in their control for a year.
And that happens quite frequently. I won't get into an argument
with my friend, Mr. O'Connor, about the California study except
to say that my research covers the points he made, and I think
I have shown that California is the best system for consumers
and excellent for the industry as well.
Ms. Jones. Several of you have cited studies. Can you tell
me the source and the funder of any of the studies that you
have discussed that support your statements? I believe, again,
sir with the white hair. I'm sorry, I can't see your name,
because I left my glasses. I think you cited a study. Mr.
Gowdy? Thank you. You cited a study, and also, sir, to the far
right, you also cited a study that you support. Can you tell me
who did these studies? Maybe if I used my list I might be
better off. I apologize.
Mr. O'Connor and Mr. Gowdy both cited studies in their
statements, and I was wondering who completed the studies and
where and who funded the studies.
Mr. Zeman. I'll begin. Actually this is Bob Zeman, and it
was in my testimony, both written----
Ms. Jones. Excuse me, Mr. Gowdy. Mr. Zeman. OK.
Mr. Zeman. I briefly reference the number of academic
studies. They were produced by a number of well-known
professors, including Professor Scott Harrington from the
University of South Carolina and Professor Darcy from the
University of Illinois.
Ms. Jones. Do you know who funded either of those studies?
Mr. Zeman. As far as I know, they were actually funded by
the universities and also in conjunction--some of these were
done by the Brookings Institution as well.
Mr. O'Connor. Congresswoman, there are studies over the 30
years that have looked at the question: ``Is market performance
better under competitive laws versus prior approval?''
The first of those studies was actually financed primarily
by State insurance departments. These were the studies that
were conducted in the later 1970's. I did one of the first ones
at the Illinois Insurance Department as a Research Director.
A large number of studies were done in that context.
Following that period of time, the insurance industry,
either individual companies or some of the trade associations,
would finance some of these studies.
The General Accounting Office performed one or two of
these. More recently, there have been a combination, I believe,
some in the States, some by industry funded by companies, some
by academics and so forth. And then in the more recent
Brookings Institution ones, I believe that there may have been
some company contributions to Brookings.
Certainly in my own studies that I've done over the years,
I was never asked to find any particular thing. It is fair to
say that my original work, done at the Illinois Insurance
Department, led to convincing, a, myself; b, ended up
convincing the National Association of Insurance Commissioners.
We ended up putting out a model bill in 1981 on competitive
rating. We actually ended up convincing the industry, which was
very skeptical when it came to worker's compensation price
competition, which many of them adamantly opposed, and which we
achieved in Illinois in 1982. So it's kind of a real mix.
Ms. Jones. Thank you. Let the record be clear that I did
not infer that any findings of any of the studies were asked
for in any particular way.
I come from a legal background as a judge and a prosecutor,
and that's always an appropriate question when someone says
they produced a study to find out who wrote it and who did it.
Mr. O'Connor. My mother always likes me to keep my skirts
clean on these things.
Ms. Jones. I'm out of time. But if the Chairman will allow
you to respond, I'd be glad to hear your answer.
Mr. Gowdy. Congresswoman, the study I referred to was done
by Professor Butler at Brigham Young, that was, I think, funded
by the Brookings Institute. Amongst its findings was a ranking
of States by how long they took to approve various forms and
rate filings.
And as the Chairman noted, Louisiana--pardon?
Ms. Jones. Where was Ohio?
Mr. Gowdy. Ohio was in the middle.
[Laughter.]
Mr. Gowdy. I think Louisiana did take the top rank, and
your Chairman cited some of the numbers from that study.
Ms. Jones. Thank you, sir. Thank you, Mr. Chairman.
Chairman Baker. Yes, ma'am. Ohio was number 19. Louisiana
was number one with an average across all lines of 222.7 days.
Ohio had an average of 80.0 days. So once again, you've
excelled greatly in your achievement.
[Laughter.]
Chairman Baker. Mrs. Biggert.
Mrs. Biggert: Thank you, Mr. Chairman.
Once again I'd like to welcome someone from Illinois. As
State Representative, Terry Parke is the insurance guru of
Illinois, I think I'd have to ask the question, what does that
make Phil O'Connor? I guess it would be the Grand Pubah of
insurance in Illinois.
I also had the opportunity to work with him when he was
head of the Commission where we created the Human Service
Agency in the State of Illinois. So he's done an awful lot for
the State, and I welcome him here.
My question is, it's my experience that Illinois consumers
have been very accepting. I know there was some reference that
consumers don't really care what kind of regulation there is,
but they've been accepting of the Illinois regulation structure
because we, as State legislators, when I was there and
Representative Parke testified, that there really is nothing
brought forward to the State legislature to change the system.
Could you tell us in your experience if you think that's
the case? Are consumers concerned about how insurance is
regulated in Illinois or not regulated?
Mr. O'Connor. Let's face it. Nobody's crazy about
insurance, OK? We don't really like buying it. We don't like to
have to deal with it when there's a claim, but we're sure glad
we have it. When we do want to buy it, we want to have a fair
price.
I think generally speaking in Illinois, things have worked
well. The issue hasn't risen to a high degree of controversy
I'd say in about 20 years.
The last time we had a controversy in Illinois, it was a
very abbreviated one. It was in 1986 and 1987. And it really
had to do with liability insurance for things like day-care
centers, municipalities and so forth.
I'll give you one example. One of the things that the
competitive rating situation in Illinois has forced regulators
and the General Assembly to do is to be much more creative
about dealing with problems rather than simply resorting to
price regulation. That's why in the late 1970s and early 1980s,
Illinois was the first and, I would submit, to this day has
done the best job of dealing with the problem of urban
insurance availability.
This goes to the question Bob Hunter was dealing with about
products not getting to market. A lot of States had a heck of a
time or companies had a heck of a time in some States getting
to market new homeowners products that dealt with the problem
of the replacement cost of a home, if it burned down, being
much greater than the market value. So they were very reluctant
to write homeowners policies on such a home because, by golly,
if it burned down it would cost $200,000 to replace it. You'd
have to do a cash settlement, while the market value might be
$50,000.
So in Illinois what we came up with and pushed the
companies toward was a policy that fixed the house or gave you
the market value. This, among other things, really solved the
problem in Illinois, to this day, of availability of
conventional homeowners insurance in every neighborhood in the
city of Chicago.
And I think that was one of the good things about not
having rate regulation. We had to think of real solutions
rather than dream up something with rate regulation they made
everybody happy for a short period.
Mrs. Biggert. Right. Thank you. And I did want to also ask
a question of Rita Nowak who is here. I'm also delighted to
welcome her, because she's one of my constituents from Downers
Grove, Illinois.
Ms. Nowak. Thank you.
Mrs. Biggert. Again, welcome to you. We've been talking a
lot about the regulatory variances that occur State by State,
but I understand that there are also variances within a State
based on the individual lines of businesses. How much does this
lack of uniformity across product lines cost insurance
companies in terms of approval time?
Ms. Nowak. The variances within a State by product line
probably are not costing insurers a significant amount of money
at this point in time.
Normally the variances are between personalized and
commercial line products. With commercial line products, the
regulations are a little bit broader, a little bit easier to
deal with. In the commercial lines regulatory environment,
you're going to find more file and use in forms, more open
competition on the rate side.
On the personal lines side, they're more restrictive.
Companies are aware of that. They're looking for
functionality here. If they understand the functionality of the
law and how it works, then they're able to file their products
and then subsequently get them approved.
Mrs. Biggert. So you don't see that we need to really
address the problem yet?
Ms. Nowak. At this point, from our members' perspective, at
least from the Alliance perspective, they have not identified
that as a critical issue.
What our members are looking at is functionality. If it's a
prior approval let's say for a personal automobile, we should
still be able to see that product get approved within 30 days.
They're looking for functionality.
Mrs. Biggert. Thank you.
Mr. Gowdy. May I respond to that?
Mrs. Biggert. Absolutely.
Mr. Gowdy. From the AIA member companies, this is a problem
for us. The CARFRA example that was used by NAIC applied only
to life products at this point in time. There is really no
similar standardization process that's going on in the property
casualty area, other than this attempt to produce the rules and
get these desk type standards out on the table and get them
into a manual.
Massachusetts tried it for just one product, and their
manual for one product was three inches thick.
This is a major problem of rules being onerous, rules being
different in terms of what it takes to file and approve a form
or a rate in either commercial lines or personal lines.
Mrs. Biggert. And do you have some possible solutions to
this problem?
Mr. Gowdy. I think it's absolutely necessary that we let
the marketplace play a bigger role and try to keep the rules
and standards to the things that are important such as
financial solvency. The States have not done a very good job,
and we have many examples of that. And market conduct. And
there again, I think we can improve upon that dramatically.
Mrs. Biggert. Thank you. I see my time is up. Thank you,
Mr. Chairman.
Chairman Baker. Thank you, Mrs. Biggert.
Unless there are further questions, I want to thank each of
you for your patience in wading through a lengthy hearing this
afternoon and for your participation.
We will keep the hearing record open for an additional 30
days longer than usual in order to facilitate your answers to
prior questions. And I'm informed Members also may be
forwarding additional questions for you to consider.
And if you have additional perspectives you'd like to offer
in light of the proceedings, we would welcome those as well.
Thank you very much. The hearing is adjourned.
[Whereupon, at 5:05 p.m., the hearing was adjourned.]
A P P E N D I X
June 21, 2001
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