[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








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80-131                          WASHINGTON : 2002
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice      BARNEY FRANK, Massachusetts
    Chair                            PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska              MAXINE WATERS, California
RICHARD H. BAKER, Louisiana          CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama              LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware          NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma             KEN BENTSEN, Texas
ROBERT W. NEY, Ohio                  JAMES H. MALONEY, Connecticut
BOB BARR, Georgia                    DARLENE HOOLEY, Oregon
SUE W. KELLY, New York               JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                MAX SANDLIN, Texas
CHRISTOPHER COX, California          GREGORY W. MEEKS, New York
DAVE WELDON, Florida                 BARBARA LEE, California
JIM RYUN, Kansas                     FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama                   JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio           JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina      CHARLES A. GONZALEZ, Texas
DOUG OSE, California                 STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois               MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin                HAROLD E. FORD, Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
VITO FOSELLA, New York               JOSEPH CROWLEY, New York
GARY G. MILLER, California           WILLIAM LACY CLAY, Missiouri
ERIC CANTOR, Virginia                STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York       MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania         
SHELLEY MOORE CAPITO, West Virginia  BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio

             Terry Haines, Chief Counsel and Staff Director
















            Subcommittee on Capital Markets, Insurance, and 
                    Government Sponsored Enterprises

                 RICHARD H. BAKER, Louisiana, Chairman

ROBERT W. NEY, Ohio, Vice Chairman   PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut       GARY L. ACKERMAN, New York
CHRISTOPHER COX, California          NYDIA M. VELAZQUEZ, New York
PAUL E. GILLMOR, Ohio                KEN BENTSEN, Texas
RON PAUL, Texas                      MAX SANDLIN, Texas
SPENCER BACHUS, Alabama              JAMES H. MALONEY, Connecticut
MICHAEL N. CASTLE, Delaware          DARLENE HOOLEY, Oregon
EDWARD R. ROYCE, California          FRANK MASCARA, Pennsylvania
FRANK D. LUCAS, Oklahoma             STEPHANIE TUBBS JONES, Ohio
BOB BARR, Georgia                    MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, North Carolina      BRAD SHERMAN, California
STEVEN C. LaTOURETTE, Ohio           GREGORY W. MEEKS, New York
JOHN B. SHADEGG, Arizona             JAY INSLEE, Washington
DAVE WELDON, Florida                 DENNIS MOORE, Kansas
JIM RYUN, Kansas                     CHARLES A. GONZALEZ, Texas
BOB RILEY, Alabama                   HAROLD E. FORD, Jr., Tennessee
VITO FOSSELLA, New York              RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
GARY G. MILLER, California           RONNIE SHOWS, Mississippi
DOUG OSE, California                 JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      STEVE ISRAEL, New York
MIKE FERGUSON, New Jersey            MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
MIKE ROGERS, Michigan
















                            C O N T E N T S

                              ----------                              
                                                                   Page
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

                              ----------                              


                         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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