[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
INSURANCE REGULATION AND COMPETITION FOR THE 21ST CENTURY
=======================================================================
HEARINGS
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
SECOND SESSION
__________
JUNE 4, 11, 18, 2002
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-72
U.S. GOVERNMENT PRINTING OFFICE
80-131 WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
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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
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Page
Hearings held on:
June 4, 2002................................................. 1
June 11, 2002................................................ 43
June 18, 2002................................................ 87
Appendixes:
June 4, 2002................................................. 135
June 11, 2002................................................ 223
June 18, 2002................................................ 323
WITNESSES
Tuesday, June 4, 2002
Bartlett, Hon. Steve, President , Financial Services Roundtable.. 6
Harter, Steven J., President and CEO, National Association of
Professional Insurance Agents.................................. 30
Phillipus, Michael D., Vice President of Communications and
External Affairs, Risk and Insurance Management Society........ 28
Spragens, Ann W., Senior Vice President and General Counsel, The
Alliance of American Insurers.................................. 8
White, Wayne, President and Chairman, Home Mutual Fire Insurance
Company, on behalf of the National Association of Mutual
Insurance Companies............................................ 5
Young, Hon. Mark, Vermont State Representative, on behalf of the
National Conference of Insurance Legislators................... 26
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 136
Gillmor, Hon. Paul E......................................... 138
Israel, Hon. Steve J......................................... 139
Kanjorski, Hon. Paul E....................................... 140
Royce, Hon. Ed............................................... 142
Bartlett, Hon. Steve......................................... 143
Harter, Steve................................................ 153
Phillipus, Michael D......................................... 165
Spragens, Ann (with attachments)............................. 181
White, Wayne................................................. 198
Young, Mark.................................................. 214
WITNESSES
Tuesday, June 11, 2002
Gasper, Joseph J., President and Chief Operating Officer,
Nationwide Financial Services, Inc., Chairman, American Council
of Life Insurers............................................... 46
Mattera, Paul, Senior Vice President and Chief Public Affairs
Officer, Liberty Mutual Group on behalf of Liberty Internation. 67
Nicely, Tony, Chairman, President And CEO, Geico Insurance
Companies; Chairman, National Association of Independent
Insurers....................................................... 48
Nutter, Franklin W., President, Reinsurance Association of
America........................................................ 68
Restrepo, Robert P. Jr., President, and CEO, Allmerica Property &
Casualty Companies; Chairman-elect, American Insurance
Association.................................................... 65
Young, Donald A., President, Health Insurance Association of
America........................................................ 50
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 224
Gillmor, Hon. Paul E......................................... 226
Israel, Hon. Steve J......................................... 228
Kanjorski, Hon. Paul E....................................... 229
Royce, Hon. Ed............................................... 230
Gasper, Joseph J............................................. 231
Mattera, Paul................................................ 249
Nicely, Tony................................................. 258
Nutter, Franklin W........................................... 286
Restrepo, Robert P. Jr.,..................................... 300
Young, Donald A.............................................. 309
WITNESESS
Tuesday, June 18, 2002
Ahart, Tom, President, Independent Insurance Agents and Brokers
of America..................................................... 94
Gilliam, Scott A., Director of Government Relations, Cincinnati
Insurance Companies............................................ 115
McOwen, Wayne E., Vice President of External Affairs, Guard
Financial Group................................................ 120
Milesko, Glenn J., President and CEO, Banc One Insurance Services
Corporation, on behalf of the American Bankers Insurance
Association and the Financial Services Coordinating Council.... 96
Sternberg, Hans, Chairman and CEO, Starmount Life Insurance
Company........................................................ 118
Van Osdall, John, Chairman, Council of Insurance Agents and
Brokers........................................................ 98
Vaughn, Terri, President, National Association of Insurance
Commissioners.................................................. 91
APPENDIX
Prepared Statements:
Oxley, Hon. Michael G........................................ 324
Kanjorski, Hon. Paul E....................................... 326
Royce, Hon. Ed............................................... 327
Velazquez, Hon. Nydia........................................ 328
Ahart, Tom................................................... 330
Gilliam, Scott A............................................. 344
McOwen, Wayne E.............................................. 350
Milesko, Glenn J............................................. 358
Sternberg, Hans.............................................. 398
Van Osdall, John............................................. 401
Vaughn, Terri................................................ 411
Additional Material Submitted
McKechnie, J. Kevin A.:
Written response to questions submitted by Members during the
hearing.................................................... 435
American International Group, Inc., prepared statement........... 439
American Land Title Association, prepared statement.............. 444
General Accounting Office, prepared statement.................... 446
National Association of Insurance and Financial Advisors,
prepared statement............................................. 464
INSURANCE REGULATION AND COMPETITION FOR THE 21ST CENTURY
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Tuesday, June 4, 2002
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance
and Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 2:00 p.m., in
Room 2128, Rayburn House Office Building, Hon. Richard H. Baker
[chairman of the subcommittee] presiding.
Present: Representatives Baker, Ney, Shays, Royce, Ose,
Rogers, Biggert, Hart, Kanjorski, Bentsen, Sherman, Moore,
Lucas of Kentucky and Israel.
Chairman Baker. I would like to call this meeting of the
Capital Market Subcommittee to order. The meeting today is the
first in what will be a series of meetings over the coming
weeks to assess the advisability and desirability of reform in
the marketing of insurance products nationally. In the course
of facilitating what we hope will be an important resolution of
these issues is a significant number of panelists who, over a
period of weeks, will each give perspectives from their
particular assessment of the advisability of any approach that
should be considered by the committee.
In the course of this, I am certain the committee will
learn a great deal, as we have a number of perspectives
represented in the course of all of the hearings. While we have
no specific purpose in mind for the end conclusion of these
hearings, it certainly is evident that some regulatory reform
is in order where a regulated financial institution may market
a product which, on its face, is not called insurance, but, in
effect, is insurance that is not subject to the 50-State review
process and can enter into the marketplace rather freely.
A similar product labeled insurance by an insurance company
must go through a rather long and deleterious process in order
to see that product marketed in like fashion. There are many
other instances which may be of concern, and I am certain the
witnesses today will bring many to our attention. But this is a
first step in what I hope will lead to a conclusion before the
end of this Congress in some legislative recommendation for
action that the committee may consider.
Chairman Baker. At this time I would like to recognize Mr.
Kanjorski for an opening statement.
Mr. Kanjorski. Thank you, Mr. Chairman. Today we meet for
the first time this year to discuss the insurance industry and
the challenges that it faces. I commend you for your diligence
in convening this series of hearings. Your efforts to educate
the members of our committee about insurance regulation will
potentially serve as the basis for future legislative action. I
suspect, however, that it will take us at least several years
to forge a consensus on this complicated set of issues.
The American insurance industry, as you know, is broad and
diverse. According to one estimate, we have approximately 5,763
insurance companies operating in the United States. These
companies vary greatly in size, structure, and product
offerings. For the last 150 years, the States have also
traditionally regulated these insurers.
Nevertheless, a discussion of insurance regulatory reform,
including various proposals designed to increase the
efficiency, promote the uniformity of insurance regulation, or
create an optional Federal charter, flows naturally from our
actions in the 1999 law to modernize the financial services
industry. That statute removed the obstacles that prevented
banks, securities firms, and insurers from affiliating and
competing with each other. It also provided for the regulation
of financial products by function, rather than by institution.
Additionally, that law reaffirmed the McCarran-Ferguson Act of
1945, which calls for the regulation of insurance at the State
level.
The 1999 reform law has also begun to change marketplace
dynamics. In fact, a number of insurers have reported that they
increasingly find themselves in direct competition with
brokerage firms, mutual funds, and commercial banks, all of
which may have a competitive advantage due to their arguably
more efficient federally-based regulatory systems. For example,
in many instances, a bank may introduce a new product
immediately without any action by their regulator, and
securities firms can typically bring new products to market
within 90 days. Insurers, however, sometimes have to wait more
than a year to secure all of the required approvals to offer a
new product nationwide.
As a result of these and other changes, some now contend
that the current regulatory system for the insurance industry
has become too cumbersome and requires reform. For example, a
recent study by the American Council of Life Insurers concludes
that the lack of uniformity in State laws, the burden of
dealing with numerous jurisdictions, and the excessive time
required for new product approval are of paramount concern of
insurers who want to compete nationally.
In response to these mounting criticisms of State insurance
supervision and the growing recognition that market forces have
changed the financial services industry, the States have
initiated their own efforts to modernize insurance regulation,
primarily through the National Association of Insurance
Commissioners.
This debate over how to reform insurance regulation has
also seeped into Congress. Earlier this year, our colleague,
Congressman John LaFalce, introduced H.R. 3766, the Insurance
Industry Modernization and Consumer Protection Act. His bill
would allow insurers to obtain an optional Federal charter and
afford consumers with various protections. As we begin our
series of hearings, I want to commend my ranking member for his
leadership on this important issue.
From my perspective, the most important thing that we can
do in the short term to help the insurance industry is to pass
legislation to provide a Federal terrorism reinsurance backstop
until the private sector can address the problem. In the long
term, we should also explore how to modify insurance regulation
and whether we should create an optional Federal charter.
One idea that merits our consideration is whether we should
create a tiered regulatory structure for the insurance industry
as we have already done for investment advisors. The Federal
Government would regulate insurers above a certain size or in
certain business lines, while States would retain the
responsibility for regulating the rest. During these debates,
we should also carefully examine consumer protection issues. In
the end, consumers should be the ultimate beneficiaries of our
actions.
In closing, Mr. Chairman, I believe it is important that we
learn more about the views of the parties testifying before us
today. Their comments will help us to better understand the
different approaches to reforming insurance regulation and the
key challenges the industry faces. I also look forward to
working with you over the coming weeks and months as we proceed
with additional hearings to examine today's evolving insurance
marketplace and the need for regulatory reform.
Chairman Baker. Thank you, Mr. Kanjorski.
[The prepared statement of Hon. Paul E. Kanjorski can be
found on page 140 in the appendix.]
Chairman Baker. Mrs. Biggert.
Mrs. Biggert. Thank you, Mr. Chairman. As we are all aware,
financial services reform, technology and globalization have
dramatically changed the marketplace, and as such, we need to
bring insurance regulation in the 21st century to adjust with
the environment in which we now live and work.
Two questions immediately come to mind. First, what is the
best path to follow; and second, why should we adjust with the
times in the first place?
Well, we are here today to help answer the questions of the
best way to proceed, and in terms of the why, we simply must
change in order to guarantee that American product innovation
and competition remain the gold standard to which others around
the world strive to imitate.
Mr. Chairman, many times our States provide the best
guidance for us to follow as we consider laws at the Federal
level, and this is one of those times. In my home State of
Illinois, our system has worked well for insurers, consumers
and regulators alike. Illinois has a very small residual
market, and significantly more auto and homeowners competing
for business than States with stringent price regulation.
Consequently, the premiums and lost wage ratios in my State are
well below most other States with large populations, high
traffic density, and urban centers of activity.
Importantly, this system of less regulation has freed up
government resources to allow State insurance departments to
redirect regulatory attention where it is most needed,
including effective solvency regulation and rehabilitation or
liquidation of troubled companies. Many argue that any action
Congress may take should bring about a system that resembles
the one found in Illinois. We will hear some of those arguments
this afternoon.
While I believe that both the States and the Federal
Government have a role in regulatory affairs, there definitely
are some industries that the Federal Government should not
touch with a 10-foot pole. Whether or not the insurance
industry falls into that category, I do not yet know. That is
why we scheduled this series of hearings: to listen, to ask
questions, and to examine the issue a little closer.
So let me offer a special welcome to the Alliance of
American Insurers, an organization with its headquarters in
Downers Grove, Illinois. For over 75 years, the Alliance has
faithfully provided property and casualty coverage to thousands
of policyholders, and I know that the Alliance's Ann Spragens
is well regarded in the insurance world and will have some
important things to say about the current and future state of
insurance regulation. So I look forward to hearing from her and
the other witnesses that are here.
Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mrs. Biggert.
Chairman Baker. Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman. Thank you for calling
this hearing and the subsequent hearings that will come from
this. The chairman and the ranking member will remember that
over the last several years, as this committee struggled with
the passage of financial modernization, we often stumbled over
the fact that because of McCarran-Ferguson and the fact that
insurance is the only financial product which is not regulated
really in any form or fashion at the Federal level, that it
made it very difficult for us to achieve financial
modernization. We ultimately did, and some would argue that as
a result of that, we chipped away at McCarran-Ferguson.
But I think that the chairman is very prescient in calling
this hearing and pursuing this matter, because I think we have
come to the realization that as it is for securities and as it
is for other financial products, the same is true for
insurance, that it is not--the United States is not a
conglomeration of 50 different markets, but rather, we are 50
different States that are subdivided among 50 different
regulators, and that may well not be the most efficient means
by which to both deliver a product to consumers and also ensure
that consumers are adequately protected.
This will be a very difficult issue. I would presume that
one, I hope that the committee pursues and follows through on,
but I think Mr. Kanjorski is right, it is probably an issue
that will take some years to accomplish, but I think it is a
step in the right direction, and I think that the committee and
the Congress should go into this with their eyes open,
understanding that market forces are going to require us to
move in this direction, that we have also shown through
experience that you can have a dual regulatory structure at the
Federal and State level which adequately protects consumers,
and we should not be concerned in trying to create a similar
structure for the insurance market.
So I appreciate the chairman calling this hearing.
Chairman Baker. Thank you, Mr. Bentsen.
Chairman Baker. I welcome our panelists here this
afternoon. I certainly appreciate each of your participation.
Chairman Baker. At this time, I would introduce Mr. Wayne
White, President and Chair of Home Mutual Fire Insurance
Company, who is here today on behalf of the National
Association of Mutual Insurance Companies. Mr. White.
STATEMENT OF WAYNE WHITE, PRESIDENT AND CHAIRMAN, HOME MUTUAL
FIRE INSURANCE COMPANY, ON BEHALF OF THE NATIONAL ASSOCIATION
OF MUTUAL INSURANCE COMPANIES
Mr. White. Thank you, Mr. Chairman.
Chairman Baker and members of the subcommittee, it is an
honor to have the opportunity to address you at this hearing on
insurance regulation and competition for the 21st century. My
name is Wayne White, and I am President and Chairman of Home
Mutual Fire Insurance Company in Conway, Arkansas. I come
before you as a representative of the 1,300 members of the
National Association of Mutual Insurance Companies. NAMIC is
the largest property and casualty trade association.
I have been asked to discuss insurance regulation,
including a perspective on the National Association of
Insurance Commissioners, advisory organizations such as the
Insurance Services Office; rating organizations such as A.M.
Best, Standard & Poor's; and finally, to provide you with
NAMIC's position on the future of insurance regulation. Each of
these issues are discussed at length in my written testimony.
NAMIC is encouraged by the NAIC's post-GOBA performance
with respect to the mandated tasks, as well as to the statement
of intent. The NAIC also deserves recognition for focusing
attention on key marketplace improvements, such as speed to
market and market conduct for which NAMIC member companies are
asking. While the NAIC can recommend standards for reform and
raise the profile of important market reform issues, they
cannot act alone. In the final analysis, before Congress
intercedes, State legislative action must be the focus of
modernization initiatives.
There are important and effective national organizations
that are prepared to lead this reform effort in the States.
Already, the American Legislative Exchange Council, ALEC, the
National Conference of Insurance Legislators, NCOIL, have
endorsed competitive rating language that satisfies the speed
to market concerns of the property casualty insurance industry.
This Friday in PhiladelpHIAA, the National Conference of
State Legislature's executive committee task force to
streamline and simplify insurance regulation will meet to
consider State legislative options for speed to market and
market conduct reform. Their proposals will be approved by this
fall so that the States may be considering these issues in
January.
Other organizations have played significant roles in the
evolution of insurance practices. Rating bureaus came into
being in the late 1800s and operated without disruption until
the enactment in 1945 of McCarran-Ferguson, which recognized
the authority of the States to preempt Federal antitrust
legislation and laws and regulate insurance rates and forms.
The role of rating bureaus has changed and their rates and
forms require regulator endorsement, thus giving birth to the
prior approval process currently in effect in more than one-
half of the States.
Today, these bureaus are transforming to advisory
organizations and gather premium and loss data for State
regulators and the public as well. They also promulgate
standardized forms for use by companies that affiliate with
them. Rating organizations provide another piece of the
regulatory puzzle. These independent organizations provide
ratings of insurance companies based on financial and
operational analyses, and give regulators an additional
perspective on the companies licensed in their jurisdictions.
The information presented today should make our position
clear. The regulation of the insurance industry is best left to
the States. The issues we are dealing with are not new, but
have simply gained a higher profile as a result of the
convergence of the financial services industry. A recently
released public policy paper, Regulation of Property Casualty
Insurance, the Road to Reform, outlines the major items in need
of regulatory attention.
In addition, it points out the flaws in a Federal solution
to insurance regulation, flaws such as the propensity of
Federal bureaucracies to use the regulatory process as a means
of social engineering; the potential for an unfair environment
for smaller companies; the additional costs associated with a
dual regulatory system that must still deal with the tort laws
that are unique to the individual States, and recognition that
the cost of such a system will be passed on to the consumer.
Many of the issues put on the table by those desirous of
Federal involvement are simply of such a purpose as to make it
easier for large companies to do business.
The areas for reform have been clearly defined. However, we
must remember that changes in regulations and business
practices are driven by consumer demand. It is at that level
which is closest to the consumer that the process of change is
most effective. Now it is up to the States to enact changes in
public policy that will make the difference, and we urge you to
give it time to work.
Chairman Baker. Thank you, Mr. White.
[The prepared statement of Wayne White can be found on page
198 in the appendix.]
Chairman Baker. Our next witness is no stranger to the
committee room for sure. Welcome, Mr. Steve Bartlett, President
of Financial Services Roundtable and a former distinguished
member of this committee. Welcome, Mr. Bartlett.
STATEMENT OF STEVE BARTLETT, PRESIDENT, FINANCIAL SERVICES
ROUNDTABLE
Mr. Bartlett. Thank you, Chairman Baker and Ranking Member
Kanjorski and members of the committee. It is good to be here.
The Financial Services Roundtable greatly appreciates the
opportunity to participate in what I believe will turn out to
be the first of blockbuster hearings in this area. I am here on
behalf of our 100 member companies and their CEOs who
identified the creation of an optional Federal charter for
insurance companies as a top priority of the industry on the
date of our inception as we reconstituted an integrated trade
association. They identified this as a top priority on day one
of the organization, Mr. Chairman, back in 1999.
We believe it is time, Mr. Chairman and Mr. Kanjorski and
members of the subcommittee, to create order out of chaos, to
unleash the genius of the competitive marketplace, and to allow
a national market to function as a national market in
conjunction with regulation, not in spite of it. In short, it
is time for Congress to create an optional Federal charter; not
tomorrow or next year or 5 years from now, but now.
In inviting the Roundtable to testify, you have asked us
for an overview of the economic and marketplace challenges
facing the insurance industry, which I shall do. As a predicate
to that, though, I would like to make four quick points:
First, as these hearings will reflect, and please note from
all of the witnesses, there will be no real disagreement about
the need for significant reform in modernization. I do not
believe anyone will come to you and say there is not a problem
to be fixed.
Second, perhaps most important, the optional Federal
charter and legislation aimed at improving State regulation are
mutually complementary rather than mutually exclusive. They can
and should be combined into a single, integrated piece of
legislation.
Third, modernization of insurance regulation is about the
economy and our customers, the American consumers, your
constituents; not about turf battles, not about barriers, not
about all of those things around it, but it is about the
consumers.
Finally, Congress can ill-afford, I believe, to wait for a
crisis to prompt comprehensive reform.
Now, the marketplace challenges. The direct and indirect
cost to national companies of dealing with the inconsistent
laws and regulatory requirements of 55 different regimes are
enormous. These costs are today borne by customers and
reflected in industry profitability. In my written testimony I
have provided some of those estimates. It is profitability,
after all, that allows our companies to offer products and
services at the lowest possible cost to the consumer. In the
year 2000, Mr. Chairman, the property casualty rate of return,
known as ROR in the industry, was 5.8 percent, and for life
insurance was 10 percent.
By contrast, the rate of return for commercial banks was
16.7 percent, and the rate of return for diversified financial
services companies was 21.3 percent, and for the Fortune 500
overall was 14.6 percent. Again, that is contrasted with 5.8
percent for property and casualty.
The myth that insurance companies are wildly successful and
overcapitalized is precisely that: a myth. Since its peak in
1999, the capital of the U.S. nonlife industry has declined by
$58 billion, or 17 percent. The ratio called the trade combined
ratio, or TCR, which is the ratio of an insurance company's
losses and expenses to its premiums is one way to view
profitability. In 2000, the trade combined ratio was 116. That
means that these companies are paying $1.16 out for every
dollar they earn in premium. Clearly, under the current system,
insurance companies are not as healthy as others in the
financial services sector.
In fact, it is reasonable to assume that under the current
State-based system, diversified financial services companies
will continue to steer away from insurance as a core business.
The true cost of State-based regulation is manifested in the
resulting lack of competition and choice for consumers.
Companies cannot indefinitely pay out much more in cost and
losses than they receive in premium while continuing to serve
their customers properly. Consumers ultimately will bear their
cost in reduced choice and convenience.
On the regulatory consequences side, Mr. Chairman, the fact
is that the existing regulatory structure adds a tremendous
cost burden on insurers and consumers and, at the same time
then, stifles competition. The need to get individual State
approvals, for example, for products, mean not only long delays
in bringing products to market; in some jurisdictions this can
take years, but also huge costs associated with time,
complexity, and duplication due to the differing requirements
and standards of 55 different jurisdictions, even though in the
case of many national companies, it is one product and the same
consumers.
The NAIC has invested enormous time and effort into seeking
to reform the system. We applaud those efforts and support
those efforts. But these reforms towards uniformity absent an
optional Federal charter of a competitive Federal charter
simply cannot succeed. The world is different from where it was
57 years ago when McCarran-Ferguson was enacted. Unlike that
time, the United States is now a single national market for all
financial services, including insurance. The world has changed
a lot in 57 years. As in every other industry, insurance
companies that operate on a national basis should be able to
choose one-stop regulation that is free of duplication,
redundancy, and inconsistent requirements and interpretations.
The principles that we have chosen to lay out, Mr.
Chairman, are briefly, first, any Federal system that must be
consistent with effective, high-quality State insurance
regulation; second, any framework of Federal regulation must be
truly optional; third, a Federal charter should be designed to
permit insurance companies of all sizes and types to engage in
multi-State operations; fourth, a new Federal framework must
represent the best in modern regulation, and that means
deregulation of rate and form; fifth, the system should be
comprehensive; sixth, the new Federal regulators should have
the stature and resources appropriate to the task.
Mr. Chairman, thank you for your boldness in holding these
hearings and for your commitment to the competitive
marketplace.
Chairman Baker. Thank you very much, Mr. Bartlett.
[The prepared statement of Steve Bartlett can be found on
page 143 in the appendix.]
Chairman Baker. Our next witness is Ms. Ann Spragens,
senior Vice President and General Counsel for the Alliance of
American Insurers. Welcome, Ms. Spragens.
STATEMENT OF ANN W. SPRAGENS, SENIOR VICE PRESIDENT AND GENERAL
COUNSEL, ALLIANCE OF AMERICAN INSURERS
Ms. Spragens. Thank you very much, Mr. Chairman, Ranking
Member Kanjorski, and members of the subcommittee.
I have served in the current position I hold for 6 years at
a National Trade Association representing property and casualty
insurers and, consequently, my comments today will be related
only to property and casualty insurance, not life and health.
Prior to that, I served for 16 years as a regulator in the
State of North Carolina, and that combined experience informs
my testimony today.
I am going to explain why the Alliance supports State
regulation and has since 1922, which was our inception, and
also what modernization we view is needed in order to bring
State regulation into better alignment with contemporary
economic needs of policyholders and insurers. In addition to
that, you have also asked me to comment on the adequacy of
revenues available to insurance departments to carry out their
functions.
First, we support the regulation of property and casualty
insurance by the States. P and C products directly reflect the
rights and remedies created by each State's law, governing
torts, property use and ownership, contracts, domestic
relations, corporations law, and a myriad of other subjects. As
long as States retain the powers granted to them by the
Constitution, this will continue to be the case, and property
and casualty products must reflect those differences. As a
result, the regulation of the property and casualty industry
cannot be carried out without recognizing State-specific law.
We believe that States should, therefore, regulate property and
casualty insurance as being most familiar with their own laws
and their own needs.
We also believe in functional regulation and the
usefulness, the continuing usefulness of the McCarran-Ferguson
Act. The need for solvency regulation serves policyholders and
insurers alike. The financial strength of insurers and
confidence in them promotes economic stability for all
concerned. There are some who have suggested that modernization
of State insurance regulation is really an effort to escape
regulation. The Alliance says it is not. It is an effort to
align regulatory functions with economic realities of a new
century.
The Alliance believes the regulation of property and
casualty insurance should concentrate on efficient regulation
of solvency with a greater emphasis on market conduct
examination and a movement away from the current level of rate
and form regulation, especially for commercial lines. Already,
24 States have, in the last 5 years, enacted simplified rate
and form filing requirements for commercial lines because they
have recognized that it is appropriate to do so and that the
marketplace demands it.We believe there is still work to be
done to harmonize these changes and obtain them in some
jurisdictions that have yet to do so.
It is the need for speed which we believe should drive
modernization: Speed to market to provide consumers with
product choices, speed in licensing approvals with minimum
redundancy, speed in the examination process using practices
that focus on sound risk assessment to engage financial
strength and a review of market behavior.
Are State insurance regulators adequately funded to carry
out that job? We believe they are, to perform functions
appropriate to the modern marketplace. However, this may
require a realignment of the resources that are available to
them and how they are used.
We note that there is budgetary distress in many States
across all functions, not just insurance regulation, due to the
current drop in revenues from income tax and nonwage income. I
think you will see that reflected in The Wall Street Journal
today. However, approximately 50 percent of regulatory budgets
go to other things beyond conventional insurance regulation,
according to a book published in 2000 by the American
Enterprise Institute entitled Optional Federal Chartering and
Regulation of Insurance Companies, and we will be glad to make
these graphs available to the committee.
So States find that they are starting to outsource some of
these functions and interestingly, as they tighten their belts,
it is the rate and form function that we see being outsourced,
a tacit recognition, I believe, that this is the least
essential part of insurance regulation and does suggest the
possibility of realigning the use of those resources in the
fashion that I have described.
Mr. Chairman, this does conclude my oral comments. I offer
them together with my written testimony and I hope they will be
accepted into the record, and I will be glad to accept any
questions from the committee.
Chairman Baker. Thank you, Ms. Spragens. Yes, your
testimony and that of all witnesses today in their entirety
will have their testimony included in the record.
[The prepared statement of Ann W. Spragens can be found on
page 181 in the appendix.]
Chairman Baker. Ms. Spragens, I note that you believe, as
does Mr. White, that the need for reform is most appropriately
pursued at the State level. What are the specific top 2 or 3
things that you think should be achieved in order to facilitate
a more efficient market which has not yet been accomplished by
the States?
Ms. Spragens. We believe that further reform is needed in
connection with rate and form review particularly. This is an
area where current economic realities no longer require the
same level of agency activity that may have been true in the
past. The role of a regulatory agency is not to supplant the
decisions of consumers, it is in order to enhance them. We
believe that that time has come when rate and form regulation
should be loosened on the front end, with market conduct
regulation brought at the so-called back end, to assure that
consumers are protected.
Chairman Baker. What about product approval, new product
approval?
Ms. Spragens. New product approval comes within that
category.
Chairman Baker. What about the ability to speed up claims
processes from a consumer perspective? It is a very difficult
morass, sometimes, coming from different State perspectives
with multi-State claimants involved. Is there anything that can
be done there?
Ms. Spragens. I so much appreciate you asking that
question. We recently conducted a survey about 2 years ago
gaging the level of consumer confidence in State government's
ability to carry out its functions compared to other levels of
government, and we found that consumers hold State government
in very high esteem in connection with its responsiveness,
which is the key point in connection with responding to claims
issues.
Chairman Baker. And Louisiana was in that survey?
Ms. Spragens. All of the States were, sir.
Chairman Baker. Oh, thank you.
Ms. Spragens. As was Pennsylvania and Illinois and so on.
So that in responding to the particular requirements of
specific State laws which will control how claims are paid,
that is, what is compensable and what is not, State government
was deemed to be the best level and venue for that function.
Chairman Baker. Assuming we would pursue the State level
with regard to rate and form, including new products, how long
would one want to wait before the Federal Government would act?
Is there an agreed upon window? Mr. White may want to get in on
this too. Is this a problem that could be resolved in a year or
2, or is this a Gramm-Leach-Bliley problem and we are going to
wait a decade? What kind of a clock should we start?
I asked this question last year of the NAIC who appeared
before the committee when outlining the goals which they had in
mind, and we could never get agreement on even how long the
clock should run. Maybe that is where we ought to start.
Ms. Spragens. May I suggest that perhaps a clock is not the
way we want to look at it; that what we ought to be doing is
gauging the substance of the reforms that are being engaged and
brought to bear, because it is functional regulation that is
being examined, Mr. Chairman.
Chairman Baker. Oh, no doubt. I would say that if there was
not a substantive reform within some period of time, then the
Congress should pursue substantive reforms was my point.
Mr. White.
Mr. White. I think I would agree with that. Your reference
to Gramm-Leach-Bliley was very appropriate. However, at the
State level, we realize that not every State legislature meets
on a regular schedule. Some, as in my State of Arkansas, meet
only every other year. So it is important that we give this
process time to work through the State legislative efforts. And
in our case, Arkansas, we are, in fact, working with our
commissioner this year on a package to achieve each of these
points that we have discussed: Speed to market, open
competition on rates, use and file, as far as new forms, new
products; company licensing requirements being made much
easier. Each of those issues will be addressed in a package
presented by the Arkansas commissioner this year to our
legislature. We feel very hopeful, of course, that we will
achieve some progress in those areas.
Chairman Baker. But even if you meet every other year, is
this a 4-year problem to be fixed? Is there any outside clock?
We are going to agree on something before we finish here.
Mr. White. Well, we might not agree on a time frame.
I would say that there is not a specific limitation. I
realize that we must take action. The regulators certainly
realize, with congressional oversight, that they must take
action, but I would agree with the Alliance, that I think you
measure this more clearly by the results, the significance of
the efforts, the achievements as they occur and, at some point,
if progress is not being made, then it may require a change in
direction. But our position is that the State regulators can,
with the assistance of the legislatures, can accomplish what it
is we need to accomplish.
Chairman Baker. Well, my time as expired, but I would just
make a concluding remark. It would seem appropriate at some
point, given the length of discussion that we have already had
nationally on these concerns, without identifiable progress
being made, there ought to be some point at which the whistle
is blown and the Congress begins to debate some of these
topics, and I do not know when that point is, but at least we
agree on that. I thank you very much.
Mr. Kanjorski.
Mr. Kanjorski. Thank you very much, Mr. Chairman.
Mr. White, I want to continue along your line of thought.
It appears that in Arkansas they are working very diligently,
but suppose they are totally successful in everything they do.
How is that going to provide uniformity in the 55 jurisdictions
that Mr. Bartlett talks about?
Mr. White. Congressman, I believe that we are in a unique
position in Arkansas in that our commissioner is currently the
Vice President of the NAIC and sees his position as a leader in
that organization as an opportunity to take the progress that
we can make in Arkansas and carry that across the country
during his term, hopefully, as President of the NAIC, working
through NCOIL, working through the NCSL, working through ALEC,
those organizations that are actively encouraging our State
legislatures to react to these --.
Mr. Kanjorski. What was the term of your president?
Mr. White. Sir?
Mr. Kanjorski. What was the term of the president?
Mr. White. The term of the president is 1 year.
Mr. Kanjorski. And in response to Mr. Baker's questions,
within a year we should therefore know whether we are going to
be successful or not.
Mr. White. Well, that would be nice. In reality, this
process, as we all know, began with the adoption by regulators
of the statement of intent by the NAIC membership. That
occurred in March of 2000, so the process has only just begun.
Yes, we are in the second year of that, but I think an
evaluation of the progress made on that statement of intent
thus far is probably in order. Some of these things, as I
mentioned, have been accomplished because of congressional
oversight; some because of Federal legislation has required
that as a part of Gramm-Leach-Bliley. But producer licensing
uniformity has now been passed in 45 States, the most recent I
believe being Tennessee. That is something that was required
and has been satisfied to this point. That, in itself, was a
milestone, because it is the first, after our--several years
ago, the response to financial accreditation--.
Mr. Kanjorski. But that is only about an 80 percent success
rate, with 45 States joining out of 55 jurisdictions.
Mr. White. Yes, sir, and I believe the requirement under
GOBA was 29 States and the NAIC is very comfortable that they
are making progress. We realize there are large States that
have not signed on to that process, certainly.
Mr. Kanjorski. Yes. Mr. White, I am really torn because I
think there is a lot of merit to what Ms. Spragens said in
regard to States providing a closer response but, on the other
hand, but I see the insurance industry having to compete with
the banking industry, the securities industry, both of which
are national in scope and nationally regulated. On the other
hand for the middle to moderate and small insurance company, I
think they can continue to do business on a State basis, but I
think for the major companies, they are going to be at a
decided disadvantage if we do not find some way to clear the
field for them. I do not know what that way is, but some way
that they can get a product to market very quickly and be
competitive with other financial industry participants. And if
they are not, they will ultimately be at a grave disadvantage.
Mr. Bartlett, what do you think of potentially having a
two-tiered system where we could identify those who would opt
in for a national charter because of either their size, the
products they write, or the nature of their market being
national? Maybe we could identify 10 percent or 20 percent or
25 percent of the market for whom there will be a national
charter, and while the second tier group would remain on the
State basis.
Mr. Bartlett. Congressman, we have not examined the
specifics of a tiered system, and we would like to do that, to
work with you on it. But in general, I think that an optional
Federal charter would result by the competitive marketplace in
essence, a two-tiered system.
My own view is that most companies would continue to opt
for a State charter because they are comfortable with that,
they have made it work and they are in one or two or three
States. The national companies and many of them, perhaps most,
would then opt towards a Federal charter, assuming it is a
competitive charter, very similar to what we have in banking. I
would caution, I think, the committee against trying to decide
in advance which companies get the Federal charter and which
companies get the State charters.
I think companies, based on their own market niche and
based on the charter themselves, will be able to decide that,
but I think it will end up to be the national companies with
the Federal charters and the State companies with the State
charters. But I think the companies and the marketplace will
end up deciding that.
Mr. Kanjorski. Mr. Bentsen, I thought, made a great point,
that we all anticipated in 1999 when we passed the
Modernization Act that we were going to have to address this
problem of the Federal charter for insurance companies at some
point in the future. To jump a little ahead of that idea,
should we project how this is going to affect the tort law
system of the 50 States? Are we going to be here 10 years from
now saying we should have uniform tort laws throughout the
United States?
Mr. Bartlett. That is an excellent question, because that
is often sort of thrown up as a straw man. The fact is, as we
discovered with the dual-charter system in banking, a Federal
charter does not require, nor should it, for the Federal
Government to change individual State laws. The Federal charter
will--each company would still have to operate within each
State law just as they do today and, Mr. Kanjorski, just as
they do in every other industry, whether it is banking or steel
or coal or home building, they have to comply with the State
laws in the States where they operate and still have a Federal
charter, so that is perfectly compatible.
Mr. Kanjorski. Don't they write policies very often using
words of art that are crafted by their individual supreme
courts so that a policy that uses these words or is interpreted
as using these words are understood by the consumer If we take
that away from the law as discerned in each of the 50 States
and we put it into one uniform contract, how is that going to
impact on the legal interpretation?
Mr. Bartlett. There may be a State in the Union that has a
shortage of good layers to interpret Supreme Court cases and
write those policies, but I do not know of that State. The fact
is that these companies, even under a State-by-State system,
every company proposes a product or a form or a policy proposes
it for that State and they would continue to do that.
With a Federal charter, however, they could propose a
product and bring it to market in a speed to market to all 50
States at once. It is then incumbent, as it is in every other
industry, for the company to comply with the laws, both the
Federal laws and the laws of the State in which they do
business. No difference.
So in short, there is no need to change any or to preempt
any State laws with regard to contract law, tort law, or
liability laws in any way. Companies should simply be able to
have a Federal charter, offer a national product, as they do in
every single other industry. This is the only industry that I
know of where you are required to go and get permission State
by State by State. It makes no sense. Perhaps it made sense in
1945. It makes no sense today. It just simply costs consumers
time, convenience and money.
Mr. Kanjorski. I know my time is running out. Do you have
any estimate of what the real cost of this State-by-State
regulation is?
Mr. Bartlett. I do not have an overall estimate. We asked
one company, just one company for what they estimated their
cost to be, and this was not the largest company by any means,
but they are in, I think, 40 States or something like that.
They estimated that just the cost of complying with the
regulations in filing their forms cost them about $25 million a
year of excess cost. Now, that is not the cost of the lost
market, that is not the cost of the higher premiums because
they cannot serve their consumers, that is just the cost of
filling out the forms. That was one company alone.
Mr. Kanjorski. That $25 million is to how much business
written or on what premium? In other words, is it a 2 percent
cost, a 3 percent cost?
Mr. Bartlett. It was about 2 percent of their premiums.
About 2 percent cost to their premium holders, and that is not
for the cost of the lost market, just for the cost of filling
out the forms, basically.
Mr. Kanjorski. Which would be removed if we had a Federal
charter?
Mr. Bartlett. If that company chose to have a Federal
charter. Under an optional Federal charter, just as it is with
banking, every company could then decide which is the best for
their particular competitive niche, and thus the competitive
marketplace would decide, driven by consumers.
Mr. Kanjorski. Thank you, Mr. Chairman.
Chairman Baker. Mrs. Biggert.
Mrs. Biggert. Thank you, Mr. Chairman.
Ms. Spragens, witnesses at one of our previous subcommittee
hearings testified that States like Illinois and South
Carolina, and I think that Mr. White mentioned this also where
they have allowed the insurance marketplace to work, they have
created more innovation and competition and coverage
availability. Would you agree with that?
Ms. Spragens. We certainly would, and believe that is an
approach that can be very successfully implemented in any
State.
Mrs. Biggert. Mr. White, would you like to expand on that
too?
Mr. White. Yes, ma'am. Obviously, a look at the statistics
and the experiment originally, beginning in 1969 in Illinois,
gives evidence to the fact that an open market does, in fact,
increase competition. The residual market in Illinois, as you
mentioned in your opening remarks, is greatly reduced. The
choices available to the consumers in your State are much more
varied in nature now. The average prices of the insurance
premiums fit somewhere in the middle of the country, which
would indicate a competitive market, both in products as well
as price.
I do not see, and I guess responding in part to your
question and in part to some of the comments I have heard, our
association, in fact, does represent about 40 percent of the
property and casualty premiums written in this country, and we
have very many small members in our association, but we also
have 5 of the 10 largest writers, and our board of directors as
unanimously agreed that States such as Illinois and their
regulatory practices are the models that we should attempt to
follow in our efforts to modernize.
Mrs. Biggert. Do you think that it would make a difference,
having an optional Federal charter versus the State regulation
to make less regulation, or would there be--do you see it with
the Federal that there would be more regulation and it would
take away that regulation and competition?
Mr. White. I have, in my experience in this industry, as
well as in the industry of public accounting from which I
originally came, I have never encountered a situation where the
addition of the Federal Government into the process reduces
regulation or increases efficiency. In fact, it would appear to
me that the initiation of that process itself would add
additional costs to the companies involved, in addition to
creating potentially an unlevel playing field for the smaller
companies that do not elect a Federal charter. Playing by two
sets of rules.
Mrs. Biggert. Thank you.
Mr. Bartlett, would you agree with that? I guess what I am
trying to ask, if you have uniformity and reciprocity when
there is no Federal option, but you would still have the
regulation, would that be greater or less--.
Mr. Bartlett. Congresswoman Biggert, the regulatory burden,
I have 100 companies who are members, all the large companies,
we share many of the same companies, and by 100 companies are
unanimous that the regulatory burden, with an optional Federal
charter, some of them may not opt for a Federal charter, would
be dramatically reduced for a number of reasons: speed to
market, the competitive nature of a Federal charter with great
deregulation and form deregulation, and just simply a
competitive charter as it works in the banking industry.
So there is no disagreement within my companies as to the
Federal charter would reduce their costs rather dramatically.
Obviously, it is their money, so they have looked at it pretty
strongly.
They are also unanimous, by the way, in believing that the
Illinois model of rate and form deregulation is the right model
for the Federal market. That is modern regulatory standards
where you regulate for safety and soundness and for consumer
protection, but not on rates and products. So our companies
believe strongly that allowing a Federal charter would
dramatically decrease costs; not only increase costs, but would
decrease costs.
We support uniformity. I mean, we support this drive
towards uniformity. It helps. But in the best of cases, the
success, if we achieve success and it has not achieved success
yet; if it achieves success, success is you convert a grossly
inefficient regulatory structure to a merely largely
inefficient regulatory structure. You still do not solve speed
to market, you still do not provide relief for a national
market, and you still do not provide a competitive charter for
a company that wants to have a competitive option.
Mrs. Biggert. Could you explain just a little bit more a
competitive charter, what you mean by that?
Mr. Bartlett. Well, the best comparison is in the banking
industry. J.P. Morgan Chase is one of the largest banks in
America, one of my largest members, and they have a State
charter, because for a variety of reasons they believe, and it
has worked for them, that a State charter works best for them.
Most of the other national companies have national charters, so
in the banking industry, similar to this, a company could
choose which charter is best for their marketplace, their
customers, their structure, and then they choose.
Thus, you have a regulatory--the opposite of what we have
today, a regulatory drive to excellence, and I will pick on the
Chairman's State, where a company based in Louisiana, if they
are, for whatever odd reason, they are dissatisfied with the
regulatory structure in Louisiana, could choose a Federal
charter as an option. I know that is unlikely, Mr. Chairman,
but it is always possible.
So a competitive charter then allows the marketplace and
ultimately the consumers, through those companies, to choose.
Mrs. Biggert. Thank you.
Thank you very much, Mr. Chairman.
Chairman Baker. Thank you, Mrs. Biggert.
Ms. Hart.
Ms. Hart. Thank you, Mr. Chairman.
I kind of have an out of left field question because I was
a State Senator for 10 years and I sat on the insurance
committee, and through the whole Gramm-Leach-Bliley debate, one
of the issues that the NAIC had taken up dealt with keeping the
State as a regulator for insurance, but somehow having this
model NAIC insurance regulation that all of the States should
comply with, which sounds to me like they were looking for
everybody to have the same rules, but to have the State still
be the enforcer.
I do not know if that is still the case, but I would like
to hear your thoughts about that theory, if that is what you
are really looking for when you looking to have sort of both
levels be involved, but not really, especially those of you who
endorse the continuation of the State and really not having a
Federal charter?
Ms. Spragens. What the NAIC has been promoting and,
frankly, what we support is more harmonization and more
uniformity in process. That is different than the great rich
variety of State substantive law that I mentioned in my
testimony that controls casualty and property products. Money
is notoriously fungible and it perhaps can be regulated in a
different way. Casualty risks are unique. They vary
significantly from State to State. Take, for example, the
difference in catastrophe risks posed by weather and geology.
That cannot be made, homogenized nationally.
So it is process that can be greatly enhanced, while
preserving what is a Federal system blessed by our United
States Constitution, and that we believe will continue.
Process can be improved dramatically. This is where there
can be uniformity in the speed of turnaround, for example, on
whatever filings are required and appropriate within a given
State.
Finally, our view is that an optional Federal charter would
not be an alternative. It would, in fact, be a second layer of
regulation. It would not be more efficient. We believe that
proponents would not be satisfied with it if they had it,
because it simply is not going to play out that way. The
proposals that currently have been floated, of which we are
aware contemplate continued activity in State residual markets,
for example, which necessarily brings to bear all of the State
requirements on what coverage has to be placed in those markets
and controlled.
Another aspect of this that is extremely grave from our
perspective and why we focus on process uniformity and
harmonization is the issue of the level playing field. If very
large companies pull out of the State system and take with them
their statistical data, this means that the ability to
aggregate credible, statistically credible data will be
significantly compromised.
This is a unique problem to the property and casualty
industry. You will not see this on the life side, for example,
or in other industries. That data provides significant
confidence for consumers and for insurers alike who are small
or midsized to be able to participate in the marketplace in an
environment of financial solidity. So we believe all of those
issues are crucial and should be examined very carefully in
connection with any discussion of an optional charter.
Ms. Hart. Thank you. Anybody else on that specific issue?
Mr. Bartlett. I would. Let me just take the catastrophic
risk or the catastrophe risk. The catastrophe risks between
Pittsburgh and Cleveland are pretty similar, between New
Orleans and Houston are pretty similar, between, pardon me,
Congresswoman, between St. Louis and East St. Louis are pretty
similar. All other types of industries trade and do business
across those State lines with cities that are side by side, and
it is only an insurance industry that has to go through these
extra steps.The data collection is an easy one to solve. You
solve that in the--I do not believe that is insurmountable.
As far as the idea that uniformity in the end can solve the
problem, it seems to me in the best of circumstances, 10 years
from now, 15 years from now, in a best case, if we achieve full
uniformity, that means the uniform, every uniform standard
would have to be set by someone, perhaps the then-commissioner
of insurance in Arkansas, and sort of jaw-bone to the other
States, which strikes me of at least having the possibility of
having uniformly bad standards in some cases, because there is
no national forum to debate those in a public way, such as the
U.S. Congress.
So I think that having more uniformity, more efficiency set
by the State-chartered organizations competing with a Federal
charter that offers that competitive model is the one in which
you end up achieving what is best for the consumers and best
for the national marketplace.
Ms. Hart. Thank you. I see my time is up. Thank you, Mr.
Chairman.
Chairman Baker. Mr. Ose, you are recognized for 5 minutes.
Mr. Ose. Thank you. Mr. Chairman, if you would clarify
something for me. Are issues dealing with the solvency of the
insurance companies and the regulatory environment that they
live in, are they subject to this hearing?
Chairman Baker. I am sorry, could you restate?
Mr. Ose. Are issues of solvency and the regulatory
environment of insurance companies the subject of this hearing
also?
Chairman Baker. Certainly. This is an informational hearing
for the members of the committee and to consider all
perspectives of reform where appropriate.
Mr. Ose. I would like to ask Mr. Bartlett about an issue.
It is my understanding that in the early 1990s, overseas
financial institutions were not allowed to own domestic
insurance companies; is that correct?
Mr. Bartlett. Yeah. I don't know. The overseas companies
own domestic companies now.
Mr. Ose. I am aware of that now. But it is my understanding
that in the early 1990s that was the case. I am speaking
specifically to the issue of Executive Life in California and
its purported ownership or control by Credit Lyonnais in
France.
Mr. Bartlett. I was sitting on this committee back then, so
I don't know.
Mr. Ose. Does anybody on the panel know the answer to that?
Mr. Chairman, the reason I raise the issue is one of the
questions that I think we have to consider in the context of
Graham-Leach-Bliley and its implementation is not just the
positive impacts of this legislation but also what happens if
everything goes south, as it did in California, when a
particular company, for whatever reason, was judged to be
illiquid or not liquid at all, and was ordered liquidated by
the insurance commissioner.
The situation that arose was that there is some evidence to
suggest that a company based in France was fronting for Credit
Lyonnais, which my understanding is, was statutorily prohibited
by law; in other words, another--a foreign financial
institution, owned and controlled by arguably the Government of
France at some point or another, was in a position to control
the prospects for dissolution of a domestic insurance company.
And the reason that is germane is that there are now
300,000 policyholders in California, all of whom had their
annuities or coverages given a haircut. And I would hope in the
context of our discussion about the implementation of the
regulations for Graham-Leach-Bliley, that we would not only
look at the positive side but also give consideration to how to
avoid a repeat of a cram-down haircut on as many as one, let
alone 300,000 people, as happened in California.
With that I yield back.
Chairman Baker. Thank you, Mr. Ose. That is certainly a
subject of importance and we should have rules which construct,
as best we can, a method to ensure that no policyholder is left
in that circumstance as a result of a corporate failure when
the premium payers have done their part. And, it is--I will
need to know a great deal more about the matter which you have
brought to the committee's attention, But certainly we will
investigate that and all similar situations and try to preclude
that from recurrence if possible.
Mr. Ose. I appreciate the chairman's offer. I will be happy
to share with him the information that I have. It has to do
primarily, as I understand it, with whether or not someone can
come in, allegedly break the law, be judged to be illiquid, the
company is liquidated, and then 8 or 9 years later they pay a
nominal fine relative to the appreciated assets that they
otherwise controlled.
Chairman Baker. I assure you that in Louisiana we have
someone who is an expert on that subject.
Mr. Ose. I think he is sitting right down there, isn't he?
Chairman Baker. Thank you. Mr. Ney, did you have questions?
Mr. Ney. Thank you, Mr. Chairman. The question I have is do
you believe that a Federal regulator can be as responsive to
industry and citizens as a State regulator? I mean we got Lee
Covington in Ohio--I wanted to put in a plug for Lee, since I
am from Ohio. I used to chair insurance and banking in the
State. And we dealt for years with doing our part on the
McCarran-Ferguson when different regulations needed to be
implemented, and we would respond with each other through the
National Conference of Insurance Regulators, et cetera.
I just wonder if a large Federal regulator would be as
responsive, and I know you can--States vary differently with
people that run the insurance. And I know there is argument of
elected versus, you know, people that are appointed and some of
the political ramifications of elected process.
But I just wonder in general, anybody, do you have an
opinion on the responsiveness of a large Federal regulator? And
the reason I state that, if something happened and we went to
the Federal side, you know, I just wonder with rules and
regulations, some people who would support that would be coming
back in about 5 years saying, look what is being done to us;
can you please save us from what is going on with the Feds?
Anybody.
Ms. Spragens. Yes. Perhaps the best answer I can give you
is that consumers believe that the States are more responsive.
And in that regard I would make available to the committee,
should you be willing to accept it, a survey that the Alliance
of American Insurers did about 3 years ago, I think, comparing
consumers' attitudes about the responsiveness of different
levels of government to deal with various issues. That question
was specifically asked, and that is a response that we obtained
that was the result of a Roper-Starch survey on our behalf.
Mr. Ney. Okay. But just to follow up on that, if citizens
through surveys believe that--but what about the practical
reality of something the Fed creates that becomes the nightmare
of the century, and the same citizens come back 5 years from
now saying, what is going on, this is all bogged down?
Ms. Spragens. As we have tried to envision how Federal
regulation of property and casualty insurers might take place
in order to recognize the regional- and State-specific
differences that I have outlined, it seems to us that
inevitably what occurs is that a proxy for the State system is
actually created.
It would be regionalized. There would have to be expertise
based upon what is taking place within a particular
geographical area. It seems to us, therefore, that it suggests
strongly that it would be inefficient to create that layer.
Mr. Bartlett. Mr. Chairman, let me try--Federal regulatory
agencies can be as responsive or more responsive to some States
or less responsive to other States, just the way it works in
the banking circles. I have, from time to time, some of my
members who will talk with me about their dissatisfaction with
the State regulatory agency and how they long to be under a
Federal regulatory agency in banking, and vice versa. I have it
exactly the reverse.
So the marketplace ends up deciding. That is why one of the
real advantages in the last 10 years really to the "dual
structure," which is what it is called in the industry, is as
competitive regulation towards excellence.
So various charters tried to provide better regulation that
provides safety and soundness but also is efficient. Now, that
only works as long as it is an optional charter, so as long as
it is truly optional and a company can choose either one,
depending on what State they want to charter in and depending
on what the Feds are doing at that time, that is what makes it
work is a truly optional charter.
On the subject of McCarran-Ferguson, Mr. Chairman, I must
say, Mr. Chairman, I come not to repeal McCarran-Ferguson, but
to fulfill it. McCarran-Ferguson, the law itself in 1945
contemplates and provides for legislation such as we are
discussing today of an optional Federal charter. In fact, at
the core of McCarran-Ferguson it says: provides for an
antitrust exemption to allow companies to, as long as they are
in a regulated market, to collude on prices on a legal basis.
What this would do is to say in a deregulated price
regulation market, you would no longer have the antitrust
exemption. And that is the way it should be.
Mr. Ney. Let me put one twist to it, because I have got the
yellow light on. Some people would argue that the only way to
do this is a Federal charter. But what about not throwing the
baby out with the bath water and making some reforms that it is
not necessarily a Federal charter but something that revolves
around NARAB and how that worked.
Mr. Bartlett. NARAB is a good step. It is helpful. It
doesn't get the job down. It doesn't provide for speed to
market. It doesn't provide for competitive marketplace. It
doesn't provide for Houston and New Orleans to be able to do
business together in the insurance business. It is good so far
as it goes. But absent an optional Federal charter, not a
required but an optional Federal charter, at the end of the day
it can't succeed.
Mr. White. Mr. Ney, also if you allow the concept of the
NARAB provision, for instance, that tends to acknowledge that
we will, in fact, look to the Federal Government to set the
standards and tell the States what they need to do. The
discussion of an optional Federal charter--I guess my question
would be: Whose option? It seems that the policyholders, the
consumer in this case, have been left out of the equation.
The company makes the selection of that option, in fact,
because it is better for them. Assuming that is the right
choice for their consumer, that may work out just fine. But in
the case of a situation in New Jersey, for instance, where New
Jersey instituted some extremely stringent regulatory policies,
in practice, and almost cleared the State of any insurance
market at all, made it extremely difficult on their consumers,
at least the repercussions from that decision were confined to
the State of New Jersey.
If you had a Federal regulator and that same type of
mistake was made, you have just impacted hundreds of thousands,
maybe millions of consumers, beyond that one area and it is
much more difficult to back-track and fix that problem.
Chairman Baker. Mr. Shays.
Mr. Shays. Thank you, Mr. Chairman. Mr. Chairman, I
sometimes think that you get bored in life and need to find
controversial issues to kind of just test your intellect.
Chairman Baker. Thank you very much.
Mr. Shays. I also want to say to Mr. Bartlett that as a new
Member, I remember your extraordinary activity as a Member of
Congress, and I thought that you were the most energetic and
effective Member in Congress. And I was very sad to see you
choose to leave this place because you were a real model to me
and many others.
What would be the alternative to a charter bank--chartered
insurance--I am sorry--to having more Federal uniformity? What
would be the alternative if you didn't have action from
Congress?
Mr. Bartlett. If there is no action from Congress on an
optional Federal charter, then in my opinion, particularly in
the property and casualty market, companies would continue to
exit. We would continue to have major problems with Europe and
other trading partners who object to this as a trading barrier.
Consumers would continue to pay some percentage; one estimate
of 2 percent higher in premiums.
Mr. Shays. So let us assume, though, wouldn't the
alternative be for there to be a real effort to get the States
to seek to have uniformity?
Mr. Bartlett. Yes.
Mr. Shays. Why isn't that--.
Mr. Bartlett. Perhaps there could be some success in that.
But there are two problems with that; there are several if all
you get is uniformity. One is the uniformity has to be imposed
by someone, and right now the system of NARAB which has not
been adopted by States, representing by my estimate some 30
percent of the premiums, but a uniform standard then would have
to be imposed or determined by someone. If that someone is not
a national--a Federal regulator, or is not the U.S. Congress,
it would be the jawboning effect of the NAIC and whoever is the
current chairman.
So in some years you could get excellent standards; in
others you can get uniformly bad standards. But the uniform
standards, if we ever achieve fully uniform standards, which I
don't believe we ever could, they would still be imposed by
someone; and the someone would be less transparent then a
Federal charter or by the U.S. Congress.
Mr. Shays. When I was in the State house, there was this
real effort to have uniformity wherever you could. But I was
trying to think, is it different industries where there is an
incentive for there to be uniformity? Is there any incentive
for States to try to build up a uniformity with other States? I
can throw that out to Mr. White or to others.
Mr. Bartlett. Briefly, I think there is. But what there is,
is the threat of an optional Federal charter, in my opinion, in
that the States are trying to achieve uniformity, and they
really are. So I think there is some incentive, but it is the
incentive to eliminate the inefficiency.
Mr. White. On that point, I believe we would agree that
certainly the State regulators are beginning to feel the heat.
When George Nichols, who at the time was president of the NAIC,
a commissioner from Kentucky, put forth the principles outlined
in the statement of intent, I think that was a reaction to the
fact that we do in fact have a system that needs fixing and
these are the steps we believe as regulators we should take to
fix them.
Mr. Shays. I find it rather interesting to think of how we
are becoming more and more dependent and interactive with the
rest of the world; how they must view coming into the United
States, and how they could--I mean, if we had to deal with
different regions in France or England or Germany and follow
different regulations, I think we would begin to think it was
designed purposefully for restrictive practices. So this is
something we are encouraging with overseas markets.
Ms. Spragens. But those overseas markets, taking the EU as
an example, there are situations where there is not absolute
uniformity in all requirements there either.
Mr. Shays. That is a good point.
Ms. Spragens. If one reverses the argument, one finds that
the same things can be said almost anywhere globally.
Mr. Shays. That is a very good point. In other words, we
still have to deal with England, we still have to deal with
France, as separate entities?
Ms. Spragens. Yes, we do.
Mr. Shays. So that argument basically goes out the window.
In other words, California and Illinois are different. We can
make the same claim that we have the same problem of going to
Europe.
Mr. Bartlett. Congressman, I think that the European Union
is particularly tough on that argument. They seem to be, while
maybe not winning the political argument, they seem to be
winning the intellectual argument in the World Trade
Organization and others that this is a trade barrier, and it is
thrown up to us with every negotiation that we have with
lowering trade barriers in Europe and elsewhere. So it does
seem to be--you shouldn't adopt this regulation, this law, just
to eliminate the trade barrier. But it comes--it is generally
believed to be a real trade barrier in the United States market
that does not exist in the European Union.
They are not perfect. They have got a lot of problems, too,
but they seem to be ahead of us in this area.
Mr. Shays. Bottom line, there could be Federal legislation
that establishes a Federal charter. There could be States that
decide to link up and have uniformity. And just tell me--my red
light is on--but if you could respond to this, what would be
the market force that will ultimately push us in one direction,
in this direction? What will be the market force that does
that?
Mr. Bartlett. I think for a long time, perhaps forever, you
would end up with a dual charter. Some companies would choose
the States--.
Mr. Shays. No, that is not what I am asking. I am asking--
right now, we are kind of in between here, wondering where we
are headed. And I am interested to know is there a natural
market force that is going to force Congress ultimately to act
or force the States to act.
Ms. Spragens. If I may answer that question. One market
force that is already at work that has caused 24 States to
already revise, say for example, their rate and form filing
requirements is the multi-State insured on the commercial side.
That is recognized as an important need. States are attempting
to respond more quickly. And in addition to that, as has
already been mentioned, there is a desire on the part of
regulators simply to respond to their constituent needs,
including insurers.
Mr. Shays. Thank you. Thank you, Mr. Chairman.
Chairman Baker. Thank you. Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman. I apologize for
having to leave to meet some constituents.
It is ironic to bring up the European Union. I don't want
to go down that path. But we did just have a hearing a couple
of weeks ago about their proposed financial services
regulations and the idea of having a regulator of a
consolidated entity, and whether or not our insurance
regulatory structure would run afoul of that to the extent that
you had U.S. Insurance companies that wanted to do business
within the Euro zone area. But I don't want to get--I don't
know that that is an issue, in and of itself, of whether or not
you ought to have a Federal charter.
But it does strike me as surprising, still, that the
industry has not come to the conclusion that a dual charter is
not such a bad thing. And I will use as an example the
securities industry. There is a dual regulatory system where
the SEC is responsible for regulating the national market
function; the States are responsible really for consumer,
individual consumer regulation.
Now, one could say, well, look at the current situation
with securities and the research analyst situation, and perhaps
the SEC was slow to fulfill its role. But arguably--and I know
the chairman has raised some concerns about this--the States,
in this case the State of New York, has actually--the State
regulator has actually fulfilled its role.
Why is it that we couldn't have a similar situation by
having a dual charter system for the insurance industry? I
don't think anyone is talking about changing the solvency to
having a Federal regulator for solvency purposes. I think it is
the idea of how you have a national market regulator for what
is--particularly in the case of life insurance, because it is
an investment product, is becoming--is a national marketplace.
And I would also add--I mean, this is an issue that is
problematic in my State on the P&C side, which arguably is a
completely different product. But how do you deal with the
companies that are pulling out? We have a problem with mold in
Texas, with wind storm coverage in Texas. And so I am not sure
that we haven't finally come to the conclusion that we need to
have a dual national charter. I still don't understand why
there is this concern about it.
And why we can't have--I mean, we have blue sky laws that
affect the securities industry. And States are still allowed to
set requirements for registration, still allowed to set
requirements for who can sell what types of securities, and yet
we have a national marketplace. Why can't we do the same with
insurance?
Ms. Spragens. That is an abundance of riches of questions.
I am certain I won't respond to all of them, but let me try.
First of all, the Alliance and our member companies do not
support a dual charter because we do not believe that it will
deliver the efficiencies that are hoped for. We are very quick
to say that more efficiency is needed, but we don't believe
that will actually produce it. In terms of comparisons with
regulators from other industries, they are different
industries.
The national marketplace for the capital markets does make
sense perhaps to regulate at a Federal level. Casualty risks,
however, are very local in their character. There is no true
property casualty national product that does not have to be
tailored to local circumstances based upon State law and
particular geological and geographical requirements, for
starters.
Mr. Bartlett. Congressman, in the industry, at least as I
define it, which is the large integrated companies--those that
have other options of other things that they can and are doing
in the financial services marketplace--it is unanimous. It is
unanimous. It has been unanimous for several years. Those
companies that are members of mine. Some are more vocal than
others. Unfortunately, some are not vocal out of a misplaced
fear of retribution by State commissioners. I think that is
misplaced. But some don't believe it is misplaced, so they are
not as vocal or as forthcoming.
But among those companies that are large and integrated and
national, there is zero debate about whether or not an optional
Federal charter will help the American consumer and provide a
much more rational marketplace. And the only disagreement is
how vocal that they choose to be individually.
Mr. Bentsen. Well, I would just say--go ahead.
Mr. White. I would, I guess, question the analysis of that,
only in the sense that we are attempting to compare the cost of
a dual regulatory system with the cost of the present system.
And yet we don't know the details of what that dual regulatory
system may bring: the layers of additional bureaucracy that may
be required, the regional offices, the people that are closer
to the consumer. And it would appear to me that even if we had,
in a perfect world, the ideal piece of legislation that could
create a dual charter situation and give us an option, we
absolutely have no belief that perfect piece of legislation is
what we are going to end up with when it comes out at the end.
I think we are dealing with an unknown in that regard.
Mr. Bentsen. Thank you.
Chairman Baker. Thank you. I just want to make sure the
record is accurate, Mr. White. In your response to a question
from Ms. Biggert about preferred structure of markets, I think
you indicated that the Illinois plan was something you found to
be--model--was one you found to be desirable, and that
consumers were well served because there was more competition
and better prices in the market as a result of that type of
system. Is that accurate?
Mr. White. Yes, sir, that is accurate.
Chairman Baker. Is there any reason why that model wouldn't
be good nationally?
Mr. White. I don't believe there is a reason. I don't know
all of the details within the Illinois system. But the concepts
that are in place there certainly are concepts that would work
in other property and casualty markets.
Chairman Baker. We found something we can agree on. Thank
you very much. Does any other member have--Mr. Bentsen.
Mr. Bentsen. I have two points. But one is, Mr. Bartlett,
just to get some clarification up front if this question were
ever to be asked, because Ms. Spragens sort of segments out the
P&C industry--presumably the Financial Services Roundtable
would want a Federal charter, a broad Federal charter--you
don't want to subdivide the industry between life, life and
investment or versus--.
Mr. Bartlett. Right. P&C and life. Yes, sir.
Mr. Bentsen. Ms. Spragens, I do agree that there is
certainly a State nature to the P&C industry, but I will remind
you that subsequent to September 11th, the P&C industry was in
Washington, hat in hand, with a very good case about the need
for a federally structured backstop for P&C.
And we have looked at other issues. In fact, I have been a
sponsor and cosponsor in the past of Federal reinsurance market
for P&C for national disaster. So it does sort of cut both
ways.
Ms. Spragens. May I respond?
Mr. Bentsen. Sure.
Ms. Spragens. We believe that terrorism is not an insurable
risk. We paid it out of good faith and concern for our
policyholders. We are in the business of paying claims, and we
want to. Nonetheless, the lesson of 9/11 is that terrorism is
not rational in the sense that casualty risks insured by the
property casualty industry can be rationalized. As a result, we
do not believe that it is insurable. And that is the reason
that we came here.
Mr. Bentsen. I don't disagree with you because, as I said,
I agreed with parts of your industry when it came to the
question of national disaster risk, as well, and whether or not
there was a sufficient reinsurance market. So I do think there
are some Federal roles here.
Thank you, Mr. Chairman.
Chairman Baker. Thank you. If no other member has any
further comment, I want to thank the panelists for their
participation. We found your testimony to be of value. We do
appreciate it. Thank you very much.
Chairman Baker. I would like to ask our second panel to
come forward. Okay. I would like to welcome each of you to the
committee's hearing this afternoon. We appreciate your
willingness to participate.
Our first witness is the Honorable Mark Young, State
Representative from Vermont, who appears here today on behalf
of the National Conference of Insurance Legislators. Welcome,
Representative Young.
STATEMENT OF HON. MARK YOUNG, VERMONT STATE REPRESENTATIVE, ON
BEHALF OF THE NATIONAL CONFERENCE OF INSURANCE REGULATORS
Mr. Young. Thank you, Mr. Chairman, members of the
subcommittee, thank you for inviting the National Conference of
Insurance Legislators, or NCOIL, to testify before you today. I
am Representative Mark Young, and it is my privilege to
represent residents of Addison and Rutland Counties in the
State of Vermont legislature. It is my further privilege to
serve as Vice Chair of the NCOIL State-Federal Relations
Committee.
NCOIL welcomes your request for testimony on State
insurance guaranty funds and residual markets. The guaranty
funds provide an example of how well State insurance regulation
can work. In fact, it may be worth noting here that none of the
present-day critics of State insurance regulation have
identified the State guaranty fund system as being inefficient,
ineffective, or in need of major reform.
I will first provide some basic details on State guaranty
funds and their purpose. Then I will move on to discuss how the
funds have fulfilled that purpose.
In each State a guaranty fund consists of insurers doing
business in that State in a particular line of business covered
by the fund.
State insurance guaranty funds make good on the outstanding
insurance obligation of insolvent insurers. At the point where
the assets of an insolvent insurer are insufficient to meet
claims obligations, the guaranty funds pay the balances up to
limits set by State statute. The funding of those payments
comes from the assessments of the remaining insurers, which
range from 1 to 2 percent of premium volume, but are also pro
rata to the State market share and the lines of business in
which the insolvent insurers had engaged.
Each State has its own guaranty fund laws for life and
health insurance and for property and casualty insurance. Some
States have additional guaranty funds set up for workers'
compensation and surplus lines insurance. These State laws
conform substantially to the model laws adopted by the National
Association of Insurance Commissioners.
All States post-assess insurers to cover insolvent
insurance claims, except the State of New York which pre-
assesses its property and casualty guaranty fund up to $200
million. The insurers licensed in the State constitute the
guaranty fund in that State under the supervision of a board of
directors and, ultimately, the State's insurance commissioner.
The State guaranty funds coordinate their work, especially with
regard to multi-State insolvencies, through two national
organizations: the National Organization of Life and Health
Insurance Guaranty Association, and the National Conference of
Insurance Guaranty Funds.
Guaranty funds serve as an effective and efficient backstop
to safeguard consumer interests in cases of insolvency. The
funds have assured continuance of coverage to policyholders of
insolvent insurers; paid more than $14 billion in the last 25
years to policyholders; they have grown in financial capacity,
and done so at no direct cost to State or Federal taxpayers;
and have shown that guaranty funds work and do not need to be
fixed in any significant way.
The funds have been there when needed. The property
casualty fund system has stood the test of Hurricane Andrew,
which felled several insurers, as well as many other
insolvencies caused by increases in the costs and severity of
medical malpractice claims and the expansion of toxic and
environmental tort liabilities.
The guaranty fund system was sufficient when Mission
Insurance Group became insolvent in 1985, resulting in 700
million in State guaranty fund payments, the largest amount for
a single insurer in history.
The system worked during the next 4 years when five more
national insurers were placed in liquidation, resulting in
State guaranty fund payments of an additional 1.9 billion in
claims.
On the life and health side, the guaranty system
effectively met the challenge of the early 1990s, when the live
insolvency activity reached its peak. In 1991 alone, there were
23 new insolvency cases on the life side. One of these cases,
Executive Life, involved in excess of 10 billion in policy
obligations. The guaranty associations effectively protected
Executive Life policyholders by transferring their covered
policy obligations to a third party insurer. While the guaranty
associations are still making payments to the assuming insurer
on behalf of Executive Life policyholders, it is estimated that
the total guaranty association costs will be about 2.5 billion
on a net present value basis.
State guaranty funds operate and pay claims at no direct
cost to State treasury or taxpayers. The policyholders of all
insurers ultimately bear the costs as a part of their premium
payments.
I might really go into and explain residual markets. States
have also established many different residual market programs
to make available insurance to individuals and businesses
having difficulty obtaining coverage where the normal market
has ceased to function effectively. Residual markets are
important for high risk applicants or individuals and
businesses with poor loss records.
Residual market insurance premiums are set at a lower level
than they would be if they were established on a strictly
actuarial basis. Therefore, coverage is attainable for everyone
who wants or needs insurance. Profits and losses of each
residual market program are shared by all of the insured in
States selling a specific type of insurance. Residual market
programs are rarely self-sufficient and generally require
assessments to insurers, which are ultimately passed on to all
insurance consumers.
Against this backdrop, the idea of a separate and competing
Federal guaranty system of insurers operating under a Federal
charter, such as those proposed in Congress by Senator Schumer
and Representative LaFalce, could not help but weaken the
State-based system. It would weaken the strong State consumer
safety net, deplete its capacity from 4.8 billion to less than
3 billion, and reduce its overall risk pools. It would build
another layer of overhead, create duplication in process, and
add unnecessary expense.
We believe this system has worked well and is no way
broken. Congress, I respectfully submit, does not need to fix
it, replace it, or establish anything parallel to it.
While guaranty funds and residual pools stand well today,
we believe continued oversight is absolutely essential to the
continuance of their effective function. We submit that an
interstate compact idea is one that is available if needed. But
for now, the guaranty fund system does not require the focus of
Congress, although your constructive oversight is welcomed and
appreciated.
I thank you for the opportunity to provide this testimony.
My written submission is far more detailed than the time would
allow me to address orally. And, Chairman Baker, I would ask,
given the short notice of this hearing, that the formal record
be held open so that I might submit final comments. I thank
you.
[The prepared statement of Hon. Mark Young can be found on
page 214 in the appendix.]
Chairman Baker. Thank you, Representative Young. I would
make the announcement that for all purposes, for all members as
well as all witnesses, the record will be held open for an
additional 30 days for any final comments that anyone might
choose to offer after the hearing is adjourned. Thank you,
Representative.
Chairman Baker. Our next witness is Mr. Michael D.
Phillipus; is that correct, sir?
Mr. Phillipus. That is correct.
Chairman Baker. Vice President of Communications and
External Affairs, Risk and Insurance Management Society.
Welcome, Mr. Phillipus.
STATEMENT OF MICHAEL D. PHILLIPUS, VICE PRESIDENT OF
COMMUNICATIONS AND EXTERNAL AFFAIRS, RISK AND INSURANCE
MANAGEMENT SOCIETY
Mr. Phillipus. Thank you. Good afternoon, Chairman Baker,
Congressman Kanjorski, and members of the subcommittee. My name
is Michael Phillipus. I am Vice President of External Affairs
and Communications for RIMS, the Risk and Insurance Management
Society, the largest professional organization in the risk
management community. I appreciate the opportunity to appear
before you today on the issue of insurance regulation and
competition in the 21st century.
RIMS member companies, which comprise over 4,000 consumers
of commercial insurance, support the advancement of efficient
insurance purchasing abilities. RIMS membership includes 84
percent of the Fortune 500 companies, as well as approximately
950 companies with less than 500 employees.
I would first like to spend a few minutes on several issues
that the committee had asked me to address: specifically,
alternative insurance markets and surplus lines.
The job of a risk manager is to protect and preserve
physical, financial, and human resources. One of the primary
means of accomplishing this job is through the purchase of
insurance. The first hard market of the 21st century has made
this job even more difficult, and risk managers are forced to
be more creative in minimizing risk to their organization and
their employers. More and more often, risk managers are turning
to alternative markets to procure necessary coverage.
Captive insurance companies are an important part of the
alternative insurance market. Captives are closely held
insurance companies whose insurance business is primarily
supplied and controlled by its owners, who are also the
principal beneficiaries.
The advantages for establishing captive insurance companies
include reduced operating costs, flexible coverage, direct
access to reinsurance, some assurance of stability of premiums
and coverage terms. Risk retention groups are a form of captive
insurance companies. These groups provide certain insured with
casualty protection on a homogeneous basis that removes their
risk from volatile industry cycles and provides focused service
customized to their exposures. Authorized by Federal law, they
are incorporated under State law and governed by the law of the
State of domicile.
The Liability Risk Retention Act, or the LRRA, passed in
1996 does not permit risk retention groups to underwrite
property insurance. This limitation reduces the number of
insurers that can underwrite property insurance at a time when
market restrictions from terrorism threats, combined with the
hard market, have driven prices up and reduced availability.
RIMS urges Congress to expand the LRRA to permit risk retention
groups and risk purchasing groups to write all coverages except
personal lines and direct statutory workers' comp coverage.
In order to adequately ensure unique, difficult to place,
or high-capacity insurance risk, risk managers frequently use
the surplus lines, or sometime called the excess lines market.
Rather than an alternative market, the surplus lines market is
better described as a supplemental market to the licensed/
admitted market. The surplus lines market, in effect, serves as
an outlet or a safety valve market to be utilized by risk
managers and their brokers when the desired coverage cannot be
found among the States admitted/licensed insurers, or when
market forces or conditions in the admitted/licensed market
causes voids and gaps to occur in coverage for certain types of
risk.
Freedom of rate and form is essential for the surplus lines
market to have the flexibility to quickly and adequately
respond to the risk manager's insurance needs, particularly for
hard to place, distressed, unique, or high-capacity limits.
I would now like to discuss RIMS' position on insurance
modernization, specifically optional Federal insurance charter.
RIMS recognizes both the incredible promise and the inherent
hazards of an optional Federal insurance charter. The Society
appreciates the serious and complex implications of allowing
insurers to obtain a federal license that would allow them to
operate nationwide. The current system in the United States is
inefficient.
Negotiating rate and form regulations in more than 50
jurisdictions is expensive and time consuming. A single
regulator, to establish risk-based capital and surplus
requirements as well as requirements for public disclosure of
rates and forms, would reduce costs and restrictions for U.S.
Purchasers and act as an incentive for increased participation
by foreign companies.
The State regulation system needs to remain accessible to
those insurers who choose not to participate in the Federal
option. Ideally an optional Federal charter would spur
improvement and innovation at the State level. The NAIC has
taken measurable steps to reform State insurance regulation,
most notably the adoption of the State certification program,
speed-to-market initiatives, and steps to deregulate commercial
lines of insurance.
By the very nature of State regulation, however, it is
almost impossible to achieve uniform laws and regulatory
interpretation of those laws. Nevertheless, creation of an
optional Federal charter should involve the NAIC on a
consultative basis to ensure that States' rights and revenue
issues are properly addressed.
RIMS understands that it may be a long road to approve an
optional Federal charter legislation, but we believe that the
time for this idea to become reality is now.
In the end, all of those risk financial options are crucial
to risk managers, but there is no one-size-fits-all solution
for insurance commercial consumers. While the alternatives
discussed today provide some relief, RIMS ultimately favors a
system unfettered by overreaching regulation, one that has the
ability to add flexibility to respond to the various needs of
the consumer and the changing marketplace. Certainly small and
mid-sized companies benefit from the oversight protection
provided by the State insurance regulation system. Care must be
taken that this system does not restrict the movement of
product and the ability of consumers to attain adequate and
affordable coverage.
Thank you for the opportunity to speak today. I appreciate
your time, your interest, and your leadership.
Chairman Baker. Thank you, Mr. Phillipus.
[The prepared statement of Michael D. Phillipus can be
found on page 165 in the appendix.]
Chairman Baker. Our next witness is Mr. Steven Harter,
President, National Association of Professional Insurance
Agents. Welcome, sir.
STATEMENT OF STEVEN J. HARTER, PRESIDENT, NATIONAL ASSOCIATION
OF PROFESSIONAL INSURANCE AGENTS
Mr. Harter. Thank you. Mr. Chairman, members of the
committee, my name is Steve Harter. I am the owner, chief
principal, for Select Risk Management in Ava, Missouri. I also
have the honor of serving as the current President of the
National Association of Professional Insurance Agents. We are a
trade association representing independent insurance agents and
their employees in all 50 States and Puerto Rico.
Mr. Chairman, as you have asked us to do, PAI will outline
some of the key competitive issues faced by multi-State
insurance producer operations, including the issues regarding
countersignature laws.
PIA is absolutely committed to a reform of the insurance
producer system in a manner that means effective oversight for
public protection. The progress that has been made with the new
single NAIC Single-License Producer Model Act has been
wonderful, but it hasn't yet been adopted in all jurisdictions.
In addition to these States, there are also challenges in some
of the States that have designated themselves as NARAB
compliant by virtue of reciprocity only.
Collectively, these minority jurisdictions still pose
challenges in the following areas:
First of all, countersignature laws. Since 1970 PIA has
worked to repeal countersignature laws as well as the secondary
level of insurance statutes that, while not technically called
or classified as countersignature laws, in effect act in
concert to frustrate open nonresident participation.
Much progress has been made in the repeal of the
countersignature laws, and only a few remain. PIA appreciates
and is sensitive to the unique market and public policy
circumstances that exist in Florida and Nevada, but believes
their issues can be solved without countersignature laws.
However, less progress has been made on the secondary level
of statutes that act in concert with countersignature laws. In
some States the per se countersignature law was repealed but
the companion statutes were not.
As an example, many times the case, if I have a commercial
client who secures a business operation in another State, under
countersignature laws I am forced to secure the services of a
resident countersigning agent from that State that my client
will not know and whom I might not know either. This resident
agent must already be licensed in this State to write the
specific type of coverages for my client's new operation in
that State, as well as already be appointed by the carrier with
which all other aspects of their coverages have been placed. As
the principal producer on the full account, I must still be
sure that all forms and the carriers are authorized to write
and issue the type of coverage being secured. The in-State
agent would then technically place the business by merely
countersigning the policy form and collecting a fee for
services.
Under a State with secondary statutes, I might be able to
perform all the regular tasks and issuance of coverage for any
client; however, the State might require that I deliver a copy
of the policy for the business location through the services of
an in-State resident agent operating in the county where the
business is located.
Another issue is the single-license producer versus the
agent broker license. A number of jurisdictions have yet to
adopt a single-license format. The nature of our business
requires that we perform both functions for clients' insurance
needs. Thus, in these States we are required to secure both
agent and broker licenses as resident producers. As
nonresidents we must select one or the other, thus limiting the
type of activities to be performed for our client in that
State.
Yet another issue is the agent-only jurisdictions. These
jurisdictions do not recognize the broker's status, something
fundamentally required for our clients' needs, whether on a
resident or nonresident basis. If in my resident State I am
licensed under the single-license producer approach, and by
nature of my business operations I am acting in a broker
capacity, I am forced to change into an agent for nonresident
purposes in the jurisdiction, something that may or may not be
possible or even wanted.
Another issue is the individual versus the business entity.
Today, several States only make available an individual
producer license. In these jurisdictions, PIA members operating
in a business entity basis are forced to only have one of their
individually licensed staff members file as a nonresident in
those States. This creates numerous legal, insurance
appointment and tax problems for such agencies, and, in PAI's
opinion, lessens the comprehensiveness of the State's oversight
of the insurance operation.
We also have an issue regarding foreign corporation
filings. This is an example of noninsurance government
officials applying a one-size-fits-all solution. In simple
terms, persons operating in what would be considered a
nonresident status must first file for and secure foreign
corporation licenses permitting them to enter the State.
Insurance departments have over 150 years' experience with
the structure, authority, and expertise required for this
issue. PIA wants insurance producers relieved of this
additional foreign corporation filing. It is duplicative of the
nonresident licensing process.
Background checks: This committee's efforts related to the
passage of H.R. 1408 are much appreciated by PIA and its
members. Prior to its passage, PIA's board adopted a position
last September, making it clear that we support H.R. 1408 as
the preferred process along with the one-time electronic
fingerprinting of all individuals currently licensed as well as
anyone applying for a license in their resident State. Is This
process should be recognized on a reciprocal basis for
nonresident filings as well.
In conclusion, PIA is working on a Federal proposal
addressing the concerns we outlined today, the details of which
will be discussed in a future hearing by our partners at the
IIABA.
We believe this proposal acts to refine and improve on
Graham-Leach-Bliley, NARAB, and supports NAIC's current
additional reform efforts. PIA's charge from its members is to
participate in and ensure that all four areas of reform
activity--model laws, State-by-State reforms, multi-State
compacts, and additional Federal proposals--come together in a
single coordinated and complementary system.
Accordingly, PIA opposes Federal optional charter proposals
because at their core they are designed and operated as an
additional competing insurance system. Neither our customers
nor our members need a 56th insurance jurisdiction.
Again, I would like to thank you for allowing PIA to
testify before this committee on this important issue.
Chairman Baker. Thank you, Ms. Harter.
[The prepared statement of Steven J. Harter can be found on
page 153 in the appendix.]
Chairman Baker. After listening to your list of the
conflicting requirements for the licensed agents, it would seem
hard to comprehend that there wouldn't be fairly significant
support for some sort of national licensure purposes, just to
simplify the list which you have elucidated for the committee
today. It is mind-boggling enough.
Mr. Harter. You ought to be on this end of it.
Chairman Baker. In the earlier panel, there was some
discussion about the Illinois model which, as I understand it,
is an open, competitive system allowing--as described by one of
the advocates of the system--allowing competition, providing
consumer choice at pretty good price. It is not a prior
approval State. There are no speed-to-market issues. Do you see
the Illinois model as a model which has advantages from an
agent perspective?
Mr. Harter. I think any State that speeds the process--I
think the Illinois model is user-friendly from an insurance
agent's perspective. Many States are going in that direction.
Chairman Baker. Representative Young, I understand the
concerns from a State perspective about a Federal intervention
unnecessarily into the conduct of its business. But at some
point there has to be an acknowledgment that if there is not
State-by-State action, then demands of the marketplace will
require that the Feds do something.
I don't take from your comments that there is--and frankly
from any witness's--that anybody feels that speed-to-market
issues are insignificant; that creating uniformity in agent
licensing isn't appropriate; that making market conduct
examinations relatively uniform in application, eliminating
arbitrary price fixings and allowing competition in the
marketplace to govern the price and the product--if those were
the issues around which we had principal concern, what is a
reasonable clock?
If we were to in good faith, say in an NARAB on steroids,
States of the world get out there, get it done by--what is a
reasonable clock in your view?
Mr. Young. Well, I think my understanding is that the NARAB
idea or suggestion, many of the States have already adopted
those measures, and I believe 18 months in advance of the
deadline.
I realize all States have not done that. The earlier panel
spoke about legislatures that only meet every 2 years or that
type of thing. But I do not see it being a long, drawn out
affair to put a time limit on it. I do not. Four years,
possibly, something of that nature.
Chairman Baker. So if we could as--the committee is going
to have additional hearings. As a matter of fact, the next
hearing is going to be dealing with some of the international
issues that were raised in the earlier panel. It is going to be
a broad series of hearings over the course of the summer. But
at end of it, I think there are going to be a number of issues
on which there is pretty much clear agreement, and there are
going to be a handful of issues on which there is going to be
some contentious decisions to be made. If that is the way in
which this develops and we resolve to let the States act within
a certain time frame, they being unable to act whatever that
time frame is, then we have to act.
As you point out, NARAB has been partially successful. But
some of the numbers don't speak really to the operational
compliance. Merely adopting a reciprocity agreement doesn't get
uniformity. If you both agree to have a countersignatory
requirement, that is not moving in the right direction.
Is it pretty much the agreement of the panel that those
general issues that I have outlined are areas where we could
make some progress on the question of whether or not it happens
State by State or whether it has to be done by Federal
intervention is the issue?
Mr. Phillipus.
Mr. Phillipus. I do agree that there has been improvement
on the State side. And as I indicated in my testimony, RIMS is
supportive of NAIC's continuing efforts. However, we do think
that the optional Federal charter gives additional latitude to
insurance consumers. And in the case of the RIMS members
particularly, those are large corporations which have
sophisticated risk management departments in management of
financial issues, and they are looking for quite often rapid
answers to problems that they face.
We have seen over the last few years the advent of issues
such as the Y2K employment practices, liability, e-risks. And
these are things which generally have come up rather quickly.
And generally the marketplace has responded from the surplus
line side or outside of the United States as opposed to within-
State basis, and they have been generally innovative in their
approach.
And those are the type of creative solutions that risk
managers and their member companies are looking for.
Chairman Baker. Thank you, sir. Mr. Kanjorski.
Mr. Kanjorski. Mr. Young, as I gather, your argument is
that States can best supervise and handle the regulatory
process, safety and soundness oversight, and all of the other
issues regarding insurance at this point. Is that correct?
Mr. Young. That is correct, sir.
Mr. Kanjorski. If that is the case, then why is there
federal pressure here in Washington and on the Hill for us to
enact a terrorist reinsurance support system for the insurance
companies? Why don't the individual States just do that?
Mr. Young. I think that issue is larger than what the
States can deal with on their own. The previous speaker had
mentioned that terrorism probably is not an insurable risk for
an insurance company, certainly not an insurance company
sitting here as a legislator. But that huge impact is not an
insurable risk or a predictable risk and really surmounts the
capacities of the States to individually deal with it.
Mr. Kanjorski. Well, if the States are going to regulate
and we are going to do the reinsurance and the bailing out,
what kind of protections do the American taxpayers generally
have from the acts of Congress to benefit the ability to
underwrite certain risks?
Mr. Young. Well, I still say it is a risk that rises about
the normal insurance market and is too large for the normal
insurance market to take in stride, or could be. They certainly
have paid claims for September 11th, but it is foreseeable that
it could happen that they could not stand to cover those
claims.
Mr. Kanjorski. I understand that. I have been a supporter
of the Federal terrorism reinsurance support system. But if the
States can handle all of these things, why shouldn't we just
pass a law apportioning out to the States what the reinsurance
should be, what their support requirements would be, and let
them go ahead and handle it? I see sort of an inconsistency
here for us to say that this is able to be and is being well
handled on he State level and yet, quote, there are times or
needs when we have to come to the Federal Government, unquote.
And this is not the first time. In health insurance,
vaccination insurance, and other support systems, the Federal
Government has had to step up, and I think rightly so. I am not
condemning the States. I think it is beyond their capacity to
handle some problems. And it seems to me if that is the case,
there seems to be a very strong case at least for the potential
of an optional Federal charter.
Mr. Young. I think from my comments that the guaranty fund
has worked so well, that certain size claims can certainly be
covered by assessment on a State-by-State level. I think there
is a point by which we exceed the capacity of the assessment
system to cover those losses.
Mr. Kanjorski. Are these products and regions so unique
that if we allow some companies to get an optional Federal
charter, we are eviscerating some protection for consumers or
the uniqueness of the State or region in which the company is
involved?
Mr. Young. I don't think so. But I will say that the
guaranty fund now works quite well for companies that are
regulated in another jurisdiction--in another State. They are
formed in another State, and they work well regardless of where
the loss is.
Mr. Kanjorski. In a prior life that I lived as an attorney,
I had some experience with performance bond insurance. And
there were some States that had a regular habit of having their
insurance companies underperform and declare bankruptcy when
any substantial claims were made. As a matter of fact, I used
to recommend to some of my clients not to purchase a surety
bond if it came from a particular State.
Is it not rather difficult for businesses and for lawyers
and for everyone else to know what the solvency standards is
for an insurer, or the particular criteria in the various
States with which we are dealing? Whereas, if we had a national
charter, there would be one regulator, there would be one
safety and soundness standard, and a calmness of certainty
would exist across the States as to what companies were solvent
and what companies were unsolvent?
Mr. Young. I think it is imperative and I think its
function is that we trust other States to regulate their
insurance companies. And through the accreditation process that
has been formed, we know that insurance commissioners and
departments across the country are adequately supervising the
insured that are within those States.
Mr. Kanjorski. At one time we did that for prescription
drugs in this country. We did not have the Federal Drug
Administration. I guess we could go back and allow each State
to handle that type of regulatory question, but would that not
be awfully redundant and expensive for drug companies to have
to qualify in each State and meet the particular conditions
that each State would want to lay down? Whereas, if you had one
Federal process, it allows for speed-to-market for product, and
it allows for less risk to the consumer.
Mr. Young. I really don't know if I am qualified to answer
that.
Mr. Kanjorski. Well, it is interesting. On your point on
representing the companies and brokers and sales operations, is
there a fear within the organization that in going to an
optional Federal charter that your members will be more at
risk? If so, what would the risk be?
Mr. Harter. I think the risk is having another
jurisdiction. You wind up with 56 jurisdictions instead of the
55 that you have now. The industry, the agent broker industry,
has been very resilient. They have been able to respond to
working with the various different State departments, and we
feel that those departments are effective. They are very
responsive to the individual States and the consumer laws, et
cetera, in the States where they operate, and we see the
systems being complementary as working with each other as being
the answer to it, not replacing one with another.
Mr. Kanjorski. Well, why couldn't you, because it is 56
jurisdictions, not one jurisdiction? Is that the major problem,
that we would have a 2 percent increase in jurisdictions
involved, that we should deny the national companies the
ability to save the 2 percent that Mr. Bartlett talked about in
costy?
Mr. Harter. I do not know how to respond to the 2 percent
because that is not a number that I am familiar with. But I do
not know whether that is accurate or not, but it is not
necessary. The system as it stands, by working with a set, a
uniform set of standards being managed, if you would, by the
States, the individual insurance departments, I think you can
solve the issues.
Chairman Baker. Thank you, Mr. Kanjorski.
Mr. Shays.
Mr. Shays. Mr. Chairman, I get a lot of constituents who
come to my office and want there to be a Federal solution to
whatever particular problem; they just see it much more simply
done if there was just this one policy.
I think this is a fascinating debate, having served at the
State level, because sometimes the argument to cut costs and to
go on a Federal level could be made almost in every conceivable
industry. So I am trying to get a handle on ultimately what is
the right way to approach this. Is this a State responsibility,
and therefore should the States just be the ones to deal with
it, or is it a Federal one?
I guess what I would want to ask the panel would be this
question: Is there a clear benefit of reductions in cost by
having a one-size-fits-all opportunity? Will there be more
competition as a result of it? Will the consumers see lower
prices? Is that the bottom line argument on one side versus the
other argument, that if you have State-level activity, that you
will have, in some cases, better protection for the consumer?
I know for instance when we went to regional banking, all
of our banks went under. Maybe they should have been
nationalized. But I mean, not nationalized, but maybe they
should have, when we lost our banks, maybe it should have been
that they should have gone just beyond the New England region.
I would just like the panelists to address the issue of
cost versus the issue of doing something on a smaller scale
means that you don't have everybody negatively impacted if you
face bad times.
Mr. Young. I guess I would have to tip my hand here a bit.
I sit here this afternoon as the President and CEO of a
national bank, and from everybody's comments this afternoon, I
have been kind of incredulous that I have it so good on the
regulatory front. My regulators are in Boston. In asking
questions of regulators, it takes a length of time, if ever, to
get a response from my regulator. My customers on the bottom of
their forms are told if they have a consumer complaint to call
Washington, and I do not think they are responded to as well as
if it was a local or State insurance matter.
Quite frankly, if I did not have probably the sixth or the
eighth oldest charter in the United States, I would have gone
to a State-chartered system a long time ago in that I would
have contact with my regulator in a much better case.
So I think, I really do believe, that in a dual chartering
situation, the consumer is not as well served as by State
regulation.
Mr. Phillipus. Congressman, I think some of the points that
Ms. Harter brought up are some of the concerns that our members
have. The idea of having to have a document shipped across the
country for a signature from someone who had not participated
in the process, just because it is required, ultimately
increases the cost to our members, the consumers, the ultimate
buyers of insurance.
Likewise, for example, as risk managers one of the common
complaints I hear is an issue regarding something as simple as
automobile insurance, and the fact that if you decide to take a
lot of risk yourself as a company, you have to fill out
countless forms for uninsured motorists, personal injury
protection, and medical payments to reject them. Every State
has a different form, sometimes requiring up to six different
signatures, sometimes three different forms; and there are
costs associated with it when the insurer has to provide those
stacks--which can be this thick--for some of our members to the
risk manager. And then the time has to be spent by the agent,
the broker, and the risk manager to review the documents, make
sure they are correct, and then they get sent back. Ultimately,
all you are doing is saying we want to accept the risk
ourselves.
So from a consumer standpoint, we see that as a waste, we
see that as inefficiency, and we see that there are
opportunities to reduce costs, to improve the system, and we
think that the optional Federal charter would provide that
opportunity.
Mr. Harter. I do not think the Federal charter is the
answer to it at all, in responding to what Mr. Phillipus has
said. Many of the States have laws, no fault laws, you have
many different laws that these uninsured motorist forms are
responding to. I am not sure that is the intent of the optional
Federal charter, to do away with that.
You also have situations where the national companies
certainly do not intend to be all things to all people in these
States. You are still going to have situations where I as a
broker and as an agent am dealing with a customer that maybe
has a federally chartered policy, they have a local State-
chartered policy, and I do not have any idea how all of that is
going to come together. All I can foresee right now is it is
going to be an incredible problem that we probably do not have
to get into if we can pull everything together, we can merge
the concerns, we can have some uniform standards that are still
regulated at the State level. I do not know of anyplace where
anybody is going to get any satisfaction with hundreds of
thousands of consumer complaint calls coming into a bureau here
in Washington, and those are literally the kinds of numbers
that the State insurance departments deal with.
Mr. Shays. Could I just follow up a second? It just strikes
me, though, that intuitively, costs have to go down to the
consumer actually, to the participants, to the insurance
industry itself, and obviously to the consumers, if you have a
more uniform system. And so I mean, I think you really have to
stretch it to make any other assumption. I think choices go up
potentially as well if you have more competition, and I think
you would encourage more competition.
The other side of it though, it seems to me, is that there
is a bit more security on the State level. So it seems to me
when I am looking at this, I see a greater opportunity for the
consumer with a national system, at least a national option;
but on the other side, the potential that if there is a screw-
up, if times are bad, you could have--you can have a system
that can be more in jeopardy with a national system than if you
have the potentially regional State systems, that you will have
some good ones and some bad ones, but there will be more
protection. That is kind of how I am viewing it as I listen to
this hearing.
Chairman Baker. Thank you, Mr. Shays.
Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman.
Representative Young, you talked about your experiences
with your bank in having a national bank charter. I have to say
when Congress was trying to pass financial modernization over
the 20 years that it worked on it, and when we spent--Mr. Baker
and I and others spent the last 8 years working on it--it was
not the Texas banking commissioner who was up here--who is a
friend of mine--that was up here arguing that national banks
ought to have some abilities to sell insurance because it was
closely related to banking under the Bank Holding Company Act,
it was the Comptroller of the Currency. Now I realize he was
the bane of existence for a lot of people in the insurance
industry.
But there is something to be said for a single-headed dog
versus a 55-headed dog who is doing your bidding for you. And
that is one thing I worry about this industry; because again,
even in the P&C market, and Ms. Spragens makes a very good
point when she testified that there are geographical
differences. But it is for the most part--I mean we are not a
50-State segmented market. And Ms. Harter raises the issue
about agents who are now multi-State agents, and most
businesses now I think, a lot of the growing businesses are
multi-State businesses, and we have had to grapple with ERISA
at our end in how we deal with that in the health insurance
field. So I mean, that is what you are fighting against.
Ms. Harter, in your testimony, if I read this correctly,
the PIA board of directors three times has adopted sort of a
statement of principles for reform; and in that, you talk about
creating a collaborative shared resources uniform effective
system. I think that is all well and good. But I am skeptical
that 50 States, 50 State legislatures, can adopt a uniform
system that preempts each other's State where you may need to
have that at some point in time. Federal preemption, of course,
can be very unpopular, and other times the industry really
wants it badly.
So those are the issues that I think Congress has to
address. I appreciate the fact that, well, we do not want
another bureaucracy, we do not want another one we have to go
through. But last week I was in a meeting with somebody from a
national financial services firm which is not one of the big
Wall Street firms, it was not a huge conglomerate, but this
firm's brokers were a lot like your members; they are NASD,
NYSE, they are registered insurance brokers in their State,
they are a conglomeration of small businesses; and yet somebody
in the home office has to sign all of the documents for all 50
States or wherever they are operating in--I assume it is all 50
States--so it is a convoluted system.
I think those are the issues that we are trying to deal
with or the Congress is trying to deal with as we continue to
see financial modernization occur, with or without our
acquiescence.
So I think it is going to become--the pressure is going to
become increasingly greater for some sort of dual system. As
Mr. Phillipus said, in reading his testimony, the bigger
clients--and it is probably moving downstream--that the bigger
clients, for risk purposes, are going to set up these captive
companies, because they are becoming multi-State and it is
going to be a lot easier.
So I would encourage you--I do not really have a question--
I would just encourage you to take a very hard look at how we
might be able to come up with a dual system. The States are
still going to play a very important role, because the States
control the solvency. I do not think anyone is talking about
setting up an insurance fund for the insurance industry at the
Federal level. I am not sure we want to bite that piece off.
But it is a two-way street, because as Mr. Kanjorski said, you
know, talked about the terrorism issue that I had raised, the
industry has come to us for disaster insurance, flood
insurance--which is an important issue in my area of the
country, is the federally insured program. So we have to figure
out some sort of two-way street, how we are going to work with
this market as it evolves.
Chairman Baker. Thank you, Mr. Bentsen. I just want to make
one additional comment.
It is clear that there are areas of agreement where current
bodies of rules and regulations are inappropriate; they do not
enable the consumer to have any particular right that is of
value, they inhibit the free flow of product, they stifle the
pricing of product, they inhibit the appropriate conduct of
business by the agents themselves. So we can identify those
problems.
As opposed to the establishment of a national bureau of
insurance with a big office down on K Street somewhere, it
seems to me this problem can be divided. On the one hand,
commonsense regulatory structure that is national in nature. If
we were to take the NAIC approach and make the Illinois model
the national model, for example, we are talking about how we
get there: Does the Federal end do it or does the NAIC with the
State legislature adopt a system, State by State? No big
difference. The end of the process would be similar.
On the other side of the coin, however, we do need State
advocacy with regard to consumer protections and that the
Attorney General and the appropriate insurance regulator would
still maintain their right to act and to determine solvency
requirements. So that without the necessity of creating a
Federal bureaucracy, you could establish national rules by
which market practice could be reformed, while reserving to the
States the right to defend consumers and to preserve financial
protections for the taxpayers.
Somebody tell me why that does not make sense.
Mr. Harter. It makes all the sense in the world to me. I
think it is exactly what we are asking to be done.
Chairman Baker. Mr. Phillipus?
Mr. Phillipus. I agree. That is the type of--I think we are
approaching it from a slightly different approach, but we are
not suggesting the creation of a new bureaucracy. We are
suggesting we just need a little bit of innovation and we are
open to how we get there, but we think the end result is where
we need to be and we can make concessions along the way.
Chairman Baker. This is only 2, 3 hours into the first
hearing. We have a long road to travel. But I keep hearing the
same things over and over. We are all really saying we see the
problem, we disagree on how we are going to fix it, but at the
end of the day, we are all going to look pretty much the same.
The only question is whether we have a building with a Federal
name on it or whether we have just simply national standards of
conduct that are applicable in all States.
Representative Young, can you respond?
Mr. Young. I would hope the coalition of NAIC, NCOIL, NCSL,
could pull this off without there being a need for a Federal
building, quite frankly.
Chairman Baker. Had they acted in the last 8 or 10 years, I
would be just happy as a clam. But I think the problem is that
we have been discussing these issues at the national level for
quite some time: NARAB, although with some degree of success,
is not where we had hoped; and that reciprocity does not look
like uniformity; and that at some juncture we could all agree
as reasonable people that if it is not done by a date certain,
the Congress will act. Maybe that is the message that needs to
be related more directly that would encourage constructive
dialogue so that the inappropriate Federal intervention would
not occur.
Mr. Shays or Mr. Bentsen, any further comments?
Mr. Bentsen. If the chairman will just yield, I think you
are on target, because if you will recall when we did the
Gramm-Leach-Bliley bill, the final compromise that was worked
out and took forever to get done set these standards that had
to be met, and there is still disagreement over whether it is a
clear entry into the marketplace, and so the chairman is right.
I mean, it may not be--we may be talking about something that
is more of a hybrid; we may be talking about something that is
more of a federally established SRO-type structure or something
that creates this uniformity. Because I think one can make the
argument that we have been waiting on the States for a long
time to come up with this uniformity in the market. And this
has happened in Congress, it happens all the time, the market
moves far past us and we are playing catch-up, and I think you
all are in that position right now.
Chairman Baker. As a fairly conservative free market
Republican, it is very hard for me to say let us create a new
Federal regulator. But something has to be done with the
current system, and I would hope that in the time remaining
with the record being open, you would respond with your
thoughts on the specifics of how such an approach might be
constructively considered.
Chairman Baker. If there are no further comments, our
meeting stands adjourned. Thank you.
[Whereupon, at 4:20 p.m., the subcommittee was adjourned.]
INSURANCE REGULATION AND COMPETITION FOR THE 21ST CENTURY
----------
Tuesday, June 11, 2002
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance
and Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 2 p.m., in Room
2128, Rayburn House Office Building, Hon. Richard H. Baker
[chairman of the subcommittee] presiding.
Present: Representatives Baker, Ney, Bachus, Royce, Oxley,
Weldon, Hart, Rogers, Tiberi, Kanjorski, Bentsen, Moore,
Maloney of Connecticut, and Lucas of Kentucky.
Chairman Baker. I would like to call this hearing of the
Subcommittee on Capital Markets, Insurance and Government
Sponsored Enterprises regarding insurance regulation and
competition for the 21st century to order. Today's hearing is a
continuation of the committee's review of current regulatory
structure of the insurance marketing and practices with an eye
toward determining the advisability of what needed reforms may
be considered by the Congress. In the course of these hearings
we will hear from a number of participants from various market
perspectives, each of whom has recommendations to make to the
committee for consideration and subsequent action.
It would be my hope that in today's continuation I am
looking forward to the testimony of those who have agreed to
appear before the committee, and advise you that the Members
will be in and out as the day proceeds, but in order not to
delay anyone, we are going to try to be as much on time as
possible. Five minutes after is pretty much on time for the
congressional committee. So I welcome you and will do so more
formally at the appropriate time.
Chairman Baker. Chairman Oxley, did you have an opening
statement for the record today?
Mr. Oxley. I do, Mr. Chairman, and thank you.
Today insurance represents one of the critical foundations
for our Nation's infrastructure. In fact, insurance now
represents about 6-1/2 percent of consumer household spending,
exceeding entertainment, clothing and health care. Insurance
has become an integral part of consumers' lives, and without
it, few people would be able to own homes, drive cars, obtain
medical care or provide retirement security for their families.
And yet our American insurance market place is entering
into a time of crisis. States collect enormous revenues from
insurers, spending only a fraction on insurance regulation and
on consumer protection. Some States fix prices below the levels
necessary to attract adequate capital even where extensive
competition does or could exist. And each State imposes its own
regulatory regime for formal approval, creating long delays for
consumers and making it impossible for insurers to provide
products uniformly nationwide. Consumers ultimately bear the
cost of this reduced competition and innovation.
The current patchwork system of insurance regulation also
has far-reaching international consequences. The financial
services marketplace is rapidly becoming more global, with our
trade negotiators prying open foreign markets to American
products. We could not be strong overseas if we are not strong
at home. And we could not argue that foreign markets need to be
more open and transparent when our domestic market is still
Byzantine and impenetrable.
To remain competitive we need to speak with one voice from
our country to harmonize international regulations and ensure
adequate consumer protections and solvency oversight. Consumers
cannot be adequately protected if insurers are subjected to
conflicting requirements at the international, Federal and
State levels.
It is my primary hope that our State legislators and
insurance commissioners can enact meaningful reform. The States
have had some success, significant progress in agent licensing
reform, solvency oversight and accreditation. I would note,
however, that this success is far from complete and has only
occurred in the face of congressional legislative pressure,
pressure that will continue to grow if the pace of reform does
not improve.
Numerous groups have now come forward to our committee
desperate for reform. In fact, some people have tried to take
advantage of this by jumping the gun and coming forward with
proposals before the committee has had a chance to fully review
the great number of issues that Congress needs to analyze in
considering any proposals. But we cannot and will not risk such
an important foundation of America's infrastructure without
understanding all of the risks involved and developing a public
record with all industry and consumer groups participating, and
that is why, Mr. Chairman, I congratulate what we are doing in
this series of hearings. We are just beginning to search out a
consensus on what reforms might be achievable. Our goal is an
industry that is competitive and profitable and brings
consumers the efficiency and effectiveness they deserve.
I appreciate our witnesses coming today to help us grapple
with these very difficult issues and look forward to their
testimony. I would like to offer a special welcome to Joe
Gasper, at present the chief operations officer of Nationwide,
a great company that just happens to be based in my home State
of Ohio.
With that, Mr. Chairman, I yield back.
[The prepared statement of Hon. Michael G. Oxley can be
found on page 136 in the appendix.]
Chairman Baker. Thank you, Mr. Chairman.
Chairman Baker. Mr. Moore has indicated he has no opening
statement.
Mr. Kanjorski, do you care to make a statement at this
time?
Mr. Kanjorski. I will submit something for the record.
The Chairman. For the record, thank you, Mr. Kanjorski.
[The prepared statement of Hon. Paul E. Kanjorski can be
found on page 229 in the appendix.]
Chairman Baker. Mr. Rogers, did you have an opening
statement? Did you care to make an opening statement, sir?
Mr. Rogers. Yes, Mr. Chairman, if I may. Thank you, Mr.
Chairman.
Just briefly, and I want to first thank the first panel. I
do want to talk to an individual who is joining us on the
second panel, and I appreciate all of you being here to speak
on the dynamic that is happening in the insurance industry
right before our eyes and the furious and sometimes adversarial
regulation conditions in which you operate in State after State
across this country. You are the industry that people love to
hate, but it is absolutely crucial that we make sure that you
can survive with the free market bent, so you can provide
efficiency to those consumers. I am glad you are here today to
help us weed through a very difficult circumstance and so we
can understand the impact of tort law and sometimes the
changing market conditions as we continue to provide insurance
services.
I just wanted to take a moment, Mr. Chairman, and welcome
Bob Restrepo from Allmerica, and I want to compliment him.
Their parent company bought kind of a small insurance company
in my hometown called Citizens Insurance. That was the place
when I was growing up where people wanted to go to work. They
were great corporate citizens. They were involved in every
activity in our community. They employed and provided great
conditions and a great product, an insurance product. When
citizens was purchased, we heard all the rumors that certainly
sent a shock wave through a small town in mid-Michigan that
they were going to up and leave and be torn apart and sold off
and moved in several different directions.
And I want to compliment Bob for taking over and not only
continuing that tradition of being a great corporate citizen
for our community, but growing and expanding on it, investing
in it, moving some operations there, rewarding the very
talented people who are there, and making good things happen in
our small town.
So for all the bad things you hear about corporate America
and mergers, this was a great success story for us and really,
I think, for the consumers who are continuing to buy that
product. So I wanted to welcome Bob here today. And from
Howell, Michigan, a small town in the Midwest, we thank you for
what you have done and what you are continuing to do, and the
great things you are doing with Allmerica. You are making great
changes there for all the right reasons, and we appreciate it.
And welcome.
Thank you, Mr. Chairman. I yield back the remainder of my
time.
Chairman Baker. Thank you, Mr. Rogers.
Chairman Baker. There being no further Members to issue an
opening statement, all Members' statements will be made part of
the record, and the record will remain open for an additional
30 days for any statements any Member chooses to submit for the
record.
Chairman Baker. At this time, Mr. Tiberi, we would be
moving to our panel of witnesses. I understand you may have
some interest in making a remark at this time.
Mr. Tiberi. Yes. Thank you, Mr. Chairman.
It is with great pleasure that I recognize one of my
constituents actually who is on the panel, the first panel, Joe
Gasper, who is the COO, as Mr. Oxley mentioned, of Nationwide
Financial, and also a board member of Nationwide Financial, and
also president of Nationwide Financial and Nationwide Life
Insurance Company; a native of Steubenville, Ohio, and now a
resident of Dublin, Ohio, which is the district that I
represent.
And Nationwide actually is headquartered in the district
that I represent in downtown Columbus. In fact, Nationwide is
now developing an area called the Arena District. For any
hockey fans in the audience, the Columbus Blue Jackets are
Columbus's newest major league team, and thanks to Nationwide
in a small part, a wonderful corporate citizen who I have had
the opportunity to work with, watched Nationwide grow up, being
a Columbus native over the last 30 years, and had an
opportunity as a legislator to work with not only the financial
company, but also the other companies that Nationwide is
involved in.
As the panelists know, Mr. Gasper is chairman of the board
of the American Council of Life Insurance, president of the
Association of Life Insurance Companies, and a member of the
board of the Insurance Marketplace Standards Association. In
his spare time in Columbus, he is on the board of Columbus
Children's Hospital, and BalletMet, and the OSU Foundation
board. He is a graduate of the Ohio State University, where our
President is going to be speaking on Friday. It is great to
have him here today.
Great to see you, Joe.
Chairman Baker. Thank you, Mr. Tiberi.
Chairman Baker. And we would now proceed with our panel of
witnesses. For operating procedures we generally try to keep
remarks to 5 minutes. Your full testimony will be made part of
the official record to enable Members to have as much time for
questions after your remarks.
Welcome, Mr. Gasper. It certainly is a privilege to have
you here today, and we look forward to your remarks.
STATEMENT OF JOSEPH J. GASPER, PRESIDENT AND CHIEF OPERATING
OFFICER, NATIONWIDE FINANCIAL SERVICES, CHAIRMAN, AMERICAN
COUNCIL OF LIFE INSURERS
Mr. Gasper. Thank you, Mr. Chairman and members of the
subcommittee. Mr. Chairman, there is one thing that just about
all the witnesses here in these hearings can agree on, and that
is the current state of the insurance regulatory system is
lacking in uniformity and efficiency, and these lapses diminish
the ability of the insurers to compete effectively in a changed
financial services marketplace or to serve our customers' needs
in the most productive and efficient manner.
Where we disagree is on the remedy. Life insurers believe
that an optional Federal charter, with emphasis on the word
"optional," is by far the most effective way to bring the
regulation of insurers in line with the needs of consumers and
the reality of the financial services marketplace. Today many
insurers do business not just across one or two State borders,
but nationwide and around the world. Our competition is no
longer just other insurers, but foreign and domestic banks,
mutual funds, multinational financial conglomerates. The
current system requiring virtually every facet of our business
activities to be approved in 51 jurisdictions has become an
overbearing administrative burden and a competitive albatross.
The subject of this hearing, product regulation, is a prime
example of that problem.
Banks, among our chief competitors in the financial
services market, can roll out an innovative new credit
instrument countrywide within 30 days. A similar product
developed by a securities firm might take it a bit longer,
perhaps 60 days, to meet SEC requirements. For a life insurer
the process of getting each states approval can require as long
as 2 years. And ultimately, because each State requires
something a little different, the insurer winds up with 35 to
40 different products, not just one. The competitive
implications of this disparity in regulatory efficiency are
enormous and are the major reasons for our pursuit of an
optional Federal charter.
But while speed to market is an important reason, it is by
no means the only one. Many activities that are routine for
other types of businesses are an ordeal for the insurance
industry; advertising, mergers and acquisitions, market
conduct, company and agent licensing and more. There is a long
list of problem areas.
The fact is that the current State-based system of
insurance regulation was not designed to accommodate national
companies, and it doesn't. That is not to say that it should be
eliminated and replaced by Federal regulation. Far from it.
Many of the ACLI member companies plan to remain State-
regulated. A Federal charter should be an option for those
businesses, organizations, products, markets, and strategic
plans that would be well served by a less burdensome and
expensive alternative.
I would like to close by focusing on two points. The first
is that life insurers along with the banking and securities
industry now form a triumvirate of essential financial service
providers with striking similarities between the three in terms
of their mission, their products and their importance to the
financial health of the Nation. And yet, unlike banking and
securities, there is no Federal insurance mechanism to address
insurance issues on a broad scale, no Federal repository of
insurance expertise, no agency at the Federal level to address
critical issues affecting this multitrillion-dollar industry
and its hundreds of millions of customers. The recent debate
over terrorism insurance coverage serves only to underscore the
existence of this void in Federal insurance knowledge and
authority.
To look at it another way, consider what would happen if
there was a crisis in the stock market, but no SEC for Congress
to turn to for guidance, no Federal securities agency to
initiate broad corrective actions to reassure investors in
foreign markets. Congress would be forced to query a succession
of State securities regulators to try to piece together
information on what went wrong and then to come up with its own
plans to address the problems, all within a very short time
frame and under intense pressure. Can we afford any longer to
leave the insurance industry and its customers in a similar
position?
The second point is that while we recognize a change of
this magnitude will take time, we do not believe that we have
the luxury of waiting through two or three Congresses producing
Federal legislation aimed only at arm-twisting the States to
become more uniform. The States with our full support are
already trying to use an incremental approach to regulatory
reform. However, incremental changes, while helpful, cannot
address in comprehensive fashion the full range of regulatory
problems facing our industry.
What we strongly urge this committee to do is to keep
focusing on one remedy that can eliminate overnight all the
uniformity and efficiency problems that we have, the optional
Federal charter.
Thank you, Mr. Chairman.
Chairman Baker. Thank you very much, Mr. Gasper.
[The prepared statement of Joseph J. Gasper can be found on
page 231 in the appendix.]
Chairman Baker. Our next witness is Mr. Tony Nicely,
Chairman, President and CEO of GEICO Insurance, and Chairman of
the National Association of Independent Insurers.
Welcome, Mr. Nicely.
STATEMENT OF TONY NICELY, CHAIRMAN, PRESIDENT AND CEO, GEICO
INSURANCE COMPANIES, CHAIRMAN, NATIONAL ASSOCIATION OF
INDEPENDENT INSURERS
Mr. Nicely. Thank you, Mr. Chairman. Good afternoon, Mr.
Chairman and members of the subcommittee. My name is Tony
Nicely. I am Chairman and CEO of GEICO. GEICO is the fifth
larger private passenger insurer in the United States,
employing 18,000 associates. I also serve as chairman of the
National Association of Independent Insurers, and it is in that
capacity that I am honored to testify before you today. NAII's
700-plus membership comprises all types of insurance companies,
writing approximately $98 billion in annual premiums. NAII's
diverse mix of insurers provide us a broad perspective from
which to comment on the conditions of insurance regulation.
NAII supports State regulation of insurance and opposes
Federal involvement in the regulation of the insurance
industry. We believe that geographic and State conditions are
such that consumers' needs differ from State to State. The goal
of regulators should be to balance insurer solvency with an
open and competitive marketplace.
Today I would like to highlight two issues, financial
regulation and data reporting. A more detailed discussion of
these topics is included in my written statement. Solvency
regulation is the single most important role that States play
in the regulatory arenas. The improvements made to the States'
solvency regulatory system over the past 10 years have reduced
the number of insurer insolvencies.
Almost all States have adopted the financial requirements
of the NAIC Financial Accreditation Standards program. The
system is based on strict financial reporting requirements and
regular financial examinations. All insurers must comply with
financial regulatory standards, including uniform laws
prescribing capital and surplus requirements as well as types
of investments insurers may hold. All but the very smallest
insurers are required to certify and file audited financial
statements on an annual basis. The annual statement reporting
requirements are far more comprehensive than normal GAAP
reporting standards.
It should be noted that the tragic events of September 11,
which caused the largest insured loss in history, are not
expected to cause the insolvency of a single U.S. Insurer. We
think that this is testimony to the general success of the
State solvency regulatory system.
While financial oversight is the most important role of the
State regulators, State guaranty funds are also critical as the
safety net in the event of an insurer insolvency. Since their
origins in the 1970s, State guaranty funds have paid out over
$9 billion in property/casualty claims to make sure that the
promises made to insurance buyers are kept.
In general, the State financial regulatory system is
working effectively. We believe Federal intervention in this
area is ill-advised and unnecessary. We are also skeptical of
any plan to overlay Federal standards over the current State-
based guaranty fund system.
The issue of data reporting and availability is another
critical area that I would like to highlight briefly. Many
States and many small and medium-sized insurers rely on
supplemental rating information developed by advisory
organizations such as the Insurance Services Offices in order
to administer their rating programs. Under current optional
Federal charter proposals, insurers would not be required to
report data and could be constrained from reporting data
because of Federal antitrust exposure. Without the availability
of aggregate loss cost data, these smaller and midsized
insurance companies would not have credible data and would be
unable to compete with larger companies that can rely solely on
their own data.
NAII believes that State regulation is the most effective
way to achieve a competitive insurance market and to target
products to meet local needs. However, we agree that the
insurance regulatory system must improve. Progress has been
made in the areas of rate and form filing, agent licensing,
company licensing and market conduct examinations. State
legislators and regulators have particularly--have been
particularly receptive to competitive-based reform measures for
commercial lines consumers. The NAII believes that such reforms
would also benefit automobile and homeowners insurance buyers.
We are confident that the States can and will continue to
improve the regulatory system. We will continue to evaluate
Federal proposals with an open mind, but believe it is
premature for Congress to expand the Federal regulatory role.
NAII has completed an extensive analysis of the two optional
Federal charter proposals. These two proposals, frankly,
generate more questions than answers. They provide such broad
regulatory authority to the Federal insurance regulator that it
is difficult to assess the ultimate impact on consumers or the
industry. All stakeholders must become fully aware of what
Federal regulation of insurance would mean to insurance buyers.
Competition and product choices serve the consumer best.
Many States are moving toward modernization, but some still
need to be prodded. Ongoing oversight by this committee can
help impress upon those States the urgency of acting now. We
believe modernization at the State level is an achievable goal.
And in closing, the NAII believes that a flexible,
innovative and competitive State regulatory system is the most
efficient and cost-effective way to deliver protection to the
insurance buyers. Thank you.
Chairman Baker. Thank you very much, Mr. Nicely. We
appreciate your testimony.
[The prepared statement of Tony Nicely can be found on page
258 in the appendix.]
Chairman Baker. Our next witness is Mr. Donald Young, who
is President of the Health Insurance Association of America.
Welcome, Dr. Young.
STATEMENT OF DONALD A. YOUNG, M.D., PRESIDENT, HEALTH INSURANCE
ASSOCIATION OF AMERICA
Dr. Young. Yes. Thank you, Mr. Chairman, distinguished
members of the subcommittee.
The members of the Health Insurance Association of America
provide a wide range of health insurance products, including
medical, dental, supplemental, long-term care insurance and
disability insurance. I am delighted to have this opportunity
to provide our views about the general issue of insurance
regulation.
Health insurance is primarily regulated by the States.
However, health insurers are also increasingly subject to
Federal laws. Proposals before the Congress such as the
Patients' Bill of Rights would dramatically expand this Federal
role. The regulation of health insurance is complex. Many
everyday health insurance functions simply have no other
counterparts in other types of insurance.
While HIAA has long supported the State regulation of
insurance, we also recognize that there are issues that need to
be addressed, such as speed to market, and inconsistencies
between Federal and State rules. Privacy provides a useful
example of the interaction between Federal and State laws and
difficulties that can arise for insurers. Congress addressed
privacy in HIPAA, but HIPAA does not preempt all State privacy
laws. Instead State laws more restrictive than Federal
requirements continue to apply. As a result, insurers must
determine for every State in which they do business whether
State law is more or less stringent than the Federal
requirements. And some States continue to adopt new privacy
laws. Therefore, the comparison cannot be a one-time endeavor.
The bottom line is that current law forces an insurer operating
in multiple States to implement multiple privacy plans
incurring greater expenses than would have been the case if a
single uniform privacy law applied. This could be said for
other issues regulated by both Federal and State laws.
One suggested solution for the regulatory problems is the
optional Federal charter. Under this concept, federally charted
insurers would primarily be regulated at the Federal level.
HIAA has not taken a position on any of the pending optional
Federal charter proposals. However, establishing an optional
Federal charter appears to require several steps. First
policymakers need to carefully review existing State regulatory
and other oversight roles. Next they must decide which of these
should be replicated in a Federal regulatory structure.
Finally, for each issue, and there are many, they need to
identify the specific regulatory policy that will apply to
federally regulated insurers.
All of this is a significant challenge. As currently
drafted, optional Federal charter proposals provide very little
in the way of the statutory framework for regulating health
insurance products at the Federal level. Rather, they defer
most decisions to Federal regulators.
I would like to end by acknowledging that the States,
through the NAIC, the National Association of Insurance
Commissioners, are making serious efforts to streamline the
regulation of insurance. The NAIC is also now exploring the use
of interstate compacts as a way to improve consistency and
reduce the regulatory burden. Such compacts raise a host of
structural process and policy issues. We are working very
closely with State insurance regulators to help assess these
matters.
HIAA would welcome the opportunity to work with members of
this committee as you continue to examine the important issue
of the regulation of insurance. Thank you.
Chairman Baker. I thank you, Doctor. We appreciate your
testimony today.
[The prepared statement of Donald A. Young can be found on
page 309 in the appendix.]
Chairman Baker. Mr. Nicely, last year in a hearing which we
conducted on speed to market issues, you participated and in
the course of that hearing indicated that the competitive
rating system that Illinois has adopted was a favorably viewed
methodology. Do you still view the Illinois model as one which
is--offers advantages?
Mr. Nicely. Yes, Mr. Chairman, we do. It is not the only
model, but it is certainly a model that we favor. Frankly, we
have not found, and I personally have not found, anything in a
nonmonopolistic society that serves the consumer better than
the free market system that we have in this great country, and
Illinois has that system. Certainly other States have similar
systems that would be file-and-use systems. And two States that
had very onerous regulation of rates, South Carolina and--
actually a jurisdiction, meaning the District of Columbia, and
a few years back moved to an open rating system, and they have
found many new players and rates stabilized.
So, as I spoke to the National Association of Insurance
Commissioners earlier this year, I believe that any
commissioner who has worked in an open-competition State would
say that it has served their citizens well.
Chairman Baker. Certainly. In order to get to that
perspective, a national basis, and being reliant today on the
State leadership to achieve that end, what would be your
expectation if you had to run a clock on seeing a 50-State
uniformity initiated either by the NAIC, State insurance
regulator or whatever moving force might be out there to get
such a--or how long should the Congress wait before we act? At
some point, I think we agree that there is some level of
difficulty in the markets today because of inefficient
regulation. And one day we are going to have to take action.
How long would you suggest the Congress wait?
Mr. Nicely. Let me answer that question this way, Mr.
Chairman. I believe that even the toughest States are now
beginning to see the light because of a number of reasons, and
one of those reasons is that we are having a much better
informed consumer today than we have ever had in our history.
Let's take one of the toughest States of all, the State of New
Jersey. Things have gotten so bad in New Jersey and consumers
so riled up by paying the highest automobile insurance rates in
the Nation that the Governor has--himself has recently said, I
propose modernization and will work to do everything possible
to modernize the regulatory system in the State of New Jersey.
It is my belief that other legislators will also begin to
feel that way because the consumer, as was said in the opening
statements by Chairman Oxley--consumers deserve better than
paying higher rates than they should. And I believe that even
tough States like New Jersey we will see moving forward. If we
see no progress at all, then I would say more is required. But
I believe even New Jersey we will see some progress in the very
near future.
Chairman Baker. Well, in the interim would there be--would
it be ill-advised to move forward with the proposal that would
take the Illinois model and make that a national plan? I mean,
is there any downside to that?
Mr. Nicely. In my personal opinion, yes, sir, because as
soon as you begin to tell the States that they have to use one
form of competition over another, we are likely to get some
political backlash.
Chairman Baker. But if it is optional?
Mr. Nicely. If it is optional, it is still the same way,
because I believe that when we get into optional--if we just
have optional ratemaking, that is not likely to happen. So when
we say optional, we say an optional Federal charter that would
get into things like how do you handle residual markets, how do
you handle reparations, what law do you use for tort, and many
other things.
So I don't think that you could just cut this up into
little bitty pieces and say, well, we will just impose open
rating on every State. If we could do that, that would be
wonderful, but I don't believe that that would be possible.
Chairman Baker. I thank you.
Mr. Gasper, I know you don't necessarily share that view,
but what sense of urgency do you have as to the need for
reform? I have, of course, read your statement, but if we knew
we could get where we need to be in 2 years, is that too long?
Mr. Gasper. Mr. Chairman, I don't have to live in your
reality of politics, but I would suggest to you that we are
almost 15 years too late. Keep in mind that I am here as the
president of a life insurance company, and I am representing an
organization that represents life insurance companies, not
property/casualty. I could make the case that the automobile
business is a State oriented business, but the life insurance
business is a national business. But if you look at this in
terms of what happened in the mid-1980s in this country, with
high interest rates and then with the equity markets, the whole
business has changed. It is no longer a life insurance
business. We are a top 10 life insurer in the United States,
and we get 40 percent of our premium through payroll deduction.
It comes to us every 2 weeks through 401(k) plans or 457 plans
for cities, counties and States in the United States. So think
about it. Whether or not you think of it as a life insurance
company, 40 percent of our business is coming from retirement
savings plans.
And so the market has changed dramatically. Life insurance
is now a national business. It is really an international
business too in some respects. It is not life insurance, it is
retirement savings. It is about long-term savings, and what we
have is a regulatory system that essentially is regulating it
like it was traditional life insurance 40 years ago.
So the idea of waiting 2 years for real reform is not
appetizing to me because I think we are essentially behind the
times for this particular industry. And I keep emphasizing how
we compete against banks and how we compete against security
firms. We are not just competing among ourselves. If we were
just competing with insurance firms, we would all be
disadvantaged equally, but our competition is coming from
mutual funds and banks.
Chairman Baker. Thank you, Mr. Gasper. My time has expired.
Mr. Kanjorski.
Mr. Kanjorski. When you say "this industry," now you are
talking about the subset life insurance industry or the
insurance industry as a whole?
Mr. Gasper. Well, I am speaking for the subset life
insurance industry, which is the life, annuity and long-term
savings retirement industry.
Mr. Kanjorski. So your theory is we could create tiers
identifying different aspects of the industry. But I suspect
that Nationwide handles other insurance products, doesn't it,
besides life insurance?
Mr. Gasper. Nationwide is a large property/casualty
insurer, writes a tremendous amount of--.
Mr. Kanjorski. What does that side of the company--.
Mr. Gasper. Well, I think that Nationwide, Nationwide in
total as an enterprise likes the idea of insurers having an
option. We are not talking about doing away with State
regulation. We are talking about giving individual companies
choice--so if Mr. Nicely's company wants State regulation and
wants to remain State-regulated, he can. If GEICO decides that
it wants to be federally regulated, it can. So all we are
asking for is choice.
Mr. Kanjorski. In all aspects, though. You are not just
talking about life insurance.
Mr. Gasper. In all aspects, from my company's point of
view. From the industry's point of view, as I sit here today as
chairman of the ACLI, I am speaking for the life insurance
industry.
Mr. Kanjorski. All right. Mr. Nicely, your company is
nationwide, without the trademark name. You sell life
insurance, don't you?
Mr. Nicely. No, sir, we sell in 48 of the 50 States. We do
not sell in New Jersey or Massachusetts because of the owners'
regulation there.
Mr. Kanjorski. Okay. Well, and you honestly don't see any
damage to having a level playing field nationwide? You are very
satisfied with the present State regulation?
Mr. Nicely. Very is an overstatement, sir. We are
satisfied. We certainly believe that State regulation must
improve. We also believe that it will improve. There has been
gradual improvement in all aspects of the regulation and in
some States much greater than others.
Mr. Kanjorski. We seem to be pushing the States to do that,
though. I am wondering whether they have--what their own
inclinations would be.
Mr. Nicely. Many of the States are doing it on their own.
Some are doing it because they are being coerced, and others
are just so resilient that they haven't moved yet. But as I
said, and in answer to the Chairman's question, I believe even
those States are beginning to see the light and will make the
changes. The consumer is going to demand it.
Mr. Kanjorski. What would you think if we looked at an
optional charter that was tiered either to specific aspects of
the industry or to the size of the companies involved, and
giving that sort of an option? Those companies that are--I
don't know what the rate is, but equivalency of having 10
billion in assets in banks, whatever that would be comparable
to, to give them a high tier and give them an option for a
national charter, but the lesser companies to say--.
Mr. Nicely. I certainly wouldn't recommend that. Now, if
you want to consider the tier on the basis of carving out
certain segments of the industry, such, as Mr. Gasper said, the
life insurance industry, that may be possible. We don't write
life and wouldn't propose to speak for the life insurers, but I
can certainly see the legitimacy of some of the arguments being
made by Mr. Gasper. But the property/casualty is such a complex
industry that goes to so many of the laws of the various States
that carving that out with a national charter is so complex
that I believe it will take several years just for all of the
players even to understand what is being proposed as you do
that.
Mr. Kanjorski. Don't you see sometime in the future,
though, your company expanding to cover all aspects of
insurance?
Mr. Nicely. Not necessarily, because we are one of those
companies that believe if you can do one thing better than
anyone else, it might be more profitable than trying to do a
lot of things as well as anyone else. We simply would like to
be the best automobile insurer in the Nation.
Mr. Kanjorski. Don't you think if you get particularly
successful, some hawk will be circling and maybe taking--.
Mr. Nicely. Well, of course that is probable, and when we
get there, of course we may have a different view on how large
we would like to be. But right now we only insure 5 percent of
the autos in the Nation, and we would like to insure a larger
number.
Mr. Kanjorski. You raised an interesting question that has
disturbed me a little bit, that if we move too precipitously on
this question, we invite a hearing 2 years or 5 years from now
on the question of adopting tort law standards, because
obviously the distinctions in premiums and rates are very
closely aligned with the tort law of the particular State
involved. Do you see this as a potential problem that we --.
Mr. Nicely. I certainly do, in the highest of magnitude. Of
course, in a way this debate goes back 200 years from Adams and
Jefferson as to what really is best left to the States, and
under the property/casualty industry, the needs in Alaska are
very different than Texas, and Texas is very different than
Florida and New York, et cetera. And I certainly wouldn't
propose that a lot of the things, financial responsibility for
instance--in certain high-income States it is the States have
judged that they should have a higher level of financial
responsibility, and other States it is much smaller. So you
really do open the proverbial Pandora's box.
Mr. Kanjorski. What do you think about the question on tort
law? And I might say not only tort law, but contract law,
because certainly that is going to bring in all the different
inconsistencies in the various States. What--how do you respond
to that, Mr. Gasper? What should we do in regard to that?
Mr. Gasper. I think the answer revolves around two
different industries. And so as Mr. Nicely has described the
property/casualty industry, especially the auto and homeowners
end of it, these are very important issues, and I think the
States vary widely. When you talked about life insurance, which
is essentially a national product, we don't see a lot of
difference in terms of the statutory requirements inside a
State or even what goes on in terms of the courts within the
State that would really matter in terms of life annuity and
long-term savings.
Mr. Kanjorski. But that is part of your company that also
is in favor of a national charter that handles the same type of
insurance as Mr. Nicely's company. What would they think about
the question?
Mr. Gasper. What would Mr. Nicely's company think?
Mr. Kanjorski. No. How would your side of the company that
handles casualty and loss deal with the tort and contract law?
Mr. Gasper. I think that our company would essentially say
that Mr. Nicely should have a choice. If he believes State
regulations make sense for GEICO, he should be able to stay
there. If Nationwide's property and casualty operations thought
that it made sense to be a nationally regulated company in
order to get to market quicker or lower cost, it should have
that choice. All Nationwide is asking for is a choice.
Mr. Kanjorski. All right. Am I overtime--my time has
expired, Mr. Chairman.
Chairman Baker. Thank you, Mr. Kanjorski.
Mr. Ney.
Mr. Ney. Thank you, Mr. Chairman. I want to welcome all of
the panelists today. I think it is very obviously an important
subject, and I appreciate the chairman's desire to get this all
out on the table.
I would like to start with Mr. Gasper, welcome, being from
Ohio, and also treat you pretty nice. I had a leak this morning
in my ceiling, and you can guess where I am insured.
Let me just lay something out here that obviously is pretty
understandable. Federally-chartered companies will be exempted
from State-imposed market conduct rules. We know that. So if a
consumer from our State were to go with the federallychartered
and, say, you know, with you all, and they would be under a
different set of sales rules than a consumer that would go with
a State-chartered company, so that consumers would be entitled
to different illustrations, lemon laws, et cetera. I mean, I
think we all agree that that is the way the system would work.
So it goes to the point--I understand what you are saying
about choice, and there is an opt-out provision, but the
scenario I described, don't you think it is going to be
confusing for the consumer to be able to shop within the States
and have to do an awful lot of groundwork?
Mr. Gasper. I think it gets confusing for consumers now. If
I buy my life insurance or annuity policy in one State then I
move to another State, am I still being regulated by the State
that I was in? I think from the standpoint of life insurance,
annuities, 401(k)s, I think the consumer's perspective is that
they should be able to get the same kind of quality, the same
kind of protection, in every state.
So my view would be that if consumers fully understood all
the nuances that occur in 51 jurisdictions and the fact that
when we get a product approved, many times we have to have 40
different requirements for the same product because there are
40 different applications for the same product because that is
how the States operate, I think the consumers would be totally
bewildered by that considering what they believe they are
buying.
Mr. Ney. Of course, if you move from one State, you still
know what the rules were when--you know, when you incurred that
policy in the State that you lived in. But I just--and I want
to go back to one other thing. Also, Mr. Nicely testified about
State regulators, the 1980s, some of the problems. I have got
some, you know, information up here, and some of the things
from your testimony, it points out that they did a better job
when they needed to. I am just wondering what your comment
would be, Mr. Nicely, on the fact that, you know, what about if
we could get the State regulators to once again, if they want
their jurisdiction upheld, to be able to look at ways to
streamline some of the problem areas? Do you think they could
do that or not?
Mr. Nicely. Of course they could, and I think they can. If
you are asking a question does oversight by this committee--is
it useful, and may it speed up the process, yes, I think the
answer to that is true also.
So I commend the committee for your oversight and hope that
you will be one of those interested, very interested parties
that helps to keep the pressure on the States to bring about
these reforms.
Mr. Ney. This may be an observation. I have dealt for years
with the HIAAA, of course with Nationwide and others, and
different insurance entities over the years. I chaired
insurance and financial institutions in the Ohio Senate when I
was there. And, you know, the Bible was McCarran-Ferguson. The
Bible was State regulation. That was the first things. Once you
got that out of the way, you could have a nice conversation
with each other. You know, where did you stand on that issue?
And the only thing--I understand about expediency. I do
look at the bottom line end to the consumers and how they are
going to be confused or not on choices, because they will be
dealing in some cases, even if there is an opt-out, with the
Federal Government. I just--it is hard, I think, for a lot of
people--maybe not others, but a lot of people over the years
have had one mind-set to understand how possibly you can shift
jurisdiction, and how many new staff do the regulators have,
and do they promulgate rules and regulations that we are so
busy we can't even keep up with particular oversight of those,
and what happens to the consumer in those cases. And maybe you
will be back here in a few years saying, oh, my goodness. Look
what is happening to us. So I--you know, there is a lot to be
talked about. But I think I just find it hard to understand how
that--what caused this whole shift to go towards, you know, the
Federal Government is better. We are here from the government
and here to help you.
Mr. Gasper. I would not make the case that it is better. I
am making the case about a choice, about an option. There are
many banks that inside their organization will have a federally
chartered bank and a State-chartered bank. I can see big
organizations having federally chartered life insurance
companies and State-chartered life insurance companies within
the same family of companies. So it is not about better or
worse. It is about choice. And a little competition could occur
between the regulatory bodies in terms of who is the most
efficient. Who is the one that basically is doing the best job
for the consumers. So it is not about better or worse. It is
about choice.
Mr. Ney. Thank you.
Chairman Baker. Thank you, Mr. Ney.
By time of arrival, Mr. Moore, you'd be next if you have
questions.
Mr. Moore. Mr. Gasper, every State already has in place
safeguards to protect insurance consumers, and these
protections would vary State by State. And I guess my question
to you is what consumer protections would be necessary if we
created this optional Federal charter that you are proposing
here?
Mr. Gasper. I believe that in our proposal essentially we
are not trying to eliminate anything in terms of consumer
protection. As a matter of fact, I think we are trying to
strengthen it by streamlining it so that it makes sense on a
national basis.
Our view would be that the State regulator would promulgate
rules for state chartered companies. The Federal system would
build on that, but would be uniform across the country. And
there would be little distinction between State and Federal
regulation when it comes to protecting consumers.
Mr. Moore. Do you believe the proposal that you have right
now, the draft proposal that you have now, speaks to that
adequately?
Mr. Gasper. I think in concept, it does. I think the devil
is always in the details, and I think we have to flesh it out,
but I think the makings are there to essentially bring all of
the protections that consumers have today into the Federal
system, and then the plus could be streamlining those so that
they are better understood by the companies and the consumers
and less costly to administer.
Mr. Moore. You have talked, Mr. Gasper, about a proposal I
think is modeled similarly to the dual banking system that
regulates commercial banks, thrifts and credit unions and is
optional. Does yours apply though your proposal only to life
insurance lines or other lines in the insurance industry?
Mr. Gasper. As I mentioned, I am here representing the life
insurance industry as chairman of the ACLI. My own company as a
major property/casualty company does support the concept of
choice.
Mr. Moore. You say does?
Mr. Gasper. Does support the concept of choice. But as I
think about the issue of life insurance, I am absolutely
convinced that it is a national business, it is not a State
business, and that Federal regulation would make more sense in
terms of efficiency.
Mr. Moore. To the other two panelists, Mr. Nicely and Dr.
Young, I guess my question would be if you would support or not
oppose a limited charter for regulation of only life products,
and why or why not? How do you see this?
Mr. Nicely. The NAII has not taken a position on the life
side. Personally I would not oppose it. I mean, I can certainly
see some of the arguments that the life insurers are making,
but it is a very different ballgame when it comes to the
property/casualty side, Mr. Moore and Dr. Young.
Dr. Young. We also do not have a position. An important
question would be, though, the nature and scope of the charter
and how it would work. Would the charter be given to a
company--if the company is in life and long-term care and
medical and a variety of businesses, would that charter apply,
in which case health would be drawn in, or long-term care would
be drawn in? So an important question is how the charter would
work, or, conversely, would the charter work by line of
business or by specific product? All those kinds of issues
would have to be hammered out before we could really look at
that effectively.
Mr. Moore. Thank you.
Mr. Gasper, does a vote in favor of pursuing an optional
Federal charter bill in Congress suggest that most of the
members of your association would choose Federal regulation
over State regulation?
Mr. Gasper. I am not in the position to say that. I know
there is a large, very large mutual insurance company inside
the association that has indicated that it would stay State-
regulated, but we have not had any poll. If I were to guess, I
would think there would be a lot of companies that would stay
State-regulated. These would be regional companies.
Many of our member companies only do business in a handful
of States, and the markets they serve are more traditional in
terms of life insurance. I would think that the large national
companies that are more in the retirement savings business, the
long-term savings business, would look with a strong eye
towards a national charter.
Mr. Moore. Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Moore.
Mr. Royce, you would be next.
Mr. Royce. Thank you, Mr. Chairman.
Mr. Gasper, a prominant insurer in my part of the country
has described to me a case where one State's onerous product
approval process prevented the insurer from offering a life
insurance product which had a lower cost and lower insurance
rates, due to the bureaucratic costs involved in that State's
justification process. Now, from my standpoint, it makes sense
if you have got a scenario where regulators would require
justification for an increase in rates, but it is a little
difficult to see why the administrative process should be
prohibitively burdensome for insurers seeking to bring lower-
priced insurance products to the consumers in that State. And I
believe it is part of an unintended consequence of different
States' regulatory processes that allows consumers in one State
to benefit from lower rates while the consumers from another
State are barred from enjoying those lower rates, when the only
justification that I can see for this price differential is the
bureaucratic process, not specific underwriting facts. And I
wondered if this is the kind of example that your own company
has run into, or perhaps you are cognizant of this situation
where others in the industry have run into this type of
situation? Mr. Gasper, could you respond on that?
Mr. Gasper. Yes. I could give you many cases for my own
company. And when I asked the ACLI member companies, I was
literally inundated with cases. The one I remember in
addressing the NAIC was we came up with a product which was a
combination annuity/long-term care product that we thought was
very attractive to help people start to save for long-term care
in an annuity format. We had some very large States approve it,
and we had some very large States not approve it. And, you
know, we were taken aback by it. I mean, it is the same policy.
So, yes, there are many, many instances where we
essentially will take a product, file it in a majority of
States, and have at least four or five big States with large
populations not approve the product or take 2 years to approve
the product.
Mr. Gasper. And then when the product is finally approved,
you know, something else has become more popular. So it is a
problem.
Mr. Royce. Well, I thank you, Mr. Chairman. I thank you for
calling this hearing, and we will look forward to hearing from
the second panel.
Chairman Baker. Thank you, Mr. Royce.
Mr. Bentsen?
Mr. Bentsen. Thank you, Mr. Chairman.
Mr. Nicely, you mentioned that in the property and casualty
business, it is obviously different in Alaska than it is Texas
and New York, et cetera. I guess the problem is, I think
everybody has agreed, that in the life insurance market, that
there aren't 50 different markets, there is one national
market; and--but in the property and casualty market, you are
arguing there are still 50 or 51 different markets. But do you
all allocate your capital? You are operating in 48 of those 51
markets. Are you allocating your capital to the number of
policies that you write based upon the capital that you raise
from each of those markets, or do you raise your capital in a
national market and then allocate differently?
I mean, I guess the point is aren't you subsidizing in some
cases one State's operations against another State's
operations?
Mr. Nicely. No, sir, we don't. That is one of the reasons
why we do not operate in New Jersey and Massachusetts, because
at one time we were licensed to write in both of those States,
and we chose not to allow customers from other States to
subsidize those two States. So while our capital is not
allocated to the various States, it is certainly sufficient to
protect the consumers in all of those States. And of those 48
States and the District of Columbia that we do business in, we
want to grow our business in all of those States.
Mr. Bentsen. Mr. Gasper, in your testimony, you talk
broadly about what a Federal charter would look like, and that
it would take over the regulatory apparatus of the States, an
optional Federal charter. Mr. Nicely in his testimony talks in
great length about State guaranty funds and the necessity of
them. Is the intention of a Federal charter, for those
companies which opted into a Federal charter, that there would
be a new guaranty fund that they would also opt into, or would
you maintain the State guaranty fund?
Mr. Gasper. Initially the best way to think of all this is
you take what you have and you let federally chartered insurers
participate in it, and then you give the regulatory authority
the opportunity to improve it as things change.
Mr. Bentsen. So you would have a Federal guaranty fund or
not?
Mr. Gasper. I just got a note here; someone is going to
help me get a little more specific.
Essentially, we would preserve the State guaranty funds and
have federal insurers become part of the State guaranty system.
Mr. Bentsen. So, Mr. Nicely--or let me ask the entire panel
this. Then you really would have a form of dual regulation in
the banking system. For instance, you know, if you are a State
bank, you are regulated by the Fed, and you are also regulated
by the F D I C, and both those entities have regulatory powers
theoretically for the benefit of consumers, for the benefit of
safety and soundness. Under your proposal for a Federal
charter, if an entity opted to take the Federal charter, they
still would be under some State regulation for purposes of
their membership in the State guaranty fund?
Mr. Gasper. Essentially the way to think about it is that
the insurer is protected by this in the State in which its
policyholders live. The national charter system would
essentially suggest that national insurers would get the
benefit of the existing guaranty system. That is how we would
see it playing out.
Mr. Bentsen. But they would stay within the State,
whichever State guaranty fund. If they are in the New Jersey or
whatever, they would stay within that, and the New Jersey
regulator would oversee their capital adequacy?
Mr. Gasper. Yes. It is about aggregating those funds. But
it is essentially, regardless of where you would live, with a
federally chartered company you would have the protection, and
it would not vary by which State you are in and where you are
insured.
Mr. Bentsen. Thank you.
Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Bentsen.
Mr. Bachus?
Mr. Bachus. Thank you, Mr. Baker.
Mr. Gasper--well, I will ask all of the panelists this,
anyone that is familiar with this. And what I am talking about
is Federal efforts to promote State uniformity in regulations.
In Gramm-Leach-Bliley, we adopted the NARAB Licensing
Provisions. Has licensing of agents been any easier than, say,
it was 3 years ago as a result of those attempts?
Mr. Gasper. I would say that there have been improvements.
Have we gotten to what we would think should be sort of the
national way of doing it? The answer is no. I think there are
still 30 percent of the producers or agents who sell insurance
that are not under the system today.
Mr. Bachus. I think we didn't really go as far as some
advocated or as we could have gone in NARAB, and I think
several States are still holding back. But maybe do you
anticipate when those States get on board that we will?
Mr. Gasper. It would be difficult for me to say by State.
Again, I am giving the States the credit for the progress. But
getting 70 percent is not what I think we need to run the
business.
Mr. Bachus. All right.
Mr. Nicely. I certainly would agree. There has been a large
improvement, but it is not perfect yet.
Mr. Bachus. Sure. Do you think that was maybe because some
States have lagged behind, or do you think that is because we
didn't go far enough in Gramm-Bliley-Leach, Gramm-Leach-Bliley?
Or do you think that that is just not the right solution?
Mr. Gasper. I think it is the nature of the beast if your
objective is uniformity and speed. I think it is the nature of
having 51 jurisdictions working with different legislatures
which makes it a tremendous uphill battle. The wind is clearly
in their face for getting to complete uniformity.
We believe the life insurance industry needs to be
regulated to compete with the mutual fund industry, to compete
with the banks, to compete with the securities firms. I mean,
that is the standard that has been set. Our competitors
basically have defined the level playing ground that we must
get to. And the idea that we might be able to get to 70 percent
or 80 percent of that is essentially unacceptable as we try to
compete.
Mr. Bachus. What you are talking about, when you say
securities companies or banks, you are talking about their
ability to raise capital as opposed to your ability because of
the current regulatory structure?
Mr. Gasper. I think that in terms of the education process
for this committee, when we say life insurance, I think we
initially think about traditional life insurance.
Our industry has evolved and my company is heavily involved
in the retirement savings, long-term savings business. So
essentially we are competing for 401(k) business. Okay.
Nationwide is the third largest administrator of 401(k)s in the
United States. Most of our employers have less than 100
employees. We are not issuing life insurance contracts for
those employees; it is the 401(k) business. We are competing
with Fidelity, with Schwab, with Citibank, with other mutual
funds. That is the market we find ourselves in.
So that is the point I was trying to make; that if you go
back to 1970, we are all trying to sell traditional life
insurance. Today the vast majority of the companies are trying
to compete in the long-term savings retirement business.
Mr. Bachus. Do you have a disadvantage over banks and
securities companies in raising capital because of the current
regulatory structure in insurance?
Mr. Gasper. As a public company I don't think we have any
more limitation in terms of raising capital. I don't see it as
an issue.
Mr. Bachus. Do you have limitations?
Mr. Gasper. The only thing inefficiant regulation would
bring into it is that it does put our industry at a
disadvantage as we try to compete for the retirement savings;
and, to the extent that we get a smaller share, we are going to
get smaller earnings increases. And that certainly relates to
our ability to raise capital.
Mr. Bachus. Okay. No more questions.
Chairman Baker. I will just take the balance of that
gentleman's time then.
I would also make the point that a bank selling an annuity
doesn't have to go through the 50-State approval process that a
life insurance company selling a similar product called life
insurance has to go through.
Mr. Gasper. Well, that became interesting as the banking
industry sort of was manufacturing annuities and not having to
go through the State regulatory system. Today they do. In
essence, they would have to. We sell a lot of annuities through
banks as such.
Chairman Baker. Thank you, sir.
Mr. Lucas?
Mr. Lucas of Kentucky. Thank you, Mr. Baker.
Mr. Gasper, I am wondering, having been in the life
insurance business for 30-some years and seeing the companies
go through the trials and tribulations of trying to get product
approval, I can't think of a reason why we shouldn't modernize
under one system, because I would think that the consumer would
be so much better off and the products would be much more cost-
effective. It is kind of like you are competing against the
banks and the mutual funds with one hand tied behind your back
maybe for a year or 2 years or 3 years, or with both hands tied
behind your back in some cases when you can't get the product
approved.
I just can't understand why the life insurance business
wouldn't--you know, I am not for bigger government, but, you
know, one size fits all here, and I just can't see any good
reason why we shouldn't do this on a national basis. Is there
any? Am I missing something here?
Mr. Gasper. I think you are right on point. I think, when
you step back and look at the business, the nature of the
business, it is a national business. It is a business, and it
has changed dramatically in the last 30 years. Banks are
selling insurance, stock brokers sell insurance. It is--
traditional insurance agents are selling insurance. So it just
screams for the idea that it is a national product, and it
screams for an opportunity for companies to be nationally
regulated.
Mr. Lucas of Kentucky. It just seems like to me that this
is a lay-up shot and a no-brainer. I don't know why we would
get resistance on this.
Mr. Gasper. Well, that is how I would see it, but I am
pretty naive when it comes to--.
Mr. Lucas of Kentucky. So am I.
Mr. Gasper.--when this is all done.
Mr. Lucas of Kentucky. So am I. Thank you.
Chairman Baker. Thank you, Mr. Lucas. I am sure somebody
will be around to explain it.
Mr. Tiberi? Do you have a question, Mr. Tiberi?
Mr. Tiberi. Yeah, I do. I have a couple questions, Mr.
Chairman. Thank you.
Chairman Baker. Sure.
Mr. Tiberi. To Mr. Gasper first off--and I wish my
colleague Bob Ney were here, because he was the chairman of the
insurance committee in the Ohio Senate. But I think that just
over the last 10 years, the life insurance industry has changed
significantly. And the point that I am going to make, and I
would like you to comment on it because you have touched on it
already a bit, and that is the life insurance industry becoming
much more different than my dad's life insurance. The point
that I am going to make is as a public employee in the State of
Ohio, as a State legislator, and as any public employee through
the State of Ohio, through the Ohio deferred compensation
system which was started in the early 1990s, you get a sheet of
different options as a public employee that you can invest in
through deferred compensation; and you have what you would
expect to have there, and that is banks as options, securities
firms as options, and then you suddenly have Nationwide
Insurance Company, which I think of today still as a property
and casualty company, but yet Nationwide is a huge player in
the State of Ohio in that market competing with banks and
insurance companies.
Can you touch upon how many States you, as Nationwide Life,
today are in with those types of plan?
Mr. Gasper. We are the largest insurance company involved
in section 457, public sector plans. We probably now are
involved in at least seven or eight States. We are endorsed by
the National Association of Counties; we are endorsed by the
United States Conference of Mayors. We probably have over six
or seven cities and counties throughout the United States, and
those are large counties like Cook County in Chicago, but small
counties where there might only be 35 or 40 employees, and in
most of those large cities and counties, we are doing exactly
what you described: We are having to put our options against
bank options, credit union options, mutual fund options, and we
compete, and the employee gets all those choices. And it is
wonderful for employees to have those choices, but when it
takes us an enormous amount of time to get products approved to
participate in those plans, we are disadvantaged.
Mr. Tiberi. And so today, Mr. Gasper, you are operating
much more like a bank or a securities company as the head of a
life company within a larger structure than you are to your
sisters within the Nationwide Company that are in the property,
casualty, and health business; am I right?
Mr. Gasper. Right. In the past, with traditional life
insurance, the main concern was dying too soon. Now, there is
still an enormous business there, and Nationwide participates
in it. But what Americans are concerned about is living too
long, outliving their income, and that is essentially what we
are trying to compete in and the business we are trying to
compete in. And it's only the industry essentially today that
can guarantee you an income for life. You can give an insurance
company X amount of dollars, and they can guarantee you an
income for life. So it is not like your father's life insurance
company, nor my father's; it is--again, I keep calling it the
retirement savings, long-term savings business that we are
competing in. And we are competing with other insurance
companies, but we are also competing with banks, mutual funds,
and securities firms.
Mr. Tiberi. Just to switch directions a little bit, you
spend most of your time in Ohio. Ohio, like many other States,
has struggled with revenues. One of the criticisms that has
come from this proposal is that States like Ohio would lose
revenue if they optioned into the Federal system. Could you
comment on that?
Mr. Gasper. That is a great question, because the proposal
as we outlined it, the premium taxes would stay right inside
the State, and we would expect the companies, you know, to pay
their fair share of taxes in the States. So the premium tax
would stay in the States. And if you look at how States tend to
regulate insurance, essentially what they do is charge the
companies for the regulation that occurs. And my suspicion is
essentially States are losing money regulating insurance
companies today. So they would keep the premium tax and get out
of a business where essentially they are not making money
today.
Mr. Tiberi. Thank you.
And one last question, Mr. Chairman, for Mr. Nicely. From
your perspective, as a property and casualty company only, do
you have the same competitive issues that banks and securities
and health companies do? Or, the issue that somebody touched on
earlier, the speed to market issues that life insurance
companies have today?
Mr. Nicely. Not really. All insureds are required to go
through the same process. So while in some cases it may be
onerous and too long, at least there is a level playing field.
Mr. Tiberi. Thank you.
Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Tiberi.
Gentlemen, we very much appreciate your participation in
our hearing today. The record will remain open not only for
Members to express further opinions, but for you as well should
you have an addendum to your own remarks here today. We
certainly appreciate your time and assistance in this difficult
matter. Thank you.
Chairman Baker. And I would ask at this time if our
panelists are available for the second panel to come on
forward, please.
I would like to welcome each of you to our hearing this
afternoon. As you know, we request that your testimony, as best
can, be contained to 5 minutes. That would be helpful. And, of
course, your entire testimony will be made part of our official
record.
With that, I would like to first introduce Mr. Robert
Restrepo, Jr., President and CEO of Allmerica Property and
Casualty. Welcome, Mr. Restrepo.
STATEMENT OF ROBERT P. RESTREPO, JR., PRESIDENT AND CEO,
ALLMERICA PROPERTY & CASUALTY COMPANIES, INC., CHAIRMAN-ELECT,
AMERICAN INSURANCE ASSOCIATION
Mr. Restrepo. Thank you very much, Mr. Chairman. As you
mentioned, my name is Robert Restrepo, and I am President and
CEO of Allmerica Property and Casualty Companies, located in
Worcester, Massachusetts. Our two flagship property/casualty
insurance companies are Hanover Insurance, which operates
primarily in the eastern part of the country, and Citizens
Insurance Company of America, based, as Congressman Rogers
mentioned, in Howell, Michigan.
Allmerica ranks 23rd among all property and casualty
insurers in the United States. Although we are certainly not
among the largest insurance companies, we are strong advocates
and supporters of comprehensive insurance regulatory
modernization, including optional Federal chartering.
I am here today on behalf of the American Insurance
Association, where I am incoming chairman. I appreciate the
opportunity to testify this afternoon about the insurance
regulatory system both in the U.S. and abroad, and, in
particular, AIA's support for optional Federal chartering as a
way to make the current State regulatory system more effective
and more efficient for all stakeholders.
Mergers and acquisitions, changes in the various financial
industry sectors, globalization, technology, and, most
recently, the tragic terrorist attack of September 11th, each
of these have had a tremendous and very different impact on our
industry. Yet with all this change, the insurance regulatory
environment has remained largely unchanged since 1945 when the
McCarran-Ferguson Act established the principle of
congressional deference to State insurance regulation.
For every incremental movement towards greater State
regulatory efficiency or uniformity, there are many new State-
specific regulatory requirements that result in cost, delay,
and frustration for insurers, with little, if any, consumer
benefit. AIA fully supports modernizing and improving the State
regulatory system, and we continue to work toward that end.
However, we also believe that Federal regulation is a more
appropriate choice for certain insurers and their customers.
Regulatory reform, including optional Federal chartering, will
benefit the insurance mechanism as a whole. In particular, it
will help the individuals, families, and businesses who rely on
property and casualty insurance products for their short- and
long-term financial security.
We commend the subcommittee's focus on this topic as part
of your broader examination of insurance regulation in the
post-Gramm-Leach-Bliley era. The current State regulatory
system imposes significant costs on insurers and, ultimately,
our customers as well as the economy at large. Statutes and
regulations are not uniform, and in many States regulatory
actions prohibit insurers from responding effectively to
marketplace changes.
Meanwhile, the legal and economic environment in which we
operate is changing at a breakneck speed. The bottom line is
that consumers ultimately pay more for less adequate risk
protection than they would under a more dynamic and fluid
regulatory system.
The National Association of Insurance Commissioners has
acknowledged the need for a more efficient regulatory system,
focusing in on what it has called speed to market. The NAIC's
recommendations move in the right direction, but ultimately
fall short of a true market-based approach. AIA remains
committed to the State reform process, but we urge Congress to
move forward with the creation of an optional Federal charter.
There are a number of compelling reasons for Congress to
move forward with optional Federal chartering. First, a level
playing field is critical to the long-term viability of the
insurance industry. The Gramm-Leach-Bliley Financial
Modernization Act changed the rules of competition for
insurers, banks, and securities firms.
Second, new technologies do not recognize State-specific
regulatory barriers. Those barriers make it harder for
insurers, agents, and policyholders to get full access to these
technologies.
Third, the insurance business is increasingly national and
international in its customer-focused and regulatory needs.
Optional Federal chartering would let companies and customers
choose the regulatory approach that is most suitable for their
size and scope of operations.
Fourth, the challenges facing the property and casualty
insurance industry are also increasingly national and
international in scope. Terrorism, natural catastrophies,
fraud, and asbestos litigation are just some of the major
issues that our industry faces, but the current decentralized
regulatory system lacks the tools to effectively address these
issues in a comprehensive manner.
I note this committee's interest in addressing the role of
the United States in seeking insurance reforms around the
world. The U.S. should continue to play that role, but we also
must address our own shortcomings in our current system.
Insurers and consumers alike all over the world will benefit
from open and competitive markets that give consumers ready
access to needed products at competitive prices.
We believe that optional Federal chartering will help
achieve that goal. Working with other sectors of the financial
services industry through the Financial Services Coordinating
Council, AIA has developed a set of principles for an optional
Federal charter that would accommodate all lines of insurance.
You have in my prepared text an outline of each of these
principles. Taken together, these principles assure that the
new regulatory system is responsive to the needs of customers
and claimants, taxpayers, and the public at large. Through the
FSCC, our organizations are also working to develop a single
legislative proposal which we hope to release shortly. We
recognize that this will be a long legislative process, but we
look forward to working with you to advance a bill that would
result in a safe, sound, and solid regulatory system.
Optional Federal chartering will bring numerous benefits to
consumers and to the public at large. Consumers will save money
as the market becomes more efficient and competitive. They will
also have more product options. Optional Federal chartering
will also enhance the U.S.'s position as a trading partner and
address criticisms that we have received from abroad that the
current system is protectionist. The changing marketplace at
home and abroad makes comprehensive insurance regulatory reform
imperative. A new structure will assure a healthy consumer-
oriented U.S. property and casualty insurance industry for the
21st century.
We appreciate the subcommittee's attention to this
important issue, and later on I will be happy to answer any
questions that you all have. Thank you.
Chairman Baker. Thank you, sir.
[The prepared statement of Robert P. Restrepo Jr., can be
found on page 300 in the appendix.]
Chairman Baker. Our next witness is Mr. Paul Mattera, who
is the Senior Vice President and Chief Public Affairs Officer
for Liberty Mutual Group on behalf of Liberty International.
Welcome, sir.
STATEMENT OF PAUL MATTERA, SENIOR VICE PRESIDENT AND CHIEF
PUBLIC AFFAIRS OFFICER, LIBERTY MUTUAL GROUP, ON BEHALF OF
LIBERTY INTERNATIONAL
Mr. Mattera. Thank you, Mr. Chairman.
Mr. Chairman, Mr. Kanjorski, members of the subcommittee,
my name is Paul Mattera, Senior Vice President and Chief Public
Affairs Officer for Liberty Mutual Group.
Liberty Mutual is primarily a property and casualty
insurance company based in Boston with $14 billion in revenue
and over 37,000 employees in the United States and in 15
countries. Liberty is the leading provider of workers'
compensation insurance in the world. The fifth largest P&C
insurer in the United States, and the second largest U.S. based
international insurer.
I am here today to express the company's long-held belief
that State-based insurance regulation is fundamentally sound
and should not be abandoned in favor of a Federal model or dual
charter model of regulation.
I have also been asked to discuss the EU model of insurance
regulation and to consider what lessons might be learned from
the European experience. Let me start by describing the EU
model. The EU has significantly liberalized company licensing
so that a company licensed in one member country can operate as
a branch or a subsidiary in other countries without additional
licenses. This so-called passport system is the key feature
that sets the EU apart from the U.S. However, like the U.S.,
the EU has strong preference for so-called host control; that
is, the country in which the business is conducted retains
regulatory authority.
Even where uniform rules exist, local interpretation can
vary widely. Now, the EU has recently abolished rate and
product regulation, but financial, accounting, tax, market
conduct, and other requirements continue to be applied by the
host country. So, the notion of on a single unified regulatory
structure has not yet come to pass. Some aspects of the
company's operations are regulated by the home country, some by
the host country, and both subject to the directives of the E
C.
Mr. Chairman, I would like now to make just a few quick
points about the EU model and about the U.S. system in
contrast. First, the EU model is not a panacea. While there are
lessons for the U.S., streamlined licensing, reliance on
competitive markets, it is too simple to say that it should be
the model for the U.S.
Second, we don't need the EU model to promote global
competition. The U.S. system is neither a trade barrier for
foreign competitors seeking to do business in the U.S., nor
does it prevent U.S. companies from entering foreign markets.
Three, reform takes time. The EU system has taken nearly
three decades to get where it is, and it is still changing.
Before we abandon the U.S. model, the Congress should send a
clear message to the NAIC and to the States that they must
accelerate the modernization agenda and complete it within a
reasonable time frame or risk Federal takeover.
Fourth, State-based insurance regulation is fundamentally
sound. The State system has served consumers and providers well
over the last century; however, considerable improvements are
needed for the system to meet the challenges of the 21st
century. One of those challenges is the expansion of class
action and asbestos liability and its impact on the solvency of
our industry. State regulators have not been effective
advocates in this regard, and their performance will have to
improve or the calls for Federal regulation will get louder.
Fifth, Federal or dual charter models are deceptively
simple. By promoting uniformity, they imply that all regulatory
functions can be managed by a single regulator. But dual
regulation, as in the EU, may be closer to the reality where
residual markets, guaranteed funds, rate regulation perhaps,
market conduct are all left to the States.
Sixth, and last, insurance regulation is inextricably tied
to State law. States have the constitutional prerogative to
establish liability laws and other reparation systems. Since
insurance is so closely tied to these laws, it follows that
insurance regulation should remain State-based. Move insurance
regulation to Washington, and the underlying reparations laws,
workers' compensation, automobile reparations, and so on will
inevitably follow.
Finally, Mr. Chairman, I urge the subcommittee to move
cautiously as it considers the best model for regulating the
property and casualty markets and promoting competition in the
21st century. Thank you.
Chairman Baker. Thank you, sir.
[The prepared statement of Paul Mattera can be found on
page 249 in the appendix.]
Chairman Baker. Our next witness is Mr. Franklin Nutter,
President of the Reinsurance Association of America. Welcome,
Mr. Nutter.
STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT, REINSURANCE
ASSOCIATION OF AMERICA
Mr. Nutter. Mr. Chairman, members of the committee, thank
you very much. Reinsurance is certainly the most global of the
insurance businesses that you will address as part of your
oversight hearings regarding insurance regulation. All of the
members of our association are either licensed, authorized, or
accredited in all U.S. jurisdictions. I am not here today to
endorse one system of regulation over another, but, as the
committee requested, to address some issues that have arisen in
the context of reinsurance regulation.
Reinsurance is effectively the insurance of insurance
companies. It serves the purpose of reducing an insurance
company's volatility; it has the effect of spreading the risk
across the capital markets of the world, and, as this committee
is well aware, addresses catastrophe exposures that insurance
companies have.
To put reinsurance in its proper perspective, the net
reinsurance recoverables by all U.S. property/casualty insurers
represents 144 percent of the total property and casualty
surplus of all U.S. insurance companies. The NAIC's own
statistics show that in the year 2000, there were 3,300 foreign
reinsurers that did some business in the United States,
although it is clearly heavily concentrated among a smaller
number of companies.
Reinsurance is regulated differently than you hear from
other parts of the industry. A reinsurance company that chooses
to be licensed in the United States is subject to all of the
same regulatory requirements for solvency regulation as an
insurance company, but reinsurers are not regulated with regard
to the rates that they charge or the coverages that they write,
largely because those contracts are deemed as written between
sophisticated commercial parties. Reinsurers do not have any
direct relationship with insurance consumers.
For those companies who choose not to be licensed in the
United States, reinsurance is regulated on an indirect basis
largely through credit for reinsurance laws, which effectively
provide the accounting treatment that is given to insurance
companies for their use of reinsurance. Reinsurance companies
that are not licensed in the United States and choose to do
business on that basis, collateralize their obligations through
trust funds, letters of credit or other forms of security to
make certain that reinsurance is collected.
The issues that I would like to comment on include credit
for reinsurance. There have been some at the National
Association of Insurance Commissioners forums suggesting that
the collateral requirements imposed upon nonauthorized
reinsurers should be reduced. The U.S. insurance market is
heavily dependent on a global reinsurance market, and yet
insurance regulators cannot be expected to understand the
accounting or the regulatory schemes throughout the world.
Regulators have confidence in the collectability of reinsurance
largely through the requirement for collateralization of the
non-U.S. reinsurance obligations. It is difficult to comprehend
how the U.S. system could impede competition based upon the
statistics that I gave you earlier; and, indeed, if the
Congress is to consider an optional Federal charter or minimum
Federal standards, our association would urge the Congress to
incorporate a strong credit for reinsurance regulatory system
similar to the NAIC's model and regulation.
I have commented in the text of my testimony on the
inconsistencies among the State systems, often referred to by
other panelists, regarding the costs and inefficiencies of
dealing with a multi-state system. When you are dealing with a
multi-state, indeed global, insurance part of the system, such
as reinsurance, there is particular concern about the
extraterritorial application that some States apply their laws
to insurance and reinsurance. It is important that the
difficulty in complying with States is recognized in a system
where States do not respect the laws and regulations of the
other States.
We have also commented in the written testimony about an
issue that is referred generally as mutual recognition. The
laws addressing regulation of reinsurance in various countries
are quite varied. There is no globally recognized method of
conducting reinsurance regulation, yet some have suggested that
the States of the United States should recognize other
countries' regulatory systems, and thereby relieve insurance
companies who do business in the United States from the
licensing or collateral requirements that would be imposed upon
them in the United States. We have opposed that initiative
largely because we feel that it cannot proceed until there is a
more uniform international accounting system; until the States
recognize the regulatory system among themselves; and, third,
that judgments entered into in the United States are recognized
and enforced abroad.
The last issue that I did want to raise is receivership.
Insurance companies that are insolvent or have financial
problems are not subject to U.S. bankruptcy laws; they are
subject to insolvency laws and receiverships on a State-by-
State basis. Generally we find those laws to be archaic and
inefficient. Often reinsurance recoverables are the principal
asset in those receiverships. We have participated in the
drafting of a uniform national receivership law. If the
Congress were to consider a national system or minimum
standards, we would strongly encourage a uniform national
receivership system be implemented.
And, lastly, I am not here to endorse one system over the
other, but to say that there are a number of alternatives
available for the future structure of insurance and reinsurance
regulation, including minimum Federal standards, and that we
believe that it is incumbent to find that critical balance
between the cost and efficiencies of the system and a
competitive and secure regulatory environment for reinsurance.
Thank you very much.
Chairman Baker. Thank you, Mr. Nutter.
[The prepared statement of Franklin W. Nutter can be found
on page 286 in the appendix.]
Chairman Baker. Mr. Mattera, in a portion of your written
testimony you submitted, you made a comment with regard to the
system and its effectiveness in Illinois that I read as being a
favorable view of that system. Is there legitimate reason, in
your mind, for the Congress not to act on some Illinois-like
model, given the length of delay we have encountered with
State-to-State regulatory enhancements? Can you comment?
Mr. Mattera. I would be happy to comment, Mr. Chairman. The
Illinois system certainly is probably the best example among
the States of one which promotes open and competitive--an open
and competitive market. We think the Illinois system as it
relates to the commercial lines is one that is achievable
through a State-by-State attempt at reform. And, indeed, both
through NAIC leadership and hard decisions made by State
legislators in a great number of States over the last 2 or 3
years, a great deal of progress has been made in opening up, if
you will, the commercial lines to a more competitive market.
Our sense--our company's sense is that there is resistance
to the notion of the Illinois model as it relates to the
personal lines. I question whether--and, with all due respect,
whether an open and competitive rating system like Illinois is
one that is achievable in Federal law, which is what has led us
to question, you know, the utility and the viability of either
a Federal or an optional charter approach. A significant reason
for one's support for either of those approaches, it seems to
me, is the opportunity to engage in a more competitive market,
and we have some serious misgivings that it is unlikely to be
achieved at least with regard to the personal lines.
Chairman Baker. Commercial lines, possibly; personal lines,
probably not.
Mr. Mattera. Is probably not.
Chairman Baker. Is your view? Thank you.
Mr. Restrepo, you also have made comments about the
Illinois model. Do you have a different view, or do you think
that it is an advisable direction for us to explore?
Mr. Restrepo. We clearly think the Illinois model is the
best practice and clearly one of the best State regulatory
systems that we have encountered, both within my company and
representing the AIA. To the extent that that kind of model is
adopted nationally, it would certainly be an improvement, but
it really doesn't get us where we would like to see the
regulatory system move eventually. And we think, given the
changes in the industry as companies become more focused on
regional sectors, on specific lines of business, workers'
compensation, let's say, as companies become more specialized,
they are going to want choices regarding the regulatory system
that would best meet the needs of their shareholders and their
customers, and which is why we are strong advocates of the
Federal option, Federal charter option.
Chairman. Baker. In exploring this, I don't know if you are
in a position to answer this particular question, but as it
relates to your company's marketing in Illinois and the
competitive environment in which you operate, is it your
opinion that Illinois consumers enjoy a broader array of
product at a better price as a result?
Mr. Restrepo. They clearly enjoy a better price. And
probably one of the single greatest or single--probably the
best characteristic of the regulatory system in Illinois is it
is pretty free; companies are free to charge what they think
they need to charge to both compete and make a profit. So,
clearly, from a rate regulation standpoint it is very
attractive, and the consumers in Illinois benefited, contrasted
with States that we do business with, unlike GEICO in New
Jersey and Massachusetts where, combined, New Jersey and
Massachusetts represent almost 15 percent of our premium
volumes, and those two States probably have the highest
automobile insurance rates in the country.
Chairman Baker. I had an omission on my part. I meant to
ask the prior panel if it would be advisable, in light of the
decision to withdraw from offering product in New Jersey, if
there were an alternative method to allow you to enter the New
Jersey market, wouldn't that really be beneficial to New Jersey
automobile drivers? It seems to me that the solution there is
more competition and less regulation.
Mr. Restrepo. I agree 100 percent.
Chairman Baker. And, however we can provide access to
product is generally beneficial to consumers.
Mr. Restrepo. Consumers in both States are suffering not
only from a lack of markets, but a decreasing number of markets
as companies either go bankrupt or decide to exit the State.
And any kind of regulatory system that will promote more
competition would make New Jersey, and Massachusetts a more
attractive place to do business.
Chairman Baker. Thank you.
And one last quick one. Mr. Mattera, given your perspective
on this, the NAIC has--I can say, I have sent some telegrams--
independently indicated an interest in seeing a time line, you
know, a direction toward uniformity, not necessarily just
reciprocity. But even with our best effort, they have some
areas where they have enjoyed more success than others; but
when it comes to market conduct examination reform, they really
lag behind there more so than anywhere else. Why do you think
that is? What is the problem?
Mr. Mattera. I think the short answer with regard to market
conduct is that they have simply taken it up later in the
process. It has been I don't want to say a lower priority, but
in terms of trying to tee up issues in some sequence, it has
been the third or fourth issue in that sequence. So I don't
know that it has been the most difficult problem to deal with;
I think it is one that they have simply chosen to deal with a
little bit later on.
Chairman Baker. If that is the case and it is only a timing
issue, if we are going to get through the entire list, and
let's just assume we agree on what the list is, how many years
are we talking in order to get the job done?
Mr. Mattera. Of course, I don't know the answer to that. I
would like to make this comment, though: I mean, we have seen,
and there has been some questioning to this effect, that when
the States--when their collective feet are held to the fire,
when the Congress is forceful with respect to the--you know,
the accountabilities--and I think agent licensing is a perfect
example of that--there has been good response. Now, some can
argue about--I think someone said 70 percent of the market is--
you know, is there, but 30 percent isn't, and we can argue
about how you define success, but I think objectively, you
know, 45, 46, 47 of the States have come in line.
I mean, there is a--and not to pander--there is a very
important role for this committee and for the Congress in
identifying the kinds of change that need to be made so that
insurance markets in this country across all 50 States operate
more smoothly, more openly, with more transparency,
competitively to identify what those areas of change are and
then establish some time line within which the States have got
to act. And if they don't act in that time, then I think, you
know, the gloves come off. And there are steps--and I don't
presume to suggest to you what they may be, but then there is
perhaps--there are actions that the Congress can take, whether
it is Federal standards or preemption or otherwise.
But as I said earlier in my opening remarks, the EU has
arrived at what some have described as, you know, a good
example of open market regulation. I would say they are not
quite there yet; but even so, it has taken them nearly three
decades.
So how much time, Mr. Chairman? I don't know. But I think
without some kind of fixed date in the future, we may not have
the kind of change that all of us, I think, at this table would
want to see.
Chairman. Baker. Thank you, sir. My time has expired.
Mr. Kanjorski?
Mr. Kanjorski. That would be about 2032? I don't think many
members of the committee will still be here, and I am not sure
how much interest the Congress will have in insurance at that
point.
Since both of you have your principal headquarters in
Massachusetts and you differ so widely on this issue, do you
want to tell me why? What is the distinguishing reason? Why are
you so much in favor, and why are you so much opposed to it?
Mr. Restrepo. Well, maybe I will go first. Even though we
are only separated by 50 miles, we have two very different
companies, two very different marketing plans. And I can't
speak for Liberty Mutual's plans. We compete with them in some
markets, but they are a much bigger company than we are. So we
have different--.
Mr. Kanjorski. But you sell the same type of insurance.
Mr. Restrepo. But we have different markets. One of the
markets that we are looking to get into, our traditional market
is, as a regional company, in Michigan and the Upper Midwest
and then New England primarily. We do some business in the
Southeast. But increasingly we are looking to enter a market
that we define as sponsored, where we go to large employers or
associations, like the American Automobile Association, to
sponsor our product to their employees or members.
So one of the restrictions we have as a regional player is
trying to enter new States. And so we would like to have the
option--to support our marketing plans as we venture into that
market, we would like to have the option of considering a
different regulatory environment that would make it easier for
us to enter that kind of a market and also to enter new States
if we choose to expand our regional presence.
Mr. Kanjorski. And you are almost nationwide at Liberty,
and you say it is easier to stay at a State level.
Mr. Mattera. Well, we are. We are countrywide--I hate to
use the word nationwide. We are countrywide.
I guess there are three reasons that I can offer. One is
philosophical. And it is hard to sort of back away from what is
a philosophical belief; that because the underlying reparation
system is State-based, the regulatory system must itself remain
State-based. There is that philosophy that guides a lot of our
thinking. That is first.
Second, perhaps more practically, Liberty is primarily a
large-risk underwriter. I mean, we are one of a handful of
insurance companies in this country who insure the Fortune 500
risks, AIG, Travelers, Liberty. There aren't very many who
really play in the market. That is essentially a deregulated
market. And even in the middle commercial market, there has
been significant movement over the last 2 or 3 years, as I
commented earlier, in the direction of more competition in
price and product.
So there is--we see on the commercial side more progress
being made. That may not be as visible to some companies; it is
quite visible to us.
And then, thirdly, we are a substantial player in the
personal lines market. Now, not like Mr. Nicely, who I think
said that GEICO has 5 percent of the personal lines premium
revenue in the country, Liberty is at 1 or 1-1/2 percent. So,
we are significantly smaller, but we are substantial, and in
that area we feel as though we have been reasonably successful,
sort of slugging it out in States, regulator by regulator,
forcing the issue, getting the rate level, getting the policy
changes, able to conduct our business. It takes time, it is
inefficient, it adds cost, but at the end of the day we have
managed to get through that process reasonably well.
And so those are the best answers that I can give you, Mr.
Kanjorski, as to why we are rooted in the notion that the
State-based system ought to remain as such.
Mr. Kanjorski. And both of your companies are writing both
in Massachusetts and New Jersey, unlike some of the others?
Mr. Mattera. Well, we are writing in New Jersey, and we are
certainly writing in Massachusetts, and we are writing in all
of those States that are held out as the parade of horribles.
And I am not here to tell you that it is just hunky dory for
us. It is not. We lost $100 million in the year 2000 in New
Jersey, it is a lot of money, but we think we are turning the
corner in that State.
Mr. Kanjorski. Is that being subsidized by--.
Mr. Mattera. It is a fair question.
Mr. Kanjorski. --Pennsylvania payers?
Mr. Mattera. At the end of the day, there are implicit
subsidies in the insurance business. I don't think one can walk
away from that. So the answer to your question, I suppose, is
yes.
Mr. Kanjorski. What happens if the Congress takes no
action, and the State insurance commissioners feel the pressure
is off of them, and we are here again 5 or 8 years from now?
Mr. Mattera. I mean, you are asking me. I think that is the
absolute worst possible result.
Mr. Kanjorski. Someone said it should have been done 15
years ago; Mr. Gasper, in his testimony. And I don't know how
long Mr. Baker is here, but I am here 18 years, and it is the
first time that I recall testimony regarding any Federal
involvement with the charters. As a matter of fact, it used to
be considered a poison pill on the Hill to mention Federal
charter and insurance in the same sentence, but now we are
being inundated by some companies.
Mr. Mattera. But if you go back to, I am thinking, the
103rd Congress, Mr. Dingell, the notion of failed promises and
the need for rejuvenated solvency regulation within the
insurance industry, the result of that cajoling, the result of
that effort was, you know, an accreditation program developed
at the NAIC, sold to the States, enacted by the States, which
did elevate considerably--and I don't know if there are many
people who would argue against this notion--considerably
elevated both the tools by which State regulators measure
financial condition and act on companies that are failing, and
also the standards, through risk-based capital standards and
otherwise. And so if there is a success of State regulation, I
think it is fair to say it was--it is the accreditation
process, and that was a direct result of Federal threats to
take over that aspect of the insurance regulatory structure.
Mr. Kanjorski. I just have one additional question. Mr.
Nutter talked about the national scope of receiverships or
conservatory operations. Do you two gentlemen agree that we
should have a national standard on that, or should we leave
that to the States, if we come out of nothing else, to a
national standard on the receiverships?
Mr. Restrepo. You are asking me? I think that would be a
step in the right direction, sir.
Mr. Mattera. I guess it would be inconsistent for me to
sort of hold the view that a national standard is something
that Congress should jump to at this time. I think, consistent
with my earlier statement, I know we would prefer to see the
Congress's other means to achieve the same result.
Mr. Kanjorski. Okay.
Mr. Chairman, my time has expired.
Chairman Baker. Thank you, Mr. Kanjorski.
Mr. Ney?
Mr. Ney. Thank you, Mr. Chairman.
I wanted to pose the question, Mr. Restrepo, to the AIA.
Looking at State insurance guaranty funds that exist, I think
we can recognize that most of those funds have done a good job
over a period of time. Now, either in your proposal or the
gentleman from New York, I think that it would be the hope that
even if an entity goes in a State charter or Federal charter,
it could still have the backing, inclusion of those State-
guaranteed funds; is that correct?
Mr. Restrepo. That is correct. Our proposal requires no
change to State-guaranteed funds, to State premium taxes, or to
State residual market mechanisms.
Mr. Ney. Let me pose a question based on that. So, let's
say that I am the head of a State guaranty fund, and for some
reason, the new Federal regulatory system is set up, I feel
that it is inadequate, or just so choose to say that you are
chartered with the Feds, now you are on your own, you are out
of our guaranty fund. Now, I understand the repercussions of
that for a State; but what if that scenario happened, and that
happened in several States? Would the Federal then have to set
up a guaranty fund?
Mr. Restrepo. Not necessarily, sir. I think that is a
detail, obviously, that would --.
Mr. Ney. That is a big one.
Mr. Restrepo. That is a big detail that needs to be
addressed in the legislation. I think, from our standpoint
right now, we feel that the State guaranty funds should
continue to operate as they are currently operating.
Mr. Ney. I am just trying to think of--you know, we can
think of any scenarios. I am just trying to think of a scenario
from a State regulator's point of view, and they can't regulate
you, but you are in the guaranty fund, and they feel something
just didn't go as it should, and then they could kick you out
of that. And I just wonder where that leaves us. It is a very
valid item, I think, that has to be looked at.
Mr. Restrepo. I agree.
Mr. Ney. The other question I have that I think is
interesting for Mr. Nutter, isn't it true that reinsurers are
largely unregulated under State laws?
Mr. Nutter. Reinsurance rates and the forms or the
coverages, the contracts written between insurers and
reinsurers are generally not regulated by the States; but an
insurance company or a reinsurance company that is licensed in
the United States is subject to all the same solvency
standards, laws, holding company statutes as insurance
companies.
Mr. Ney. So wouldn't a Federal--if we created a Federal
regulator--be able to tighten the regulations then nationwide
on, for example, you know, your type of industry?
Mr. Nutter. We have no position in favor of a Federal
national system, but it is quite clear that reinsurance tends
to be--because of the global nature of it, tends to have issues
that transcend State borders and, in many cases, transcend
national borders. The State system is an awkward system, if you
will, to deal with a business that is writing contracts on a
multistate and often a multinational basis.
Mr. Ney. So you basically are disputing, then, that you are
not--that you are free from State regulation?
Mr. Nutter. There is no question that a reinsurance company
licensed pursuant to State law is subject to all of the same
solvency regulatory standards other than rate and form
regulation. Much of the U.S. reinsurance market is written by
non-U.S. reinsurers who are subject to regulation only through
the collateral requirements. They fund their obligations
through letters of credit or trust funds or other funds
withheld.
Mr. Ney. One other question I had real quick. What is the
angle of the WTO? I saw that in one of the testimonies. I
understand what Europeans have been talking about. Am I to
gather that there will be eventual filings against us at the
WTO? Somebody mentioned WTO in their testimony.
Mr. Mattera. I don't know that I did, but I did make some
references, I was asked to, to the EU and the regulatory model
there. And I did make some further comment. Maybe I can just
expand on it.
Some have suggested that the 50-State regulatory system is
a trade barrier because it is inefficient. Now, as ugly as what
I am about to say next sounds, I think it is the truth. An
inefficient system per se is not a trade barrier so long as it
applies equally to all who seek to do business in that market.
That is not to apologize for what is admittedly an inefficient
system in the U.S., but I don't see the argument that somehow,
unless we create a single regulatory structure, either an
optional charter or pure Federal regulatory structure, somehow
we are going to be in violation of WTO or imposed trade
barriers. I don't see that argument at all, if that is where
you are going.
Mr. Ney. I just read it.
Mr. Nutter. It was in my testimony that the WTO was
mentioned because some of these issues about collateral
requirements have been considered by the International
Association of Insurance Supervisors, by the NAIC, and there
have been references at the WTO for these kinds of things;
nothing in the trade barrier level, but in the context of
questions about whether or not any of our regulatory
requirements in the reinsurance area would be considered
anticompetitive or create barriers, as Mr. Mattera says.
Mr. Ney. Thank you.
Chairman Baker. Thank you, Mr. Ney.
But that inefficiency does create a higher premium cost if
you can get product. And in some cases where the regulatory
barrier is so bad--New Jersey--some people don't even go. So I
think that is the economic reality.
Mr. Bachus?
Mr. Bachus. Thank you.
First of all, Mr. Restrepo, what Mr. Ney was saying about
the LaFalce--all these proposals I have seen don't allow a
State to regulate a federally chartered property and casualty
insurance company. And I think it is sort of Pollyanna to think
that the States are going to allow a federally chartered
company to participate in their State insurance guaranty fund.
I think clearly constitutionally they can say, you can't
participate; we can't regulate you, you can't participate. And
in that case I don't see any alternative to having a Federal
guaranty fund.
Now, do you believe that constitutionally we can take the
States out of the regulatory business and at the same time
require the States to supply an insurance guaranty fund?
Mr. Restrepo. I think, number one, we are--a company that
chooses the Federal charter as an option is still controlled by
State laws.
Mr. Bachus. But not--.
Mr. Restrepo. Regulatory, as it relates to market conduct
and financial solvency, would change, but we would still be
using--a company that chooses that option would still be using
the same statutory accounting principles that most insurance
companies operate under.
Mr. Bachus. But I think clearly the State could say, you
can't participate if you are not subject to market conduct
rules.
Mr. Restrepo. As I understand it, that would be a State's
prerogative.
Mr. Bachus. That is what I am saying, it would be their
prerogative.
Mr. Restrepo. But as a practical matter, even though a
State--from my perspective, even though a State wouldn't be
regulating, let's say, the financial solvency, they would still
have access to the information to make an informed decision
whether or not they want an individual company to participate
in it.
Mr. Bachus. They would. And if they decided that the
Federal regulation was loose, whatever --.
Mr. Restrepo. But in the best interest of the consumers in
that State, I think most informed State regulators would want
to have the maximum amount.
Mr. Bachus. I think they want the fees that are generated,
too.
Mr. Restrepo. Well, and they want the participation in the
fund. And if they had a solvent company --.
Mr. Bachus. But they wouldn't be able to regulate; so how
would they be able to determine?
Mr. Restrepo. They would be able--.
Mr. Bachus. I am just saying--.
Mr. Restrepo. --to have access to the information to make a
decision whether or not they wanted company A or B.
Mr. Bachus. But would they have any power to do anything
about it when they got the material?
Mr. Restrepo. I imagine they could kick the company out.
Mr. Bachus. Well, that would be State regulation now.
Let me go on to something else. How many people are
employed in the various States in regulating insurance
companies? Do you know how many? How many employees of the
State insurance regulators?
Mr. Restrepo. I do not know.
Mr. Bachus. Anybody got a figure?
Mr. Mattera. Well, I mean, it varies wildly from State to
State. You know, whether there are sort of relativities
associated with size of population or not I can't say. But
Texas probably has in excess of a thousand employees regulating
insurance. California probably well over that. Massachusetts
probably a fewer than a hundred. So it varies widely.
Mr. Bachus. From maybe 100,000 nationally--.
Mr. Mattera. Oh, I see. In total, I don't know. But--I
don't know.
Mr. Bachus. When we have Federal regulation, have a
Federal--we have Federal employees regulating. That would be in
addition to the State, to the employees at the State
regulators. Now, somebody has to pay for that regulation.
Mr. Mattera. That is right.
Mr. Bachus. Doesn't that add to the cost or couldn't that?
Mr. Restrepo. Well, under our proposal, companies that
would choose a Federal option would be paying the freight of
the new regulatory system, so the taxpayers would not be hurt.
Mr. Bachus. So they would actually pay for the Federal
regulations.
Mr. Restrepo. That is correct. They would pay for their
choice.
Mr. Bachus. You know, for property and casualty insurance
particularly, don't State regulators often play a big role in
seeing that claims are paid? I mean, that has always been my
observation.
Mr. Restrepo. State regulators are responsible for market
conduct. One of the areas that they get involved with is,
obviously, responding to complaints about--from consumers who
don't like the way a claim was--.
Mr. Bachus. So you would--the Federal regulator that would
be formed would actually insure that claims were paid properly?
Mr. Restrepo. That they--yes, that they--that claims were
being handled in compliance with--.
Mr. Bachus. With State law?
Mr. Restrepo. --with State law or according to the Federal
regulations.
Mr. Bachus. So you would have a Federal regulator that
would be interpreting insurance contracts under the law of the
pertinent State. So the Federal regulators would have to
interpret the law of 50 different States and the territories?
Mr. Restrepo. No. They could be handling the complaint. A
claim rep would be settling a claim in compliance with the
local--.
Mr. Bachus. Well, you know, even to determine whether a
valid claim is being asserted, you have to go to State law to
see whether that is a valid claim.
Mr. Restrepo. That is correct.
Mr. Bachus. So they would--you would have a Federal
regulator that would be having to interpret the law of all 50
States, and if there were a dispute it would have to be
resolved in the State court. So your Federal regulator could be
involved in litigation in all 50 States and yet the federally
chartered insurance companies would have to pay all the freight
for that?
Mr. Restrepo. Yes.
Mr. Bachus. It could be pretty expensive.
Mr. Restrepo. For the companies that exercise that choice,
yes.
Mr. Bachus. I have never had a--I have never--of course, I
am a Congressman, but I have never had a constituent complain
to me about the lack of claims being paid, so I don't see that
there is a problem. So, you know, from my standpoint I have got
to wonder why I want to fix a system, at least in payment of
claims, that seems to be functioning well.
Mr. Restrepo. Well, we are in the business, obviously, sir,
of paying claims; and that is good to know.
Mr. Bachus. That is sort of--when the public deals with
you, that is--basically, their interest is seeing that their
claims are paid, paid properly and adequately paid.
Mr. Restrepo. That is correct.
On the other hand, though, there are consumers that are
looking or would like to entertain new products, and they see
new risks that they would like to insure. The thrust of our
proposal is really to accelerate our ability to respond to
those emerging needs.
Mr. Bachus. I am just saying I don't hear customers out
there saying their claims aren't being paid.
Mr. Restrepo. That is good to hear.
Mr. Bachus. And you agree, I think.
Mr. Restrepo. I think we have a pretty good reputation.
Mr. Bachus. That is not a big problem. In a nation full of
problems, that doesn't seem to be a problem. Yet we are going
to create a national regulator charged with--one of their
duties is to see that claims are paid and replace a system that
apparently is working quite well.
Mr. Restrepo. That is one aspect of the regulatory
authority. Another, though, would be rate regulation and
product regulation, I think, as we have mentioned.
Mr. Bachus. I understand the product part. I understand
that. But couldn't we fix that by having Federal mandates to
the States for uniformity with regard to approval of products
and et cetera?
Mr. Restrepo. We could.
Mr. Bachus. That could take a much smaller federal
bureaucracy than one that has to monitor every claim, has to
interpret every contract.
Mr. Restrepo. We could, but our most recent experience even
with the NARAB is, as we have heard, only 70 percent of the
people are really--the consumers have been affected.
Mr. Bachus. Well, some of those deadlines aren't here yet,
though. So with NARAB--.
Chairman Baker. Thank you, Mr. Bachus.
Dr. Weldon.
Dr. Weldon. Thank you, Mr. Chairman.
Mr. Restrepo, how do you think Florida could benefit from
an optional charter, Federal charter, particularly with the
States' increased risk for natural disasters, specifically
hurricanes?
Mr. Restrepo. Well, one of the biggest risks, obviously,
are natural catastrophes. Natural catastrophes, as you are
intimating, don't know State boundaries.
There have been efforts under way over the past couple of
years, both on a national and a regional basis, particularly in
the Southeast, to establish pools, risk pools; and one of the
biggest impediments is getting the agreement of State
regulators who have differences in the statutory authority that
is granted them, differences politically. Some are elected.
Some are appointed. Being able to get States with common
interests, such as States bordering Florida and the Southeast,
to come up with alternative risk transfer mechanisms that
certainly Florida consumers have, they are very difficult to
move through a State-regulated process.
I think having a Federal charter as an option would allow
States--would allow new companies to come into Florida and not
be subject, obviously, to Florida regulatory restrictions and
be able to offer products that perhaps aren't offered right
now. Certainly under different terms and conditions as well.
Dr. Weldon. Thank you.
Mr. Nutter, earlier in the year we heard a lot from the
insurance companies about the post-9/11 status of their
industry. I don't know if we have heard anything about the
reinsurance market. If we did, I don't recall. Did that
adversely affect the reinsurance industry? And what is the
status of the reinsurance industry right now, post 9/11?
Mr. Nutter. Thank you for the question, Dr. Weldon.
It is estimated the reinsurance market, both domestic and
foreign market that serves the U.S. Market, will probably pay
two-thirds of the claims that arise out of the September 11
disaster. If the loss estimates are between 40 and $70 billion,
you can make your own calculations. So you can see it was an
enormous financial impact on the reinsurance markets.
Having said that, I am not aware of any reinsurer that has
been threatened for its solvency for that; and indeed I think
the market has responded extremely well to pay for the
catastrophe loss associated with September 11th.
Dr. Weldon. Has there been any impact on capacity, or are
the demands of insurers for reinsurance being adequately met?
Mr. Nutter. The impact on capacity has largely been limited
to issues about coverage for acts of terrorism.
With respect to capacity for other kinds of risks, such as
natural catastrophe risk, it does not appear that that has
affected the capacity. Indeed, there were a number of new
insurers and reinsurers that were begun after September 11
believing that there was a market opportunity and capital
wanted to be in the market. Reinsurance rates have risen fairly
dramatically. Capacity appears to be plentiful, with the
exception of acts of terrorism where there clearly are some
limitations in the reinsurance market.
Dr. Weldon. So insurance companies wanting to get
reinsurance to cover natural disasters are not facing any kind
of difficulty in obtaining reinsurance.
Mr. Nutter. Perhaps you have two primary companies sitting
here who probably should answer the question.
I would say that, indeed, property catastrophe reinsurance
rates have risen.
Dr. Weldon. So there is plenty of capacity, but rates have
gone up. Is that what you are saying?
Mr. Nutter. Rates have certainly gone up.
Dr. Weldon. But aren't those two things related? As there
is more capacity, rates tend to come down.
Mr. Nutter. Generally, that has been true. If you look at
Hurricane Andrew and the subsequent Northridge earthquake,
indeed insurance rates rose. Capacity seemed limited at the
time. The market responded over time. Indeed, you now have a
highly competitive market with a reasonable amount of capacity.
As you know, Dr. Weldon, we believe that there still is a
need for a Federal role with respect to catastrophe capacity
dealing with both natural disasters and for acts of terrorism;
and we commend you for your leadership in that regard. There is
not sufficient capacity to deal with costs associated with acts
of terrorism. There is no question about that. Indeed, for
major catastrophic events there are limitations in the
reinsurance market to deal with the kind of hurricane or
earthquakes that might hit a major metropolitan area. A Federal
role in both areas would be very important.
Dr. Weldon. Do either of you, Mr. Mattera or Mr. Restrepo,
want to add to that at all?
Mr. Restrepo. The only thing I--go ahead.
Mr. Mattera. No, I would just like to maybe underscore an
issue which has perhaps recently become more apparent; and that
is the very urgent need for buyers of worker's compensation
insurance and providers of worker's compensation insurance to
have in place--for the Congress to put in place a Federal
backstop at a high level for a short period of time. Because it
is becoming increasingly apparent that those employers with
large concentrations of employees, particularly in the urban
core of this country, it is--the providers are exposed. Those
who are self-insuring that risk are exposed. Ultimately, the
economy is exposed.
Certainly, the House has done its part; and we are all
focusing our attention, of course, now to the Senate.
Mr. Restrepo. Two examples, Congressman, that I would cite
regarding the impact of reinsurance on the U.S.
Number one, from the capacity standpoint, we got the same
limits, but we don't have terrorism coverage, and we are paying
30 percent more. That is just a microcosm. I can't say that is
an average of everybody.
On the second issue, I would raise, just to support what
Mr. Mattera just mentioned, we have also changed our
underwriting attitudes about larger companies. We don't write
many of them, but people that employ more than a hundred people
or in our case even 50 people at one site, we are withdrawing
capacity because we don't--we are not able to find reinsurance
for that kind of exposure as a result of the lack of Federal
backstop.
Dr. Weldon. I just had one quick follow-up for you, Mr.
Mattera. In your opening statement you defended the State
regulatory system, and then in response to I think it might
have been Mr. Ney's questioning you acknowledged that it was
inefficient. Those are the words that you used.
Mr. Mattera. Uh-huh.
Dr. Weldon. I am sorry.
Mr. Mattera. And you think there is a contradiction in
there some place, do you?
Dr. Weldon. Yes. Can you kind of explain to me why you
would come before our committee and defend an inefficient
system?
Mr. Mattera. I am not defending.
Dr. Weldon. I am not trying to put you on the spot. It is
just you said it.
Mr. Mattera. No, it is a fair question. We prepared--the
company prepared a white paper some months ago called, The Case
for State Regulation, and when it was first drafted it had a
different title. It was called, In Defense of State Regulation.
We thought about that, and we thought that there was actually a
subtle but important distinction between defending the State
system and trying to make the case for the State system.
Fundamentally, the State insurance--the State-based
insurance regulatory system is sound. But it is inefficient.
There is a great deal of change that must occur.
I don't think I need to elaborate all of those points
unless we have got another hour, and I would be more than happy
to do that.
Dr. Weldon. Well, the impression I get is that it is an
inefficient system but that carriers like you have adapted well
to that inefficient system and that there is really no gain to
changing the system because you have already accommodated to
it.
Mr. Mattera. That would be a large overstatement.
The number of truth in there I think, though, is that the
system is solvable to some degree. That is not to say that
there aren't significant changes.
You see, there has been a lot of discussion in the first
panel and this one about uniformity, the notion that, you know,
we are not going to get to where we want to go unless we have a
set of regulations across the 50 States that are uniform one to
the other. We don't believe that uniformity is the Holy Grail
in insurance regulation.
Dr. Weldon. Uniformity doesn't necessarily mean greater
profitability, correct?
Mr. Mattera. Put profitability aside. I mean, just
conceptually, philosophically. I mean, uniformity --I mean,
obviously, profitability is the end game for a provider of
insurance. But service to customers, staying in business, I
mean, all of that is equally important.
My point is only that one can have what is, you know, sort
of inherently inefficient systems that are effective and don't
need to be replaced. Where the inefficiencies become so great
as to sort of thwart the proper carrying out of the business
and service to customers, then change needs to take place.
I think we are there today. We need to make changes. The
system is too inefficient. But I don't think that
inefficiencies, per se, are the reason for change, so long as
the rules are effective. They are not effective across the vast
number of States, and change does need to be made. So I am not
defending the system. I am defending the notion of a State-
based regulatory structure.
Dr. Weldon. Well, my time has expired. It has been a very
interesting hearing. Thank you, Mr. Chairman.
Chairman Baker. Sure.
Mr. Bachus, you had an additional question.
Mr. Bachus. Thank you.
I think I would also endorse, you know, Federal promotion
of State efficiency and, in some cases, I would say uniformity,
too. But let me--Mr. Restrepo, let me ask you this question.
What is your projection for the number of people that would be
employed by the Federal insurance regulator that you want to
create, number of people that would be employed?
Mr. Restrepo. Sir, I wouldn't hazard a guess. I don't know.
Mr. Bachus. It could be any number, couldn't it?
Mr. Restrepo. Yes.
Mr. Bachus. I wonder if anybody, you know, in proposing
this if they have thought through how many employees would be
created, how big this agency would have to be. Do you know of
anybody that has done any study on that?
Mr. Restrepo. No, we haven't.
Mr. Bachus. And whether those employees would be in
addition to or in lieu of those folks back there in the States
that are regulators?
Mr. Restrepo. I think it would be certainly a company
choosing a Federal option, since they are paying the freight,
would have an incentive to encourage a system that wasn't only
effective but obviously efficient and--.
Mr. Bachus. But you--it wouldn't be the companies that
would be in charge of how many people worked at the regulator.
Mr. Restrepo. No, that is true. But to the extent that--.
Mr. Bachus. You know--.
Mr. Restrepo. Obviously, in the company's best interest to
have a system that was not overstaffed.
Mr. Bachus. I would be interested in that.
Mr. LaFalce has brought forth this legislation. I would be
interested--he is not here. I would be interested in asking him
what he envisions as far as the number of employees that would
be needed.
Mr. Nutter, let me--.
Mr. Kanjorski. Maybe I should take a little opportunity on
that. Probably no additional employees like the Department of
Homeland Security will cause now additional employees.
Mr. Bachus. Let me ask just the one final--.
Chairman Baker. I am sensing meltdown, but go for it one
more time.
Mr. Bachus. Mr. Nutter, I mean, am I right that reinsurers
are largely unregulated by the States today, right?
Mr. Nutter. Mr. Bachus, a reinsurance company, including
all the members of my association, are licensed in the United
States by a State or are accredited. They are all subject to
all the same financial reporting solvency standards and the
holding company statutes as any other insurance company.
Mr. Bachus. Do they have separate rules for reinsurers?
Mr. Nutter. With regard to licensing and solvency
regulation, none whatsoever. With the respect to a non-U.S.
reinsurer, access to the reinsurance market in the United
States is achieved through collateral requirements, trust
funds, letters of credit. It is an optional system.
Mr. Bachus. I just don't--I have never known of much State
regulation of reinsurers, I mean, other than your licensing;
and I am not saying that is bad.
Mr. Nutter. No, I understand that.
Just to clarify that, Mr. Bachus, the real distinction
between the insurance market served by these two companies and
the reinsurance market is that the reinsurance market is a
competitive market with respect to rates and the coverages
because it is a market between commercial entities. You don't
have a regulatory structure that looks at rates and forms as
you would in the primary insurance industry.
Mr. Bachus. But, you know, I guess what I am saying, if you
created a Federal regulator, then there would at least be
potential there to tighten regulatory oversight on reinsurers,
which I am not sure is needed, but I certainly--.
Mr. Nutter. Well, certainly you would want a system in
place that had a solvency oversight system, much as you have at
the State regulatory level, and a system that dealt with the
credit.
Mr. Bachus. Are the States doing a good job of that today?
Mr. Nutter. The States have actually done a very credible
job with regard to credit for reinsurance. I think Mr. Mattera
referenced the House Commerce Committee hearings of the late
1980s, early 1990s that did, in fact, generate an enormous
amount of State legislative activity dealing with credit for
reinsurance statutes; and indeed there have not been the kind
of solvency issues that we saw in the 1980s that gave rise to
these hearings.
Mr. Bachus. So you don't see any need for any additional
regulatory oversight?
Mr. Nutter. At the Federal level?
Mr. Bachus. Yes.
Mr. Nutter. Mr. Bachus, our testimony really has been if
you are going to create the option, here are issues that should
be addressed.
Mr. Bachus. But you don't see a need for any, do you?
Mr. Nutter. We are not here to promote either system. If
the Congress chooses to do that or to create national standards
for State regulation--there are just certain features we think
are important.
Mr. Bachus. Thank you.
Chairman Baker. Thank you Mr. Bachus.
Mr. Kanjorski.
With that, I want to express my appreciation to you. It has
been a productive hearing today. We certainly do appreciate
your comments.
The record will remain open should you choose to make
additional comment or forward further information for the
committee's consideration.
Thank you very much, and our meeting stands adjourned.
[Whereupon, at 4:26 p.m., the subcommittee was adjourned.]
INSURANCE REGULATION AND COMPETITION FOR THE 21ST CENTURY
----------
Tuesday, June 18, 2002
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance,
and Government-Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:00 p.m., in
Room 2128, Rayburn House Office Building, Hon. Richard H. Baker
[chairman of the subcommittee] presiding.
Present: Representatives Baker, Ney, Gillmor, Weldon,
Biggert, Ose, Rogers, Kanjorski, Bentsen, Maloney of
Connecticut, Sherman, Inslee, Shows, Ross, Grucci, and Lucas of
Kentucky.
Ex officio present: Representative Oxley.
Chairman Baker. I would like to call this meeting of the
Capital Markets Subcommittee to order.
This hearing represents the third such meeting of the
committee in our exploration of the need for reform with regard
to the marketing and sale of insurance products nationally. The
one thing that is clear to date is that the current system is
not working as well as it could. And despite the best efforts
of state regulators and those involved in the markets, the
inability to control the actions of 50 independent regulators
is a very daunting task. The end-loser in the process in the
current environment, of course, in my view, is that of the
consumer, who often finds limited choices or high-priced
choices as a result of the lack of competitive forces.
We have had testimony from some CEOs of insurance companies
that they simply do not participate in certain states in the
marketing of their product because of the regulatory
constraints. That certainly is not acceptable.
Having recognized the significance of the problem, it is
also apparent that we will not be able to seek resolution in a
short-term window. It is a very complicated matter requiring
thorough study and examination, and the members of the
committee are entitled to have all available information to
make the best appropriate decision. However, Chairman Oxley has
expressed on repeated occasions his interest in seeing the
committee do its work, that we move toward a reasonable goal as
quickly as is possible, and that we do it in the most
professional manner available to us. As a result, this hearing
will not be the last. There is much more work for us to do
before beginning discussions of legislative proposals.
In the likelihood that Mr. Kanjorski would be here shortly,
he has been the proponent on the committee of what we call
roundtables, where we get folks together in a room, roll up our
sleeves, and just sit there until we get something done. We are
contemplating a roundtable with regard to the issues raised in
these three hearings over the course of the next couple of
months--and I was praising you in your absence, Mr. Kanjorski,
talking about your advocacy of roundtable approaches and that
it is advisable, I think, given the nature and complexity of
this subject, certainly over the course of the next couple of
months to attempt to form an environment for such a roundtable
to take place, assisting us in identifying all the areas where
it is evident that there is significant agreement.
And I guess that would be sort of the concluding
perspective is that as difficult as it will be to have a plan
on which all parties can agree, there are significant areas
where many people do find agreement and we should move in those
areas certainly as quickly as we are able. To that end, I am
certainly appreciative of all those who will appear here today.
Your input and testimony will be helpful to the committee
members as we move forward in the coming months.
With that, Mr. Kanjorski, if you have an opening statement,
I would like to recognize you.
Mr. Kanjorski. Thank you, Mr. Chairman. Mr. Chairman, we
meet today for the third time to analyze various proposals to
increase the efficiency and uniformity of insurance regulation
in the United States. I again commend you for your diligence in
convening this series of hearings. Today's proceeding should
help us to better appreciate the regulatory models used in
other sectors of the financial services industry and how these
sectors might be affected under various proposals to reform
insurance regulation.
At our previous hearings, we have heard from both sides of
the ongoing policy debate about reforming insurance regulation
and creating an optional federal charter. Some of our witnesses
have argued that the needed reforms are most appropriately
pursued at the state level. Others have suggested that joint
state and federal oversight would most effectively address the
regulatory efficiency problems plaguing the industry. We will
hear similar views today.
No matter what side one takes in this long-standing debate,
it has become clear to me that there is no longer a question of
whether we should reform insurance regulation in the United
States. Instead it has become a question of how we should
reform insurance regulation.
This reform effort will likely prove difficult given the
diversity and complexity of the insurance industry. As a
result, I suspect it will take us several years to forge a
consensus on this complicated set of issues.
Later today I plan to continue to explore whether we should
create a tiered regulatory structure for insurance similar to
the oversight system we devised for investment advisors. Under
this system, the Federal Government would regulate insurers
above a certain size or in a certain business line while states
would retain the responsibility for regulating the rest.
We should also continue to carefully examine the consumer
issues as we proceed in the weeks ahead. We should, for
example, find out the cost and benefits of a streamlined
regulatory system. We should further determine what safeguards
are needed to protect the interests of consumers. In the end,
consumers should be the ultimate beneficiaries of our action.
Additionally, Mr. Chairman, I am particularly pleased that
Wayne McOwen will testify before us today. Mr. McOwen serves as
a senior vice president of Guard Financial Group, which is
based in my congressional district. Guard Financial Group
operates several subsidiaries and affiliates that participate
in various aspects of the insurance and financial services
industries. I have previously found Mr. McOwen's insights
informative and instructive, and his comments today will help
us all to better understand the needs of a small, progressive
insurer.
In closing, I look forward to hearing from our
distinguished witnesses and to learning more about their views
for improving insurance industry regulation. As we continue to
examine these issues, I am confident that our careful analysis
will allow us to eventually identify a bipartisan consensus on
the most effective and appropriate way to move forward.
Chairman Baker. Thank you, Mr. Kanjorski.
[The prepared statement of Hon. Paul E. Kanjorski can be
found on page 326 in the appendix.]
Chairman Oxley, did you have an opening statement?
Mr. Oxley. I do, indeed. Thank you, Mr. Chairman. Today,
the committee holds its third and final hearing on its series
examining various proposals to reform insurance regulation. I
am very pleased that Chairman Baker has devoted so much time
and energy to this issue, which is of the utmost importance to
insurance consumers across the country.
While we have just scratched the surface of this very
complicated matter, this series of hearings has established the
foundation for the committee's future work in this area. And I
can assure you there will be future work. This committee will
remain focused on this issue until true reform is achieved.
As many of you know, my interest in reform is not new.
Several years ago, I asked the National Association of
Insurance Commissioners to focus on this glaring problem, and
they responded in March of 2000 with a statement of intent,
``The Future of Insurance Regulation,'' which established
NAIC's platform for modernizing insurance regulation. It was a
good first step and laid out goals and timetables for action.
Since that time, the NAIC has experienced some successes
and some failures. In the face of congressional legislative
pressure, the NAIC has made significant progress in agent
licensing reform, and I commend their efforts. However, there
is still much work to be done. First, to make reciprocity a
reality in every state and to achieve the ultimate goal of
uniformity. I also remain troubled that many of the larger
states, with the bulk of the agent-broker population, have
either not yet passed legislation or have passed legislation
that may not meet the NARAB requirements.
Unfortunately, the NAIC has met with less success in its
efforts to modernize the product approval process. Almost a
year ago to the day, the NAIC testified before this
subcommittee and held out CARFRA as the solution to the life
insurance product approval problem. Now, the NAIC has largely
abandoned the initial CARFRA approach and has shifted gears to
an interstate compact mechanism. The interstate compact
mechanism has been around for quite some time and raises some
difficult issues. It is too early to say whether such a system
will succeed or fail, but one thing is for certain: consumers
cannot afford another misstep.
I am here not to blame the NAIC for lack of reform. The
leadership team at the NAIC has done yeoman's work, and I would
like to thank Commissioner Terri Vaughan, who is with us today,
Ohio Commissioner Lee Covington, Illinois Commissioner Nat
Shapo, and others for their important leadership efforts.
To a large degree, their hands are tied. The NAIC can
approve initiative after initiative but it is the state
legislatures that must act on them. Unfortunately, it is
becoming increasingly apparent that the NAIC may be facing an
insurmountable task.
Mr. Chairman, it is my hope that organizations such as
NCOIL, which I helped to found back in the 1970's when I was in
the Ohio legislature, will take an active role also in this
important reform process.
It is my sincere hope that the alliance between the NAIC
and state legislators will bring reform to this industry.
However, this committee will not sit idly by. I am committed to
continuing working on this issue for the long haul, looking at
all the different facets of the industry. We will keep building
on our reform efforts, and we will not let up until consumers
receive the most effective and competitive marketplace that can
be created.
Mr. Chairman, again, my congratulations on this effort at
three very important hearings to set the stage for future
activity. And I yield back the balance of my time.
[The prepared statement of Hon. Michael G. Oxley can be
found on page 324 in the appendix.]
Chairman Baker. Thank you, Mr. Chairman. Mr. Ross, did you
have a statement?
Mr. Ross. Thank you, Mr. Chairman. Actually, I do not have
a statement. I got here early in hopes of being able to ask a
couple of questions soon after what I am sure will be some very
brief testimony from this panel.
Chairman Baker. Thank you, Mr. Ross. Mr. Ney? Mr. Gillmor?
Mr. Gillmor. I will just enter my statement in the record,
Mr. Chairman. And I do commend you for moving forward on this
important subject.
Chairman Baker. Thank you, Mr. Gillmor. Mr. Bentsen did not
have an opening statement.
If there are no further members wishing to make an opening
statement, at this time I would like to move to our panel of
witnesses, and I certainly do appreciate all of your
willingness to appear and participate. As you probably know, we
encourage you to keep your remarks to five minutes. Your
prepared text will be made part--if possible, your prepared
text will be made part of the official record. And that
facilitates us being able to get to our question and answer
period, which is usually very productive for us.
With that, I would like to welcome the Honorable Terri
Vaughan, who is here today in her capacity as president of the
National Association of Insurance Commissioners. Welcome,
Commissioner.
STATEMENT OF TERRI VAUGHAN, PRESIDENT, NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS
Ms. Vaughan. Thank you, Mr. Chairman and members of the
subcommittee. It is an honor and a real pleasure to be here
with you.
Today, I would like to make a few basic points. First, the
sole reason for government regulation of insurers and agents is
to protect American consumers. Effective consumer protection
that focuses on local needs is the hallmark of state insurance
regulation. We understand local and regional markets and the
needs of consumers in these markets and we recognize that
consumer protection is the purpose of our jobs and the basis of
our statutory authority.
The subcommittee's theme for these hearings is insurance
regulation and competition for the 21st century. While
commercial competition is certainly a significant aspect of the
insurance markets in the United States, it has not been the
primary purpose of government regulation. The primary purpose
is consumer protection. And once the consumer protection
responsibilities of government insurance regulators are
satisfied, it is fair to ask how the system of regulation can
be made most compatible with the demands of commercial
competition without sacrificing the needs of consumers. The
NAIC and state regulators have given this much attention over
the years, and we continue to give this matter our highest
attention.
Paying for insurance products is one of the largest
consumer expenditures of any kind for most Americans. Figures
compiled by the NAIC show that an average family, people right
here in this hearing room, can easily spend a combined total of
$4,500 each year for home, auto, life, and health insurance
coverage. Protecting insurance consumers in a world of hybrid
institutions and products must start with the basic
understanding that insurance is a different business than
banking and securities. Insurance is a commercial product based
upon a number of subjective business decisions.
During 2000, we handled approximately 4.5 million consumer
inquiries and complaints regarding the content of policies,
treatment of consumers by their insurance companies and agents,
and many of those calls led to a successful resolution of the
problem at little or no cost to the consumer.
During your June 4th hearing one of the industry witnesses
testified that a recent Roper opinion poll concluded that the
public rates state government is better than the Federal
Government at consumer protection and this statement does not
surprise us. State regulators know from years of firsthand
experience that when consumers need help with insurance sales
or claims problems, they naturally look to their local state
agency charged with supervising insurers to get assistance.
While recognizing the inherent strength of our system when
it comes to protecting consumers, we also agree that there is a
need to improve the efficiency of the system. And in March
2000, we adopted the NAIC statement of intent on the future of
insurance regulation, endorsing a new action plan to do this.
Working in their individual states and collectively through the
NAIC, the commissioners have made tremendous progress. And
looking ahead we will continue to deliver on the goals and
objectives set forth in the statement of intent, that is
creating an efficient market-oriented system, regulatory system
for the business of insurance.
In Attachment A of my written testimony, you will find a
status report on our modernization efforts.
In responding to the demands of insurance consumers in each
state, the NAIC generally agrees with the comment by a previous
industry witness that state uniformity is not the Holy Grail.
However, where appropriate, we are working to achieve full
regulatory uniformity to benefit both consumers and insurance
providers. And marketing life insurance is one area where we
agree with the industry that national uniformity is needed to
enable to life insurers to market products nationally.
To accomplish uniform supervision of life insurance
products within the state system, we are currently working with
state legislators and regulators to draft an interstate compact
that gets the job done while preserving necessary and effective
state consumer protections. The goal of the compact is to
establish a single point of filing, where life insurers would
file their products for approval and thereafter, assuming the
product satisfies appropriate product standards created jointly
by the compacting states, insurers would be able to sell those
products in multiple states without the need for making
separate filings in each state.
Over the next few months, we will continue to work with
legislators and regulators, as well as consumer and life
insurance industry representatives to develop model compact
legislation.
If I could just for a moment digress and respond to a
comment that Chairman Oxley made in his opening comments. We
have not abandoned CARFRA. In fact, we view CARFRA as a
critical first step to creating an interstate compact. Through
CARFRA we developed uniform standards, we developed a
coordinated review process, and we continue to pursue CARFRA
because it provides essential building blocks for the
interstate compact. In fact, in June we just added 12 new
states to CARFRA, I think demonstrating that CARFRA remains an
important element of our reforms.
The subcommittee asked us to address a few specific
questions in our testimony, and let me do that. In the producer
licensing reform area, to date 46 states enacted legislation
designed to satisfy Gramm-Leach-Bliley and that legislation is
being considered by four additional jurisdictions. This
represents about 76 percent of total nationwide premiums. While
these numbers are significant, we continue to work toward the
goal of uniformity.
In approving the insurance product approval process in both
life and property and casualty industries, I previously
mentioned our work on the interstate compact for life and
annuity products. In addition, we are working to achieve
operational efficiencies in the rate and form filing area. And
we are pursuing changes to the regulatory framework for
property and casualty rates and forms.
Our achievements and goals for operational efficiency are
detailed in my written statement. However, I would like to
highlight one area. That is our electronic rate and form filing
system, SERFF. Almost 500 companies are now using SERFF, are
filing rates and forms with the states. One company told us
that with SERFF, its cost per filing has dropped from $38 down
to less than $10 per filing with added savings because
regulatory review is done more quickly. With SERFF, we have a
ready-made opportunity to streamline and generate savings to
companies and presumably their customers, and we wonder why
more companies are not taking advantage of SERFF since many
have testified to the NAIC about the cost and the time savings.
In the area of market-based regulatory reform, the NAIC has
developed a streamline model law to implement reforms for
commercial lines. Recent consideration of commercial lines rate
regulation led to the conclusion that commercial insurance
consumers will generally be better served by less restrictive
regulatory interventions and a greater reliance on competition.
We are working with state legislators to enact the model in the
states, and we are also studying the benefits of market-based
models for personal lines markets. However, we have not yet
concluded our recommendations.
The system of state regulation in the United States has
worked well for 125 years. We understand that protecting
America's insurance consumers is our first responsibility. We
understand that the markets have changed and that modernization
of state insurance standards and procedures is needed to ease
regulatory compliance for insurers and agents.
We ask Congress and the insurance industry participants to
work with us to implement the NAIC's modernization initiatives
through the state legislative system. It is the only practical
way to achieve the necessary changes quickly, in a manner that
preserves the state consumer protections that are expected by
the public. The state process may take more effort than having
an insurance czar in Washington but it rewards the citizens and
consumers in each state by giving them control over important
aspects of insurance and claims procedures that affect their
financial security and the communities in which they live.
We look forward to continuing to work with Congress, with
you, and within state government to improve the national
efficiency of state insurance regulation while preserving its
long-standing dedication to protecting American consumers.
Thank you.
[The prepared statement of Terri Vaughan can be found on
page 411 in the appendix.]
Chairman Baker. Thank you very much. It is evident we have
votes on the floor. I was thinking this through. If anybody
understands the assumption of risks, probably our four
witnesses do. You have just assumed a three-vote risk. Rather
than rush the next witness and try to get the testimony in
before we have to leave to vote, I suggest we recess now. We
will return as quickly as we can. I am going to guess about 20
minutes. And as soon as I can get back, we will start back up
again.
We stand in recess. Thank you.
[Recess.]
Chairman Baker. We will now reconvene our hearing. Members
will be filtering back from the vote momentarily. But given
that, and not wanting to detain anyone longer, let me introduce
our next witness, Mr. Tom Ahart. Is that correct? President of
the Independent Insurance Agents and Brokers of America.
Welcome, sir.
STATEMENT OF TOM AHART, PRESIDENT, INDEPENDENT INSURANCE AGENTS
AND BROKERS OF AMERICA
Mr. Ahart. Thank you very much.
Chairman Baker. You will need to punch your little button
on that thing. Got it? There you are.
Mr. Ahart. Thank you very much, Chairman Baker. I
appreciate the opportunity to be here and appreciate the full
committee and the subcommittee looking into this issue.
We have listened to a lot of testimony and read testimony
from the other hearings and would like to say that we agree
that there is definitely a need for reform in the regulatory
area. When we look at the way it is regulated right now that
the state basis, there are a lot of good issues at the state
basis but there are two issues in particular which we need to
help and that is the speed to market issue and the over
regulation in the licensing and post licensing audit issue.
On the speed to market issue, as an agent, especially from
New Jersey, I can tell you there is definitely a problem in
getting products--new products out to consumers. Often it is
years before new products can get to consumers, which hurts
insurance companies. It hurts the agents and brokers. And it
hurts the consumers, who don't have the opportunity for the new
types of programs. So we definitely need to do something with
that.
There is also still a problem with licensing, both at the
company and the agent-broker end, and we would like to do
something with that.
So although we recognize the need for reform, we don't
agree with some of the other proposals in certain areas. First
of all, from the proposals we have heard, there are really two.
One is to keep the status quo, which would keep the state
regulation basis as it is. And although we think the state
regulators do a fantastic job for the most part in protecting
consumers, there are certain areas, as we mentioned, with speed
to market and licensing issues that remain a problem. Again, I
would like to say that the state regulators in protecting the
consumers are great in making sure that minimum coverages are
provided. They are great in taking care of claims disputes and
claims inquiries which happen often at the state level. And
they are very good at operating their guarantee fund, which has
not had to any taxpayer input since its inception in the 70's.
The other option, other than status quo, is going with
federal charters and some type of federal regulation. Our
problem with the federal regulation overall is, number one, we
believe it is overkill. We think that there definitely are
problems in the system, as we mentioned, with speed to market
and with inefficiencies in licensing. But, as we also
mentioned, there are a lot of good things that are done by the
state regulators. And the federal charters or federal
regulation doesn't necessarily tackle the problem. I can see
situations where you could have a new federal bureaucracy or
federal legislator which actually operates as one of the
poorest states might operate or one of the ones that don't do
the job so well and you could actually then be hurting other
states that have good regulation.
Again, coming from New Jersey, we have great state
regulators but we have some real political problems that impede
what they can do. And in those situations, if we had something
like that at the federal level, which there is no guarantee it
wouldn't be that way, it would be terrible for everybody.
So, first of all, I think that it could be overkill.
Second, I don't necessarily see that it attacks the problem.
The problems are, again, speed to market issues. The problems
are inefficiencies in licensing and whatnot. And federal
charters don't necessarily attack those issues.
What I would like to propose is our solution, which we have
been working together with different insurance companies, with
different agent-brokers groups, with state regulators, and with
legislators. And we are offering a pragmatic middle ground
approach, which is a compromise between the status quo and
federal regulation. What we believe is that we should continue
to use state regulation, which has worked well for over 150
years but use federal legislative tools to help with specific
issues.
To give you some examples on the speed to market issue, we
would use uniformity and a model similar to the Illinois model
in that on forms we would use file and use provisions with a
30-day review period so that when products are--when forms are
filed, the regulators would have 30 days to look at them and
they would be deemed approved unless they are disapproved,
which would move products along.
On the rate end, we also would follow the Illinois model
where we have the competitive market model. And the rates would
be filed but they could not be disapproved on competitive
markets. States would only be able to disapprove them on non-
competitive markets.
Well, on agency and company licensing we would really use
reciprocity, which is starting to work now with the NAIC model.
And what we would do is have both companies and agents have
approval in their resident states. And once they are approved
in their resident states, they would be able to have
reciprocal, non-resident licenses in other states by just
showing their current resident license as well as paying the
fee.
In addition, in market conduct exams, we think that that
should be regulated better and that it is completely
inefficient right now and we try to move those inefficiencies
and reduce the cost. We would try to limit the use of those in
non-resident states so that they can only require an exam to
review compliance with properly promulgated statutory and
regulatory requirements.
Also, just getting back to the agency company licensing end
for a minute, we think that you could use the legislative tool
of preempting states rights, for instance, on the counter
signature laws, which would get rid of those if they are a
problem.
So, in conclusion, I would just like to say we recognize
that there is a problem. We ask Congress to help as soon as
they can. We believe that they should meet with the states and
work with the NAIC and come up with a solution similar to our
proposal, which is a middle of the ground, pragmatic approach
which uses the well-founded base of state regulation but uses
legislative tools to help. And we believe that would protect
consumers in the outcome.
Thank you very much.
[The prepared statement of Tom Ahart can be found on page
330 in the appendix.]
Chairman Baker. Thank you, Mr. Ahart. We appreciate your
testimony.
Our next witness is Mr. Glenn J. Milesko, president and CEO
of Banc One Insurance Services Corporation, appearing here
today on behalf of the American Bankers Insurance Association
and the Financial Services Coordinating Council. Welcome, Mr.
Milesko.
STATEMENT OF GLENN J. MILESKO, PRESIDENT AND CEO, BANC ONE
INSURANCE SERVICES CORPORATION, ON BEHALF OF THE AMERICAN
BANKERS INSURANCE ASSOCIATION AND THE FINANCIAL SERVICES
COORDINATING COUNCIL
Mr. Milesko. Thank you, Mr. Chairman. The banking
industry--
Chairman Baker. And you will need to pull that mike a
little closer. It is hard to hear you, sorry.
Mr. Milesko. The banking industry is keenly interested in
the regulation of insurance because it is actively engaged in
that business. In 2001, 1,900 banking organizations were in the
insurance business. And ABIA's member banks sold more than $50
billion in premium volume.
Our experience with the state regulatory labyrinth has led
us to conclude that it is not suitable for all insurers and
producers, especially those operating in multiple states or
using the Internet to reach consumers. An alternative is
urgently needed.
These hearings show that many others share our frustrations
with the lack of uniformity among state laws, the failure of
the existing system to allow products into the market on a
timely basis, the continued existence of multiple agent
licensing and continuing education requirements, and the
competitive disadvantage insurers face relative to banks,
security firms, and mutual funds in the delivery of like
financial products. And these shortcomings remain despite
federal pressure on the state system to modernize.
We believe that the solution to this problem is to give
insurers and producers a choice between federal and state
regulation. Federal regulation would be an option, not a
replacement, for state regulation. The system has worked well
in banking for 140 years. We believe it would work well for
insurance.
Dual chartering has actually strengthened the banking
system--the state banking system. Over 70 percent of banks are
state chartered and it is the charter of choice for new banks.
Why? Choices has kept banking vibrant, innovative, and diverse.
The alternative regulatory environments serve as laboratories
for change that have led to the development of products that
are now commonplace, all to the benefit of consumers. Choice
has also promoted better, more efficient supervision. Any
soulution must also rely on market-based competition rather
than price controls for establishing rates for insurance
products. It is ironic that we avoid price controls on food,
clothing, and shelter, commodities more necessary to human
survival than insurance, yet rate regulation persists all to
the detriment of consumers.
Last year, Illinois state representative Terry Park, then
president of NCOIL, testified before this committee that
because his state eliminated rate regulation for auto
insurance, such insurance is readily available to consumers,
and at a lower cost than in other states. He also noted that
Illinois has more than double the number of competing insurers
than either Massachusetts or New Jersey, two states whose rigid
rate controls have led to the highest average auto rates in the
nation.
For these reasons, our optional federal charter proposal
does not permit regulation of rates or forms. Instead, we would
protect consumers through strong solvency and market conduct
standards and the application of antitrust laws. Our proposal
includes risk-based capital standards, investment standards,
and dividend restrictions. Federally chartered insurers and
producers would also have to adhere to vigorous market conduct
standards, preventing unfair competition and deceptive acts and
practices.
Regular reporting, examination of federal insurers and
producers, and strong enforcement authority would be part of
the federal regime. The combination of strong solvency and
market conduct standards, backed by examinations and potential
enforcement actions, would ensure that federal insurers and
producers operate for the benefit of policy-holders and that
consumers are protected.
Now, let me broaden the perspective and speak for the
insurance banking and securities interests that together make
up the FSCC. In my 30 years in the insurance business, I have
never encountered an issue this significant where there is such
agreement. Here, these industries are approaching Congress
shoulder to shoulder with a single message. We agree on the
nature of the problems confronting the current system. We agree
on principles for addressing those problems. And we agree on
the details of a legislative solution.
This consensus reaches beyond the FSCC. The Financial
Services Roundtable, the Council of Insurance Agents and
Brokers, the Financial Services Forum, all are in support of an
optional federal charter.
In large measure, we credit this consensus to your efforts,
Mr. Chairman, and to the efforts of Chairman Oxley for moving
in a deliberate fashion to investigate the workings of the
state regulatory system. We are grateful for your interest and
believe these investigations have favored support for a
comprehensive rather than an incremental approach to regulatory
reform. The scope of the problem is simply to great and the
need to act too strong for incremental measures to succeed.
Mr. Chairman, there is a rare convergence of interest here
and a broad consensus for a very specific course of action. On
behalf of the ABIA and the FSCC, I urge you to move forward
with an optional federal charter for the insurance industry.
The members and staff of the ABIA and the FSCC stand ready to
assist in this endeavor.
Thank you very much.
[The prepared statement of Glenn J. Milesko can be found on
page 358 in the appendix.]
Chairman Baker. Thank you very much, sir.
Our next witness is Mr. John Van Osdall, Chairman, Council
of Insurance Agents and Brokers. Did I pronounce that
correctly, sir?
Mr. Van Osdall. You did.
Chairman Baker. Oh, terrific.
STATEMENT OF JOHN VAN OSDALL, CHAIRMAN, COUNCIL OF INSURANCE
AGENTS AND BROKERS
Mr. Van Osdall. Thank you, Chairman Baker.
Chairman Baker. You are welcome.
Mr. Van Osdall. And Ranking Member Kanjorski and
subcommittee members, thank you for the invitation to be here
today.
Today, I am representing the Council and I think, as you
know, the Council of Insurance Agents and Brokers tends to
represent the insurance agents in the United States that
represent the larger business interests. We probably handle or
place each year about 80 percent of the commercial insurance
business that generates throughout the United States. So that
is really our phase and the direction that we would like to
have our comments made in today.
We want to thank the fellow panelists also, particularly
Commissioner Vaughan, who has done yeoman's work in the area of
licensing for us and licensing reform, and that is very much
appreciated. It has gone a long way and we know that we still
have a ways to go. So thank you very much.
And Tom Ahart is with us today in a capacity that also is
very similar to ours in the idea of believing that this is the
time for more federal intervention in the regulatory process.
We really feel strongly that this is the appropriate time
to begin talking about the options for federal regulation and
federal intervention. And to that end, our FAME organization,
which is really a newly created research report that was being
released today for the first time, is entitled, ``The Cost and
Benefit of Future Regulation Options for the U.S. Insurance
Industry.'' About a year ago, we engaged an independent
economic consulting firm to do a study of regulatory approaches
and options that we should be considering. And we think they
have done a good job and are looking forward to sharing this
with you.
The Council is also very interested in the possibility of
SROs. We have watched the SROs work in many models in
professional organizations throughout the United States. We
think that this may offer a real opportunity and hope that the
committee will look into the SRO model. We have seen it work in
the bar associations for years throughout the United States.
And we feel that this may be the kind of solution that could be
meaningful as you consider it.
Apparently the states have crossed the threshold in
adopting NARAB. And I think it should be commented also that
the NARAB model itself is based on the National Association of
Securities Dealers' models. So this is another SRO that we
think has done well over the years. We really suggest that you
seriously consider it as you go about your deliberations.
We really support reform in any form. We need reform. The
idea of the speed to market that you are now considering, the
idea of the flexible rates and policy forums that you are now
considering, we think is really a step in the right direction
and we applaud you for that.
None of the concepts and the regulatory approaches that you
seem to be considering we think are mutually exclusive. We
think that there is room for each of these considerations and
would like to do anything we can to encourage that.
Again, NARAB we think is a good template. It is really a
carrot and a stick sort of a template. We think that it has a
good effect. We think it has had the result of improving state
regulation. We think that without the NARAB as the carrot and
as the stick, that we would not have nearly made the progress
that we have made. We think the Illinois model is really the
great model for the future of insurance regulation and that
would be beneficial for our clients, who again tend to be the
larger commercial insurance buyers.
We also know that congressional oversight is very important
and whether it be done by an independent, newly created agency
or a part of an existing agency, like the Treasury Department,
would be workable from our vantage point. We think that that
will also be encouraged by the optional federal chartering.
So we are here to support to you. We thank you for what you
are doing and want to be a part of anything we can do to
further the effort.
Thank you, Mr. Chairman.
[The prepared statement of John Van Osdall can be found on
page 401 in the appendix.]
Chairman Baker. Thank you very much. Mr. Shows, did you
have a statement? Yes, I will get you in regular order. Thank
you.
Commissioner Vaughan, I was interested in how the compact
process would actually be formalized. As I understand it, the
compact has not yet been formally prepared so there is not a
document yet ready to circulate. That is subject to NAIC
approval, I believe. Which would then have you take the next
step of going to each state legislature to adopt the provisions
of whatever the compact elements are. And my question is, in
good faith, what do you see as the time necessary to achieve
that in light of what has happened with NARAB?
Ms. Vaughan. Well, in light of the producer licensing
activities, the enactment of Gramm-Leach-Bliley slightly less
than three years ago, we now have legislation enacted in 46
states. Now, I am not going to say that we could enact
interstate compact legislation in 46 states in two-and-a-half
years. I think that would be a pretty optimistic time frame.
But I do think the key to all of this, as you have said, as
Chairman Oxley said, is the participation and support of the
state legislators. We are working very closely with them on
this. They have the--NCSL has a task force to streamline and
modernize state insurance regulation, and they spent about a
day in Philadelphia a week ago working on the interstate
compact draft with us, having a hearing, inviting people to
come in and testify, and making some suggestions to us on ways
that we could improve the draft so that it could be acceptable
to the legislators.
So we are working very closely with them. And our plan is
to have it in a form that we can adopt as a membership of the
NAIC in September and hopefully have some legislative
endorsement at some point in the fall so that we can introduce
it in state legislatures next January. I think if we can do
that, and I am confident we can meet that time line, I believe
that we can very quickly get a significant group of states in
place to make the interstate compact operational.
The current draft that we have says that the interstate
compact does not become fully operational, in the sense of
approving products, until we have at least 26 states or 50
percent of the market. And I am pretty confident that we could
do that in short order.
Chairman Baker. So you are basically guesstimating a three
to five year window?
Ms. Vaughan. You are going to make me put a time frame on
this.
Chairman Baker. Oh, I was just going to give it my best
shot.
Ms. Vaughan. Boy, let me tell you with respect to producer
licensing. The challenge that we have had is that we can get a
whole bunch of states very quickly, we did that in producer
licensing. We got 46 states. And then we have got four or five
jurisdictions that you just have to pull along and pull along
and really work with. And the challenge that we face is that we
are as an organization unfortunately are being judged by you
folks in terms of all states. And when it is really--it is just
a few states, it is three or four states that are a problem and
it may be a problem in the interstate compact. We are working
very hard to get the large states on board, and we believe that
we are going to be able to do that. But I would have a hard
time promising and committing to all 50 states in a particular
period of time.
Chairman Baker. I understand. Thank you.
Mr. Ahart, how do you feel about the Illinois model? Do you
find that to be a reasonable structure?
Mr. Ahart. Yes, definitely. As we look to the speed to
market issues, first of all, with forums it would be a perfect
model for us. And then it would be a file and use model in that
companies would file their forms and they would have 30 days to
approve them. And they would know within 30 days whether
approved or not and then they could use them. On the rate side,
it is pretty much a free marketplace on the rates. They file
the rates but they are allowed to use them right away on a
competitive marketplace. If a certain marketplace is deemed
uncompetitive because of very few companies writing the
business, then the state would have the ability to work on
those rates or approve or disapprove them. But it would be a
great model. And that was one of the legislative tools we would
like to use by adopting similar provisions to the Illinois
model.
Chairman Baker. What would be your objection to the
Illinois model being made national?
Mr. Ahart. I would have no objections to that.
Chairman Baker. Terrific.
Mr. Milesko, do you think the Illinois model goes far
enough for you?
Mr. Milesko. It is a good model. We like the free
competition, but we also are concerned that--I think we are
concerned that it doesn't go far enough in terms of allowing
some of the other issues to be addressed. It does talk about
the licensing. It talks about the rate and forms. But I think
there are other issues that still need to be addressed that are
much broader than just what we are doing in Illinois.
Chairman Baker. And if you would for at least my purposes,
I would love to have your written thoughts as to the objections
of pursuing a line of that sort. In trying to understand it, it
would be helpful to know the specific areas of contention that
the organization would have with that type approach.
Mr. Milesko. Well, right now we operate in all 50 states.
When we look at the issues that we have in terms as an
insurance company, it just addresses I believe the agents. For
example, in one state it takes us over a year to get our
certificate of authority. In other states, such as North
Carolina, Connecticut, there is a three year seasoning
requirement for the legal entity to be licensed in doing
business before it can get approval in those states. In many
cases, the capital surplus requirements are much higher than
the NAIC model. So I am looking at it from an insurance company
perspective as well as from a national agency perspective where
we need to be licensed with our 5,000 agents in all the states.
Chairman Baker. Sure, thank you very much. My time has
expired.
Mr. Kanjorski?
Mr. Kanjorski. I am going to put you on the spot, Ms.
Vaughan. Could you name the three to four states that give you
the worst trouble?
Mr. Milesko. From my standpoint, the states are New York,
California, Texas are some of the worst states.
Mr. Kanjorski. Are the worst states?
Mr. Van Osdall. May I comment on that?
Mr. Kanjorski. Yes.
Mr. Van Osdall. From a licensing standpoint, the big three
that we are missing, really, are California, New York, and
Florida. They have a significant portion of the premium. In
fact, the Council of Insurance Agents and Brokers filed suit
against both Nevada and Florida this past week because we
continue to have such concern about the punitive income-
sharing arrangements that those two states protect their local
agents with. That has been of great concern to us. That has a
real impact on our business.
Mr. Kanjorski. So it is just the small states that give you
trouble?
Mr. Van Osdall. Just the small states, right.
Mr. Kanjorski. What is the worst disadvantage if we went to
a federal or a federal optional charter, Ms. Vaughan?
Ms. Vaughan. I think the worst disadvantage would be the
inability of the regulators in Iowa to address the local market
issues in Iowa. And to give you a specific example, we have a
very large senior citizen population in Iowa. We have the
highest percentage I think in the country over 85. And so that
means that we have had to focus a lot of attention in that
area. And I guess I have concerns as a regulator from Iowa
about whether the federal regulator would be sensitive to the
market issues that we encounter in Iowa.
Mr. Kanjorski. Very good. Mr. Ahart, you are sort of
looking for the best of all worlds, state regulation, federal
legislative tools, and reciprocity of licensing. That would be
Christmas on the Fourth of July, right?
Mr. Ahart. I think it is very doable actually. Right now,
we have a very good state regulation process in almost all
areas. The one problem again with federal charters, whether
they are optional or mandatory, is for agents and others they
are mandatory because you would have to deal with your national
companies as well as your regional companies. And they are
against speed to market, licensing issues, things like that. If
you went after each issue with federal tools for uniformity and
reciprocity and let the state regulators handle the rest of it,
which they are doing so well, you could tackle those issues as
they came about. So I think it is very doable.
Mr. Kanjorski. Mr. Milesko, you talk about the federal
optional charter, and what I am curious about, if we were to
allow insurance companies to select a federal charter or state
charters, how would that impact on the cost of administration
at the state level? Wouldn't that take money that now flows to
the states for regulation and take that away from them and have
to flow to the Federal Government for regulation and wouldn't
there be a shortfall since we are having two distinct bodies of
regulation, how do you make that distinction up?
Mr. Milesko. I think the insurance companies that are
national companies and national agencies that would opt for the
federal charter would pay the costs. And those companies also
would still participate in the guarantee funds.
Mr. Kanjorski. But would they contribute to the states?
Mr. Milesko. Yes.
Mr. Kanjorski. In other words, pay the states, as you are
now, and pay an additional fee for the benefit of the federal
charter?
Mr. Milesko. Yes.
Mr. Kanjorski. Okay.
Mr. Milesko. It would overlay on top of the state system.
Mr. Kanjorski. And you think there is uniformity in the
large companies to assume a greater burden of cost for
regulation?
Mr. Milesko. I think the cost savings would more than pay
for--
Mr. Kanjorski. Offset.
Mr. Milesko.--the additional costs that they would pay for
a federal regulator.
Mr. Kanjorski. Okay. Mr. Osdall, while you were talking
about the tremendous accomplishments of the SROs, the chairman
and I had a slight discussion on the auditing field. Do you
think that they do the best in the world?
Mr. Van Osdall. I do not have any comment on that.
[Laughter.]
Mr. Van Osdall. I think if you look at the--I can't speak
to the auditing field, excuse me. No.
Mr. Kanjorski. You are turning into a good politician. That
is what we do, shut up when you can't say something good,
right?
I think this has been a great panel, Mr. Chairman, in terms
of setting out all the choices. I am just wondering--going back
to your opening statement and my tremendous affection for
roundtable discussions, I hope the panel that is here today are
part of that roundtable because I think they would certainly
help us to find some common ground. And their input I think
would be most worthwhile for the committee.
Chairman Baker. I thank you, Mr. Kanjorski. It will be a
big roundtable and we will try to get everybody a seat.
Mr. Ney?
Mr. Ney. Thank you, Mr. Chairman. The question I had, Mr.
Van Osdall, under some of the proposals, you would have to have
a federal charter license and then you would still have to have
a state license, I assume. Would you support that dual
regulatory licensing situation?
Mr. Van Osdall. Well, we know that at the end of the day
there is going to be some dual regulation. I think we don't
escape that. I think one of the interesting things that you
will see in our report that is being released today is of the
premium taxes that are taken by the various states, about 10
percent of that amount is actually used to run the regulatory
agencies within the state. So we know that we are already
paying a tax to the state. We therefore also feel that the
additional cost--going to Mr. Milesko's comment about also
satisfying a federal regulator where necessary--at the end of
the day we think will cost less in the hidden or internal costs
of an insurance company in providing the consumer the product.
That does not seem--the duplicative cost does not seem to be a
concern when we weigh it against the benefit of the ease of
doing business and being able to more quickly deliver the
product to our client.
Mr. Ney. One other question based on state and fed. Several
years ago, the FTC started to look at business practices and
Congress banned them from doing that because you are state
regulated. If we embark down this path of the federal charter,
would you accept the fact the FTC and such other entities could
look at your business practices and do an entire regulatory
scheme?
Mr. Van Osdall. We would do that.
Mr. Ney. You would accept that. One question I had for
anybody who would like to answer, if you could. What are you
hearing from the consumers of the country? Are they focused at
all, any people calling and consumers saying, ``Gee, I think
fed is better than state.'' Is anybody actually hearing from
any of the consumers that use your product?
Mr. Milesko. Maybe I could take a try at that.
Mr. Ney. I am not talking about the ones you might have
wrote a letter to to tell them about the hearing. I mean
genuine people.
Mr. Milesko. One of the things that we have been able to do
on the bank insurance side is use a lot of the banking systems
because of the penalties, when you violate any of the banking
regulations and apply those to the system that we have put in
place on the insurance side.
To give you an example of that, last year we did $2.7
billion in annuity sales and because of the systems and the
edits that we have built in, there were less than $5,000 of
complaints and charge-offs that we had to make good for
consumers. So the number of complaints we get in relationship
to the premium volume that we write is de minimis. And I think
part of that is because we try to the extent we can to
systematize everything we do. And if we went with the optional
federal charter, it would make it that much more efficient. And
I could give you some examples of very specifically today, in
terms of pre-licensing education, just to deal with licensing
but you take each one of these issues separately. In Arizona,
there is no requirements. In Colorado, there are 90 hours of
pre-licensing study.
Mr. Ney. Let me interrupt you--on my time, but what about
the consumers? What are you hearing from--I understand you are
saying--I gather you are saying there will be better
educational practices.
Mr. Milesko. Right.
Mr. Ney. You will be better able to do better for the
consumers. Are you actually--anybody hearing anything from
people that are calling up and saying, ``Hey, I have been
looking at this issue.''
Mr. Ahart. I would just like to say that we have--being an
insurance agent, we deal with our consumers all the time. We
talk to them actually a lot about state versus federal
regulation. Their biggest concern is there is a lot of
questions on claims and coverage situations and things like
that that they feel fairly comfortable going to their State
Department of Insurance on. And I think they would be very
uncomfortable going to a federal bureaucracy to find those
problems--they like to deal as local as they can with those
issues.
Ms. Vaughan. I would say we don't have a lot of consumers
calling us out of the blue and saying what they are thinking
about having federal regulation of insurance, because the
average consumer is not really aware that this debate is going
on. But when I am out speaking and I am talking to consumer
groups or I am talking to high school teachers and I make them
aware of the debate, I can tell you, the reaction I get is not
a good one. They want to know that they can go to their local
insurance regulator to deal with issues. And that gets back to
the 4.5 million consumer inquiries and complaints that we have
every year and the fact that they know that there is someone
there that can contact when they have a problem.
Mr. Ney. Sorry, Mr. Milesko. Did you have an observation on
that or the consumers or any interaction?
Mr. Milesko. Well, I think the biggest thing for consumers
is the access to new products, innovative creative products,
and what we have been able to do, for example, with annuities
and some of the other products that we are now bringing to
customers and consumers that maybe didn't have the opportunity
to get that in the past. And I think generally if you look at
the track record, there aren't fines, there aren't penalties,
there aren't consumer complaints, there aren't censures.
And I know in one of the other panelists' testimony they
were talking about the number of consumer issues. And I guess
the point that I would make is with the optional federal
regulator and the way we would put it together, I think you
would cut down on the number of complaints and offer the
consumers potentially better products at lower cost because of
the savings involved.
Mr. Ney. My time has expired. Thank you.
Chairman Baker. Thank you, Mr. Ney. Mr. Ross?
Mr. Ross. Thank you, Mr. Chairman. And, first for Mr.
Milesko, I am trying to sort this thing out and figure out
exactly where I am going to come down. And one of the concerns
that I have, and all of you have done a great job today in
providing testimony that has been very helpful to us, both
verbally and in writing, and I want to thank each of you for
joining us here today, or at least a few of us. For property
and casualty insurance, state insurance regulators often play
an important role in helping to ensure that claims are paid. I
served for 10 years in the state senate, so I have some
understanding of how it works at the state level. This involves
helping to interpret the insurance contract under the law of
the pertinent state to determine whether a valid claim has been
asserted. From everything I understand, the consumers, at least
in my state, are happy with this system. As far as I can
recall, 10 years as a state senator and 17 months as a Member
of Congress, I have never had a constituent upset with the
aspect of insurance regulation and how it works by each
respective state, at least at this time.
Why do you think that my constituents in rural Arkansas
would be better protected by a distant federal regulator
located in Washington, D.C., some 1,200 miles away, rather than
one located in our capital city in Little Rock, some hour and a
half away.
Mr. Milesko. Well, the state laws, number one, would
continue to apply. The federal regulator would regulate those
national companies and national producers but it would overlay,
again, on the states. I mean in terms of the state regulator
would still be involved.
In terms of the claim payment on the property and casualty
side, I would have to think about that a little bit in terms of
the complexity with which those claims come in. From my
standpoint, I think to the extent we can simplify the entire
process, a sign of an intelligent man I think is to take
something very complex and make it simple. And one of the
things that we have done in the insurance industry is we have
made it very, very complicated, overly complicated from the
standpoint particularly on commodity products, such as auto and
homeowner's. And I think a lot of that may be smoke and
mirrors. A commodity product, if there is a claim such as an
auto policy or a homeowner policy, it pretty much goes down to
what the forum says and that determines whether there is a
claim or isn't a claim.
Mr. Ross. You said you need to think about it a while, and
I think a lot of us need to think about a lot of aspects of all
of this before we move forward with trying to pass a piece of
landmark legislation that will totally change how we have done
things forever.
If you could be so kind, sir, after you have had time to
think about, if you could maybe provide me or this committee,
especially me, with a letter of your thoughts--
Mr. Milesko. Absolutely.
Mr. Ross.--on how it can be regulated from Washington, how
is that best going to serve my constituents as opposed to being
regulated at the state level. And I know you said you need some
time to think about it, and I respect that. But after you have
thought about it for a while, and I will let you define what a
while is, then if you could provide to me in writing and
perhaps this committee, I would appreciate your thoughts on
that.
One follow-up question. Do you know how many people
currently work for all the--collectively for all the state
insurance departments nationwide?
Mr. Milesko. No, I do not.
Mr. Ross. It is 11,000, roughly. It is roughly 11,000. And
with the proposal that you are advocating being optional, I can
only assume that all the current state employees would still be
needed on the state level. So what is your projection, I am
looking for a number, regarding how many people the federal
insurance regulator would need to employ? How many jobs--
keeping in mind that this country is already spending $1
billion every 24 hours simply paying interest on the national
debt, given the current financial condition of this country,
exactly how many new federal jobs do you propose that we create
and roughly how much do you think we would need to pay each of
those people a year?
Mr. Milesko. Well, I think it would be considerably less
than using 50 states to do the regulation. I think if you look
at the total cost of the state insurance regulation, if my
figures are correct, it is $880 million. You compare that with
say the OCC, a federal regulator does it for $400 million. So I
think there could be some savings there over time. The cost of
the regulation, again, is paid by the industry at this point,
the number of individuals it would probably be similar to one
of the other federal regulators, if you looked at it as an
example. But I think those are issues that would need to be
looked at and worked through.
Mr. Ross. So are you saying that we could reduce the 11,000
state employees that are out there?
Mr. Milesko. I think there possibly could be some
redundancy depending on how--
Mr. Ross. And you think you could do it at the federal
level for less than 11,000 employees and do it as effectively
and as timely?
Mr. Milesko. I think you could on a national basis. You
would eliminate--think about it. You have got 50 states, 50
different ways of doing things. Fifty different systems that
currently are in operation. If you have one, it is very logical
to assume that you are going to do it much more efficiently.
Mr. Ross. Where are we going to find these people that
already have training and are qualified?
Mr. Milesko. Well, if you look at when Banc One got into
insurance, we now have 5,000 licensed agents. Where did we find
them? We found them from the independent agency system. We
found them from colleges that we trained and educated to do
that. I think there are a number of people that are involved in
regulation, involved in insurance and would look at that as an
opportunity.
Mr. Ross. So what was the number again on how many jobs you
would propose that we create?
Mr. Milesko. I don't have a specific number. I think that
is something that you would have to work through as we have
further dialogue on the proposal.
Mr. Ross. A hundred? A thousand? Ten thousand?
Mr. Milesko. I think it is going to be less than a
thousand, considerably less because if you looked at 50 states
with 11,000 and one federal regulator, I would think there has
got to be some--it has got to be a lesser number. I don't know
if it would be mathematically proportional but there would be a
lesser number.
Mr. Ross. So this government that is going back to the days
of deficit spending for the first time since 1997 is spending a
billion dollars every 24 hours paying interest on the national
debt, we probably--at a time when we need to be cutting
government, you are proposing that we increase to the tune of
maybe a thousand new federal jobs?
Chairman Baker. Mr. Ross, if I may, your time is well
exhausted.
Mr. Ross. Well, if I could--
Chairman Baker. We will come back to you because there is
not going to be many of us here in a few minutes, and I want to
give a couple of other members time, particularly your ranking
member wanted, without objection, one minute to follow-up on a
prior comment.
Mr. Kanjorski. Yes, Mr. Milesko, in response to Mr. Ross
and your response to me seem to be different. I asked you
whether or not the insurance industry would maintain in what I
understand your optional charter, which would mean all of the
states would have to maintain their commissions and process,
and there would be additional federal regulator cost, you seem
to indicate to my answer that the companies were going to pick
up that additional cost.
Mr. Milesko. That is correct.
Mr. Kanjorski. Are you saying now that you are looking to
get an efficiency out of reducing the states' participation and
making that up on the federal level and paying for the federal
level or are you making a commitment for your association that
the insurance industry is going to pick up the additional cost,
whether it is a thousand additional employees or 10,000
additional employees? I thought that is going to come out of
the cost of the insurance industry.
Mr. Milesko. The insurance companies and the national
producers that choose to go--or the optional federal charter
would pick up the cost.
Chairman Baker. Let me make sure we get the answers
correct, because it is apparently a misunderstanding, I think,
as between the answers to Mr. Kanjorski and Mr. Ross. If you
would not mind on that particular point, just give us a letter
back that explains the companies' willingness to pay
appropriate cost because we can't do both. We can't save money
by not paying for the state if we are going to tell Mr.
Kanjorski we are going to pay for the state and the federal.
And therein is the conflict, if we are understanding it
properly. Is that satisfactory, Mr. Kanjorski?
Mr. Kanjorski. Yes.
Chairman Baker. Ms. Biggert?
Mrs. Biggert. Thank you, Mr. Chairman. I guess I should say
that I am very proud to be from Illinois, hearing all about
Illinois' model. And I have to say that I was in the state
legislature, but I can't take credit for the passage of the
model, since it happened before I was there. But I think that
what has happened in Illinois has been very good, and it really
is a model for the country.
Commissioner Vaughan, I wanted to ask you about dealing
with the state legislatures again. About how long does it take
from the time that a state legislature might decide to pass a
model law that NAIC has from the inception to final adoption of
a law that you have suggested?
Ms. Vaughan. That is going to depend to some extent on the
state in Iowa, for example. We know that we need to get this
model, speaking of the interstate compact, or any model,
producer-licensing model a couple of years ago, we needed to
get that adopted by the NAIC and ready to go very early in the
fall because many state legislatures come into session in
January. And so you need that lead time in the fall to get the
bill drafted and into the hopper in the states.
So there are a number of states where you can, if we have
something ready in say, September, you can get into the state
legislatures in January. There are other states that only meet
every other year. And so you have to wait an extra year to get
it in.
And then there are some states where the legislative
process just tends to be slower and they need to mull it over
for a while. We are seeing that happen, for example, in New
York, with the producer licensing legislation. It is something
that has been in there for a while but they are kind of working
it through the system.
Mrs. Biggert. More like the time that it takes Congress
probably to adopt something.
Ms. Vaughan. Right.
Mrs. Biggert. Have any of the NAIC model laws been adopted
by state legislatures without amendment so that it might be
uniform?
Ms. Vaughan. Certainly. A number of our accreditation
models, the models that the NAIC has required for
accreditation, risk-based capital, codification, use of the
examiner's handbook, financial examiner's handbook, many of
those are adopted on a very widespread basis with very few
amendments. There may be in one or two states but it tends to
be a highly uniform system in financial regulation.
Mrs. Biggert. Okay, well, some efforts have been made to
streamline the agent's license through passage of NAIC's model
producer licensing law and through construction of a single
point filing mechanism, CARFRA. Have any of these licensing
laws passed exactly the same in many of the states?
Ms. Vaughan. In the producer licensing area, we can get you
specific numbers on how many of the 46 states did exactly the
uniform producer licensing model, a number of states did. Not
all of the 46 states, I have to be honest with you, did it. But
I think a critical thing is that of the 46 states they all
enacted the elements that were necessary for us to build a
streamline non-resident producer licensing system.
One of the things we are trying to do is build a system
where an insurance agent can go one place, file one
application, do it electronically, have it go through some
automated review process and then get basically an electronic
notification that they are licensed within 24 or 48 hours, if
it is a clean application. If it is not clean, if there are
disciplinary issues, then it goes to the state to decide what
to do with it.
But in order to do that, you have to have a certain amount
of uniformity in the system. You have to have uniform
applications, uniform lines of authority, and there are some
minimal elements. And we are getting those pieces in place that
are critical to do our national non-resident licensing system.
And we now have I think 15 states online doing non-resident
licensing. We have processed over 2,000 non-resident licenses
this year already through our non-resident licensing system.
And our goal was to have 35 states on board by the end of the
year.
Mrs. Biggert. So on the rate and form filing, how many
products have been approved under this mechanism?
Ms. Vaughan. CARFRA has been kind of an interesting animal.
The intent when we built CARFRA, that is our streamline
coordinated rate and form review system, the intent was to
build a system that would allow for coordinated review, that
would allow us to do a speedier review, that would allow us to
set national standards so that we could identify state
deviations against those standards and really streamline the
process. And we did that last May. We went online with 10
states and three products.
And the good thing is that the products that have been
filed with us, we have done the review, we have done it very
quickly. Everybody has been happy about how it has worked. The
sort of disappointment, I think, is that we have only gotten
two filings so far. It is clearly not what we expected. We
thought that this was going to be something that people would
jump on board with. And, as we spent the fall dealing with the
events of September 11th and dealing with what we were seeing
emerge in CARFRA, we were trying to understand what was holding
CARFRA up, the success of CARFRA.
And it appeared to be a number of issues. In the companies,
there were certain sort of cultural issues. They were used to
doing it one way and one has to get past that, not just in the
regulatory side but also on the company side. Second, there was
some technology issues. They needed to have our electronic
system up and running in order to do it. Issues about which
lines of insurance were chosen.
But I think the main thing came down to the deviations that
were in place. We had 10 states. Two of those states, New York
and Texas, had a significant amount of deviations. A number of
the other states had a couple, but that is really what led us
to focus on the sort of the next stage of CARFRA, evolving
CARFRA into something that would allow us to deal in a very
systematic way with the problems of deviations and getting to
more uniformity in the standards. And that is where we have
gotten to the interstate compact.
Mrs. Biggert. Thank you. Thank you, Mr. Chairman.
Chairman Baker. Thank you, Ms. Biggert.
Mr. Bentsen?
Mr. Bentsen. Thank you, Mr. Chairman.
Mr. Milesko, in your testimony, in talking about the
optional federal charter, you talk a lot about the upside in
terms of bringing product to market and developing product for
the benefit of the consumer and doing it more quickly. But I am
a little concerned in your discussion with respect to consumer
protection. And I have to say I sort of agree with the idea of
a federal charter. But I think that--I am concerned that your
proposal or your association's proposal is a little light when
it comes to consumer protection. And you stated in response I
think to Mr. Ross that federally-chartered insurers would still
be subject to state laws. But in the summary, in your
testimony, it seems to state otherwise, that once you opted for
a federal charter, you would be under a federal charter and
there is not necessarily any parity provision that would carry
state laws or federal laws the other.
And Mr. Ross had the concerns about the 11,000 employees
and the state regulators and how big is the federal regulator,
I don't particularly care about how many employees there are
one way or the other. But our experience has been with the
federal banking regulators, that they have not always been the
most effective consumer protection regulators at the retail
level. And I tell you this just because I think it is something
you all need to think about.
I think, quite frankly, Mr. Van Osdall's testimony is some
of the best testimony I have read on this subject because I
think your group has started to wrap this all together, of
saying if you are going to have a federal regulator, fine, but
you need to have some connection between the federal regulator
who is looking at the national market with state regulators or
someone who is looking at the retail market vis-a-vis how the
securities market works.
And you talk about NARAB as being some form of a SRO. And I
really think you need to consider that both from a policy
perspective and arguably from a political perspective as well.
Because I think that while you are right, that having the
flexibility to bring product to market, the flexibility to
license will benefit the consumer in that regard, it concerns
me that it is just a lot harder to get the Federal Government
to respond on a retail consumer complaint than it is to a state
regulator. And it is something that I think you all need to go
back and take a hard look at your proposal and how you are
developing it.
If you look at what Mr. Ahart is proposing, it is just
amazing how it is moving the direction because he is talking
about a federal preemption, I assume, using federal statute to
preempt and create a de facto federal system run by the states.
So I think even the independent insurance agents understand
the necessity for some sort of federal structure. But I am just
concerned that your federal charter system doesn't go quite far
enough.
Mr. Milesko. I think we need to look at that. I think that
that makes a lot of sense. I think that having a federal
charter, though, would eliminate some of the issues that you
have currently like with the Franko case as an example, where
the individual, Franko, was not--
Mr. Bentsen. I read your testimony. It wasn't detected
necessarily as quickly, although the banking regulators have
not always been on top of the issues as well.
Mr. Milesko. Right.
Mr. Bentsen. And the other thing is--and, again, I tend to
agree with your position in the abstract, I think also the
comparison that the OCC--using the OCC comparison, remember, as
you well know, the OCC is not the only regulator of national
banks. The FDIC is also a regulator of national banks and looks
at safety and soundness. So I just think you need to go back an
take a hard look at that.
Mr. Milesko. Let us get back to you and take a look at
that.
Mr. Bentsen. Appreciate it.
Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Bentsen.
Dr. Weldon?
Dr. Weldon. Thank you, Mr. Chairman. I had a question for
Mr. Ahart. I thank you for your testimony. I wanted to get an
opinion from you regarding--my question is would a federal
charter perhaps benefit high-risk states, as I represent
Florida and we pay very, very high, understandably, premiums
for property casualty insurance. Do you feel that a federal
regulator would be perhaps better able to provide the necessary
oversight and market sensitivity to what is going on in states
like Florida? Your opinion there?
Mr. Ahart. Sure. Actually, I am almost a brother in there,
I guess, because I come from New Jersey and we have very high
rates in auto insurance. So I can feel the pain. I think that a
federal charter program would not help that situation at all. I
think the issues in New Jersey and Florida can best be dealt
with and understood by someone in Florida and someone in New
Jersey and someone that deals with that every day. Again, to
me, a federal chart is really overkill. And I am not sure why
we would handle--if we have specific issues involving market
conduct, speed to market, things like that, I am just not sure
why we wouldn't just attack those issues rather than replace
the whole system.
Again, I just think that somebody in those states can best
see those problems better than somebody from Washington, D.C.
Dr. Weldon. Do the other three witnesses agree with that or
disagree, or do you want to comment on it at all?
Yes, Ms. Vaughan?
Ms. Vaughan. I would be happy to comment. I think this
demonstrates some of the differences between banking insurance
that Congressman Bentsen was identifying and that is there
really are some local issues and there are some significant
consumer protection issues involved in insurance. There is
nothing more frustrating to me than to hear some of the
proponents of an optional federal charter say it works in
banking, therefore it can work in insurance, because as an
insurance regulator, I know that there are very significant
differences between banking and insurance, and the fact that we
have to deal with things like hurricanes and earthquakes and
they vary across the country and we have different auto
insurance systems and we have things in New Jersey that are
driving auto insurance costs that don't exist in Iowa, where we
have the lowest auto insurance rates in the country.
And so we have very different markets. And I would agree
that I have a hard time seeing how a federal, an optional
federal charter could solve the market problems that you have
in Florida that exist because of the geographic issues and the
weather-related issues that you face.
Dr. Weldon. Yes, Mr. Osdall.
Mr. Van Osdall. I think your comment also embraces the
whole idea that at some point there needs to be cooperation
between both the federal and state level to solve some of the
issues we deal with and a hurricane may be one of those issues,
an earthquake may be one of those issues. Certainly, terrorism
on the table today is one of the great issues. Without the
federal influence, without a federal solution to the terrorism
issue, we would be nowhere because what the states have
generally done is accepted the terrorism exclusions that are
represented by the insurance companies. So I do think there are
those legitimate areas where we have to have the cooperation
and the support of the Federal Government in the insurance
industry.
Dr. Weldon. I thank you, Mr. Chairman. I yield back.
Chairman Baker. I might take that minute just for a point
of clarification from the commissioner. By way of current body
of law in consumer protection, let's assume for the moment that
a Louisiana Congressman buys an annuity from a New York
company. He then is retired, moves to California, where he is
deceased. His heirs live in Wyoming and South Carolina. And the
company refuses to give them their money. If I am understanding
the law correctly, Louisiana law applies, which is the only
state, not common, law, civil code, that you would either have
to litigate it in a common law court using Louisiana law or
hire a Louisiana counsel and fly everybody to Louisiana to
litigate the issue. Now, tell me, how simple is that?
Ms. Vaughan. Not simple. And I am not a lawyer, so I won't
pretend to understand how this legal system would work. But I
think what this demonstrates also is insurance is very
complicated and that the issues in life insurance are
fundamentally different from the issues in auto insurance and
homeowners' insurance and commercial lines insurance, and
medical malpractice. We have not one insurance market but
multiple insurance markets.
In life insurance, annuity insurance, disability insurance,
and long-term care insurance, people buy long-term products.
They move from state to state. That is different from auto and
homeowner's, where you buy a product and it covers you in the
state in which you live for one year or six months and then you
renew it where you are.
Dr. Weldon. Mr. Chairman, can I reclaim my time? I want to
ask a follow-up question to what she just said.
Chairman Baker. Sure, absolutely.
Ms. Vaughan. Can I finish just one second?
Dr. Weldon. Yes, go ahead, go ahead.
Ms. Vaughan. I was going to say in life annuity,
disability, and long-term care, that is why we have agreed, the
commissioners have agreed, that we need to have more uniform
national standards to address the issue, the fact that people
move from state to state. And we agree with that. That is a
different problem, but it is not the classic problem affecting
all insurance markets.
Dr. Weldon. Okay, well, I think you partially answered my
question. But my question was a federal charter for auto is
going to illicit more of a negative response. A federal charter
for property casualty is going to elicit more of a negative
response than a federal charter for life insurance is what--
because the case he made is a very good case.
Thank you, Mr. Chairman, for your indulgence.
Chairman Baker. Oh, certainly. Please proceed,
Commissioner.
Ms. Vaughan. Thank you very much. I think we have property
casualty insurance. We have life insurance. We have very local
issues in property casualty insurance. And the reality is you
don't have nearly as many local issues in life insurance. I
would agree with that. The risks that life insurers assume,
mortality risks, interest rate risk doesn't tend to vary from
state to state. Consumers move from state to state.
And so we agree that you need some kind of national
uniformity in life insurance. The problem is that we don't want
to throw the baby out with the baby water. One cannot create a
federal regulatory system in Washington without impacting the
important consumer protections that we have in place, without
impacting the property casualty side in the industry. So the
question is can we find a targeted solution to get to national
product standards in life insurance and annuity insurance,
which we agree we need, without gutting the rest of the system?
And that is what led us to the interstate compact.
Chairman Baker. Thank you very much. And I want to express
my appreciation to all of you for your contributions. It has
been a very helpful hearing. We appreciate your remarks. The
record will remain open for an additional 30 days--oh, I am
sorry, Mr. Rogers, I didn't see you. Mr. Rogers?
Mr. Rogers. It is the price you pay for being a new guy,
Mr. Chairman.
Chairman Baker. Or for not being here.
[Laughter.]
Mr. Rogers. Well, it is good to see you, Mr. Chairman.
Doesn't he look handsome today, everybody?
[Laughter.]
Mr. Rogers. I want to also thank Commissioner Vaughan; not
being a lawyer and being from Iowa really ranks up there. Your
credibility is fantastic around here.
Mr. Ahart, I wanted to ask a question. You talked about in
your proposal preserving state regulation while having Congress
act to reform the state insurance regulatory system. And you
mentioned specifically speed to market. And I am curious if you
can explain how you can do that and still address the issue of
speed to market within the confines of that what seems like a
contradictory--
Mr. Ahart. Sure, what we would is use again federal
legislative tools. We would have federal legislation that would
preempt state rights on the issues of forms and rates. So we
would pretty much recommend adopting, similar to the Illinois
model, where states would have to follow a file and use
provision on forms and have only 30 days to review. Where on
rates they would be able to--companies would file but would
automatically be able to use them in competitive markets. So
that by having those uniform standards, states would need to
use those but it still would be regulated from the state level.
Mr. Rogers. Great. I just want to follow up with Mr.
Milesko on that same vein. We have got about 7,400 state
legislators across the country, which should send shivers up
your spine with regulation. And I was one of them on the
Financial Services Committee. We have heard from the different
witnesses regarding the challenges facing state legislators in
uniformity and speed to market and agent licensing. And as we
kind of move forward, what do you think is the proper role for
Congress to address those issues?
Mr. Milesko. I think the dialogue that we are having today,
roundtable discussions, I think is very appropriate to get
these issues on the table. They will look at the merits of all
the proposals. Now, we certainly would defend the optional
federal charter, which leaves the state system as it is and
just overlays a federal system on top of that.
Mr. Rogers. I yield back the remainder of my time, Mr.
Chairman. The handsome, very handsome chairman of the
committee.
Chairman Baker. Very helpful member, I might add. Thank you
very much, Mr. Rogers.
I want to thank each of you for your participation here
this afternoon. It has been very helpful. And the record will
remain open for 30 days for any additional comment. And I
forgot, Mr. Kanjorski wants another minute.
Mr. Kanjorski. I just wanted to make the point, we were
talking about the various states. I am not sure, but some
states elect their state insurance commissioners, and others
are appointed. If any of the members would like to express an
opinion, if we go to a national charter, are we going to create
another national office of national insurance commissioners who
run along with the President, or do you think that an
appointive Cabinet position? I really want your opinion on the
election process in various states and how that impacts on some
of the problems that we see in the insurance business on the
state regulatory level.
Mr. Van Osdall. I would like to offer comment on that. The
elected position, without having the background in the business
and the training and understanding, I think, has been one of
the things that continually slows down those very issues that
we are trying to address and tackle. You can almost look at it
state by state and when it becomes an elective position, which
is often a stepping stone to another position, you have a
transient person filling that job in many cases. And that has
been a real detriment to insurance regulation, I think, over
the years.
Mr. Kanjorski. Yes?
Ms. Vaughan. I am not going to take a position on which is
better. I happen to be an appointed commissioner, and I am
proud to be an appointed commissioner. And I have very fine
colleagues who are elected commissioners. And I think we have
had some very fine elected and appointed commissioners. But I
think what this reflects is the idea of local control. And the
citizens in Kansas have decided that an elected commissioner is
what works for them. And the citizens of Iowa have decided that
an appointed commissioner is what works for them.
Mr. Kanjorski. But if the Federal Government takes up the
position that we are going to overpower the states and create a
federal charter, we are going to decide what now is covered by
an elected official will be covered by an appointed official?
Ms. Vaughan. You are overriding the decisions that are made
by the citizens of those states with respect to the markets in
their states, by the legislators, the state legislators, the
elected commissioners, and whoever is in there working on the
state insurance market issues.
Mr. Kanjorski. Is that an argument against having a federal
charter?
Ms. Vaughan. I would say that there is a question--it gets
back to the question of whether a federal regulator can best
understand and create a regulatory environment in Iowa when
they are based in Washington, D.C. and they don't understand
our Iowa markets and our Iowa consumers and our Iowa issues. So
this is all about--one has to go back to this is all about
consumer protection. The reason that regulators exist is
consumer protection. And the question is what is the best way
to frame that consumer protection. And we at the NAIC believe
that regulators that are local, given that so much of insurance
issues are local and so many of the issues that consumers deal
with come at times of crisis and stress, things that we have to
help consumers with--their house burned down, their company is
not paying for it, their child needs an operation and the
insurance company won't pay for it--that these are things that
local people are best able to respond to.
Chairman Baker. Thank you, Mr. Kanjorski. Another issue
that has to be resolved is the term that someone would serve.
In Louisiana, for several commissioners it has been 20 years to
life. So that has to be worked out.
[Laughter.]
Chairman Baker. I would like to thank you again and excuse
this panel so we may hear from our next gathering of witnesses.
Thank you very much.
I would like to welcome each of our participants to our
second panel and certainly appreciate your willingness to
appear here today. Our first panelist is Mr. Scott A. Gilliam,
who is Director of Government Relations, Cincinnati Insurance
Companies.
Welcome, Mr. Gilliam.
STATEMENT OF SCOTT A. GILLIAM, DIRECTOR OF GOVERNMENT
RELATIONS, CINCINNATI INSURANCE COMPANIES
Mr. Gilliam. Thanks, Mr. Chairman, Ranking Member
Kanjorski, and members of the committee. I am with Cincinnati
Insurance Company. We are a property and casualty and life
insurance company. We operate in 31 states, with a premium
volume of about $2.5 billion a year and a million policies in
force. So we are not the biggest but we are not a small county
mutual.
I was asked to talk about consumer protection issues today
and how they impact the question of whether insurance
regulation should remain a state-based system or whether a
federal approach to insurance regulation should be considered.
My first point today, already touched on by some of the
first round of questions, consumers are served best by state
regulation. For consumers, the strength of the state-based
system of insurance regulation lies in its ability to respond
to consumers, to adapt to local market issues, and to enable
states to experiment and learn from each other. State insurance
commissioners become experts in the individual state issues
they face, enabling other commissioners to learn from their
experience. In this way, the insurance regulatory system
evolves to meet new challenges. Accessibility is another
advantage that state insurance regulation has over the federal
regulation insofar as consumers are concerned. No one can
quarrel with the fact that it is easier to deal with regulators
in the consumer's home state than by having to call 1-800-
Washington in order to get help with a consumer insurance
issue.
The accessibility of insurance regulators to consumers
would suffer under an optional federal charter system given the
likelihood of consumer confusion with the two systems. Under an
optional federal charter system, state-chartered insurers and
federally-chartered insurers would operate side by side in the
states. Under those circumstances, consumer access to
regulatory protection would be needlessly complicated by the
mere existence of dual regulatory systems and the resulting
confusion as to which system has jurisdiction over a particular
consumer complaint. Insurance consumers should not have to roll
the dice when deciding whom to contact for a problem.
The warning made by Chairman Oxley in his opening statement
last week, that consumers cannot be adequately protected if
insurers are subject to conflicting requirements at the federal
and state levels, seems equally applicable to the situation
insurance consumers would face with conflicting federal and
state consumer protection systems.
It is also doubtful whether the Federal Government would
have the resources and expertise necessary to effectively and
efficiently protect insurance consumers. It would take a huge
effort to duplicate the activity of the states in this regard.
Consider two key facts. In the year 2000, insurance consumers
made approximately four million consumer inquiries and
complaints to state regulators. State insurance regulators
employ 12,500 regulatory personnel nationwide and those
departments spend $853 million annually to be the watchful eyes
and helping hands on consumer insurance problems.
We feel the Federal Government is simply not equipped to
take on such a role and develop a regulatory authority for
insurance consumer protection as sophisticated and widespread
as the state system that has been 200 years in the making.
My next key point, the benefits of state regulation to
insurance companies also benefit insurance consumers. The
benefits of the state insurance regulatory system on insurance
companies also translate into benefits for insurance consumers
in the form of competitive markets. Let's consider a few
examples.
Unique knowledge of markets and local conditions. States
are the only logical choice for the comprehensive regulation of
insurance given their unique knowledge of local markets and
conditions. State regulators know the insurance markets within
their borders. Although there are uniform national concerns in
the industry, as in many others, in uncountable ways insurance
involves concerns of an intensely local nature. The concerns in
Ohio, for example, with its multiple urban centers, lakefront
communities, and manufacturing base are quite different from
the insurance issues raised in Iowa with its thousands of
farmers and few large urban areas.
Less risk of regulatory mistakes. Under state regulation,
good regulatory initiatives spread to other states and
conversely the bad ideas tried in one state prevent others from
making the same mistakes by offering real market examples.
Having 50 different regulators is less risky than gambling on a
single federal regulator who might have an axe to grind against
the insurance industry and ultimate power over the industry to
swing the axe.
Another example: State regulation encourages innovation.
Insurance companies often use a particular state as a
laboratory for testing new product ideas or competitive
strategies before they are introduced on a national level. Good
products and good competitive strategies in one state often
spread to other states. Likewise, unsuccessful strategies in
one state often educate the rest of the industry and lead to
better products and more competitive markets in all the states.
So where are we today? While state regulation of insurance
has worked very well, the realities of changing market
conditions, including globalization and financial services
convergence and consolidation demand a more efficient
regulatory system, including greater coordination and
consistency across the states. While some are calling for
federal regulation to address the changing face of the
insurance industry, we feel state regulation still works best.
At the same time, we realize that in order to preserve
state regulation during these changing times, the current
system of state-based insurance regulation needs to be
modernized, streamlined, and made more efficient. We have
already heard about the strong and growing effort underway
within the National Association of Insurance Commissioners to
modernize state insurance regulation and it appears a national
regulatory agenda is taking hold.
But there still remains work to be done. We would be remiss
if we did not acknowledge that the efforts by the NAIC to
modernize state insurance regulation are only a start.
Virtually every area of insurance regulation needs to be
improved if the state-based system is to meet the challenges of
a modern insurance market. But unlike those companies who would
abandon the state system and start over with federal regulation
or dual regulation, the Cincinnati insurance companies are
committed to doing the hard work needed in the state capitals
to modernize, streamline, and increase the efficiency of state
regulation.
Two more quick points and I will conclude. What if the
states do not follow the lead of state insurance regulators and
the NAIC and enact the reforms needed to modernize state
regulation or do not act soon enough or do not do enough to re-
invigorate state insurance regulation? In this event, our
company is intrigued by the possibility of using federal
legislation to encourage the states to undertake more rapid and
comprehensive reform of state insurance regulation. While we
are yet undecided on the form such legislation would take, we
would prefer a model that would allow the NAIC to be active in
crafting the reform legislation states need to enact to avoid
federal regulation.
In suggesting that Congress consider the use of federal
legislation to encourage reform at the state level, we are
mindful of the dangers incumbent in opening these issues up for
federal legislative debate. And while we recognize these
dangers, we believe that using federal legislation to encourage
reform at the state level as a last resort is certainly better
than jumping hook, line, and sinker into a federal system of
insurance regulation.
My final point this afternoon, my company feels that state
regulation is the preferred model of regulation for all lines
of insurance, property, casualty, and life insurance. Many in
the industry think of my company as a property, casualty
company only, but we do have a significant life insurance
operation with over $100 million in premium a year. In fact,
our life subsidiary, Cincinnati Life Insurance Company, is a
former member of the American Council of Life Insurers. I bring
this to your attention in reply to what seems to be the growing
refrain in Washington, that we should not think twice about
lobbing off the life industry and handing it over to federal
regulators. My company strongly disagrees with this point of
view and believes that state regulation works best for all
aspects of the industry, including life insurance as well as
property and casualty. A reform system of state insurance
regulation for all lines of insurance, including life, is far
superior to an unproven system of federal regulation.
Thank you.
[The prepared statement of Scott A. Gilliam can be found on
page 344 in the appendix.]
Chairman Baker. Thank you, Mr. Gilliam.
I take particular pleasure in introducing our next witness,
Mr. Hans Sternberg, a long-time friend and resident of Baton
Rouge, Louisiana. More importantly, he and his wife, Donna,
have been accomplished business people and very civic-minded in
their work within the community. So it is a pleasure to welcome
you here today in your capacity as chairman and CEO of
Starmount Life Insurance Company. Welcome.
STATEMENT OF HANS STERNBERG, CHAIRMAN AND CEO, STARMOUNT LIFE
INSURANCE COMPANY
Mr. Sternberg. Thank you, Mr. Chairman.
Chairman Baker. You have to hit the little button on the
front of the mike. It is not on.
Mr. Sternberg. Thank you, Mr. Chairman, Ranking Member
Kanjorski, and members of the subcommittee. My name is Hans
Sternberg. I am chairman of Starmount Life Insurance Company.
We employ 63 people and are admitted in 18 states. I am here to
offer my perspective as the owner of a small family business.
In fact, four years ago, when our premiums were under $4
million, I boasted we were America's smallest life company.
This year, premiums will exceed $18 million. Obviously, still
small, but growing.
I spoke to Chairman Baker about the optional federal
charter to be sure small independents are not excluded by high
capital or revenue minimums. Companies like mine need this
legislation because the present system imposes high regulatory
costs and restricts market access. Regardless of size, all
companies pay the same dollars to comply with legislation--
regulation. Thus, smaller companies bear a higher percentage
cost than larger ones. To Geico, which testified here just one
week ago, $100,000 is pocket change. Not to companies like
Starmount.
One of our divisions sells life insurance by mail. The
economics of direct mail selling assume we reach all names on
productive mail lists. Unfortunately, barriers to entry in many
larger states makes this impossible. Conversely, we generally
avoid the 12 smaller states, like Delaware, North Dakota,
Idaho, Montana, Wyoming, and Rhode Island, with 2 million
people or less, because the costs of regulation make it
difficult to be profitable there.
Not only is Starmount barred from many larger markets, but
citizens of both state groups lose the competitive benefits new
companies bring. For example, greater product choice, lower
prices, better service.
Here are other examples of what we face. One, for several
years we bought insertion privileges in the Visa monthly bills
of our local bank, which allowed us to send marketing material
to the bank's several hundred thousand Visa cardholders. It was
our most profitable venue. Then the bank won a 50-state
military contract. We lost all opportunity to continue selling
through the bank because the bank needed a company which could
serve all its customers. There was no way to replace that
business.
Two, we once developed a policy at a cost of $20,000 to
$25,000, which is a lot for a company our size. It was approved
in all our states except two. After three years, we abandoned
the program. It is not economical to promote to only part of
our customer base, plus there is the constant fear of mailing
to the wrong jurisdiction.
Three, for years we ran a newspaper ad in several states
but one fined us $10,000. That state has a unique rule we
didn't know about. If you show even one rate in an ad, you must
show all rates. That would have meant 188 of them. We obviously
no longer run ads in that state, but such foolishness is solely
political protection for entrenched marketers who oppose
competition.
Four, at one time we used brochures to sell in
supermarkets. The distributor inadvertently sent the one
state's material to some Wal-Mart stores. The insurance was
approved by both states, but the minor differences caused a
$7,000 fine. We stopped using brochures in grocery stores, so
the consumer lost that option.
Five, we have insurance product filed for two and a half
years but not yet approved in every state. The excessive delay
is expensive and frustrating. In the end, the consumer has less
choice.
Six, our largest division uses agents to sell supplemental
health benefits to companies. To take advantage of a 50-state
opportunity offered us by a major national retailer, we
recently partnered with a national carrier, giving half the
potential sales to the partner. For us, it is better to have
half the business rather than none. But the sales relinquished
by us will involve millions. Over the next two years, licensing
for this program will cost over $100,000.
The present system will always handicap Starmount's
efficiency. We are forced to charge the consumer more as well
as to fall short of our sales potential because of unnecessary
and inconsistent legislation and regulation.
I hope this committee remembers the small companies which
regularly encounter these bureaucracies.
Thank you for this opportunity.
[The prepared statement of Hans Sternberg can be found on
page 398 in the appendix.]
Chairman Baker. Thank you very much, Mr. Sternberg. Our
final panelist is Mr. Wayne E. McOwen, Vice President of
External Affairs, Guard Financial Group. Welcome, sir.
STATEMENT OF WAYNE E. McOWEN, VICE PRESIDENT OF EXTERNAL
AFFAIRS, GUARD FINANCIAL GROUP
Mr. McOwen. Thank you. Chairman Baker, Ranking Member
Kanjorski, and members of the subcommittee, my name is Wayne E.
McOwen. I am senior vice president for government affairs and
industry relations for Guard Financial Group.
I thank you for the opportunity to offer comments, and I
join my industry colleagues in applauding your commitment to
insurance regulation reform. Guard Financial Group is engaged
in the full financial services arena of insurance, banking, and
investments. Accordingly, we are subject to multi-state, as
well as federal, regulation.
My purpose today is to offer observations on the advantages
of choice. As requested, my comments will address the
regulation of insurer business practices and issues of
regulatory choice and regulatory competition.
State regulators scrutinize the financial viability and
business practices of insurers through a process of
examinations. Such exams are conducted routinely at scheduled
intervals but can also be triggered by circumstances. The
primary public policy objective or regulators is solvency. The
financial exam focuses on insurers' adherence to universally-
accepted financial standards. The process is as precise as
mathematics.
Whereas there is consistency to the focus on the objective
components of an insurer's financial health, the evaluation of
business practices or market conduct is neither universal nor
uniform and can be somewhat subjective. Consumer protections
are a priority of state insurance regulators, yet the process
is complex, costly and rife with inconsistencies that limit its
benefits.
Especially problematic is the interpretation of
regulations; what are considered fair business practices or
arbitrary or capricious actions in one jurisdiction may not be
in another. Sometimes variations of the same requirement are
problematic, such as when performance benchmarks differ for no
apparent reason. Consider coverage cancellation rules, for
instance. There is no clear rationale for why policy holders of
one state are accorded a 30 or a 45 day notice or more while
those in another state receive only 10. With postal services
standard country-wide, this patchwork of delivery notice rules
seems unnecessary and only confuses consumers, particularly
multi-state commercial policy-holders for whom such rules may
have different business consequences.
The market conduct process is by design duplicative.
Carriers are subject to the scrutiny of regulators in all
states of operation. Exams conducted by one state may be
duplicated by another to evaluate identical business practices.
Duplicative exam fees and the down time of staff engaged in the
process raise the cost of doing business and fragmentation can
exist even within the same state when two or more agencies
share regulatory responsibilities.
For more than 100 years, the dual regulatory system has
worked successfully for banks. Applying a similar model for
certain insurance operations portends all the benefits derived
from choice.
Choice, America was founded on it. Competition, America
thrives on it. Why, then, is the prospect of regulatory choice
for insurers and competition between state and federal
regulators so difficult to accept? Admittedly, an optional
federal charter does not have universal appeal but the
operative word here is optional. For insurers doing business in
a multi-state arena or for those marketing a limited number of
products with consistent risk factors, a streamlined federal
regulatory process portends a wider selection of more
innovative and competitive offerings. Simply stated, regulatory
choice for insurers translates to more choice for consumers.
The National Association of Insurance Commissioners is to
be commended for its leadership and resolve toward the
uniformity and consistency of state regulation. But without an
impelling incentive, expect the process to continue to move
slowly.
Here are some compelling reasons to accelerate the process:
The demands of an expanding global economy; increasing strains
on insurance from a complex legal system; providing viable
insurance products via e-commerce; federal initiatives such as
the Patient's Bill of Rights and the pending Health and Human
Services medical privacy rules all boast arguments for a
centralized authority in certain circumstances.
Providing the insurance industry with a strong national
voice does not require reinventing the wheel. A system of
federal and state regulation should be neither exclusionary nor
duplicative but simultaneous and complementary. Ideally, it
would identify the best practices of state regulatory systems,
precisely the process engaged by state regulators in crafting
model laws aimed at encouraging uniformity. But encouraging it
is not the same as requiring it. A federal regulator could have
the tools to make it happen.
Finally, our preparedness to meet the far-reaching and
extraordinary challenges of possible further terrorism events
illustrates the key role of the Federal Government.
Stakeholders did not approach 50 states for a solution to
terrorism insurance, they went directly to Washington. The
founding fathers were judicious in crafting a federal umbrella
that would not impair states rights. Their goal was to
strengthen the system by bringing structure and unity. More
than two centuries later, we struggle with this concept and its
application to the regulation of insurance, a mechanism that
the events of September 11th reaffirmed is so critical to our
economy and to our lives.
Thank you.
[The prepared statement of Wayne E. McOwen can be found on
page 350 in the appendix.]
Chairman Baker. Thank you very much. Again, this panel has
also been very helpful.
Mr. Sternberg, I found the examples you cited, the
regulatory inefficiencies, to be quite troubling, and frankly,
those are the kinds of examples that the committee needs to
understand better; the fact that you are licensed in two
adjoining states and had marketing material reversed and still
found yourself financially liable I think points out some of
the difficulties of the current system.
To that end, we have had earlier testimony in another
hearing in which a CEO of an insurance company indicated that
they had withdrawn and would not return to the state of New
Jersey primarily because of the regulatory complexities within
the state. That leads me to remember a conversation you and I
were having earlier with regard to the size of the industry
today versus a year or two ago. Could you give the committee
that information, on what is happening in the marketplace from
your perspective?
Mr. Sternberg. Yes, I actually can. I did a little research
before I came up. Five years ago, there were 1,748 life
insurance companies in this country. Today, there are 1,454.
That is a drop of 16 percent. I understand something similar--
that is for life companies only--I understand something similar
is happening in the P&C industry. And part of that is normal
consolidation, but also, a lot of it is because companies are
struggling to make a profit. The ROE, return on investment--on
equity--is not good in the life insurance company--industry. It
doesn't approach the banking industry. And we are suffering
because of it. And you are going to see more shrinkage.
Chairman Baker. And would the likely outcome of this, as
capital formation and start-up costs are difficult, if you were
in business and approved in all 50 states, had your regulatory
costs behind you, wouldn't it make sense from a business
perspective that companies who find themselves in that posture
not to be too excited about lowering regulatory barriers
because you might have a Starmount coming around the corner?
Mr. Sternberg. Well, certainly. We would be twice as large
today if we could operate in more states or significantly
larger. And there are some entrenched feelings on that, sure.
But I would assume most of the larger companies would prefer to
have a national charter also, though I am not aware of the
testimony on that.
Chairman Baker. Thank you.
Mr. Gilliam, I have asked other panelists along the day and
over the course of the few weeks their view of the Illinois
system which in my judgment is sort of the other side of the
coin in this process where you file and you don't have to even
have rate pre-approved and it seems to be working fairly well
there with a lot of competitive product at pretty good prices
for folks in Illinois as opposed to New Jersey where you have
insurers trying to leave the market. If we were to try to come
to some agreement, and I am just fishing for less volatile
territory here, particularly on the life insurance side, the
advisability of a national location for your filing similar to
the Illinois structure, leaving consumer protection to the
states. I see the viability of having someone local to call,
some local point of accountability if you are defrauded or have
difficulty in getting settlement but doesn't the logic of
having more competition make a great deal of sense from a
consumer perspective, forget property and casualty, forget
automobile because they are more difficult. Do you still have
the same objections if you go in that narrow of an approach?
Mr. Gilliam. Just so I am clear, are you just talking about
life insurance products now?
Chairman Baker. Yes.
Mr. Gilliam. I would echo the remarks of Commissioner
Vaughan when she was asked a similar question. Clearly, there
are less differences in the nature of life insurance products
than P&C products on a national basis. I have heard some say a
life insurance policy is a life insurance policy in Florida,
Iowa, or Washington state. But I guess what I would say is I
see the point there, our view is that if the same uniformity in
terms of product approval and so on is there to allow a company
like his to file one product and have it approved in all 50
states simultaneously, I think that is a great thing.
But I guess we would say if the states can do that--and
again, that may be a big hurdle because they haven't come that
far yet--but if the states can do that, why not have them do
it, versus going to a new, untested national or federal
situation?
Chairman Baker. Though I guess my response to that would be
in your best judgment, if all things worked well, how long is
it going to take us to get to a uniform system even with regard
to life, much less everything else?
Mr. Gilliam. That is the $64 billion question. How much
time do we give the states to do this? How far do they have to
go before we say they have met their charge? Is it like a NARAB
system where when a majority of states do it, it is okay? I
don't think that probably works, because a system where 29
states of 50 do something is not like having a national system.
And I guess I would add on that is why we are intrigued by the
idea of using some federal legislative authority to urge the
states to action. It is clear that the states have to act and
modernize. This is not going to be an issue that is around for
20 years, like Gramm-Leach-Bliley. There is too much at stake
in terms of the changing face of the marketplace. It has to be
addressed in the next five, ten years at the very latest.
So I can't tell you how long it is going to take the
states. But our view is let's give them a shot. If they don't
look like they are reacting, let's put some federal onus on
them. And at the end of the day, if they can't do it, then we
may have to rethink things.
Chairman Baker. I think that is much of the thinking here.
We had hoped that NARAB would be the shot. We had hoped that we
could see more positive development with regard to premium
dollars regulated. But it just doesn't seem to be moving very
well. And I guess we have to come to some decision about how
much longer can we wait and then explore in the meantime
whether an Illinois-like model doesn't make a great deal of
sense at least in some product lines, reserving consumer
protections to the state. That to me doesn't seem to be on the
edge of irresponsibility at least.
Mr. Gilliam. And I did fail to mention that we also jump on
the Illinois bandwagon. All of us in the industry love the way
things are done in Illinois, but with all due respect, it is
also done well in the great state of Ohio.
Chairman Baker. Well, I certainly have great regard for the
state of Ohio, sitting on this committee, and would look at
that very advantageously.
Mr. Kanjorski?
Mr. McOwen. Excuse me, Mr. Chairman, may I comment on that
last question?
Chairman Baker. Certainly, yes.
Mr. McOwen. I think there is another issue to the licensing
of products. One doesn't just file to be approved to sell a
product in the state. First, a certificate of authority has to
be obtained from that state. One has to be licensed to do
business. And there is a great deal of inconsistency in terms
of state approval of companies to do business. And whereas I
indicated in my testimony that the financial benchmarks are
fairly universally accepted, it is nevertheless true that
although you might be licensed to write business and accepted
to write business in one state, you may not be accepted as
readily in another state.
Having then gotten the license, another issue, of course,
as mentioned, is filing those products for acceptance.
Chairman Baker. Thank you very much.
Mr. Kanjorski?
Mr. Kanjorski. Mr. Chairman, I have been listening to the
witnesses today and, of course, Mr. Sternberg surprises with a
small company like that asking for a national charter. That is
really gamesmanship in terms of wanting to get out there to
compete. That is great.
There was one suggestion on the earlier panel about using
SROs, self-regulatory organizations. And perhaps we could
expound on that to think about that as the entity to create
uniformity of policies, language policies. Even dealing with
the rates in some way or methodology of setting rates.
What I am most interested in, having been here maybe too
long, is whenever the Federal Government reaches out its arm to
help, it generally has its other hand out to extract a price.
And in the insurance industry, that could be an extraordinary
price.
As Mr. Gilliam knows, we worked on catastrophic insurance
not too many years ago. And when you analyze what was
attempting to be done legislatively was to force the residents
of Idaho to pay a premium to cover the residents of Florida
against hurricanes. It was looking at a national problem of
disasters and saying the residents of that one area or the
present based were insufficient to cover the risk so that we
wanted to enlarge the base nationwide. Either use it by adding
on to the premiums and surcharging premiums across the board or
the Federal Government using the base of the taxpayers to stand
the expense that was unique to a single region or a single
state.
I am just wondering have you given some thought--maybe Mr.
Sternberg, I will direct it to you first--would you be
disappointed if the Federal Government says that if we are
going to allow you to write insurance nationwide, that we also
are going to require you to charge a uniform premium or to
write in the states of New Jersey and Massachusetts, which
seems to be nobody's desire at this time, for some reason or
another. But can't you envision the time when politically a
President of the United States will direct his cabinet officer
or Members of Congress would get together and say, ``Boy, the
big state of Massachusetts and the big state of New Jersey have
a problem in auto insurance, and we want the federal
commissioner to direct all P&C writers that they have to write
in these states even though they take a loss.''
Mr. Sternberg. Of course, I am a life company.
Mr. Kanjorski. I had an example for your company. Let's
suppose that longevity in Pennsylvania is average 85 years of
age but in L.A. it is only 65 because of smog. Would you want
to have to charge and offer the same premium in L.A. as you
would in Pennsylvania?
Mr. Sternberg. Yes, that would not in the life industry
create a major problem. The price-fixing that I thought I heard
you say, price controls have never worked. And they didn't work
in the Nixon administration, they won't work here.
Mr. Kanjorski. How would we set the rate on the life
insurance if you had a life expectancy in L.A. of 65 because of
smog and a life expectancy in Pennsylvania because of the
beautiful weather of 85?
Mr. Sternberg. Well, I think it would work even better than
it works in a constricted marketplace as you have now. You
would have a lot of people out there--
Mr. Kanjorski. You would charge different premiums based on
the state lines?
Mr. Sternberg. Well, that isn't quite the way we do it in
the life business. We are in 18 states and what we do, we base
it on the health of the individual and our own products and our
own cost structure.
Mr. Kanjorski. But isn't there an environmental factor as
to where you live, the impact on your life expectancy?
Mr. Sternberg. Not that we have come across, no, sir.
Mr. Kanjorski. There isn't any?
Mr. Sternberg. It has to do with health. For example, if we
have an American citizen who is living in Africa 10 months out
of the year, we will not insure that person. But if we have a
foreign person who is living over half the year in the United
States and getting their health care here, we will. So it is
where you get your health care that would determine.
Mr. Kanjorski. But you wouldn't see any difference in life
insurance of insuring someone in a smog city like L.A. as
compared to Iowa, nice fresh country air?
Mr. Sternberg. The only thing we would pay attention to is
crime. If it is a high-crime area, we generally tend to avoid
it. Otherwise--
Mr. Kanjorski. Then you wouldn't write the policy?
Mr. Sternberg. We would not write the policy.
Mr. Kanjorski. Then maybe that gives me the example. But
the federal commissioner says L.A. is a very important town for
votes and we are going to order your company to sell life
insurance in L.A. so that we don't lose the benefit of the
electoral vote for the next presidential election; are you
going to be happy with that situation?
Mr. Sternberg. I have never faced it before.
Mr. Kanjorski. Well, there is no federal commissioner.
Mr. Sternberg. But there are state commissioners, there are
50 state commissioners.
Mr. Kanjorski. Yes, but you can pick up and leave the state
of California and he can't tell you to do anything. You have
got 49 other states to do business in. If you have got a
national charter, he is going to say, ``If you want to do
business in those 18 states you like now, Mr. Sternberg, you
are going to have to do it in California, too, and here are the
terms and conditions you are going to have to do it under.'' Do
you want that done to you?
Mr. Sternberg. Would I like that? No. Would I abide by it?
Sure. If everyone else in the industry has to abide by it also,
then we would do it. I would just spread my risk further.
Mr. Kanjorski. Well, I am just wondering, I am posing the
question because I am hung up, quite frankly. I am a person who
recognizes the distinct differences between regions and states
in the country and the country as a whole. I sometimes make the
comparison that going to Utah as an Easterner is like going to
Austria. It is almost a different country in terms of the make-
up of the people and the climate and everything else. And I
think since I have gotten elected to Congress, I have gotten a
great deal more respect for the differences that exist in the
country as opposed to the sameness and the uniformity of the
country. And I am just wondering, insurance seems to be a very
personal thing to me. It is insuring property in a particular
area. It is insuring my life or someone that is close to me. It
is a very localized, very special community area. And I am
wondering if we nationalize it whether we are going to lose
something there or are we just going to further cause the big
operators, the huge operators to dominate the field.
I sometimes wonder with H.R. 10 whether we haven't
consolidated the financial services industry to the point where
they no longer have to pay attention to the state of Iowa, who
cares? There is another state out West that I think the largest
bank is $100 million. Is it Iowa or another state? But, anyway,
they are so insignificant that a lot of major companies don't
even look at them. It is a flea on the back of an elephant.
Maybe that is a good example too, considering what the elephant
represents. But don't you fear that that may happen if we
nationalize insurance?
Mr. Sternberg. Actually, the exact opposite will happen,
because, as I mentioned, there are states we won't go into
because the populations are too small, whereas if we didn't
have to face the extra regulation that those states now impose
on us, we would be happy to be in those states. We would love
it.
Mr. Kanjorski. Mr. McOwen, I know you write workman's
compensation insurance. And being an old workman's compensation
administrative law judge, I never did understand the massive
jurisdictions--I didn't even understand how you come up with
premium rates, quite frankly. It just was so complicated as to
safety standards, et cetera, that apply in the various states
and the rates that apply, et cetera. But how would that work?
Would there be an advantage or a disadvantage to the say, small
states as compared to the large industrial states, if the
premium and policy requirements were uniform?
An example, I think it is present now in Pennsylvania, the
minimum workman's compensation is like $350 a week, something
in that range. And yet in the state of Mississippi, I think it
is $110 a week. So that if you get injured, they tell you to
drop on a train and drop off in Pennsylvania if you are injured
in Mississippi because you will make out a hell of a lot
better. But isn't this a problem that if we uniformize it that
we take away the state uniqueness? Even sometimes policies and
costs like that being used as an economic advantage by states
wanting to attract industry, they try and drive the price down
or the benefits down?
Mr. McOwen. Well, I think that there are a couple of
answers to that question. And one answer is to examine the way
states deal with this issue. Now, part of state regulation is
that insurance rates cannot be unfairly discriminatory or
excessive. And that reflects the state regulator's interest in
having a fair rate to the consumer. But it also reflects the
regulator's interest in the solvency of the carrier. Rates are
set by risk factors. And a large risk factor or a high risk
factor engenders a higher rate. A low risk factor engenders a
lower rate. And it is up to the insurance company to help the
consumer find a way to mitigate his risk factors to earn a
lower rate.
I would assume that a federal regulator would be as
interested in solvency as a state regulator. So it would not
seem likely to me that a federal regulator would impose a
restriction or an edict that says you must charge the same rate
in all states. Rather, I would say that the national regulator
would be concerned for solvency and therefore would continue to
look at rates being charged relative to risk factors, which
generally are not geography. I mean even in one state you have
parts of states where auto rates may be higher than others or
different kinds of rates are higher or lower.
Mr. Kanjorski. Well, as a Member of Congress, I would be
very much tempted to make a uniform workman's compensation
payment throughout the entire country instead of seeing
different rates in different areas simply because I find it
very difficult to understand how a person who has a total
disability can live at the rate paid in Mississippi relative to
what the rate is in New York or Pennsylvania. And wouldn't it
be our temptation here to pass legislation saying there shall
be relatively uniform rates paid in workman's compensation
throughout the country? We are not setting the rate of the
premium or what is going to be paid, we are just saying
fairness. Or the large states get together and say, look, why
are we paying so much more compared to these small states and
they are stealing our industry. Let's get the Congress to pass
a uniform rate, then that takes that away from competition.
Chairman Baker. We can come back to this. Let me get Ms.
Biggert in.
Mr. Kanjorski. Oh, surely. Oh, I am sorry.
Chairman Baker. Ms. Biggert?
Mrs. Biggert. Thank you, Mr. Chairman. This question is for
Mr. Gilliam. You heard NAIC Commissioner Vaughan testify in the
first panel about the new efforts of NAIC to achieve uniformity
through interstate compacts and yet she also, when I asked her
about CARFRA, that it didn't seem to be working so they
virtually have abandoned that to go to the interstate compacts.
And yet a year ago, when NAIC testified here, it was to be the
answer to the product approval problem for life insurance and
that I think it was said that in approximately a year from now
we would have a working CARFRA mechanism that would allow all
51 jurisdictions to participate, plus the District of Columbia,
and that doesn't seem to have happened, and that was abandoned.
Aren't you a little bit skeptical about how this interstate
compact will work?
Mr. Gilliam. I don't think I can be skeptical yet. If you
use--and, again, I mean no disrespect to the NAIC. In fact if
Commissioner Vaughan felt like the Lone Ranger here this
afternoon, I am her loyal sidekick, Tonto. But perhaps the
CARFRA interstate compact example is an example of why if
CARFRA ends up on the cutting room floor, why one idea is tried
and if doesn't catch on, we move to something else. And I think
that is a healthy thing, to look at new innovative ways to
handle that situation.
Mrs. Biggert. Well, then how many years do you think it
takes to judge whether a program is a success or a failure? And
how many--in this world of competition, with the other
financial institutions, how many products can be lost by the
insurance industry waiting for something that will work as far
as the regulation?
Mr. Gilliam. Well, single point of filing and approval of
products in one state and all states is certainly the Nirvana
we are all looking for. And I can't look into my crystal ball
and tell you that we give the states a year and a half, two
years, three years, five years, ten years. We have to a lot
faster than we did with Gramm-Leach-Bliley, but I guess my
point is let's at least give some consideration to letting the
states get this thing right before we turn it over to 1-800-
Washington.
Mrs. Biggert. Okay, thank you.
Then, Mr. Sternberg, I would just like to thank you for
your testimony. I think it very clearly put what is really
happening in the industry and how the regulations are affecting
you, I think very succinctly. And appreciate your testimony.
Mr. Sternberg. Thank you.
Mrs. Biggert. And I would just like to ask one question,
and that is how is the life insurance industry faring under the
current regulatory structure? Are smaller companies
disappearing?
Mr. Sternberg. Yes, they are. There are 16 percent less
today than there were five years ago. And there will be 10 or
15 percent less in another five years. And I think the whole
industry has, in terms of the investment community, has a
serious problem because we are not throwing off--and I am
saying big and small, we are not throwing off the kind of
profits that would command the investments that need to be made
in every industry to keep up with the world.
Mrs. Biggert. Okay, thank you.
Thank you, Mr. Chairman.
Chairman Baker. Thank you, Ms. Biggert.
Dr. Weldon?
Dr. Weldon. Thank you, Mr. Chairman. I just have one
question for Mr. Gilliam. Prior to Hurricane Andrew, we had
1,200 property casualty companies in the state of Florida, and
now I think we are down to less than 200. Some of the inflation
in premiums that we have seen in the property and casualty
sector obviously is attributable to the reasonable calculations
of risk. But there are some people in our state who
legitimately argue that a big component--or component of the
price inflation has been a decline in competition, basically.
And there are a lot of proposals being put forward to try to
bring more carriers into the state.
One of the questions I get asked is this issue of a federal
charter, it would make it easier for companies to come into the
state, increase the number of companies, increase the amount of
competition, and perhaps have an impact on premiums. How would
you respond to that? You made some very persuasive arguments
about this current system working well. How would you respond
to that question?
Mr. Gilliam. I think it would have just the opposite
effect. I would hold out Florida as the national poster child
for state regulation, because the issues that Florida faces
with its high probability of risks for hurricanes and
catastrophes is far different from what the risks are in Iowa
or Nevada or other states. And if we have a national federal
regulator who is overseeing everything, there is not going to
be as much sensibility on his or her part as to the unique
concerns in Florida.
Dr. Weldon. Well, let me clarify my question. I would
never--at least I don't think I would ever want to preempt
state regulation. I view this as sort of like the approach in
banking where you have the option of state licensing or state
chartering versus a federal charter. How would you respond? You
were on a roll there, do you want to continue? You were
starting to say you thought it would make things worse?
Mr. Gilliam. Well, you bring up the general issue of
disaster and catastrophe, and I failed to bring my trailer load
full of data on that issue. That will be the subject of many
more hearings before this committee. But having been very
involved on the national scene on legislative issues dealing
with catastrophes, I can't see how the creation of an optional
federal charter is going to bring more competition to Florida
in terms of insuring catastrophic risks. I wish I had some of
my data with me, but I think in the last five years, while
there may be a smaller number of companies selling P&C coverage
in Florida, it is a much more competitive market. The prices
are kind of leveling out. And I believe that your state
mechanisms, the JUA and so on, have become vastly depopulated.
And I just can't think of any advantages to an optional federal
charter in terms of the problem with insuring catastrophic
risks in Florida.
Dr. Weldon. Well, thank you very much. I appreciate your
comments.
And I want to commend you, Mr. Chairman, for the panel that
you put together. I think we have heard some very, very good
testimony on this issue.
Chairman Baker. Thank you, Doctor.
Mr. Kanjorski?
Mr. Kanjorski. Yes, Mr. McOwen, I will go back to you on
that workman's compensation, just to clear it up. Would we be
in effect going into a national workman's compensation system
if we have a federal charter? And how would that impact on the
state legal systems that apply workman's compensation, the
competitiveness of rates, the competitiveness of payments under
the workman's compensation system, how would that work?
Mr. McOwen. Well, I think that there are a couple of issues
there. Workers' compensation has two parts. One part is medical
coverage. And the other part is lost wages. If you were to
standardize the wage loss component, there would probably be an
adjustment, a rate adjustment in terms of being able to support
that wage loss component in the marketplace.
Ultimately, the cost of workers' comp reflects the
experience of losses and the lost costs involved in determining
the rates. And I don't think that under a federal system that
would change. I think the insurance, it works because of spread
of risk, and it would continue to work because of spread of
risk. It works because of fair prices charged for the exposure.
And, as I said earlier, higher exposures engender higher costs,
lower exposures, a lower cost. So I think that that would
continue to be true.
What I think that might help with the administration of
workers' compensation is that a single charter, if a company
wanted to have a federal charter, it would have fewer
individual market conduct issues and regulatory issues to
navigate in terms of the efficiency of its company. And a
greater efficiency would then be reflected in the cost of its
product and its ability to get new products to market and its
ability therefore to serve the consumer. And I think therein is
the advantage.
Mr. Kanjorski. Very good. Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Kanjorski.
Just to follow up a point, Mr. McOwen, with regard to the
issue of a national charter and let's say, property and
casualty in Florida. Your point you made a moment ago was that
the industry works by spreading risk, so that if you have a
loss in a particular area or line, that those losses as to the
corporation will be offset by profits from other areas of
activity. It would seem to me to be fairly advantageous, if I
was in that marketplace, to have insurance in lovely
Pennsylvania, Florida, as many places as I could get because
the likelihood of repetitive loss spread across the broader
market would be far less, thereby making capital adequacy a
much more sure thing than if I was a single line person located
on the coastline of Florida and that is the only place I sold.
Is that logic flawed?
Mr. McOwen. No, I think that logic is accurate. I am not
sure that a federal charter is necessarily the answer to market
availability in a state with a catastrophe exposure. I think an
optional federal charter is intended to answer other questions
than market availability. However, you are correct, spread of
risk is certainly what makes insurance work. And the ability to
write the same kinds of exposures in multiple states is an
advantage for a company. Unfortunately, we cannot write
hurricane exposure insurance, for instance, in 50 states. There
are only a few states that have a hurricane exposure. And,
again, I don't think an optional federal charter is intended to
enhance market availability or to answer those problems of
catastrophe issues.
Chairman Baker. Sure, no. But my point, contrary to that of
Mr. Kanjorski, subsidization of some other consumer of the same
company located in a different jurisdiction, that occurs
because capital is fungible. Where you have losses, you use
those resources to pay off the losses. And you hope by having
the risk spread in broad enough jurisdictions, you make enough
money on the whole to be able to remain solvent. So my only
point was that broader geographic exposure, at least in that
marketplace, makes some sense.
Mr. Kanjorski?
Mr. Kanjorski. Well, the only point--you are absolutely
right, but when you carry that to its logical conclusion, the
people in Pennsylvania would be paying a higher insurance rate
because of the losses of Mr. McOwen's company in Florida.
Chairman Baker. Correct.
Mr. Kanjorski. So you would be accomplishing, outside of
the federal system of catastrophic insurance but you would be
saying because you have a national charter, you folks in
Pennsylvania on the high mountains that never get flooded,
never get a hurricane, your premium is going to go up because
we have losses in Florida. And that may be the disadvantage of
having the federal charter, because right now the insurance
concentrates, particularly in the smaller companies, so that it
gives the area that doesn't have that catastrophic potential or
the potential loss, they don't pay a premium for that. And that
is where capital will flow.
Let me give you the example. If you had a client that
wanted to build a $100 million building, and you have the
choice of Kokomo, Indiana or Miami Beach, Florida. Naturally,
there wouldn't be much rocket science to think that if it goes
to Miami Beach, Florida, appreciation is going to be much
better on his asset. But the thing in the insurance business,
that if you honestly assess premiums for risk, his premium
against hurricane loss in Florida is probably going to put his
rate two or three times what it would be in Kokomo, Indiana.
Therefore, he would look at Kokomo, Indiana as a potential
investment because of the high risk. If you uniformize that
risk, you are going against social policy and encouraging
capital to flow to the highest risk areas, because the under-
risk areas are going to pick up the premium for it.
Mr. McOwen. Well, could I add a comment to that?
Chairman Baker. Certainly, jump in.
Mr. McOwen. If you look at the federal flood model--
Mr. Kanjorski. Well, that is subsidized.
Mr. McOwen. Well, but the point I was going to make is that
flood insurance is required for homeowners who live in areas
where there is a likely flood. We don't require all homeowners
in all states to buy flood insurance to spread the risk. But we
do require all homeowners who live in a flood area to buy flood
insurance.
Mr. Kanjorski. Yes, but it is so subsidized.
Mr. McOwen. It is subsidized, but the price reflects the
fact that there is exposure to flood in those areas. I am just
addressing the fact that--
Mr. Kanjorski. No, no, but by virtue of the fact that it is
subsidized, we are spreading the risk to the entire country.
The taxpayers are picking it up on an equal basis. That is a
tremendous spread of the risk, but we do it through
governmental activity. That is exactly what we probably do not
want to do, to give an area that has a great disadvantage an
equality with other areas, because we are going to require
either the private marketplace to pick it up by virtue of the
federal charter or subsidization by using taxpayers' money--the
country as a whole, to pick up that loss.
The very nice thing about insurance now is that it stays
very close to the supply and demand of the marketplace.
Mr. McOwen. Right.
Mr. Kanjorski. It is a real market force once the
conditions are worked out and rates are worked out. But we are
talking about disturbing that when we are talking about
spreading the rates uniformly by either action of the Congress
or action of the federal commissioner or by subsidization. That
changes the marketplace.
And I think I hear from most of the insurance industry that
they really like their free enterprise system and supply and
demand and really don't like all of us to stick our hands in
their brew, if you will. And we have been doing it in several
ways like subsidization. But at least that is an honest--we say
it is so important, federal taxpayers are going to subsidize
terrorist insurance, we are talking about subsidizing. No
question about it. But here now we are talking about
indirectly, through charter mechanism and federal control, the
ability to subsidize to the entire country base without putting
that up to a vote or without having the investor or the insured
have any say in the matter.
Chairman Baker. But I think that happens today, Paul, to
some extent where you have a large corporation that is licensed
to do business in 50 states, who has capital available. The
regulator looks at the capital adequacy of the parent company.
And the company sets its rate based on, let's say, competitive
factors, the fact that it can have a loss leader and offer a
product at a lower price, it captures significant parts of the
market. Then go back to the regulator and allege now because of
market conditions, people going out of a business, you have a
higher likelihood of loss, you are going to raise your premium.
So I think it happens indirectly today. You are correct, I
think it makes it more pronounced.
Mr. Kanjorski. No, but today State Farm was able to get out
of Florida. They just said we won't write casualty loss
insurance in Florida, because it is a loss. Under our system,
they are not going to be allowed to get out of Florida. We are
going to say you are licensed nationally. Florida has a problem
because of its hurricanes. But you are going to write insurance
in Florida and pass it off to the other 49 state participants
or you are not going to have your federal charter. And you
know, the Congress would ultimately do that.
And when I look at the three major states here that are
giving us problems--I didn't catch the fourth--but New York,
California, and Florida are the least cooperative, apparently,
in getting this uniform system on a state basis, compact basis,
started, I begin to wonder just why they do that. And they are
the three states for catastrophic insurance and have taken
advantage of catastrophic insurance. They are the three states
that perhaps a what, about 20 percent of the American
population and maybe about 40 percent or 50 percent of the
economic activity of the country.
Chairman Baker. Now, I think that may go to economic
issues, wanting to maintain control of significant parts of the
market without the enhanced competition that would be brought
about if you didn't have the barriers. But--
Mr. Kanjorski. Mr. Chairman, I know that we could go for--
Chairman Baker. Yes, we probably will.
Mr. Kanjorski. I just want to thank you. I think these have
been great hearings. The first panel and this panel have been
very informative. I can't think of too many hearings that I
have been this interested in, quite frankly, since I have been
in Congress.
Chairman Baker. And that is saying something, because this
is the third of these hearings that have gone four and five
hours. And we have actually been interested in the topic. So
you all have done a marvelous job. Thank you very much. I do
express our appreciation. Should you have additional comments,
the record will remain open for 30 days, as all members may
have additional time to file any amended statements they wish
to file for the committee's purposes.
With that, I thank you, and our meeting stands adjourned.
[Whereupon, at 5:00 p.m., the subcommittee was adjourned.]
A P P E N D I X
June 4, 2002
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