[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]





                OVER-REGULATION OF AUTOMOBILE INSURANCE:
                       A LACK OF CONSUMER CHOICE

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             AUGUST 1, 2001

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 107-42

                                _______

                  U.S. GOVERNMENT PRINTING OFFICE
74-624                     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, Texas                 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 FOSSELLA, New York              JOSEPH CROWLEY, New York
GARY G. MILLER, California           WILLIAM LACY CLAY, Missouri
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 Oversight and Investigations

                     SUE W. KELLY, New York, Chair

RON PAUL, Ohio, Vice Chairman        LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              KEN BENTSEN, Texas
ROBERT W. NEY, Texas                 JAY INSLEE, Washington
CHRISTOPHER COX, California          JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida                 DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina      MICHAEL CAPUANO, Massachusetts
JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York              JOSEPH CROWLEY, New York
ERIC CANTOR, Virginia                WILLIAM LACY CLAY, Missouri
PATRICK J. TIBERI, Ohio


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    August 1, 2001...............................................     1
Appendix:
    August 1, 2001...............................................    27

                               WITNESSES
                       Wednesday, August 1, 2001

Ahart, Thomas, CPCU, AAI, President, Ahart, Frinzi & Smith 
  Insurance, on behalf of the Independent Insurance Agents of 
  America........................................................     7
Hunter, J. Robert, Director of Insurance, Consumer Federation of 
  America........................................................     9
Litan, Robert E., Vice President and Director, Economic Studies, 
  Brookings Institution..........................................     4
Snyder, David F., Assistant General Counsel, American Insurance 
  Association....................................................     6
Zeman, Robert L., Vice President and Assistant General Counsel, 
  National Association of Independent Insurers...................    11

                                APPENDIX

Prepared statements:
    Kelly, Hon. Sue W............................................    28
    Oxley, Hon. Michael G........................................    36
    Ferguson, Hon. Mike..........................................    38
    Ahart, Thomas................................................    55
    Hunter, J. Robert............................................    62
    Litan, Robert E..............................................    39
    Snyder, David F..............................................    46
    Zeman, Robert L..............................................   103

              Additional Material Submitted for the Record

Kelly, Hon. Sue W.:
    ``Jersey Way Wrong Way,'' New York Daily News ...............    30
    State Rate and Form Law Guide................................    32
Hunter, J. Robert:
    Written response to a question from Hon. Janice D. Schakowsky    90
Alliance of American Insurers, prepared statement................   125

 
                OVER-REGULATION OF AUTOMOBILE INSURANCE:
                       A LACK OF CONSUMER CHOICE

                              ----------                              


                       WEDNESDAY, AUGUST 1, 2001

             U.S. House of Representatives,
      Subcommittee on Oversight and Investigations,
                           Committee on Financial Services,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2 p.m., in 
room 2220, Rayburn House Office Building, Hon. Sue W. Kelly, 
[chairwoman of the subcommittee] presiding.
    Present: Chairwoman Kelly; Representatives Tiberi, Inslee, 
Schakowsky, Moore, Capuano, Crowley, and Clay.
    Also present: Representative Ferguson.
    Chairwoman Kelly. First of all, I want to welcome all of 
you. This hearing on the Subcommittee on Oversight and 
Investigations is going to come to order. Without objection, 
all Members' opening statements will be made part of the 
record.
    This afternoon, we are holding a hearing on the effects of 
State over-regulation of automobile insurance on consumer 
choice. State insurance commissioners bear a responsibility to 
promote a competitive climate in which consumers can choose 
from a number of stable and solvent companies at competitive 
prices. When that climate is not maintained, there are going to 
be warning signs.
    Unfortunately, the alarm bells are sounding in New Jersey 
and Massachusetts. It is apparent from the exodus of companies 
from New Jersey and the refusal of many insurance companies to 
do business in Massachusetts that the regulatory climate for 
automobile insurance in those States has turned into an 
oppressive one.
    In New Jersey, over one-half of the 15 largest auto 
insurers in the country have either already left or will leave 
in the near future. Over one million people in New Jersey will 
lose their automobile insurance with a dwindling supply of 
alternative companies willing to do business in that State.
    Massachusetts might be in even worse shape, with two-thirds 
of those same 15 largest insurers either writing little or no 
business or refusing to do business at all in the State. Why 
are the people of Massachusetts denied the right to do business 
with the insurer of their choice? Why do they continue to 
tolerate a system that has driven two-thirds of the largest, 
most competitive providers out of the State?
    Meanwhile, in free-market States such as Illinois and South 
Carolina, there are numerous auto insurance companies providing 
consumers with real choices at competitive prices without 
subsidizing risky drivers with bad records. For instance, in 
South Carolina, the number of insurers accessible to consumers 
has doubled since the State eliminated artificial price 
controls. It is that contrast that we are here to examine 
today.
    I would note that the New York insurance superintendent has 
been watching the events in these States very carefully, 
especially across the border in New Jersey, and has drawn the 
right conclusion. If there is a problem with high auto 
insurance rates, the answer is more competition and sound fraud 
enforcement, not just regulation. That is why New York is 
pursuing a package of real reform to catch and prevent 
insurance fraud, bar drivers who won't pay their insurance from 
recovering damages, and allowing more choices and incentives 
for lower cost repairs. That sounds like reform, and that will 
bring real results for New York's drivers.
    I have a recent op-ed, written by the New York Insurance 
Superintendent, Greg Serio, that I believe sets out a strong 
case for the reforms that they are working on in New York. I am 
going to ask unanimous consent to have it made part of the 
record.
    Hearing no objection, so ordered.
    [The information can be found on page 30 in the appendix.]
    Chairwoman Kelly. Before us today, we are honored to have a 
distinguished panel of auto insurance experts to share their 
thoughts and observations with us on these issues. I thank all 
of you for taking the time out of your day to be here and to 
share your thoughts with us. We need to take a look at how the 
regulations in these States are being affected by the State's 
regulation and the consumers' needs, and I look forward to 
discussing those issues with you.
    I also want to inform Members of my subcommittee and their 
staff, it is my intention to strictly enforce the 5-minute 
rule, and I would appreciate their cooperation in notifying 
their Member if their Member decides to appear.
    We have been joined today by my friend from New Jersey, Mr. 
Ferguson. He is a Member of the Financial Services Committee, 
but he is not a Member of this subcommittee. I would ask 
unanimous consent to allow him to participate as if he was a 
Member of this subcommittee.
    Hearing no objection, so ordered.
    In addition, we have received a statement from the Alliance 
of American Insurers, and I am going to ask unanimous consent 
to have that made part of the record.
    Hearing no objection, so ordered.
    [The prepared statement of the Alliance of American 
Insurers can be found on page 125 in the appendix.]
    Chairwoman Kelly. I am now going to go to the panel, and I 
want to inform the panel that I am not only pleased to have you 
here today, but I am also going to ask you to remember that we 
have your written statements, therefore, I will ask you to hold 
your remarks within the 5 minutes.
    I would first like to go to Mr. Ferguson, who has an 
opening statement, I believe.
    [The prepared statement of Hon. Sue W. Kelly can be found 
on page 28 in the appendix.]
    Mr. Ferguson. I do have a brief opening statement.
    Chairwoman Kelly. Thank you.
    Mr. Ferguson. First of all, I thank the chair for your 
graciousness in hosting me here today. As a Member of the Full 
Committee who certainly has an interest not only in this topic, 
but also in today's proceedings, in particular, since we are 
talking about, one of the States we are talking about is my 
home State. I do have a brief statement, and I appreciate the 
opportunity to be with you here today.
    Certainly, I know today is not a beat-up session on New 
Jersey or Massachusetts, as much as it is a learning process, 
looking at some of the things that perhaps we can improve upon 
and certainly maybe some things that are not going well in some 
of our States.
    Automobile insurance in my home State of New Jersey, as we 
know, is in dire need of reform. New Jersey has been 
overburdened with strict regulations resulting in a reduction 
of competition and choice between insurance companies with 
equitable rates. I appreciate my presence here today and the 
chair for having me here today to attend the hearing and to 
focus on this lack of consumer choice in New Jersey and some of 
the announced withdrawals of four auto insurers in our State 
within the last year.
    Specifically, I am interested in discussing with our panel 
the challenging regulatory climate in New Jersey and the 
benefits of a much more competitive market found in States like 
Illinois and South Carolina. The State of New Jersey auto 
insurance market has been criticized for being both politicized 
and over-regulated, and also we have been criticized for 
enacting laws within our State in the last few years which have 
crippled the market.
    Recently, two of the top five automobile insurers announced 
that they were being forced to withdraw from the New Jersey 
market, citing the burdensome regulatory system, exceedingly 
delayed decisions by our State commissioner and restrictions on 
rate adjustments.
    In addition, in 1999, the State Commission required a 15-
percent rate reduction to policyholders, forcing insurers to 
provide the cut before enacting many of the reforms that would 
have enabled insurers to adjust their rates without increased 
market volatility. Some insurers have not been able to reduce 
by 15 percent the rate reductions within the strict State 
regulations and have chosen to exit the State, rather than to 
try and work with the State Commission.
    Today, New Jerseyans have seen a loss of consumer choice 
and an increase in rates without relief from some of the 
regulatory burdens, leaving potentially a million drivers 
uninsured. It is my hope that today's witnesses will touch upon 
this research and the analyses that they have done within the 
State and to provide some suggested solutions to the growing 
number of uninsured drivers in my home State.
    I thank the chair for your graciousness again for having me 
here. I yield back.
    [The prepared statement of Hon. Mike Ferguson can be found 
on page 38 in the appendix.]
    Chairwoman Kelly. Thank you very much. We are delighted to 
have you here.
    I am going to move now to the panel, since there are no 
more opening statements, and we have before us Mr. Robert 
Litan, the Vice President and Director of Economic Studies for 
the Brookings Institution.
    Mr. Litan, I apologize for the fact that we haven't got a 
long enough table there. You are really kind of hanging on by 
your fingernails, but thank you for hanging on and for being 
here.
    Mr. Litan worked in two capacities for the Clinton 
Administration. He was the Associate Director for the Office of 
Budget and Management and the Deputy Assistant Attorney General 
for the Antitrust Division of the Department of Justice. I am 
going to introduce you as you speak, if you don't mind. I am 
not going to introduce the whole panel now. In the interest of 
time, I would like to go on with you first, Mr. Litan.
    As I said before, we have your written statements. Without 
objection, they will be entered as a part of the record. So, if 
you would be willing to try to stay within the timeframe, that 
would be appreciated. I just want to explain the lighting 
system. There is a box here with the lights. The green light 
means you have 5 minutes, the amber light means you have 1 
minute left, and when the red light comes, it means that you 
might just hear me tapping. That means summarize it quickly.
    Thank you. It is an important issue. I don't mean to make 
light of the issue, but the thing is that we need to hear from 
you. So I want to hear from you all, and then we will have some 
questions.
    So, Mr. Litan, will you please proceed.

  STATEMENT OF ROBERT E. LITAN, VICE PRESIDENT AND DIRECTOR, 
            ECONOMIC STUDIES, BROOKINGS INSTITUTION

    Mr. Litan. Thank you very much, Madam Chairwoman. It sounds 
like you have already summarized my testimony.
    [Laughter.]
    Mr. Litan. But what I am going to do here today is 
summarize very briefly the major findings of a study that will 
be released by the AEI-Brookings Joint Center, which I 
codirect. This study was directed by Professor David Cummins of 
the University of Pennsylvania. Here are a few key points that 
are worth noting:
    Number one, academic scholars, including those who 
participated in our study, overwhelmingly agree that auto 
insurance rates should not be regulated. Insurance is not a 
natural monopoly, but instead, over 100 firms typically compete 
in most states. Like other firms in our economy, insurers ought 
to be free to compete subject to the antitrust laws.
    Two, the AEI-Brookings study looked at three States where 
auto rates have been regulated: Massachusetts, New Jersey and 
California. The findings for Massachusetts and New Jersey are 
similar. In both States, rates have been held down which looks 
like a good deal for consumers, but is not, on closer 
inspection. Artificially low rates discourage entry into the 
business and discourage existing insurers from staying, as has 
been pointed out. In Massachusetts, for example, in 1982 all 
top ten auto insurers in the State were national firms, but by 
1998, only three were national. In New Jersey, five of the 
Nation's top ten auto insurers do not do business in the State. 
The net result is that regulation deprives consumers of choice.
    Binding regulation also punishes good drivers by forcing 
them to subsidize bad ones. In Massachusetts, for example, some 
high-risk drivers receive subsidies as high as 60 percent, 
requiring some low-risk drivers to pay 11-percent higher 
premiums. In South Carolina, where rates were recently 
deregulated in 1999, 42 percent of consumers were forced to buy 
in the so-called residual or involuntary market in 1992, 
requiring significant subsidies from other drivers. And by 
1999, this State residual market facility had a cumulative 
deficit of over $2 billion--then South Carolina deregulated. 
But the point is that subsidizing high-risk drivers makes 
absolutely no economic sense, as it can lead to higher accident 
rates and loss costs.
    California has been an exception to these patterns, but 
only because Proposition 103 turns out not to have been that 
binding. Claims costs for insured vehicles in the State, unlike 
energy costs, actually fell after 1988, so insurers were not 
forced to abandon California, as they were in New Jersey and 
Massachusetts. In addition, the most controversial part of 
Proposition 103, the 20-percent rollback, was never fully 
implemented, for constitutional reasons.
    What about States that have deregulated? Well, let us look 
to South Carolina. As I said, it deregulated in 1999, and guess 
what? Insurers came flooding back to the State, doubling in 
number. Meanwhile, South Carolina's residual market has almost 
disappeared simply because insurers can now charge according to 
risk. What about Illinois? As has been mentioned, there has 
been deregulation there for over 3 decades. The result, almost 
no residual market. Meanwhile, Illinois consumers have roughly 
twice the number of auto insurers to choose from than is true 
in New Jersey.
    One of my Brookings' colleagues, Cliff Winston, has 
documented that in other industries, where prices and entry 
have been deregulated, efficiency and productivity have 
dramatically improved. Professor Cummins, who led our study, 
has documented significant inefficiencies in the insurance 
industry that could be rooted out if the forces of competition 
were simply unleashed.
    So is there any role left for regulation? Yes, there is: To 
ensure solvency, number one; to protect consumers from 
unscrupulous practices, number two; and, finally, to help 
standardize forms for personal lines and small businesses so 
that customers can easily compare prices.
    State insurance officials should not have to spend their 
scarce dollars on collecting rate data and, in some cases, 
approving them.
    Thank you, and I look forward to your questions, and I beat 
the time clock.
    [The prepared statement of Robert E. Litan can be found on 
page 39 in the appendix.]
    Chairwoman Kelly. You did, indeed. Thank you very much, Mr. 
Litan.
    Next, we move to Mr. David Snyder, the Assistant General 
Counsel for the American Insurance Association. Mr. Snyder 
previously served in the Pennsylvania Department of Insurance 
and has been employed by several major insurers.
    Mr. Snyder, thank you very much for appearing today.

   STATEMENT OF DAVID F. SNYDER, ASSISTANT GENERAL COUNSEL, 
                 AMERICAN INSURANCE ASSOCIATION

    Mr. Snyder. Thank you very much for the opportunity to be 
here, distinguished Chairwoman Kelly and members of the 
subcommittee.
    The association which I represent is composed of member 
insurers that not just provide auto insurance in the U.S., but 
do so around the globe. The lessons and experience they have 
can be applied to the subject of your hearing today. And thank 
you for holding this hearing, because the issue of State auto 
insurance regulation is an issue that is important to 
consumers, public officials, and insurers.
    Most States currently have the extraordinary authority to 
fix prices on personal auto insurance, something they don't 
have for virtually every other product, including absolute 
essentials such as food, housing, and even the automobiles 
being insured. The damage that can be done with this far-
reaching power is now evident in States such as New Jersey, 
which is experiencing the exit of companies that insure 20 
percent of the market and Massachusetts, where consumer choices 
are very limited, both due to the regulatory system's denial of 
needed rates.
    State rate regulation harms consumers, when the underlying 
costs paid by auto insurance are declining, by retarding the 
market's lowering of its prices, as happened in California. But 
when the costs of providing insurance are perennially high or 
rising, costs such as auto repair, increased litigation, 
increased medical costs, rate suppression can cause severe 
market dislocations and shortages, as now being felt in New 
Jersey.
    State rate regulation hurts consumers because they have 
fewer choices. It hurts insurers because they have less capital 
than they need to operate in the market and even harms the 
public officials administering the system by forcing them to 
make political decisions on issues they know should be left to 
the private economic marketplace.
    But State rate regulation has additional negative impacts. 
It is often used to mandate hidden subsidies that are not cost-
based. This obviously harms the consumers who are paying those 
subsidies, but it also harms the subsidized parties, because it 
hides from them and the public the preventable causes of 
higher-than-necessary losses, such as too lenient supervision 
of beginning drivers, a newly emerging pattern of fraudulent 
behavior or hazardous intersections in congested areas. This, 
in turn, results in delaying effective measures to prevent 
accidents, deaths, and injuries, such as graduated licensing 
laws, antifraud measures, and more effective enforcement of the 
traffic laws.
    If particular subsidies are desirable, they should be 
applied through legislation above-board, not, as so often is 
the case, through back-door methods, because the regulator can 
hold hostage through the rate-approval process a company's 
entire financial ability to function in the State.
    Finally, rate regulation of the kind embodied in most U.S. 
State laws is contrary to international best practices. As more 
countries establish their insurance markets, competition for 
global insurance capital will intensify. Regulatory systems 
which assure solvency, but leave pricing to the market, will 
emerge as the most capable of attracting capital.
    The U.S. should not be left behind in the global 
competition because of a legacy of State price control systems. 
So, regardless of your viewpoint, whether as consumers, as 
public officials or as insurers, rate regulation, as embodied 
in most State laws, is inherently capable of abuse. And when 
abused or even used as envisioned, it ultimately harms the very 
people who are intended as its beneficiaries.
    Thank you, and I would be pleased to answer any questions 
you may have.
    [The prepared statement of David F. Snyder can be found on 
page 46 in the appendix.]
    Chairwoman Kelly. Thank you. You, too, went in under the 
wire. Thank you very much, Mr. Snyder.
    Next, we have Mr. Tom Ahart. Did I pronounce that 
correctly?
    Mr. Ahart. Ahart.
    Chairwoman Kelly. Ahart, pretty good. President of the 
Ahart, Frinzi & Smith Insurance firm located in New Jersey, who 
is testifying on behalf of the Independent Insurance Agents of 
America. Mr. Ahart is a chartered property casualty 
underwriter, an accredited adviser of insurance in New Jersey.
    Mr. Ahart, thank you very much for being here, and we look 
forward to your testimony.

  STATEMENT OF THOMAS B. AHART, CPCU, AAI, PRESIDENT, AHART, 
    FRINZI & SMITH INSURANCE, ON BEHALF OF THE INDEPENDENT 
                  INSURANCE AGENTS OF AMERICA

    Mr. Ahart. Thank you very much. Good afternoon, Chairwoman 
Kelly and members of the subcommittee.
    As mentioned, I do own an insurance agency in New Jersey. 
It is a second-generation insurance agency started by my father 
in 1950. We currently have half of our business in personal 
lines, and I also am an auto insurance buyer in New Jersey, 
including three young drivers. So I do have firsthand 
knowledge.
    [Laughter.]
    Mr. Ahart. Also, I will be president of the Independent 
Insurance Agents of America in October.
    Chairwoman Kelly. Congratulations.
    Mr. Ahart. Thank you. Well, maybe, right.
    [Laughter.]
    Mr. Ahart. One crucial theme you will hear the IIAA say 
repeatedly is our desire to identify mechanisms that can be 
used to help foster uniformity of the existing State insurance 
regulatory systems. At the same time, we recognize that in many 
respects insurance remains an inherently local business. And 
any system of insurance regulation must be flexible enough to 
accommodate differing local, State and regional needs.
    The current problems related to the over-regulation of auto 
insurance rates in many States implicate both the potential 
benefits of greater uniformity and the need to accommodate 
different local contexts. Rates that will be viewed as adequate 
will, of course, vary from State-to-State with the specific 
conditions of the respective marketplaces.
    In many States, however, dozens of auto insurance carriers 
have withdrawn from the insurance markets over the course of 
the last 2 decades because of excessive efforts to account for 
such conditions have resulted in approved rates that have been 
grossly inadequate. In a competitive economy such as ours, 
insurance companies cannot be required to lose money. In some 
States, however, the only effective alternative for them, with 
respect to auto insurance, has been to abandon the marketplace 
completely. And in New Jersey, in order to leave the auto 
marketplace, you need to turn in your license and leave in all 
lines. And even though they are making money in other lines, it 
still is paying some of them to leave New Jersey completely, 
just because of the loss in auto insurance.
    Consumers suffer because their insurance markets are 
underserved and because drivers with better driving records and 
those that live in lower exposure areas subsidize other 
drivers. Consumers also suffer, because even in times when 
approved rates are more than adequate, insurers are reluctant 
to reduce prices for fear that they will not be able to raise 
them again if cost inflation accelerates. Insurance agents also 
suffer because of the lack of markets and fewer products to 
sell. The challenges any reform effort in this context must 
overcome are thus significant.
    I would now like to spend a few moments discussing in more 
detail the rate regulatory environment in two States in which 
it is particularly onerous, my home State of New Jersey and 
Massachusetts.
    In New Jersey, new carriers may change premiums without 
affirmative approval of the insurance commissioner. We have a 
prior approval law, and it generally takes at least 6 to 12 
months for the commissioner to make an initial ruling. The 
commissioner has not, however, granted a significant rate 
increase request in recent memory, and the last several 
commissioners have refused to grant any increases at all during 
an election year. The futile process is coupled with two 
particularly burdensome regulatory requirements:
    First, although insurance companies are not guaranteed any 
profits, they are prohibited from earning more than 6 percent 
in profits from their sales of auto insurance over any 3-year 
period. This excess profits law is very difficult for companies 
to make any kind of rate of return.
    Second, carriers are required to take all comers, meaning 
they are required to insure any licensed New Jersey driver that 
has less than eight points that applies for coverage. Because 
of the difficulty in raising rates under the State's 
procedures, drivers with good driving records inevitably 
subsidize those with poor records.
    In Massachusetts, the maximum auto insurance rates for all 
carriers are established globally. In August of each year, 
briefs are filed by both industry and Government 
representatives, and a full trial-type hearing is then held 
that can last 3 to 4 months, during which they have testimony 
and all kind of different presentations. At the conclusion of 
these proceedings, the insurance commissioner unilaterally sets 
the rates that will apply during the next year.
    In summary, auto insurance needs to be more uniform, while 
respecting the differences within each State. We need to allow 
the free marketplace to work by enhancing competition. At the 
same time, we need to remove politics from the rate-making 
system.
    In New Jersey, commercial lines has been deregulated for a 
period of time, and the commercial marketplace has blossomed. 
Years of company insolvencies and higher premiums have proved 
to be wrong in commercial lines. Likewise, States like Illinois 
and South Carolina, who have had similar problems like New 
Jersey and Massachusetts, have changed to make their laws more 
competitive and their marketplace more competitive, and at the 
same time their premiums have been reduced.
    So, with that, I thank you for the opportunity to present 
our testimony and look forward to any questions you may have.
    [The prepared statement of Thomas B. Ahart can be found on 
page 55 in the appendix.]
    Chairwoman Kelly. Thank you very much, Mr. Ahart.
    Next, we have Mr. Robert Hunter, the Director of Insurance 
for the Consumer Federation of America. Mr. Hunter served as 
the Federal Insurance Administrator under both Presidents Ford 
and Carter. Mr. Hunter, we are pleased to have you here today. 
Thank you for testifying.

STATEMENT OF J. ROBERT HUNTER, DIRECTOR OF INSURANCE, CONSUMER 
                     FEDERATION OF AMERICA

    Mr. Hunter. Thank you, Madam Chairwoman.
    Consumers agree that there needs to be more uniformity and 
more efficiency in the regulation of rates and forms. And, in 
fact, we participated in a process of developing methods for 
more efficient, timely and effective review of rates and forms 
through the National Association of Insurance Commissioners 
over the last year, including the CARFRA and Improvements to 
State-Based Systems Initiatives. We have even proposed ways 
which will shorten the time regulation takes to no more, in any 
State, than 30 to 45 days.
    The assumption, however, that over-regulation of auto 
insurance as a major consumer problem in America is not right. 
The real problem that we face as consumers is market conduct 
abuses that are not caught by the State regulatory regimes in 
any State, much less in one or two States. So you have 
vanishing premiums, you remember, with Prudential and MetLife 
and insurers like that. You have State Farm putting on parts 
that were found by courts to be fraudulent and in breach of 
contract. You have race-based premiums now recently being 
caught and red-lining in minority communities that courts have 
ruled against.
    These are the issues that are very important to consumers. 
They really abuse consumers, and these are the ones that have 
national implications. The States have done a poor job in 
policing these practices.
    There is no groundswell from consumers for faster products 
or less review of rates and forms. I have never, out of 27,000 
calls I have received in my career that I have estimated, had a 
consumer say, you know, we need less look at the insurance 
companies or, you know, I can't find some product that I am 
looking for that some company wants to get to market.
    Some of the new ideas that insurance companies come up with 
have potential to downright harm consumers. Congress right now 
is looking at the possibility of controlling use of the human 
genome by health insurers, for example. That is a potential 
problem. Credit scoring is now being used in auto insurance by 
93 percent, according to Conning and Company in a study that 
just came out today. Some insurers, they say, give more weight 
to the type of credit card you own or other elements of your 
credit history than to your driving record when establishing 
auto insurance prices.
    When I was Texas Insurance Commissioner, I first heard of 
the use of credit scoring when a woman told me she was being 
surcharged for her insurance because she had declared 
bankruptcy 7 years earlier. I asked what kind of insurance it 
was, and she said ``auto insurance,'' and I almost fell over, 
because I couldn't understand the connection between the fact 
that she had filed bankruptcy a few years ago and her driving 
ability. But I really got mad when she told me she never went 
bankrupt, that she, as a single mother, got a second job, 
pulled herself out and withdrew the bankruptcy, but it was 
still being used to up-rate her by the insurance company. I 
think Government needs to look at those kinds of things and see 
if those are proper to use.
    Progressive Insurance Company in Texas is now using Global 
Positioning Satellites to follow cars around so that they track 
where you are, where you are going, what time you drive, and so 
on in cars they insure. I think Government needs to look at 
that. That is an incredible invasion of privacy, in my view.
    Regarding New Jersey and Massachusetts, these two States, 
over the last 5 years, had rates of return, New Jersey of 8.3 
percent, compared to 10.8 in the Nation, and in Massachusetts, 
8 percent. They are slightly below the national average, but 
there is no crisis of profitability in these States. The 
traffic density in New Jersey is 2.67 times the national 
average, and in Massachusetts, it is 2.19 times the national 
average, and therefore their rates are going to be high, and 
particularly in New Jersey, where you have one of the richest 
benefit systems in the entire country, Mr. Ferguson. It is very 
rich. That obviously costs money.
    Can companies succeed in New Jersey? Absolutely. New Jersey 
Manufacturers is a classic example, and Plymouth Rock in 
Massachusetts is another example of a very successful company 
competing in that State. The market share in New Jersey of New 
Jersey Manufacturers has gone from 9.8 percent in 1994 to 12.7 
percent in 1999. They have the lowest complaint ratio in the 
State. They have paid dividends to policyholders every year 
since 1918--$1.4 billion in dividends in the last 10 years 
alone to policyholders. Therefore, you can succeed in New 
Jersey. You have to be efficient. Maybe why companies are 
withdrawing is they are not competitive.
    Consumers have looked at California's auto insurance 
regulatory system, and we find California to be the best 
practices in the country.
    I would conclude here because I see the red light is on.
    [The prepared statement of J. Robert Hunter can be found on 
page 62 in the appendix.]
    Chairwoman Kelly. Thank you very much, Mr. Hunter.
    Finally, we are going to hear from Mr. Robert Zeman. He is 
the Vice President and the Assistant General Counsel for the 
National Association of Independent Insurers. Mr. Zeman directs 
the State Government relations activities for the NAII. Mr. 
Zeman, we appreciate having you here today and look forward to 
your testimony.

  STATEMENT OF ROBERT L. ZEMAN, VICE PRESIDENT AND ASSISTANT 
 GENERAL COUNSEL, NATIONAL ASSOCIATION OF INDEPENDENT INSURERS

    Mr. Zeman. Thank you. Good afternoon, Madam Chairwoman, 
Members of the subcommittee.
    NAII represents over 690 property/casualty insurance 
companies. We are the largest property casualty trade 
association. Our perspective on this issue is that, indeed, 
some States have excessive regulation and that impedes the 
ability of consumers to have a wide array of choices in the 
marketplace. The good news, however, is that other States do 
take a more competitive approach, with clear benefits for 
consumers, more choices for consumers, and these competitive 
States provide the road map for State-based reform that can be 
accomplished in the more troubling States.
    Yes, in the view of our members, New Jersey is a State 
where excessive regulation has restricted competition, and thus 
had a negative impact on consumers. We recently conducted a 
specific analysis of the problems in the automobile insurance 
regulatory system in New Jersey, and the results confirmed the 
concerns that have been expressed by our members for some time 
and the points that have been made by other panelists today.
    New Jersey has a highly politicized and volatile regulatory 
system that makes it very difficult for insurance companies to 
compete, contrary to Mr. Hunter's assertion. The culmination of 
these regulatory factors and restrictions has hurt the 
marketplace and hurt New Jersey's consumers, and it is clearly 
evidenced by the companies that have made their independent 
decisions to withdraw from the State.
    Other witnesses have given details about the problems in 
New Jersey, and they are detailed in our written statement. But 
first and foremost, would be the onerous rate regulatory system 
that was outlined by the agent representative. Other problems 
include restrictions on rate adjustments in the involuntary, as 
well as the voluntary market, and all of this is of critical 
importance to our members.
    The results of our analysis were confirmed by an 
independent study conducted by Professor John Worrall of 
Rutgers University. And basically he concluded that all of the 
problems in New Jersey have indeed resulted in fewer firms 
writing business in the State and fewer choices for consumers. 
And the 1999 rate rollback was mentioned, where the rollback 
was implemented, but the cost-saving measures were never really 
fully implemented.
    Now, some of the reforms recently implemented in New Jersey 
at least have elements of steps in the right direction, but 
major additional reform is needed, and the details of our 
suggested reforms are in our statement.
    Now, in Massachusetts as well, as you have heard, we see 
similar problems. There is unequivocal evidence in the 
marketplace that the strict regulatory environment, the strict 
regulation of rates, and forms, and underwriting has led 
directly to a decrease in the choices available to consumers. 
And by law, as was noted, the commissioner actually sets the 
rates in Massachusetts. That is a result of the legislative 
system that is in place. It is that legislative, regulatory 
structure which needs to be reformed. All of this has a 
tremendous adverse impact on consumers in Massachusetts.
    But as I said at the outset, there is good news in other 
States, and a few of them have been mentioned, but you need to 
be aware that there are actually several States out there that 
take a more competitive approach, and a wide array of academic 
studies, our own surveys and our own studies with our members 
have confirmed the same thing; that in the States with the more 
competitive environments, consumers have a better choice. They 
have more choices in terms of coverages and insurers from which 
they can get coverages. There is less subsidies, there is more 
accurate pricing. These are all clear benefits for consumers in 
the more competitive environments.
    It is most important to note that some States like 
Illinois, where I come from, and Wisconsin, have used the more 
competitive system for years. But the best news of all was 
mentioned regarding South Carolina, which went from a 
restrictive regulatory environment to a more competitive 
approach. And very quickly the number of companies doing 
business there doubled, rates fell, the residual market 
population fell. There are a number of solid indicators of the 
progress that was made in South Carolina, and it gives us hope 
for other States.
    Some Insurance Departments across the country are 
implementing operational reforms that have been proposed by the 
National Association of Insurance Commissioners. But in 
addition to those operational efficiencies, we need better 
public policy, legislative changes in the more restrictive 
States. We are also pleased that the National Conference of 
Insurance Legislators just produced a model bill which would 
help truly enhance competition, but that model, or elements of 
it, must be enacted by the States.
    NAII has continued to believe, and we will continue to 
support State regulation, we believe the State-based system can 
work. We totally reject any assertion by Mr. Hunter or anyone 
else that the California system is better for consumers. Their 
study was completely flawed, ignoring the fact that the 
reduction in premiums have been due to a reduction in losses. 
The prior approval system in California has hurt consumers. 
Other academics have said that if not for the prior approval 
system in California, rates probably would have gone lower. 
But, because of the prior approval system, companies, even when 
they saw loss costs going down, felt somewhat reluctant, 
perhaps, to increase rates or to lower rates as far as they 
could for fear of inability to raise them down the road.
    Proposition 103 has been a bad deal for consumers in 
California. Clearly, when you look at the total landscape 
across the country, the total academic evidence, the experience 
of our members countrywide is that in the more competitive 
States there are better choices for consumers, less subsidies, 
and those States provide the road map for State-based reform.
    I have gone over time--my apologies.
    [The prepared statement of Robert L. Zeman can be found on 
page 103 in the appendix.]
    Chairwoman Kelly. I have been clocking exactly the number 
of seconds. You are not that far over, but thank you very much.
    I appreciate the testimony of all of you today. I have a 
few questions.
    I, first of all, want to say, Mr. Snyder, for a tired 
Congresswoman, it was nice to read your testimony. You sure 
summed it up and made it easy for me to read, and I thank you 
very much. I appreciate that.
    We have been joined now by several other members. I am 
going to start the questioning here. I just want to welcome the 
people who have come in--Ms. Schakowsky, Mr. Moore, Mr. Clay.
    I am going to just ask one question, and I would like an 
answer from all of you. New York insurance costs have been 
rising, in large part because of $1 billion in fraud that is 
committed annually. But instead of imposing price controls, the 
governor is fighting the fraud head on. New York is cutting the 
reporting and processing time for medical claims. It is letting 
consumers pick preapproved doctors and repair shops in exchange 
for lower rates. It is barring uninsured drivers from filing 
claims, raising the penalties for fraud and making the attorney 
general a special prosecutor for insurance fraud.
    Do you think this is a better approach to reducing the 
costs and increasing the choices for the consumers, instead of 
imposing a sort of a stop-gap price control that is only going 
to probably worsen the problems in the long run?
    I would be glad to have any of you answer this. I would 
like to hear especially from you, Mr. Litan.
    Mr. Litan. There is an old saying in economics that if you 
have a problem, you want to have a solution that directly 
attacks it, and you have outlined that if the problem is fraud, 
you attack it directly, not indirectly.
    Now, Mr. Hunter raised in his testimony some legitimate 
points about market misconduct. He said, and I think it is true 
that if you look across the country, insurance departments have 
scarce resources. Many of them are underfunded. They have 
difficulties getting revenue from their State legislatures. But 
wouldn't it make a lot more sense to get them out of the 
business of doing rate regulation, which as I said makes no 
economic sense, and use those resources to attack the market 
misconduct, which includes, by the way, not just misconduct by 
insurance companies, but also misconduct by insured, fraudulent 
claims?
    So I think it makes all of the sense in the world to attack 
the problem directly.
    Chairwoman Kelly. Does anyone else want to--Mr. Hunter, 
would you like to speak?
    Mr. Hunter. Yes. Well, you know, New York has been, for 
decades, viewed as the State to look to by the rest of the 
country kind of for leadership in a lot of issues. That is 
probably why they have prior approval for their auto insurance.
    Chairwoman Kelly. So you think New York is a pretty good 
State?
    Mr. Hunter. It is a very good State on regulation, I mean, 
historically, anyway. I don't know how currently, but actually 
it does have prior approval of auto insurance rates. So, if the 
PIP rates are going up because of fraud, they still have to 
come forward to the Department and say we want to raise the 
rate and get the approval of the Department, and I think that 
is appropriate. And I do think that the direct attack on the 
PIP fraud is the right approach in any State that has a problem 
with fraud in PIP.
    Chairwoman Kelly. Apparently, I have just been advised by 
counsel. New York has flex rating, not prior approval, for 
private passengers.
    Mr. Hunter. That is not true.
    Chairwoman Kelly. Well, that is what we have here.
    Mr. Zeman. They have flex rating for private passenger 
automobiles.
    Chairwoman Kelly. We do have flex rating in New York.
    Mr. Snyder. Madam Chairwoman.
    Chairwoman Kelly. Yes?
    Mr. Snyder. If I might add further to the comments, New 
York is at a juncture at this point, a very important juncture. 
It has a fundamentally good no-fault system of reparations 
benefits, but a growing fraud problem has exerted significant 
cost pressures all across the system and has resulted in, for 
example, a residual market plan growing alarmingly over the 
past few years.
    The State administration, as I understand it, is proposing 
really a twofold approach: The first is to address the 
underlying fraud problems by something called Regulation 68, 
which would require prompt notification of claims, among other 
factors, and would increase penalties and increase resources to 
fight the fraud that is broken out there. That is clearly 
something that needs to be done.
    The second thing is, the Administration is proposing the 
continuation of important free-market elements that have been 
added to the New York system, without which the market could 
very well go the way New Jersey has. That includes the flex 
rating process--the idea that, at least for some slight amount 
of rate increase, it is something the companies can get when 
they really need it. If that is not continued by the 
legislature, and there is opposition in the legislature, it 
could well be that we would have the same kinds of problems in 
New York State that we do elsewhere. So, the Administration is 
trying to address both the maintenance of the private 
enterprise elements in what is otherwise a very strict 
regulatory system and to address the underlying problems.
    Thank you.
    Chairwoman Kelly. Thank you very much.
    Mr. Zeman, you have something you would like to say?
    Mr. Zeman. Just briefly. I agree with what Mr. Snyder has 
said. From our indications, clearly, fraud is the major problem 
in New York right now. And, clearly, the package that you 
outlined before the State legislature is clearly directed at 
that problem and can go a long way toward resolving issues in 
New York. New York does have flex rating now. It does sunset 
frequently. And down the road in New York, New York might want 
to look at either making that permanent or considering 
additional, more competitive regulatory systems.
    But, clearly, for now, you are absolutely right, Madam 
Chairwoman, the package that is oriented toward fraud in the 
legislature would be a major step toward reform, for the 
benefit of consumers.
    Chairwoman Kelly. Thank you very much.
    I wanted to say that, according to the State Rate and Form 
Law Guide of the American Insurance Association, they say that 
New York does have private passenger flex rating.
    Mr. Hunter. That may be correct. I may have been thinking 
back a couple of years.
    Chairwoman Kelly. Your comment, Mr. Zeman, is about the 
sunset problems with it.
    Mr. Zeman. Yes.
    Chairwoman Kelly. Something that we may need to discuss 
with our New York colleagues in the State Assembly and Senate.
    In the meantime, I am going to turn now to Mr. Clay. We 
welcome you, Mr. Clay, and thank you very much for being here.
    Mr. Clay. Thank you very much. Just a few questions.
    Mr. Snyder, you testified that over-regulation by States 
such as New Jersey and Massachusetts not only penalizes good 
drivers to subsidize bad ones, but also forces citizens in the 
rest of the country to subsidize high-risk drivers in those 
States. Can you elaborate how this negative subsidization 
occurs.
    Mr. Snyder. Yes, sir, I can.
    Problems in the auto market in New Jersey can be spread to 
all other lines of property and casualty insurance, through 
something that is phrased a ``lock-in law.'' In other words, in 
order to exit from the auto market, you have to give up the 
ability to do all other lines of property and casualty 
business. So you start with a spot problem in automobile 
insurance, and pretty soon you have a problem that affects 
homeowners and commercial property and casualty insurance.
    Then, if the company involved is part of a larger national 
company, the shortfalls in New Jersey have to be made up from 
somewhere, and they are made up from capital that has been 
contributed to the company by policyholders in other States. So 
you have even an interstate subsidy issue going on with respect 
to New Jersey.
    Mr. Clay. OK. Along those same lines, say in States where 
there is no regulation--I represent Missouri--and you know 
rates vary according to zip codes and other factors, do you 
ever take into consideration drivers' records, good drivers, no 
claims ever filed? Do you ever take that into consideration 
when you set premiums and rates?
    Mr. Snyder. The driving experience of the drivers?
    Mr. Clay. Yes.
    Mr. Snyder. It is one of the many factors, one of the 
principal factors that are used--the driving experience also. 
The conditions under which the driving occurs, is it driving to 
and from work, which are the highest accident times. All of 
those factors are considered, as is the make and model of the 
motor vehicle, because we know there is very different loss and 
theft experience with respect to motor vehicles. So there are 
many, many factors that are used to determine as accurate a 
rate as possible. There is a strong market incentive for that, 
to be as accurate as possible in rating.
    Mr. Clay. Just to be clear, you are advocating today 
against over-regulation by the States of New Jersey and 
Massachusetts, correct?
    Mr. Snyder. That is correct.
    Mr. Clay. You don't think there should be Rate Commissions 
and all of that?
    Mr. Snyder. We think there is a proper role for regulation, 
principally in the solvency area, because that is ultimately 
the promise that the insurance company makes, that it is going 
to be there when you have a claim. We also believe that 
regulations should be pro-competitive.
    Mr. Clay. Yes.
    Mr. Snyder. And, unfortunately, rate regulation, which was 
well-intended, can have a very, very adverse impact on 
consumers, generally, in terms of creating shortages that 
didn't have to exist.
    Mr. Clay. What factors prompted the New Jersey and 
Massachusetts statutes?
    Mr. Snyder. Both States are high-cost states. They are 
perennially high-cost States. They have prior approval systems 
of regulation. In fact, in Massachusetts, it goes beyond that 
to the State directly, doing what it calls fixing and 
establishing the rates. Once a determination is made that the 
market isn't competitive, and that is routinely made, despite 
evidence to the contrary.
    So, when you get the combination of high costs and a rate 
approval system, a rate regulatory system that gives the State 
the authority to set prices, you have a very volatile situation 
with the results that you have got in Massachusetts and New 
Jersey, which means that ultimately consumers aren't benefited 
because shortages are unnecessarily created.
    Mr. Clay. Mr. Litan, let me ask you, you know, some States, 
I guess most States now, mandate auto insurance. Do you know of 
any associations who oppose that initiative in any State? Most 
of them don't, do they?
    Mr. Litan. Most States do mandate auto insurance.
    Mr. Clay. Yes, right.
    Mr. Litan. Yes.
    Mr. Clay. But do you know of any insurance associations 
that ever opposed mandating auto insurance?
    Mr. Litan. Some people are shaking their heads. I don't, 
but there are other people here----
    Mr. Clay. Mr. Snyder, would you answer?
    Mr. Snyder. Yes, sir. We have traditionally opposed 
mandatory insurance, but recognize that it has some appeal, and 
we have tried to work within the system accordingly. But we do, 
as a policy position, oppose mandatory insurance.
    Mr. Clay. I see.
    Mr. Zeman. And the same for our organization. For the 
record, we have opposed it. It is another example of over-
regulation.
    The States, when they mandate, they don't always mandate 
just the fact that you have insurance, but having a specific 
amount that allegedly is right for everyone. We think it should 
be a matter of consumer choice, a matter of consumers selecting 
the right benefit levels for themselves.
    Mr. Clay. Mr. Zeman, let me ask you about choices, and 
premiums, and pricing for insurance. I represent an urban area 
in Missouri, and the rates vary so widely throughout my State. 
Now, I realize that there are factors that set your rates, but 
let us take, for instance, a 70-year-old retired woman parks 
her car in a garage, never had a moving violation, never an 
accident, and never filed a claim, but she pays the same rate 
as, say, a younger driver who has had moving violations, who 
has filed claims.
    What causes that?
    Mr. Zeman. First of all, I would like to know more details 
about whatever this case is. But, second, Missouri, we 
generally hear, has a positive environment. There are a number 
of companies doing business there and giving consumers other 
opportunities and other choices. So, if any individual feels 
that he or she is not paying the right amount of premium, one 
thing that we recommend is they shop around to other companies. 
The companies, as Mr. Snyder and others indicated, use a number 
of factors to determine insurance rates. It is not a one-size-
fits-all, and that needs to be considered as well.
    Mr. Clay. OK.
    Mr. Hunter. Mr. Clay, actuarially, the older person 
typically does pay less than the younger person, and people 
with accidents, everything else being equal, do pay more than 
people that don't have accidents.
    Mr. Clay. Except for in Missouri. See, I am a consumer in 
Missouri, and I shop around for my auto insurance. As a member 
of the State legislature, I was able to use an address in the 
State capital, which is in a rural setting. Legally, I can do 
that. And my premiums were a lot less than what I pay now in 
the City of St. Louis because that is now my legal residence. I 
don't have any moving violations. I haven't filed any claims. I 
have a garage, park my car in it.
    Mr. Hunter. The other factor is territory. They do charge 
differential rates based upon where you live, and the cities do 
pay more. There is no question.
    Mr. Clay. Based upon zip codes or what factors are related 
there?
    Mr. Hunter. Some companies do use zip codes.
    Mr. Hunter. It depends on the State, but some companies use 
zip codes and some companies don't, but there is definitely a 
territorial aspect to the rating.
    Mr. Zeman. Different companies definitely use different 
rating plans. And you know what? It is another example of 
competition and how companies find different market niches, and 
ultimately we think that benefits consumers.
    Mr. Clay. And now I heard Mr. Hunter say that you don't 
have a crisis of profitability.
    Chairwoman Kelly. Mr. Clay, I am sorry, but you have gone 
well over your 5-minute limit.
    Mr. Clay. Perhaps someone on this side would like to share 
their 5 minutes with me.
    Chairwoman Kelly. Perhaps they would.
    Mr. Clay. Perhaps.
    [Laughter.]
    Chairwoman Kelly. Perhaps they would, but right now I am 
asking you--I am saying that everyone----
    Mr. Clay. OK. I will stop now, and perhaps they can get 
back around to me.
    Thank you, gentlemen.
    Chairwoman Kelly. Thank you. Yes, if we want, we can have a 
second round. Thank you.
    We will move now to Ms. Schakowsky.
    Ms. Schakowsky. Thank you, Madam Chairwoman.
    I have to tell you that as a person who self-identifies as 
a consumer advocate, I always find it somewhat difficult to 
swallow when industry people come in and tell us what is really 
good for the consumer, and then the person representing the 
consumer advocacy organization is opposed, in general, to the 
proposals. What is a consumer to do? How are we to understand 
what is really in our interest?
    My background is, as I say, dealing with consumer 
organizations and then in the State legislature, where we dealt 
with problems in Illinois, by the way, of insurance red-lining, 
various kinds of discrimination, particularly based on 
neighborhood. And I have to tell you that in all of my 
experience, never once has a consumer come to me and said, ``I 
am so sick of all of these regulations. I am really wanting to 
see this industry more deregulated.''
    So, perhaps, and I do apologize for coming in late, but I 
am trying to understand how exactly the consumer--well, let me 
ask a threshold question. Why are we here? Are you seeking 
national actin on auto insurance regulation; are any of you? 
Mr. Snyder, what do you hope to get from us?
    Mr. Snyder. Madam Congresswoman, I think the first thing is 
that as the Congress looks at insurance issues, and 
particularly the Financial Services Committee, more than had 
been the case in the past, it is important to understand the 
functioning of it, so that important decisions that you will 
have to make in the future you can make on the basis of that 
information.
    Ms. Schakowsky. And what might we be looking at, in terms 
of auto insurance? Just single that----
    Mr. Snyder. We are looking at a record of----
    Ms. Schakowsky. No, for potential action in the future.
    Mr. Snyder. We support an approach that would return the 
auto insurance market and all other property and casualty 
markets to a free enterprise model, rather than a model in 
which the State or Federal Government or anyone else has the 
authority to fix prices, has the authority to make all kinds of 
market-based determinations that ultimately, in the end, 
results in unnecessary shortages, and disruption. And New 
Jersey is a classic example, absolute chaos in the market that 
benefits no one.
    Ms. Schakowsky. So we are focusing just on rates here.
    Mr. Snyder. We are focusing on rate regulation and over-
regulation, in general, by the States today.
    Ms. Schakowsky. Yes, Mr. Zeman.
    Mr. Zeman. If I may, one of the reasons why you don't hear 
consumers in Illinois complaining is because we hold Illinois 
up as the model for other States.
    Ms. Schakowsky. Oh, I know, I know, I know. But we do have 
a good deal of regulation. We do have a good deal of 
regulation.
    Mr. Zeman. That is true. It is true. Illinois is not 
without regulation.
    Ms. Schakowsky. And we are not without regulation.
    Mr. Zeman. That is right.
    Ms. Schakowsky. And, in fact, some of us would like to 
think that there ought to be a little bit more regulation. So 
what I am not hearing is we love it, because the insurance 
industry is so great, and in fact we would like a little less 
regulation to make it even better. This has never come up in 
conversation.
    Mr. Hunter, did you want to comment?
    Mr. Zeman. Can I add one more?
    Mr. Hunter. I just wanted to say that the reason the 
insurance companies want hearings like this is to pressurize 
the States to try to deregulate and take away consumer 
protections.
    Ms. Schakowsky. And what would those be?
    Mr. Hunter. They are pushing very hard. The National 
Association of Insurance Commissioners has moved very fast to 
try to simplify regulation, to try to make it quicker, to make 
it more effective, and to even promise that in any State, even 
with the toughest regulation, that within 30 to 45 days, there 
will be a final answer on any filing. They have done all of 
that. That is not enough for the insurers. Now they want to 
deregulate auto insurance. The insurance companies came back to 
the NAIC and started pressurizing them late last year, early 
this year. They are starting to look at it again, and that is 
what is going on.
    Ms. Schakowsky. Well, you heard Mr. Snyder's summary of why 
this is bad for consumers, why the current regulatory system is 
bad for consumers. Can you summarize then why you disagree with 
that.
    Mr. Hunter. Well, every State has a slightly different 
regulatory regime. No State has no regulation. Even Illinois 
has regulation of forms, for example. You can't put a policy 
out in Illinois without getting approval. So every State has a 
slightly different regime. The legislatures of the State make 
their mind up, and quite frequently it has to do with how much 
urbanization there is, and there has been red-lining in a lot 
of the big cities.
    Ms. Schakowsky. Including mine.
    Mr. Hunter. There have been serious problems. And so the 
States, over the years, have moved to tougher regulation in 
those situations. In the more rural areas, they have not moved 
that tough. That is historic.
    Now, in my testimony I put forth that California has the 
best system in the country because it combines both regulation, 
as a backstop, with real competition; that is, they apply the 
antitrust laws, they get rid of the antigroup, and antirebate 
laws. They allow the companies to really fight and have to 
operate at arm's length, unlike in most States where there is 
an antitrust exemption, even with no regulation.
    So I think, if you want to look to a best-practices model, 
look at California. Since Proposition 103, the rates have 
fallen by 12 percent; whereas, the typical State has gone up by 
37 percent. The assigned risk plan has almost disappeared, the 
uninsured motorist has fallen about in half, and the insurance 
companies made the most profits. The biggest complaint, as you 
have heard again today is, ``Oh, we made too much money in 
California. It is terrible for consumers.'' Well, we like it 
that way, when rates are falling, and they are making money.
    Chairwoman Kelly. Thank you very much, Ms. Schakowsky. I am 
sorry you are over time here.
    We are going to move to Mr. Moore.
    Mr. Moore. Thank you, Madam Chairwomanperson. I appreciate 
the testimony of the witnesses here.
    Mr. Snyder, if I understood your testimony, basically, it 
was that the insurance companies would like less regulation, 
more competition or opportunity for the market to work. Is that 
essentially correct?
    Mr. Snyder. That is correct.
    Mr. Moore. What do you say to Mr. Hunter and what he just 
said and some of his concerns about consumers and the way that 
insurance companies affect consumers?
    Mr. Snyder. Well, let me start by saying this: There are 
probably a million consumers in New Jersey right now that are 
wondering how effective their regulatory system really is as 
they are cast out into a market without some of the very 
players that are major players in virtually every other State. 
And it is the insurance regulatory system, with its element of 
price control, which is truly extraordinary in this day and 
age, for any product anywhere in the United States, indeed, 
anywhere in the world, for the Government to be able to 
directly set prices, as it can in virtually every State. When 
that authority is exercised in an environment with otherwise 
high costs, significant market shortages can occur which, in 
turn, benefits no one, certainly consumers most of all.
    So the issue today is, as this subcommittee looks at the 
largest line of property and casualty insurance, almost $120 
billion is this line of insurance in the United States. So it 
is appropriate for this subcommittee to look at its dynamics 
and its regulatory system and what is the best way to deliver 
those products to consumers. It needs to look at the different 
models that are out there.
    Now, Mr. Hunter mentioned California. Fortunately, for the 
drafters of Prop 103, it was put in place at a time in which 
other factors were dramatically driving down costs. The Supreme 
Court there reversed what is called a third-party bad-faith 
doctrine, which allows two actions to be brought in every 
automobile accident case. That reversal dramatically cut costs. 
In addition, highway safety measures and antifraud measures 
occurred at the time when Prop 103 came in, in California.
    Now, because those costs were going down, the rate 
regulator didn't need to force the premiums down because they 
were going down on their own. In fact, the evidence seems to be 
that the premiums would have gone down even more dramatically 
if the companies functioned under a system where if they needed 
to adjust to market conditions by raising rates, they could do 
that. Compare that with the absolute disaster in New Jersey and 
Massachusetts, where there are few national players, where 
consumers do not have the choices they do elsewhere.
    Mr. Moore. Thank you, Mr. Snyder.
    Mr. Snyder. That is how we prevent that kind of thing from 
happening. It is what we are focusing on.
    Mr. Moore. Mr. Zeman, I believe you testified that levels 
of insurance should not be mandated; is that correct, sir?
    Mr. Zeman. That is the position of our association, that it 
should be up to each individual and their family to make the 
choice as to what level is right for them.
    Mr. Moore. Should there be minimum levels of insurance by 
people who drive cars?
    Mr. Zeman. That largely reflects what many States have 
right now--you know, a minimum level. In some States, it varies 
from State-to-State.
    Mr. Moore. Do you agree with that, that there should be 
minimum levels and that States should be able to set minimum 
levels?
    Mr. Zeman. Again, actually, our position is that it is bad 
public policy for the States to mandate the purchase of 
insurance and mandate the specific levels as well. There have 
been tremendous problems in enforcing this, since compulsory 
was tried back in the 1920s.
    Mr. Moore. So you are saying or your association would be 
taking the position that people could drive automobiles without 
any insurance if they chose to do that?
    Mr. Zeman. No. Well, our position is that people should be 
adequately insured, and that includes making sure they have 
underinsured motorist coverage to protect themselves if they 
are hit by an uninsured motorist.
    Mr. Moore. Well, how do you do----
    Mr. Zeman. We do recognize that the vast majority of States 
have adopted compulsory provisions, so we work with our members 
in helping them implement in those States.
    Mr. Moore. But you disagree with a requirement or a mandate 
for minimum levels of insurance?
    Mr. Zeman. Philosophically, yes, because of the mandate.
    Mr. Moore. We are talking about the real world here. I am 
not talking philosophy.
    Mr. Zeman. Once again, the position of our members is that 
the specific levels should not be mandated by the States.
    Mr. Moore. Not even a minimum level.
    Mr. Zeman. Not even a minimum level.
    Chairwoman Kelly. Thank you very much. Mr. Moore, have you 
finished? Do you want one more question?
    Mr. Moore. I think my time is up.
    Chairwoman Kelly. Just about.
    Mr. Moore. Thank you very much.
    Chairwoman Kelly. OK. Thank you.
    I turn now to Mr. Capuano. Oh, I am sorry. We have Mr. 
Tiberi. Mr. Tiberi, do you have questions?
    Mr. Tiberi. Yes, but I will defer to the----
    Chairwoman Kelly. I will take you first.
    You two can fight it out over there, just let us go.
    [Laughter.]
    Mr. Tiberi. Thank you, Madam Chairwoman. I apologize. I was 
at a markup actually.
    Just a couple of observations and then maybe a question, an 
open-ended question to everyone on the subcommittee.
    First, Mr. Hunter, you mentioned about State legislatures 
making the law. I am from Ohio, and we have a court that likes 
to make the law in Ohio. So I would take exception to your 
statement, specifically with respect to auto insurance, by the 
way.
    We had, in Ohio, a few years back, a bill that was 
introduced dealing with no fault insurance. And through 
testimony in the Insurance Committee, both positive and 
negative, it became clear that, at least from Ohio's 
perspective, no fault would have a detrimental effect to 
consumers, ultimately, Ohio, because of a lack of competition 
because insurers wouldn't be writing there, at least in Ohio, 
which I think is considered a competitive State for the 
industry.
    There are two Ohio companies that are large companies, 
national companies, that do not write in either Massachusetts 
or New Jersey. I don't know if anyone here is an expert at 
least on what would the reasons be that a national company not 
write in New Jersey and Massachusetts.
    Mr. Ahart. As an agent in New Jersey, we have had quite a 
few national companies not participate in New Jersey, and it is 
pretty simple. It is just because they don't believe they can 
make money in New Jersey.
    Mr. Tiberi. And companies that are writing in New Jersey, 
what reason is it that they continue to write there?
    Mr. Ahart. Some of them have large books of other lines of 
business other than auto, and some are making money in auto 
insurance. You know, efficiency clearly is a key to that, but 
the simple fact is, again, there wouldn't be so many leaving if 
they could actually make money. And the fact is that so many 
are leaving right now, it is really starting to put a burden on 
a lot of the others that can't even absorb the 25-percent 
market share that is going to be missing once those companies 
leave.
    Mr. Tiberi. In Ohio, with this most recent court decision, 
there have been several companies that have already pulled out 
of writing in Ohio. Are there other States where an example 
could be used or either a legislature or the court has 
regulated, has gone farther, in terms of regulating the 
industry, where there has been a significant pullout of 
carriers? Can anyone point to that?
    Mr. Hunter. Not really. Usually, there are threats, but 
they usually don't follow through. There were threats, for 
example, as Proposition 103 was being debated, that if that 
happens, we are going to pull out, but they didn't. In fact, 
17-percent more company groups are writing now in California 
than before.
    Mr. Litan. But we discussed earlier in the testimony the 
flip side, and that is South Carolina deregulated, it went the 
other direction, and the number of insurers doubled within the 
space of a little more than a year.
    Mr. Hunter. I might comment on that too.
    The numbers of insurers doubled, and I have done a little 
bit of research. I only got the testimony notice yesterday, but 
I made a couple of phone calls. The doubling of companies in 
South Carolina is almost exclusively within groups that are 
already in the State, when they have added very high-cost, 
nonstandard companies, which I have great difficulty finding a 
great consumer benefit out of this sudden inrushing of very 
high-priced companies into South Carolina.
    Mr. Zeman. If I may, rates have fallen for consumers in 
South Carolina--let me finish, please--and the residual market 
population has gone down as well. So there are a number of 
factors, indisputable, that the South Carolina deregulation has 
been a success story.
    Mr. Hunter. Unfortunately, as I pointed out in my 
testimony, the South Carolina data that you are relying on is 
wrong. The NAIC left the recoupment charges out of the data.
    Mr. Zeman. Once again, Mr. Hunter, you are talking about 
rates, and I stand by what I said about rates, in terms of the 
companies there and the residual market population has 
decreased--no dispute there.
    Mr. Litan. It went from, roughly, a million people in the 
assigned market to only about 50,000 today.
    Mr. Hunter. There was no assigned market in South Carolina.
    Mr. Litan. Residual market.
    Mr. Tiberi. I know my time is about to expire. Can I ask 
the other two witnesses who haven't spoken yet if they have any 
clue?
    Mr. Snyder. Thank you very much, Congressman. I think the 
issue here is to apply the lessons in every other product and 
market to insurance, and it really functions according to the 
same rules.
    What occurs in States where costs are high, and in Ohio, 
you are right, there were some very adverse court decisions, 
but the legislature dealt with that, and that law was signed 
yesterday.
    But in States where those costs continue to rise 
unaddressed, and there is price regulation which is imposed on 
insurance companies, just as if it were imposed on food 
producers or anyone else, the result would be to create 
scarcity in the market. Because a company, when unable by 
Government fiat to earn what it needs to cover its costs, will 
try to reduce the number of products that it is selling in that 
market.
    And we have that case in both Massachusetts and New Jersey, 
where major national writers, including writers which are based 
in your State, as you mentioned, are simply unable to do 
business because of the economics imposed upon them through 
Government regulation.
    The fundamental point today is apply the same lessons that 
we know from every other product to insurance, and you will 
find that it will function the same way. Reduce or eliminate 
the price regulation, allow the prices to go where they need 
to, work with insurance companies, and consumer groups, and 
highway safety groups, and law enforcement to continue to 
address the underlying problems, deal with those court cases 
that are completely outliers, and you'll have a very, very 
positive system, one that costs less for consumers and one in 
which consumers have a maximum amount of choice. And they are 
being denied that because of the over-regulation principally 
resulting from rate regulation.
    Now, let me add one other thing. This does not imply that 
abuses that insurers may engage in cannot be addressed by the 
Government. Clearly, the antidiscrimination laws, clearly, 
other laws continue to apply to insurance companies. Laws that 
apply to businesses, generally, would apply to insurance 
companies. And we have said that if optional Federal chartering 
is adopted, we are willing to give up totally with the 
antitrust exemption, but let us leave that aside.
    The reality is that the abuses can be addressed, but the 
automobile insurance market can be made healthy again and be 
assured to be healthy in every State if we simply apply the 
lessons to that product that we do to every other product.
    Thank you.
    Chairwoman Kelly. Thank you very much.
    We are going to go to Mr. Capuano.
    Mr. Capuano. Thank you, Madam Chairwoman.
    I am from Massachusetts, gentlemen.
    First of all, I would echo Ms. Schakowsky's question, why 
are you here? The Massachusetts legislature is in session, they 
are working on their budget. Go tell them. Why are you telling 
us? I mean, I appreciate it.
    Chairwoman Kelly. Because I am running this hearing, Mr. 
Capuano.
    [Laughter.]
    Mr. Capuano. Fair enough. That is a fair answer.
    Mr. Litan. They asked us to come.
    Mr. Capuano. That is a good answer.
    [Laughter.]
    Mr. Capuano. Well, thank you very much. It was very 
interesting.
    [Laughter.]
    Mr. Capuano. I guess I want to make one statement, because 
in some of the stuff I was reading before I got here, I noticed 
there were some quotes from some executives from Liberty Mutual 
that may be pulling out of the auto insurance business in 
Massachusetts. And just as a footnote, last I knew, Liberty 
Mutual was adamantly opposed to Federal charters. Now, they may 
have changed their tune since in the last week or two, but as 
of 2 weeks ago, they were adamantly opposed to it. Now, they 
may or may not be part of the industry, and I know that that 
will be a discussion.
    But just as another footnote, a subfootnote to that, if and 
when you get Federal charters, please recognize that there will 
be many of us who will then try to hold you to other Federal 
laws that you don't want to be held to--many little things like 
fair housing standards when the insurance comes to us. Another 
argument for another day, but you can't just get Federal 
charters without getting Federal requirements as well, at 
least--you might be able to, but not from me.
    [Laughter.]
    Mr. Capuano. The third comment I want to make is when I 
hear deregulation, lately, I get a little nervous. It didn't 
work so well in energy. It didn't work so well in airlines. 
Every day I read the paper, I went to a hearing just yesterday, 
it is not working so great in the stock market right now. We 
have got analysts who are getting questioned. Deregulation is 
not the panacea of business. And as we all know, there is 
regulation in the insurance industry. Even in those States who 
have allegedly ``deregulated,'' they still have regulation.
    I guess the other point I want to make is, for those of you 
who don't know, Massachusetts has had three governors now who 
have each been vehement proponents of little or no Government 
regulation on anything, and it is the governor in Massachusetts 
who appoints the rate setters. So, if there is a rating problem 
in Massachusetts, the first stop you should make is to the 
governor of Massachusetts, the last three of whom have run on 
antiregulation. So, if there is a problem, see them.
    I also want to make another comment. Very clearly, I don't 
like the Massachusetts auto insurance system. It is terrible. 
It is horrendous. It is archaic. It does subsidize bad drivers 
at the expense of good drivers. Being a good driver, I am one 
of them. It is also, in my opinion, incredibly discriminatory. 
I believe, in my heart, that it is unconstitutional because of 
rating territories. In Massachusetts, I don't know other 
States, rating territories almost uniformly conform to where 
racial minorities and economically deprived people live. It is 
almost a perfect overlap. That is discrimination, gentlemen, in 
my opinion. An argument for another day in a State court, more 
than likely.
    All that being said, the fact that companies have withdrawn 
from Massachusetts, you are right, and again I agree with you. 
The Massachusetts system needs to be overhauled. There are ways 
to do it that don't jeopardize some of the fundamental concerns 
we have in consumer fairness, minimum coverage, because I would 
respectfully disagree that I believe strongly in minimum 
coverage requirements because I know plenty of people, 
personally, who without that minimum coverage would be in 
serious trouble today.
    All of that being said, though, I am glad you came, and I 
am glad the chairlady asked you to come, and I am glad you 
respected her wishes.
    [Laughter.]
    Mr. Capuano. I would respectfully request, unless you want 
to come and ask for a Federal charter, which if you do, fine, I 
will tell you right now, I am going to start talking about 
other things as well. I don't have any opposition to Federal 
charter, but you are not going to just get on a silver platter, 
I hope, just the Federal charter without the Federal 
requirements. And for me, when it comes to auto insurance, we 
will talk a lot about auto insurance discrimination when it 
comes to my constituents and whatever Federal plan there will 
be.
    But other than that, I do thank you for coming today, and 
enlightening me and educating me a little bit anyway.
    Chairwoman Kelly. Thank you very much, Mr. Capuano.
    There is a vote on the floor. We have all had a period of 
time in which to ask some questions of you.
    I am going to enter into the record the State Rate and Form 
Law Guide that I mentioned earlier from the American Insurance 
Association, making that a part of the record. And hearing no 
objection, so ordered.
    [The State Rate and Form Law Guide can be found on page 32 
in the appendix.]
    Chairwoman Kelly. I, also, want to say that there are no 
more questions. I am sure there are questions, but since we 
have a vote on the floor, I know that these additional 
questions members may want to submit to you in writing.
    So, without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses and to place their responses in the record.
    With that, I want to say thank you very much, gentlemen. 
This was a very interesting hearing. I appreciate your being 
here. It, obviously, is something that we need to continue to 
explore until we come up with some right or at least 
illuminating answers on the topic.
    The panel is excused with our great thanks and appreciation 
for your time. The hearing is adjourned.
    [Whereupon, at 3:20 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             August 1, 2001


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