[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



 
                    REFORMING INSURANCE REGULATION:


                      MAKING THE MARKETPLACE MORE


                       COMPETITIVE FOR CONSUMERS

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                     CAPITAL MARKETS, INSURANCE AND
                   GOVERNMENT SPONSORED ENTEREPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                            NOVEMBER 5, 2003

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-63








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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          CHARLES A. GONZALEZ, Texas
    Carolina                         MICHAEL E. CAPUANO, Massachusetts
DOUG OSE, California                 HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
MARK GREEN, Wisconsin                KEN LUCAS, Kentucky
PATRICK J. TOOMEY, Pennsylvania      JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut       WM. LACY CLAY, Missouri
JOHN B. SHADEGG, Arizona             STEVE ISRAEL, New York
VITO FOSSELLA, New York              MIKE ROSS, Arkansas
GARY G. MILLER, California           CAROLYN McCARTHY, New York
MELISSA A. HART, Pennsylvania        JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia  JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio              STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota           ARTUR DAVIS, Alabama
TOM FEENEY, Florida                  RAHM EMANUEL, Illinois
JEB HENSARLING, Texas                BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey            DAVID SCOTT, Georgia
TIM MURPHY, Pennsylvania              
GINNY BROWN-WAITE, Florida           BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona

                 Robert U. Foster, III, Staff Director
  Subcommittee on Capital Markets, Insurance and Government Sponsored 
                              Enterprises

                 RICHARD H. BAKER, Louisiana, Chairman

DOUG OSE, California, Vice Chairman  PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut       GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio                DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama              BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware          GREGORY W. MEEKS, New York
PETER T. KING, New York              JAY INSLEE, Washington
FRANK D. LUCAS, Oklahoma             DENNIS MOORE, Kansas
EDWARD R. ROYCE, California          CHARLES A. GONZALEZ, Texas
DONALD A. MANZULLO, Illinois         MICHAEL E. CAPUANO, Massachusetts
SUE W. KELLY, New York               HAROLD E. FORD, Jr., Tennessee
ROBERT W. NEY, Ohio                  RUBEN HINOJOSA, Texas
JOHN B. SHADEGG, Arizona             KEN LUCAS, Kentucky
JIM RYUN, Kansas                     JOSEPH CROWLEY, New York
VITO FOSSELLA, New York,             STEVE ISRAEL, New York
JUDY BIGGERT, Illinois               MIKE ROSS, Arkansas
MARK GREEN, Wisconsin                WM. LACY CLAY, Missouri
GARY G. MILLER, California           CAROLYN McCARTHY, New York
PATRICK J. TOOMEY, Pennsylvania      JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia  JIM MATHESON, Utah
MELISSA A. HART, Pennsylvania        STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota           BRAD MILLER, North Carolina
PATRICK J. TIBERI, Ohio              RAHM EMANUEL, Illinois
GINNY BROWN-WAITE, Florida           DAVID SCOTT, Georgia
KATHERINE HARRIS, Florida
RICK RENZI, Arizona




                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    November 5, 2003.............................................     1
Appendix:
    November 5, 2003.............................................    57

                               WITNESSES
                      Wednesday, November 5, 2003

Ahart, Tom, President, Ahart, Frinzi & Smith Insurance Agency....    44
Breslin, Hon. Neil, Senator, New York State, on behalf of the 
  National Conference of Insurance Legislators...................     9
Fisher, William B., Vice President and Associate General Counsel, 
  Massachusetts Mutual Life Insurance Company....................    43
Fitts, John T., Deputy General Counsel, Progressive Insurance 
  Company........................................................    40
Hannon, Hon. Kemp, Senator, New York State, on behalf of the 
  National Conference of State Legislatures......................    12
McKnight, Markham, President and CEO, Wright and Percy Insurance.    47
Pickens, Hon. Mike, Commissioner of Insurance, Arkansas; 
  President, National Association of Insurance Commissioners 
  accompanied by the Hon. Gregory Serio, Superintendent of 
  Insurance, New York............................................     7
White, Jaxon A., Chairman & CEO, Medmarc Insurance Group.........    41
Wolin, Neal S., Executive Vice President & General Counsel, The 
  Hartford Financial Services Group, Inc.........................    46

                                APPENDIX

Prepared statements:
    Gillmor, Hon. Paul E.........................................    58
    Kanjorski, Hon. Paul E.......................................    59
    Breslin, Hon. Neil...........................................    61
    Fisher, William B............................................    68
    Fitts, John T................................................    79
    Hannon, Hon. Kemp............................................    86
    McKnight, Markham............................................    99
    Pickens, Hon. Mike...........................................   110
    Tubertini, Ronnie............................................   148
    White, Jaxon A...............................................   159
    Wolin, Neal S................................................   164

              Additional Material Submitted for the Record

American Land Title Association, prepared statement..............   167
American Academy of Actuaries, Public Policy Monograph, Role of 
  the Actuary Under Federal Insurance Regulation.................   169
National Association of Mutual Insurance Companies, prepared 
  statement......................................................   184


                    REFORMING INSURANCE REGULATION:



                      MAKING THE MARKETPLACE MORE



                       COMPETITIVE FOR CONSUMERS

                              ----------                              


                      Wednesday, November 5, 2003

             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 2:30 p.m., in 
Room 2127, Rayburn House Office Building, Hon. Richard H. Baker 
[chairman of the subcommittee] presiding.
    Present: Representatives Baker, Shays, Bachus, Royce, 
Kelly, Miller, Tiberi, Kanjorski, Sherman, Inslee, Moore, Lucas 
of Kentucky, Israel, Ross, Emanuel, and Scott.
    Also Present: Representative McNulty.
    Chairman Baker. I am informed that Mr. Kanjorski is on his 
way. With that understanding, I am going to proceed to call our 
meeting of the Capital Markets Subcommittee to order for the 
purpose of receiving testimony today on the advisability and 
need for reform of our current national insurance regulatory 
marketplace.
    I am looking forward to hearing the perspectives of the 
members of our distinguished panels today as to the need for, 
and the nature of, proposed regulatory reform. Over the past 
years, the subcommittee has examined this subject matter and 
received various recommendations and stated plans of action. We 
certainly hope to hear encouraging reports on the status of 
those reform efforts.
    I feel it is very important to state that reform is 
essential, because delivery of product to consumers, where 
limited, now results in unnecessarily high premium rates. The 
lack of competitive product in the marketplace only further 
sustains those non-responsive rate structures.
    I do think it appropriate for the committee to move only 
after careful analysis and understanding. But we should seek 
the broadest possible scope of reform while recognizing the 
importance of the State structure in the protection of consumer 
interests. I do not think those goals are mutually exclusive.
    While we seek the broadest scope of possible reform, I also 
understand there are limiting factors for proposals that may 
not ultimately gain Congressional approval. Other than no 
reform, dead reform is equally unacceptable. I appreciate the 
efforts made to date by all of the parties who have exhibited 
interest in seeing national uniformity in various perspectives, 
but I don't think that we frankly have made sufficient progress 
through the current hearing date that would not in fact cause 
the Congress to take further actions on its own initiative.
    It is my hope that we receive from each perspective, from 
all market stakeholders, recommendations that can be weaved 
together into some sort of policy platform that could possibly 
lead to congressional action next year. Short of that, it would 
be my hope we could at least reach agreement on a time line by 
which meaningful reforms could be attained through State and 
local initiatives, and, absent attaining that goal, suggesting 
automatic congressional action after waiting a few more years.
    I am not encouraged, because the Graham-Leach-Bliley effort 
only took about 75 years. Sarbanes-Oxley, fueled by a national 
crisis, took a few months. Somewhere between a few months and 
75 years, I think the insurance regulatory structure is 
probably solvable. Seeing how we are closing out the first real 
decade of discussion on this matter, maybe we are further down 
the road of progress than some may expect.
    Given those perspectives, I certainly welcome each of you 
to the hearing today and look forward to receiving your 
comments.
    Chairman Baker. Let me turn to this side. Is there any 
member on this side who has an opening statement that would--
Mr. Israel.
    Mr. Israel. Mr. Chairman, I had planned to introduce one of 
our experts, if it is appropriate to do that now.
    Chairman Baker. Since we have a number of requests for 
members to introduce, particularly members of this panel, and 
while we are waiting Mr. Kanjorski, why don't we proceed with 
those specific introductions.
    Please proceed, Mr. Israel.
    Mr. Israel. Thank you very much, Mr. Chairman. I appreciate 
your convening this very important hearing on insurance 
regulation. And while there is a diversity of opinion on this 
issue, and while I continue to study it, I am very pleased that 
one of our experts today is a distinguished elected official on 
Long Island, which I represent, and it is my privilege to 
introduce him to the committee.
    He is a fellow Long Islander, Senator Kemp Hannon, of New 
York. He is Co-chair on the National Conference of State 
Legislatures Task Force on the Federalization of Insurance 
Regulation. Senator Hannon is uniquely qualified to provide us 
with insight into the ongoing debate of the role of the Federal 
Government in insurance regulation.
    Senator Hannon also serves as the chairman of the New York 
State Senate Health Committee, and has previously served as 
chair of the Council for State Governments Committee on 
suggested State legislation.
    I am very eager to hear his insights. I look forward to 
working with him and enjoy the relationship, the bipartisan 
relationship that we have on Long Island. I am so pleased to 
welcome him to this committee today.
    I yield back my time, Mr. Chairman.
    Chairman Baker. Thank you, Mr. Israel.
    I believe Mr. Ross has an introduction that he would like 
to make at this time.
    Mr. Ross. Thank you, Mr. Chairman.
    One of our panelists today, an expert witness, comes from 
my home State and actually grew up in my district and is 
someone I think is doing an outstanding job on behalf of our 
state.
    And I am pleased to introduce Mike Pickens, the 
Commissioner of Insurance for the State of Arkansas. And Mike 
was appointed Insurance Commissioner in 1997, back when I was 
still in the State senate, and was reappointed for a second 4-
year term in 2001. He is a graduate of Pine Bluff High School, 
which has an exceptional football team this year.
    He has attended the University of Mississippi, or Old Miss 
as we call it, in Arkansas, and he returned to the University 
of Arkansas at Little Rock where he attended the school of law, 
and received his juris doctorate degree.
    And prior to his post as the Insurance Commissioner, Mike 
was a partner in the Little Rock law firm of Friday, Eldridge, 
and Clark where he practiced in the areas of insurance defense, 
representing policyholders in personal injury and workers' 
compensation litigation.
    In Arkansas, the Commissioner is responsible for protecting 
insurance consumers through insurer solvency and market conduct 
regulation. And, as a licensed independent insurance agent 
myself, I can speak firsthand to the efforts of this agency in 
ensuring that companies conduct their businesses fairly and in 
a manner that puts the consumers first.
    The Arkansas Insurance Department has been identified as 
one of the Nation's most progressive insurance regulatory 
agencies by the A.M. Best Company, one of the country's oldest 
and most highly respected insurer rating organizations.
    Mike was elected President of the National Association of 
Insurance Commissioners back in 2002, which is composed of the 
chief insurance regulatory officials from the 50 States, the 
District of Columbia, and four of the five U.S. Territories.
    I am pleased to hear that the National Association of 
Insurance Commissioners is making progress in its efforts to 
modernize State regulation with implementation of the insurance 
regulatory modernization action plan that was adopted back in 
September of this year.
    I look forward to Mike's testimony and the other witnesses' 
that have joined us today, and I appreciate this committee's 
commitment to examining this industry that is essential to all 
Americans. Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Mr. Ross.
    Mr. McNulty, would you care to make an introduction?
    Mr. McNulty. I thank the Chairman and the Ranking Member 
for allowing a nonmember of the committee into the room today 
for the purpose of making an introduction.
    I also want to welcome Commissioner Pickens, whom we have 
surrounded by New Yorkers. I also want to extend greetings to 
my very dear friend, Senator Kemp Hannon, with whom I served in 
the assembly many, many years ago, and Greg Serio, the 
Superintendent of Insurance from New York, who will be 
introduced a bit later by another member of the panel, but who 
I want to greet because he is a friend and he is a constituent.
    And, finally, I want to introduce my longtime friend, 
Senator Neil Breslin. Senator Breslin is not just an 
outstanding lawyer and a great Senator, and considered an 
expert on insurance issues, but, more importantly to me, he and 
the members of his family have been friends to me and the 
members of my family for a very, very long period of time. And 
it is always great to be with him, to work with him, and to 
welcome him to Washington, and I look forward to being with him 
soon back home in the district.
    So I welcome all of the panelists, especially my State 
Senator. Thank you, Mr. Chairman, and I thank the Ranking 
Member.
    Chairman Baker. Thank you, Mr. McNulty.
    Mrs. Kelly, did you wish to make an introduction at this 
time?
    Mrs. Kelly. I do. And thank you very much, Mr. Chairman. I 
really appreciate your holding this hearing on improving 
insurance regulation, which is an issue of great concern not 
only to me and the members of the committee, but to people 
across the country who are consumers of the products.
    Today we are going to have a lot of diverse witnesses with 
distinct interests, backgrounds, and experiences. And despite 
all of these unique perspectives, I think we all agree that 
protecting consumers and providing the best service possible 
are really the goals that we are focused on here today.
    I think we also all agree that a lack of consistency and 
regulation from State to State hurts Americans by undermining 
protections and driving up costs. And the solution is a more 
efficient and systematic approach to regulation.
    As we continue our work on these issues, I am really 
honored to have the opportunity to introduce--we have a couple 
of witnesses from the State of New York. I understand that some 
have been introduced, but I would like to introduce the 
Superintendent of Insurance, Greg Serio. He has been wonderful 
for our offices to work with.
    And, Greg, we are very happy to have you here today. There 
is a lot of important issues that we are going to discuss here 
today. But I don't think there is anything that is more 
important than doing what we have to do to make sure that not 
only are we protecting our consumers, but that they understand 
the products that they are purchasing.
    And, I believe that Mr. Serio has prided himself, and I am 
happy, too, because I applaud him in what he has been doing, 
because while carrying out his duties as a Superintendent of 
Insurance in New York, he has undertaken many successful 
programs and initiatives at the New York Insurance Department, 
including a successful effort to adopt the model producer 
licensing statute.
    I also would like to welcome Senator Breslin. I understand 
someone has also introduced you. It is a pleasure to have you 
all here today. I am hopeful that we are able to wrap our arms 
around this and come to some conclusions on it. We tried a long 
time ago, several years ago, to address this issue, and tried 
to get passed a bill that the insurance industry had been 
interested in trying to get passed for self-regulation since 
18--it was pending in Congress since 1847. We got part of it 
done; we just have to get the rest of the job done. I am 
hopeful that some of the testimony today is going to finish 
that up.
    It is really a pleasure to have you here. I look forward to 
your testimony and to your initiatives that you are offering to 
modernize insurance regulation in a way that is going to better 
serve all of us.
    Thank you, Mr. Chairman. Yield back.
    Chairman Baker. I thank the gentlelady.
    Mr. Kanjorski for an opening statement.
    Mr. Kanjorski. Thank you, Mr. Chairman. We meet today for 
the second time in the 108th Congress to consider insurance 
issues.
    Today's hearing will focus on the latest modernization 
efforts announced by the National Association of Insurance 
Commissioners, and the prospects for achieving State-based 
regulatory reform.
    Before we hear from our experts, I believe it is important 
to review some observations about the insurance industry that I 
have raised at our previous hearings on this matter.
    Insurance, as my colleagues already know, is a product that 
transfers risk from an individual or business to an insurance 
company. Every single American family has a need for some form 
of insurance, especially products like auto, renters' or 
homeowners' insurance. The vast majority of these families also 
has or wants other insurance products, like life, health and 
long-term care policies.
    The McCarran-Ferguson Act authorized the States to regulate 
the insurance business. And 4 years ago this month, the 
Congress reaffirmed this system in approving the law to 
modernize the financial industry. As a result, each State 
currently has its own set of statutes and rules governing the 
insurance marketplace. Traditionally the States have highly 
regulated the insurance industry. Many States, however, have 
begun to experiment with their regulatory models in recent 
years. In the last several sessions of Congress, our committee 
has held regular hearings about the need for regulatory reform 
in the insurance industry.
    During these debates, we have heard from a variety of 
viewpoints on the need for reform and the options for achieving 
it. These hearings have also helped to educate us generally 
about the mechanics of the insurance industry and the latest 
regulatory developments in it. As a whole, however, the Federal 
Government continues to lag behind in its knowledge of 
insurance issues.
    As our witnesses from Mass Mutual will point out later 
today, the insurance business is the only portion of the 
financial services industry that does not have a regulatory 
presence in Washington.
    At times, this lack of expertise has caused difficulties 
for us. For example, although many Members of Congress had 
concerns about the insurance industry's ability to respond to 
the 2001 terrorist attacks, they had difficulty in immediately 
identifying Federal experts to advise them in these matters.
    The deficiency of Federal knowledge about the insurance 
industry might have also impeded our efforts to adopt 
expeditiously the terrorism reinsurance backstop law. Everyone 
involved in the debate on future insurance regulation agrees on 
the need for reform.
    From my perspective, promoting competition through fair and 
effective regulation should ultimately result in better and 
more affordable insurance products for consumers. While I am 
pleased that the National Association of Insurance 
Commissioners recently released an action plan for pursuing 
further modernization efforts for regulating the insurance 
marketplace, this proposal was developed 3-1/2 years after the 
release of its paper calling for the efficient market 
regulation of the insurance business.
    Absent demonstrated advances in these State insurance 
regulatory efforts going forward, the Congress may need to 
consider altering the statutory arrangements through the 
creation of an optional Federal chartering system or the 
adoption of other reforms.
    In closing, Mr. Chairman, I want to commend you for 
bringing these matters to our attention. I believe it is 
important that we learn more about the views of the parties 
testifying before us today, and, if necessary, work to further 
refine and improve the legal structures governing our Nation's 
insurance system. I yield back.
    [The prepared statement of Hon. Paul E. Kanjorski can be 
found on page 59 in the appendix.]
    Chairman Baker. Thank the gentlemen. Mr. Lucas.
    Mr. Lucas. Mr. Chairman, I am not big on formal opening 
statements, but I would like to say that this is of a 
particular interest to me, since I spent, in my prior life, 32 
years in the insurance business and I had a lot of frustrations 
about the speed to market of products and so forth, working in 
many States.
    And I look forward to the testimony here. And I am hoping 
that we can move forward and get some very meaningful reform. 
Thank you.
    Chairman Baker. Thank you, Mr. Lucas.
    Mr. Bachus, did you have an opening statement?
    Mr. Bachus. Mr. Chairman, I will make it brief. I want to 
thank you, first of all, for holding this hearing. Since the 
jurisdictional change in 2001 to include insurance as a part of 
the House Financial Services Committee, I have heard from 
numerous regulators in various sectors of the insurance 
industry on this very important issue.
    While I applaud the life insurance industry for attempting 
to make their case of the need for a dual system of insurance 
regulation in their bid to compete with federally regulated 
security products, I still have many concerns regarding various 
proposals for an optional Federal insurance charter. In 
particular, proposals which include the property and casualty 
line of insurance as a part of the Federal charter.
    As you may know, Alabama has a $1.3 billion per year 
insurance business, resulting in $240 million of insurance 
premium taxes every year. A proposed optional Federal insurance 
charter not only could reduce this important source of State 
revenue in an era of tight State budgets and dwindling State 
income taxes but will also threaten the ability for States to 
adequately fund their State insurance departments.
    Issues such as state insurance premium taxes must be 
addressed as part of any optional Federal insurance charter. 
Currently our Alabama Insurance Commissioner, Walter Bell, is 
working with the National Association of Insurance 
Commissioners on an insurance regulatory modernization plan, 
which will include a streamlined uniform regulatory process for 
product approval and additional consumer protections.
    I look forward to hearing about this proposal today from 
the NAIC, and comments from the independent insurance agents on 
this new proposal.
    In addition, I look forward to listening to representatives 
of Mass Mutual, Hartford, and the Council of Insurance Agents 
and Brokers on their innovative proposals for modernizing our 
insurance regulatory system.
    And again, I thank you for holding this hearing.
    Chairman Baker. Thank you, Mr. Bachus.
    Any member desiring to make an additional opening 
statement? Mr. Scott.
    Mr. Scott. Thank you very much, Chairman Baker and Ranking 
Member Kanjorski. I want to thank you for holding this hearing 
today. And I just want to also just mention how important the 
insurance industry is.
    Several of my constituents have expressed opposition to a 
national approach, but nevertheless I will listen today to the 
testimony with an open mind. Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Mr. Scott.
    Any further opening statements? If not, at this time I 
would like to proceed to recognize the members of our first 
panel.
    The first to be recognized would be the Honorable Mike 
Pickens, Commissioner of Insurance for the great State of 
Arkansas, who appears here today as the President of the 
National Association of Insurance Commissioners, and is 
accompanied by the Honorable Gregory Serio, Superintendent of 
Insurance from the State of New York.
    Chairman Baker. Mr. Pickens, you are certainly warmly 
welcomed here today.

  STATEMENT OF HON. MIKE PICKENS, COMMISSIONER OF INSURANCE, 
  ARKANSAS, AND PRESIDENT, NATIONAL ASSOCIATION OF INSURANCE 
       COMMISSIONERS; ACCOMPANIED BY HON. GREGORY SERIO, 
             SUPERINTENDENT OF INSURANCE, NEW YORK

    Mr. Pickens. Mr. Chairman and members of the subcommittee, 
thank you very much for allowing us the opportunity to be here 
today. It truly is a privilege to have a chance to advise you 
of the progress State regulators have made in our consumer 
protection and market-oriented regulatory reform efforts.
    I particularly appreciate my Representative, Mr. Mike Ross, 
or one of our Representatives in Arkansas, and his kind 
introduction.
    First, though, Mr. Chairman, I would like to take this 
opportunity to thank you for your interest in and your support 
of our important work. Your oversight of State insurance 
regulation truly has been a positive force for necessary 
change. And we recognize that.
    I commend Financial Services Committee Chairman Mike Oxley. 
I commend you, Mr. Chairman, and I commend all of the members 
of the Financial Services Committee for what I believe is your 
highly progressive leadership on these issues.
    Mr. Chairman, let there be no doubt, State insurance 
regulators are committed to creating a regulatory system for 
the 21st century, one that both protects our fellow insurance 
consumers but also one that facilitates growth and stability in 
the financial services marketplace.
    Our goal is very simple: It is to make regulation more 
effective and more efficient; but also, at the same time, to 
make it less costly and less burdensome. I believe we have 
demonstrated commitment by our expeditious compliance with the 
Graham-Leach-Bliley Act of November of 1999.
    The NAIC has to date certified 41 States as being GLB-
compliant in producer licensing. That constitutes 67 percent of 
the premium volume in the country. We expect very soon to 
certify New York, who just passed a bill this summer as being 
GLB-compliant. And when that happens, we will have 75 percent, 
75 percent of the marketplace GLB-compliant.
    All 50 States and the District of Columbia have passed 
privacy laws or regulations to protect consumers' personal 
financial and health information. And as has already been 
mentioned today here, Mr. Chairman, in September State 
regulators unanimously passed a reinforced commitment insurance 
regulatory modernization action plan.
    This action plans sets out our goals in the areas of 
consumer protection, market regulation, speed to market for 
insurance products, producer licensing, insurance company 
licensing, solvency regulation, and change in insurance company 
control. The action plan also allows the NAIC to use our highly 
successful financial solvency accreditation program to enforce 
compliance where it is necessary and appropriate to do so. This 
action plan sets deadlines by which States should accomplish 
these goals.
    And, Mr. Chairman, I am here today, first and foremost, to 
commit to you that the NAIC and State regulators will reach 
these goals, but also to tell you that we can't do it alone. I 
believe, significantly, we are not alone in our efforts. Over 
the last several years we have enjoyed some very important 
allies in our work, all of whom--or many of whom, I should say, 
are at the table with me here today: the National Conference of 
Insurance Legislators, a group that Chairman Oxley helped 
found, and the National Conference of State Legislators have 
endorsed the NAIC's interstate compact for life insurance, 
annuity, disability and long-term care products. We received 
that endorsement just this summer.
    Both NCOIL and the NCSL have signed joint resolutions with 
the NAIC, clearly stating their support of State regulation of 
our modernization work, and also their strong opposition to a 
Federal regulator of the business of insurance.
    In October, the Council of State Governments passed a 
similar resolution that was sponsored by the CSG chair and my 
Governor, Mike Huckaby, in Arkansas.
    Mr. Chairman and Members, State regulators want and need 
your help and support, too. You each are very influential 
political leaders in your respective States. Please help us 
keep the pressure, help us keep the pressure on the insurance 
industry and encourage them to support our modernization 
efforts, not to undermine them in the States.
    Mr. Chairman, we also believe that it is important to note 
that the vocal minority of the industry out there calling for a 
Federal regulator for insurance consists of the very largest 
banks and life insurance companies that operate in the country 
today. The insurance business is significantly different from 
the banking and securities business. It touches every man, 
every woman, every child, every family in this country, 
including your families and my family. And the only people 
standing between all of us consumers and what far too often 
becomes these huge corporate bureaucracies are home-State, 
home-grown insurance regulators.
    Is it the real consumers our States, the grassroot 
consumers that are in Washington asking for a Federal regulator 
of the insurance business, or is it just the lobbyists for 
these huge insurance companies? Ask your constituents if they 
want to call some far-away government bureaucracy to help them 
with a consumer complaint about their roof or their car or 
their home or a life insurance or health insurance policy.
    If you ask your constituents--who I assure you don't always 
understand the legalese and the small print that are in ever-
increasingly complex insurance policies. When a consumer needs 
to call 911, they want that call and they expect that call to 
be a local call, not a long distance call.
    And as taxpayers, I think all of us would agree that none 
of us can afford the creation of yet another huge new costly 
bureaucracy in Washington, D.C., one that most certainly, 
ultimately, will be less accountable and less responsive than 
home-State regulators.
    Finally, the insurers and the agents in our States don't 
want the increased costs and the multiple layers of regulation 
a Federal regulator ultimately would create. And our State 
governments and our consumer protection guarantee funds can't 
afford what would inevitably be the loss of premium tax and 
other revenues that must ultimately go to fund a Federal 
regulator. And Mr. Bachus has already alluded to that. That is 
a serious concern for our governors and legislators.
    So in closing, Mr. Chairman and subcommittee members, let 
me just again ask that you please continue to support our 
State-based, market-oriented regulatory modernization efforts. 
All of us that are grassroots consumers in our States want and 
need you to do so.
    Again, thank you for your leadership. Thank you for the 
opportunity to visit with you here today. And we look forward 
to answering your questions.
    Chairman Baker. Thank you, Commissioner.
    [The prepared statement of Hon. Mike Pikens can be found on 
page 110 in the appendix.]
    Chairman Baker. Our next witness this afternoon is the 
Honorable Neil Breslin, State Senator from the State of New 
York, who appears here today on behalf of the National 
Conference of Insurance Legislators. Welcome, Senator.

  STATEMENT OF HON. NEIL BRESLIN, SENATOR, NEW YORK STATE, ON 
   BEHALF OF THE NATIONAL CONFERENCE OF INSURANCE LEGISLATORS

    Mr. Breslin. Chairman Baker, members of the subcommittee, 
thank you for inviting the National Conference of Insurance 
Legislators, or as we refer to NCOIL, to testify before you 
here today.
    I am a New York State Senator, representing the city and 
county of Albany, which amounts to some 300,000-plus people.
    NCOIL is a nonpartisan organization of State legislators 
whose primary purpose is to develop and promote legislation 
that protects consumers and fosters a vibrant insurance 
industry.
    As I stated in testimony before Chairman Oxley and the 
members of the Subcommittee on Commerce in the year 2000, NCOIL 
welcomes the oversight of Congress on insurance regulation. We 
are grateful for the ongoing dialogue with the committee and 
efforts to improve the State-based insurance regulation.
    Under State regulation, insurance markets have grown and 
become increasingly competitive. There are more than 3,300 
property and casualty insurance companies and over 1,800 life 
and health insurance companies now in competition throughout 
the U.S. Markets.
    At the outset, I would like to commend the NAIC for their 
work to improve insurance regulation. Their recently adopted 
action plan clearly demonstrates their understanding of the 
challenges facing insurance regulations in the 21st industry. 
While such pronouncements are laudable, they demand follow-up 
with real measurable results, and, more important, such 
regulatory improvements need to happen without delay.
    And I might parenthetically add, the NAIC, NCOIL, and the 
NCSL are working together in a way that they never did before.
    In my testimony today, I will report to you on the progress 
NCOIL has made to improve regulation of the insurance 
marketplace and our vision for continued modernization.
    The key areas of reform. I am here to say that insurance 
regulatory modernization is well on its way. By the end of the 
year, NCOIL will have adopted model laws or passed resolutions 
in support of NAIC model laws addressing four areas of 
insurance regulation, requiring immediate improvement.
    I would like to take a moment to provide you with a brief 
overview of what NCOIL has done in each of those areas. First, 
as Commissioner Pickens pointed out, insurance producer 
licensing. The States rose to the challenge to reform producer 
licensing laws, albeit on the threat from the Federal takeover 
of the multi-state licensing function as proposed by NARAB and 
GLBA. The number of States was 29. We far surpassed that. Today 
the NIC has certified 41 States as meeting the requirements for 
producer licensing reciprocity under GLBA. I am happy to report 
that the last State last month was New York, and I can assure 
you that the bill will pass the muster of the GLBA 
requirements.
    Secondly, speed to market for insurance products. Critics 
of State regulation point to a State-by-State regulatory 
approval process as too slow and too cumbersome, putting 
insurance carriers on an unlevel playing field with other 
financial service providers.
    NCOIL has taken a two-pronged approach to improving the 
insurance product approval process. First, for the approval of 
property casualty products, NCOIL has adopted the Property 
Casualty Insurance Modernization Act. The NCOIL model is a step 
towards the competitive rating system which is found in 
Illinois.
    The NCOIL model offers States an alternative to prior 
approval mechanisms that can stifle innovation and force higher 
prices upon all consumers. To date, several States have based 
their insurance rate modernization initiatives on the concepts 
found in the NCOIL model law.
    Second, for the approval process for life insurance and 
related products, NCOIL worked closely with the NAIC and the 
NCSL with the development of the Interstate Insurance Product 
Regulation Compact. It was my privilege to recommend the 
compact approach and testimony at a hearing here in Congress in 
the year 2000. NCOIL earlier this year adopted a resolution 
supporting the compact and is encouraging the States to 
consider it during the 2004 legislative session.
    Thirdly, company licensing. NCOIL adopted in July of 2000 
the Company Licensing Modernization Act. The model act can 
promote consistency among the 50 States in licensing insurance 
companies, using procedures in the NAIC uniform certificate of 
authority application.
    The NAIC has made good progress streamlining and 
simplifying company licensure through its ALERT program. 
However, State-specific deviations still remain. State 
enactment of the NCOIL company licensing model will bring 
greater uniformity to company licensing.
    And, finally, market conduct regulation. As NCOIL past 
President Terry Park testified in May of this year before the 
Oversight and Investigations Subcommittee, problems with the 
current market conduct regulatory system are 
glaring.Representative Park based his statement on a 4-year 
study made by the research arm of NCOIL. Those findings of the 
NCOIL study are consistent with State market conduct 
regulations found in the recent GAO report on market conduct.
    As Representative Park testified in May, NCOIL planned to 
begin developing a model law addressing the problems with 
market conduct. I am happy to report to you that NCOIL will 
consider a market conduct surveillance model act when it 
convenes its annual meeting later this month. That model act 
would provide a statutory framework for market conduct 
regulation currently not found in most States. Once the model 
law is adopted by NCOIL, and enacted by the States, market 
conduct regulations will provide consumers with a greater level 
of protection than they have today.
    In conclusion, it is no coincidence that over the past 3 
years, NCOIL has doubled its efforts to bring about real and 
measurable improvements to the insurance regulation. State 
legislators are acutely aware of the forces at work to create 
an optional Federal charter for insurance companies.
    Our heads are not in the sand. We understand that political 
and marketplace realities demand that we improve State 
regulation. We understand that the status quo is not an option. 
In previous testimony before this subcommittee, NCOIL 
articulated its unwavering opposition to any encroachment on 
State insurance regulation. Our position has not changed. NCOIL 
strongly believes the creation of a new Federal bureaucracy 
would be unwise and most likely harmful and counterproductive 
to insurance buyers.
    NCOIL welcomes the attention that you, Chairman Oxley, and 
other members have given to the issue of insurance regulation. 
There is no question that your focus has expedited the pace of 
reform.
    I would be happy to answer questions after the panel. Thank 
you very much, Chairman.
    Chairman Baker. Thank you very much, Senator. We appreciate 
your participation here today.
    [The prepared statement of Hon. Neil Breslin can be found 
on page 61 in the appendix.]
    Chairman Baker. Our next witness is the Honorable Kemp 
Hannon, Senator for the State of New York, appearing today on 
behalf of the National Conference of State Legislatures. Thank 
you, Senator.

  STATEMENT OF HON. KEMP HANNON, SENATOR, NEW YORK STATE, ON 
    BEHALF OF THE NATIONAL CONFERENCE OF STATE LEGISLATURES

    Mr. Hannon. Thank you very much, Mr. Chairman, members of 
the subcommittee. Thank you, Mr. Israel, for your kind remarks 
in introducing me. Thank you for the opportunity to testify on 
behalf of the NCSL. I have submitted some written remarks and 
just will make some highlights from there.
    As was said, I am Kemp Hannon. I am a New York State 
Senator, where in that body I serve as chair of the Health 
Committee.
    Since 2001 I have served as co-chair of NCSL's Task Force 
to Streamline and Simplify Insurance Regulation. Currently my 
co-chair is Representative Frank Martino of Illinois.
    NCSL is a national bipartisan organization. And for the 
last 3 years we have worked hand in hand with NCOIL and with 
NAIC to work on a coordinated effort to streamline and simplify 
insurance regulation while preserving the advantages of the 
State system. I want to thank all of the members of this 
subcommittee and the staff for the interest they have had, 
especially since Graham-Leach-Bliley, in financial services and 
insurance regulation.
    Our position is that we strongly support the State 
regulation of the business of insurance, because we believe it 
is a different kind of product, one best suited for State 
regulation. Whereas banking and securities and mutual funds are 
about access to capital and risk-taking, insurance is a 
guarantee, a legal promise to pay benefits if and when someone 
loses their home, their health, their income, or a loved one.
    For over 150 years, we have effectively protected 
consumers, ensured that the promises made by insurers are kept, 
and we think it is a system that is worth preserving. State 
legislators accept the responsibility for creating a system 
meeting the challenges of the modern financial marketplace.
    The legislators and Commissioners have developed a shared 
vision for modernizing insurance regulation. We already have 
made significant progress in critical areas, and expect to 
continue widespread reform in the future.
    So for 2 years we have had a Task Force to Streamline and 
Simplify Insurance Regulation, working with the NAIC and NCOIL, 
open meetings, sitting, negotiating the proposed model compact 
for life insurance, annuities, disability and long-term care 
insurance, having that compact first adopted by NAIC, and then 
further hearings where we reached out to all interested 
consumers, parties, Attorney Generals in order to get comments.
    We identified speed-to-market issues as the issues greatest 
in need of attention. The compact for life insurance, et 
cetera, came about with a balance, geographical balance, large 
State/small State balance, in terms of the amount of insurance 
premium regulated, as well as the geographic balance.
    And the NCSL this summer endorsed a model statute, only the 
third time in its history endorsing a model statute. And in 
recognition of the significance of what this Congress has done 
in passing Graham-Leach-Bliley and starting a new era in regard 
to financial service regulation, we also endorsed this summer a 
statement of principles to guide State legislative efforts to 
modernize property and casualty insurance rate and form 
requirements, an area where States continue to make significant 
progress.
    State legislators will play an important role in other 
areas of reform, and we endorse the NAIC's modernization action 
plan.
    We ourselves, on an ongoing basis, have just established a 
Financial Services Standing Committee, so that the task force 
efforts can be continued as well as we can address the other 
issues raised by GLB.
    We believe that any Federal legislation in the area of 
insurance regulation would be a tremendous mistake. We believe 
that the Federal legislation would endanger effective State 
regulation, undermine consumer protection, and threaten the 
creation of a vast new costly Federal bureaucracy.
    It also risks introducing a host of unforeseen and 
unintended consequences. While it is easy to theorize what you 
would want to do in a model world for new insurance regulation, 
I think it is far more difficult, if not impossible, to 
establish and operate one. As chair of the Health Committee in 
New York, I deal daily with the unforeseen consequences of the 
1974 ERISA Act, the first Federal effort in the area of 
insurance.
    ERISA effectively transferred authority for employer-
sponsored benefit plans, the self-insured plans, from the 
States to the Department of Labor and Federal judiciary. It 
basically created a nonsystem for dealing with health insurance 
and gave pretty much the regulation of that nonsystem a bad 
name. It would be very easy to see how Federal action in the 
areas of life and property and casualty insurance could bring 
about similar unforeseen circumstances.
    And under the umbrella of my criticism of Federal 
regulation, I direct my attention also to the concept known as 
the optional Federal charter.
    We encourage you to continue on the ongoing dialogue with 
the States as we work to modernize insurance regulation, while 
preserving the advantages of the State system. We think that 
State reform, rather than Federal legislation, offers the best 
promise for a regulatory system meeting the needs of both 
consumers and industry in the 21st century.
    I thank you very much for your attention and would be very 
willing to answer any questions you may have.
    Chairman Baker. Thank you very much, sir.
    [The prepared statement of Hon. Kemp Hannon can be found on 
page 86 in the appendix.]
    Chairman Baker. I will start questions with Mr. Breslin. I 
appreciate the observations you have made with regard to the 
progress by the organization in setting model reforms in place, 
and certainly agree that the four targeted areas that the 
organization has outlined are certainly critical to the reform 
effort we are attempting to facilitate.
    You also indicated that, at least with regard to the 
licensing reform, that the Graham-Leach-Bliley trigger did have 
some operable consequence in obtaining the reforms achieved to 
date. Give me a reason for or reasons why, if we were to take 
the view in some period of time, a year, 2 years--and we will 
negotiate the terms--why we couldn't take the models adopted by 
the organization, and say that those have to be in place within 
a time certain.
    From the perspective that Graham-Leach-Bliley mandates 
triggered necessary reforms at the State level, what is wrong 
with taking--for example, the Illinois model, which I happen to 
think is a very good model, your company licensing reform--I 
understand you are soon to adopt your market conduct regulation 
reform model--take your work, and, as we often do in politics, 
make it our own and put a trigger date on it? Respond to it, if 
you would.
    Mr. Breslin. I think that ultimately may be something to be 
considered. But as you said in your initial remarks, we have 
kind of compressed 150 years into a couple of years. Graham-
Leach-Bliley is 4 years old. So there was an education process 
after GLBA, and the education process including those States 
representing over 75 percent of the industry, of complying with 
the NARAB provisions.
    So it worked there. The idea that we--if you told me 5 
years ago with market conduct, that we could put together a 
model bill in several months and interact with the NAIC and 
NCSL, and interact with the industry, and be prepared to come 
up with that model act--which we think, because we are now 
educating the whole industry, that the Federal Government is 
going to do things unless we do them ourselves.
    So I have a much more optimistic view now than I did when 
GLBA was passed for us to make our own repairs.
    Chairman Baker. Well, I am not arguing that the experts at 
the State level ought not be the contributors to the end 
product. What I am suggesting is we take the product you have 
developed and make it the model nationally, with a certain time 
by which the States can voluntarily implement, at the 
legislative level, or failing to do so in a certain period of 
time, ala Graham-Leach-Bliley, the Feds come in and do it for 
you.
    Mr. Pickens, would you want to respond to that, or give me 
your observations about the advisability or ill-advisability of 
that?
    Mr. Pickens. Yes, sir, sure. I must agree with Senator 
Breslin. I really believe that the NAIC now has a plan. We are 
on time. We are on target. It has only been 3 to 4 years since 
Graham-Leach-Bliley was passed. We were busy passing the 
privacy protection regulations required by GLBA. We were busy 
solving the producer licensing issue.
    We have made again a great deal of progress there. But I 
just don't believe at this point we need to consider a Federal 
option. There may be some point in the future when we should, 
all together, get together and talk about that. But at this 
time we have got a plan. We are on time. We are on target.
    If we can get the NAIC reforms enacted in the States 
working with our legislative partners here, I think we will be 
in good shape and we will satisfy the expectations of this 
subcommittee and the committee in general.
    Chairman Baker. Well, does the NAIC view the NCOIL models 
as products which are supportable? Are you all together on the 
direction of reform?
    Mr. Pickens. That is a good question. I think--we have had 
a great deal of input, as Senator Breslin mentioned, with NCSL 
and NCOIL. Our relationship has become very close over the last 
3 to 4 years.
    In fact, we--NCOIL allowed us to work with them in 
passing--I am sorry, in drafting their market conduct model 
that they expect to vote on in Santa Fe. I think it depends on 
what model you are talking about, to be honest with you, 
whether or not the NAIC would fully support implementation of 
all of those models.
    Obviously we prefer the action plan that we put on the 
table, and feel like that is what we would like legislators 
back in the States to help us with.
    Chairman Baker. Let me take the final piece then, because I 
am getting to near the end of my time. How long do you think it 
reasonable for Congress to wait? If I had to ask each of you 
for a clock, and given the fact that you have slightly 
different perspectives on what the marketplace ought to look 
like, marketplace regulation ought to look like at some point, 
what is that point?
    Do we wait another 2 years? Is it another 20? Can you set 
your own self-imposed clock? We have the responsibility, I 
think, to make sure consumers get access to product in a 
responsible manner with State consumer protections. If we agree 
on that principle, how do we get there, and how long do we wait 
on the sideline until we say, look, guys, we have given it our 
best effort, we need to act?
    Mr. Pickens. That is an excellent and fair question. We 
have tried to do that in our action plan. I think if you will 
take a close look at attachment A, Mr. Chairman, we give you an 
updated status as of November 2003, number one, what our plan 
is, and, number two, where we are in achieving the plan.
    The plan does set deadlines. For certain deadlines those 
reach out as far as 2008. That is the farthest deadline in the 
plan. The closest deadlines are December of this year. And many 
of the things that we have committed to in this action plan we 
have already done over the course of the last couple of years.
    Chairman Baker. I will probably come back on the next 
round. My time has expired. Mr. Kanjorski.
    Mr. Kanjorski. I know you all represent a special 
disposition as to the insurance industry, in terms of its State 
regulatory authority. Now, as a Commissioner you want to keep 
authority, and as legislators you like to keep it. But do you 
see any product or insurance activity that really does warrant 
national licensing or national enforcement?
    Mr. Hannon. What NAIC, NCSL, and NCOIL have done is 
proposed a compact so that there would be a national plan to 
deal with the approval of products for life, long-term care, 
disability and annuities. The thought on that was there was 
something especially needed, especially after Graham-Leach-
Bliley, so that insurance companies could have a speedy time to 
market for their products, when they would be competing with 
products from companies that either had a 30- or 60-day 
approval or no approval required.
    Now, that does not necessarily mean Federal, but it means 
national. But we have come up with a compact which would be 
allowable as an agreement among the States, so that there could 
be a filing with that compact entity, and once approved by that 
compact entity, that product could be sold in the participating 
States to the compact.
    That would be an answer affirmatively to your question, and 
I believe that is a viable way to go. It preserves the State 
regulatory authority. It gives them an ability to compete in 
the marketplace.
    Mr. Kanjorski. But are you guaranteeing all 50 States will 
be in compliance with that one standard?
    Mr. Hannon. No, but you are not guaranteed anything. In 
this case----
    Mr. Kanjorski. Well, if we do it by Federal law, it sure 
will be.
    Mr. Hannon. Well, even the last Federal law in regard to 
insurance, as I recall, was HIPAA in 1996. And it still doesn't 
have 50 States in compliance with that. We still have a couple 
on the east coast and the west coast that haven't opted in.
    So there are different ways of going about it. I think the 
best way of lawmaking is to get people to go about 
participating and buying in, whether it is by a Federal 
statute, whether it is by a compact, whether it is by mutual 
State statutes. Unless they buy in, you are going to find 
yourself with a statute that just is not as effective as it 
might otherwise could be.
    Mr. Kanjorski. Wouldn't really a compact operation just be 
a substitute national legislature? All you are doing is 
creating another arm out there representing the 50 States in 
the nature of a compact. Isn't that what the Congress is all 
about, that we are supposed to be the legislature for all of 
the States?
    Mr. Serio. There is a significant difference between the 
compact notion and a national legislator, or national 
legislation. And it comes down to this, and this has been 
proved many times in the use of compacts previously. That has 
been what we have been trying to do as the three groups here, 
and that is, take in the local environmental factors that you 
find in an insurance marketplace, in each of the individual 
States, and bring that into the policy being made.
    What we are trying to establish here is a baseline, and a 
baseline that can then be used and has the versatility to deal 
with the local features, local environmental factors, that are 
unique to the individual States that cannot be wrapped up in 
one uniform standard.
    Mr. Kanjorski. Commissioner, you put your hand on the very 
point that I had a hesitancy as to what to do here. I think 
there is an absolute need to have community touch in the 
situation, that it shouldn't be removed completely from the 
average community.
    But I can tell you that I am starting to get the impression 
that the States want to maintain jurisdiction and authority 
over all insurance areas that are easy. You know, just think of 
what has gone into the Federal responsibility over the years.
    Mr. Kanjorski. Nuclear destruction insurance, flood 
insurance, catastrophic insurance, terrorism insurance or 
reinsurance. And now, if you really look at the California 
wildfires, we are being called upon in the Federal Government 
to be a very, very large player, not in necessarily writing the 
policies, but picking up the cost of the losses, the 
inadequacies of State regulation, that action in California. At 
some point we might as well take jurisdiction of the insurance 
industry because we are in it, and we are in it in a very big 
way. Unfortunately, the Federal Government and the taxpayers 
are in insurance where we are not getting adequately 
compensated through premium payments; we are underwriters, if 
you will, where no one else will tread to bear. Wouldn't it be 
better if we had catastrophe insurance or casualty insurance 
that was national in scope, that they would get together and 
say, gee, we have got to come up with a policy to handle 
floods? And how they work that, instead of the Federal 
Government being an underwriter at a tremendous loss of poor 
planning, poor organization on the part of States and 
communities--because they are not bearing the responsibility 
and yet our constituents are, your constituents.
    Mr. Serio. I think the easy stuff hasn't been left to the 
States. And trust us when we say we take on any of the 
challenges that the insurance marketplace may throw at us. I 
have had this conversation with Mrs. Kelly and members of the 
full committee on a number of occasions where it has been the 
daily challenge of, whether it is the commercial liability 
marketplace, the market conduct in the life insurance 
marketplace, that the States have taken on and have taken on 
aggressively and directly.
    The impression that may have left, and I think you 
characterized it correctly, isn't so much the hard stuff but it 
is the unique risk. But that risk is not limited to a Federal 
intervention and, as a result, the consequence being why don't 
we just simply regulate everything from the Federal level. The 
examples you described are extremely unique and hopefully very 
rare in their occurrences. In those cases where flood insurance 
or where the urban insurance was necessary in years past, it 
has always been done in a framework where the State or the 
local regulatory operation was largely in control of the 
management of that program, whether it was the urban crime 
insurance or even the flood insurance program, which actually 
turned out to be largely a market-driven program that the 
carriers wrote under State regulation, under the overall 
guidance of the Federal Government, but where there wasn't a 
lot of Federal intervention even in the flood insurance 
program. But those are unique instances. And I think if we are 
looking for anything where the Federal Government said, well, 
this is a place we really need to step in, maybe the question 
isn't let us find that item; rather, let us look at what the 
States have done across the spectrum that--is it really speed 
to market and auto insurance that you want to be involved in? 
Is it really market conduct that you want to be involved in? 
They are both very--well, they are all very local issues when 
you really come down to their impacts.
    Mr. Kanjorski. We don't have much choice if States decide 
to lay down conditions that if you don't have auto insurance 
written in that State. There are still millions of constituents 
in that State that say they need that coverage, and they come 
down here for a remedy.
    As I first described myself in the beginning--I know my 
time is going, Mr. Chairman--I am a person that sort of, I 
define myself as a Burkean; I don't change for change's sake, I 
usually only change when it appears that there is no other 
opportunity to correct the problem or I know what the results, 
that they will be more positive.
    When I hear the national organization coming forth with an 
idea that we are going to have to wait until 2008 for a program 
to be implemented, I think that is just several years too long 
and too late. I would suggest to you, and honestly coming from 
a moderate to conservative person for States rights and other 
protections here, if we can't get something moved along on the 
State level within the next year to 18 months, I would suggest 
we are going to have Federal legislation.
    Mr. Pickens. Mr. Chairman, could I just add something here?
    Chairman Baker. Certainly.
    Mr. Pickens. When you talk about the flood insurance 
program or the crop insurance program or the cap programs that 
are in place at the Federal level, I think we can all agree 
that those programs are not without their problems, one of 
which is they really become where they are not insurance 
because there is no contingency. We know certain areas are 
going to flood, we know there will be wildfires periodically, 
we know a hurricane will hit the coastline periodically. And I 
would just respectfully submit to all of the committee members 
here today that if government becomes--it is appropriate for 
government to become the insurer of last resort in certain 
places. In other words, if the private market can't handle it, 
you need a safety net there where the government can step in. 
But the government should never--I think it is very bad for the 
government to become the insurer of first resort. And I think 
if you let them in the door a little bit, they will end up 
taking it over. And I would ask the committee staff maybe to 
look at what has happened in Japan with the CAMPO program and 
other places where the government really is squeezing out the 
private marketplace because there is never--you never have fair 
competition between a government entity and private entities; 
the government will always win.
    Mr. Kanjorski. If I may just respond, Mr. Chairman.
    That would be on your part a very good argument and I would 
be very sympathetic to it, except there is something here other 
than just having fire insurance and writing protection. To a 
large extent, the States and the localities control, for 
instance, where people build homes, in flood plains or not 
flood plains, whether or not they build on sides of mountains 
that periodically burn, whether they are building buildings and 
factories on faults. You could be lenient or fail to administer 
good, smart planning out there. What ultimately ends up is the 
risk, is an insurable risk that lands in the hands of all the 
taxpayers for the whole country for generally the 
irresponsibility of a limited number of taxpayers, and I think 
that is what is getting us involved.
    We would know how to encourage better planning, better 
social policy in this country if we were aware of the 
inadequacies of some of the protections that are out there and 
the losses that will occur because of unintelligent planning on 
the State or municipal bases.
    Chairman Baker. I need to go to Mrs. Kelly now, if I might.
    Mrs. Kelly.
    Mrs. Kelly. As you can see, we have some bugs in our 
systems, too.
    I would be remiss if I didn't first thank you, Senator 
Hannon, for all you have done for the medical safety of the 
citizens of New York. I am so delighted that you are here 
testifying on this topic, but also I just wanted to acknowledge 
the wonderful work that you have done for all of us in New York 
with regard to our medical problems and our safety.
    I want to just say that it must be obvious to all of you on 
this panel that we are somewhat concerned that this process has 
dragged out as long as it has. When they wrote the NARAB bill, 
we thought 3 years would be a good time, and we were hoping we 
would get 29 States. Well, we got lots more than 29; we wound 
up with over 40 who are now involved. But I think it is also 
very clear, and this is one of the reasons I am glad to see you 
New Yorkers here today, New York has joined this program. But 
we still have a few more to go. We have got to have the big 5 
in there. We have got to have Texas and we have got to have 
Florida and we need California. We need those States in. It has 
to be a 50-State self-regulatory system. If it is not, it will 
not succeed.
    So toward that end, I would like to ask you if you feel--
and anyone on this panel can answer that--that there might be a 
need for us to come back with some legislation that looks as 
though that we expect a full 50-State reciprocity and 
uniformity in licensing. Anyone of you can answer that.
    Mr. Serio. To have a 50-State requirement, I think--I guess 
the bottom line is that I don't think we are going to have to 
or that the committee or subcommittee is going to have to feel 
compelled to act. I think--and the action that has been taken 
already, and frankly getting New York over the hurdle was a 
very big effort, but it was done without doing any violence to 
the basic model act. And getting the other big States and the 
large markets involved, I think we are now on the other side of 
that hill. And it has been, I know it has been a focus of the 
committee to focus on the large market share States, and 
appropriately so. But now with New York and getting the other 
States involved, I think we are now getting there. But I think 
the perspective really had to be broadened out a bit to 
include, what are the other things that we are looking for in 
terms of benchmarks, producer licensing being one. I don't 
think we are going to be having that discussion again. But on 
speed to market and other issues like that, I think a critical 
element with any of these discussions is, what the other side 
brings to the table with respect to their contributions to 
these modernization efforts.
    On the producer licensing, the agent community was 
extremely helpful not only in getting the bill passed in New 
York but in other States, but in having the legislatures who 
are asked to pass on this to understand what this really does 
in the marketplace.
    Now, compare that or contrast that with speed to market. We 
have been talking to the legislators from the NCOIL and from 
the NCSL for a long time on speed to market. New York has spent 
a lot of time as with Pennsylvania, Ohio, former Director Lee 
Covington very--a major presence in the improvement to State-
based systems, yet I cannot get the property casualty industry 
in New York to go beyond--my numbers are somewhere in the 
neighborhood of 10 to 12 percent of the filings to be done on a 
speed to market basis. Can't get them. Don't know why. Tried 
it, hasn't worked.
    The life insurance industry on the other hand--and it is 
curious that they would be asking for Federal intervention on 
speed to market. They are using the New York system for 50 
percent of all of their filings right now; yet the property and 
casualty industry can't get passed 10 percent in terms of their 
products being filed on a speed to market basis. I think what 
will happen, we will be back before this subcommittee, but it 
is going to be a question of who has brought what to the table 
and how have they executed on that. That has been part of the 
process. When we talk about 2008, we are talking about this 
being done, but it really is a constant work in progress. It is 
a process non-event, as my predecessor liked to say. And the 
fact of the matter is that we may be talking about speed to 
market, we may be talking about market conduct, but it has to 
be in context of what all the various parties are bringing to 
the table. Because right now some of those modernizations are 
done, and speed to market has largely been accomplished except 
for the fact of the buy-in, whether it is to serve the 
individual States' speed to market systems or any other 
process, and the leveraging of technology that I think the 
government side has done extraordinarily well. When government 
has a past reputation of being stingy on technology, it 
actually--this modernization has actually been driven through 
the leveraging of technology from the government side where our 
customers in the industry are trying to figure out how can they 
match that leveraging so that they can get into these 
modernization systems that we have already been.
    Mrs. Kelly. Mr. Pickens, you wanted to say something?
    Mr. Pickens. Yes, ma'am. I just wanted to place the comment 
Superintendent Serio made in a national context.
    What Greg is talking about is our system for electronic 
write and form filing, a nationwide filing system. 50 States 
and the District of Columbia and Puerto Rico are on board with 
this.
    Last month, or as of last month we had accepted nationwide 
nearly 45,000 forms; we expect 75,000 forms through that 
nationwide filing system by the end of December. The average 
turnaround time on those filings is 17 days. 17 days. That is 
speed to market. And on the producer licensing side, we have a 
technological initiative called NIPR, NIPR, the National 
Insurance Producers Registry. Anybody can participate in that, 
companies can appoint their agents, they can terminate their 
agents, they can do everything they need to do. They can file 
forms electronically, do the whole shooting match. And one 
thing that is holding us up there is that we don't have access 
with the big States, Mrs. Kelly. One of the things that is 
holding us up is the fact that we don't have access to the FBI 
fingerprint database, and New York and California and Florida 
and other States really believe that we need that access so 
that we make sure we are not licensing felons out in the State.
    So H.R. 1408 was on the table a couple of years ago. I am 
not sure where it is in the process now, but that is one thing 
Congress could affirmatively do to help us, is give us access 
to that fingerprint database, and I think you would see 100 
speed to market for--or not speed to market, but producer 
licensing ASAP.
    Mrs. Kelly. Anybody else want to address that?
    Thank you very much.
    Chairman Baker. Thank you, Mrs. Kelly.
    Mr. Pickens, just for the record, to make sure, you 
referred me to your addendum in your testimony, which is the 
compact. And the 2008 deadline you referred to, does that 
include uniformity with regard to property and casualty? Or is 
the 2008 date only the life insurance piece?
    Mr. Pickens. Yes, sir. That is only the piece by which we 
have committed to get the compact passed in 30 States, or 
States comprising 60 percent of the premium volume for the 
products involving the compact.
    Chairman Baker. But that is life insurance?
    Mr. Pickens. Yes, sir. That is life insurance.
    Chairman Baker. Mr. Kanjorski departed before we got that 
piece of news. I think he was thinking it was 2008 to do the 
whole thing. So I just want to make the record clear.
    Mr. Lucas.
    Mr. Lucas of Kentucky. Thank you, Mr. Chairman.
    One of the things that has been brought to my attention 
recently is that we have some States where insurance companies 
have pulled out because their auto insurance--because the State 
set the rates and they quit writing automobile insurance. But 
they also, if they couldn't write auto insurance, they 
couldn't--there are other lines they couldn't, life, health, 
and other things, they were not allowed to sell those.
    It seems to me that, you know, we have such as 
sophisticated society population today, people get on the 
Internet and they check out air fares, hotel rates, and they 
obviously would do that on the insurance as well. Why would we 
not let competition set rates versus the States and politicians 
setting the rates? Who wants to answer that?
    Mr. Pickens. I will be happy to take a shot at it.
    Representative, you are singing our song at the NAIC. We 
are a pro-competitive marketplace. The key is there. In order 
for rates to be a prime or to be self-regulating, you have to 
have a competitive marketplace. And at times you can have 
certain market conditions arise where you don't have a 
competitive marketplace in individual locales. Arkansas' 
homeowners market, even throughout a very hard market the last 
4 to 5 years has been highly competitive, remains highly 
competitive. But some States have had trouble in that regard.
    So that is another area where you really need that local 
touch, that local control that Representative Kanjorski was 
talking about, because one size does not fit all when it comes 
to auto rates. What goes into the price of an automobile 
insurance product has happened in Massachusetts and New Jersey, 
and I commend the committee for throwing the spotlight on the 
market problems that were caused really by too much State 
governmental interference into the private marketplace.
    So we are all for a balance, looking at just the right 
amount of government intervention into the private market, but 
we agree with you that prices can and should be self-regulating 
in a competitive market.
    Mr. Serio. Let me add to that, if I may. I think your 
characterization about the auto market and the way the 
regulators kind of approached it in terms of threatening to 
stop someone's homeowner writings if they want to get out of 
auto, things like that. The Northeast was the poster child for 
that philosophy for a long time. And I think as Commissioner 
Pickens said, Massachusetts, New Jersey, and New York included, 
and some other States in the Northeast used to adhere to that 
philosophy pretty ardently and they used to use that as their 
leverage when companies decided they weren't making money in 
the auto insurance business.
    Now, in New York we had a very successful competitive 
rating or quasi-competitive rating called flex rating in our 
market which allowed rates to go up or down. But the one 
cautionary note I would say about any competitive rating 
system, and in fact any company would have to come before this 
subcommittee and acknowledge this. Sometimes the marketplace 
gets overheated and it gets too competitive and they start 
charging rates they can't sustain over the long term. A lot of 
the rate increases you saw in the markets that were not being 
allowed, and as a consequence of it being that companies were 
leaving certain States, was the result of overheated 
competition where the rates went too far down, they could not 
sustain the type of risks that they were taking on for those 
rates.
    If you balance that out--and we are all for competitive 
rating of automobile insurance and using the competitive market 
pressures to their best and highest use. You just have to be 
careful that to allow a completely open and competitive market 
without some responsibility on the other side where they don't 
drill it down to a rate inadequacy situation and suddenly the 
regulator, whether a State regulator or a Federal regulator, is 
being asked the question the following year: I need a 30 
percent rate increase. It is an untenable situation to put any 
regulator in if that is now the price of admission for a 
company to stay in that marketplace, because those kinds of 
rate swings don't do you any good, don't do us any good, and 
certainly don't do our constituents any good. So you need to 
balance that out.
    But competitive rating, we have had great success in the 
Northeast by having a competitive or quasi-competitive rating 
system that has worked for the benefit of the consumers.
    Mr. Lucas of Kentucky. Thank you.
    Mr. Pickens. May I add something very quickly? The 
competitive rating model that the chairman referred to allows 
for the market to set rates when it is competitive, but it also 
takes care of the problem that Mr. Serio talked about, because 
it says the regulator still has to monitor the rates to make 
sure that they are not excessive, too high, inadequate, too 
low, or unfairly discriminatory against similar risks. And this 
is the Illinois model, Mr. Emanuel. It is a very successful 
model, and if we could get that enacted across the entire 
country our rating problems would be taken care of, I believe.
    Mr. Lucas of Kentucky. Thank you.
    Chairman Baker. Thank you, Mr. Lucas. I just want to jump 
in right there and say I think we could do that.
    Mr. Lucas of Kentucky. Okay. Going to a little different 
subject, the banking system has a dual system where banks can 
have a State or Federal charter. That looks like a great 
business model for insurance companies. What is wrong with 
having an optional--let us don't call it a Federal charter, let 
us call it a national charter, if that Federal bothers 
somebody. Who would like to take a whack at that? If the 
business model suits you better as a company, you go to the 
Federal.
    Mr. Hannon. May I take a whack at that, Representative?
    Mr. Lucas of Kentucky. Sure.
    Mr. Hannon. A couple different things in regard to a, 
quote, optional national charter. First of all, it is not 
totally optional because the Federal Government isn't an equal 
partner. You have, rightfully so, the power of preemption for 
your statutes so that when you come in you totally exclude. So 
it is really not an option.
    The second, as we have watched the optional charter for 
banks, we have watched the virtual disappearance of State 
chartered banks compared to what they were 20 years ago. The 
charters, it has been very attractive. The regulatory scheme 
has been made by the Office of the Controller of the Currency 
very attractive for banks to opt for the national charter; 
consequently, we do not have many left at the State.
    If you are going to go to a national charter, you might as 
well say, wait a minute, we want that as a proposal. Veiling it 
with the thought of it being optional I think is just masking 
what really is the intent.
    Mr. Lucas of Kentucky. Somebody correct me if I am wrong. I 
thought we had a lot more State chartered banks than Federal 
nationwide.
    Mr. Hannon. I used compared to 20 years ago, where most of 
the major banks have now moved to Federal charter. And coming 
from New York, believe me, we have seen a lot of our banks opt 
for Federal charter.
    Mr. Lucas of Kentucky. That could be in New York, but I 
think there is 70 percent State charters versus about 30 
percent national charters.
    My time is probably up, but I would like to discuss this 
further with the next panel.
    Chairman Baker. Thank you, Mr. Lucas.
    Mr. Shays.
    Mr. Shays. Thank you, Mr. Chairman. Thank you for your 
interest in this issue.
    I am going through thinking as we try to compete on an 
international basis, the EU is trying to find ways to have 
uniformity, and we are asking our corporations to compete in 50 
marketplaces and then compete with the rest of the world. I am 
having a hard time understanding why it is in our best 
interests, the United States, to wait until 2009, 6 years from 
now and 9 years after this process began, to try to bring some 
uniformity to it on the State level. And I want someone to give 
me their best argument. Why should we wait until 2009?
    Mr. Pickens. Mr. Shays, I will start with a very practical 
argument. If you passed an optional Federal charter bill 
tomorrow, it would take the Federal Government a long, long 
time to get up to speed. I would venture to say probably, if 
not 2008, beyond 2008 to regulate 3.5 million insurance agents, 
producers out there and the 5,000 or so companies, many of whom 
don't even do business in every State. In fact, I will defer to 
Mr. Serio on those numbers in just a second. But that is a very 
practical reason. The Federal Government could not get up and 
running that quickly on such a complex issue as insurance.
    The second practical reason is the insurance industry is 
entirely divided over what an optional Federal charter looks 
like. Three of the four P&C trades are in favor of State 
regulation. The sole property and casualty trade that is in 
favor of Federal regulation can't agree with the life and 
health industry what a Federal charter bill looks like, and the 
life and health industry is divided somewhat. Life and health 
is more aligned with bankers, but then you have got all these 
other divisions out there. So the primary interest groups and 
the consumer groups--I must throw them in there, Mr. Hunter, 
others that you have heard from--they have a totally different 
idea about what the Federal regulator should look like. So I 
just don't think as a practical matter, number one, you could 
do it from a technical standpoint, number two, from a political 
standpoint you could get everybody on the same page.
    Mr. Shays. Anybody else?
    Mr. Serio. Thank you. Let me just jump in with this 
observation. I suppose that this always just becomes the grass 
is always greener on the other side type of observation. 
Judging from my experience as the chairman of the Holocaust 
Task Force for the NAIC, and having interacted with a number of 
European companies who have had to navigate through their own 
multi-leveled regulatory systems in Europe, not just the EU but 
the individual countries and the individual States within those 
countries all regulate certain portions of the insurance 
business over there as well. So while there may be a unified EU 
market, when you drill down to some of those local companies 
and some of that local impact, they are dealing with a lot of 
the same issues that we are dealing with here.
    Number two, when you have almost half of all the companies 
that are licensed in the U.S. operating in a single State, that 
State suddenly becomes more important as a focal point for 
those companies in terms of a regulatory objective.
    Mr. Shays. But the EU is working to come find more common 
ground in uniformity. I am having a hard time understanding why 
I would want my American businesses to have to compete and have 
different rules and regulations and, you know, so many 
different entities. I honestly don't see the logic of why I 
want to do that.
    Mr. Serio. The second observation on this was that as the 
EU tries to sort through their own regulatory constructs, that 
is happening at the EU level, in the U.K. With the FSA and in 
Japan and in other major countries, are all sorting through 
what their regulatory structure should look like and we are all 
talking to one another.
    So going back to your original question of why should we 
wait that long, is it really prudent to wait that long, it is 
happening right now. And I think what you are going to find is 
a certain amount of synergy between the EU's ultimate construct 
and the U.K.'s ultimate construct and the U.S.'s ultimate 
construct, between the uniformity that we can achieve on a 
nationalized or a federalized basis while retaining the 
jurisdiction at the local level, so that half of the companies 
that just write in a single State can continue to operate on a 
State regulatory structure.
    One of the challenging questions--and this goes back, I 
think, to the Chair's question originally--what is it that the 
Federal Government should be focused on then? You know, is it 
speed to market, is it global reinsurance, or something in 
between that really is the proper venue or proper subject for 
the Federal venue? And that is still an open question. And so 
it may not be so much a question of will there ever be or not 
be Federal regulation or Federal policy with respect to 
insurance, but it is really other things we are talking about 
today, talking about the day in and day out business of 
regulating insurance that we have done at the State level that 
the individual countries of the EU have done on their levels 
and in their own States over the years. What we are really 
talking about is another set of issues: How do we deal with 
international trade and international reinsurance as opposed to 
speed to market products and agent licensing?
    Mr. Shays. Thank you.
    I would just close, Mr. Chairman, by saying I find the 
answers of both of you helpful and certainly giving me a 
perspective. But I have a tough hurdle, and that is I don't 
want my American businesses to have to compete so much within 
the United States, to have so many different rules and 
regulations, and then have to compete worldwide. And so we need 
to find a solution to that, and this appears to be the best but 
with some limits, and it may in fact take longer than I would 
like. And I thank you both.
    Chairman Baker. I thank the gentleman.
    Mr. Emanuel.
    Mr. Emanuel. Thank you, and I would like to thank the 
Chairman for holding this hearing.
    The whole concept of going to a national or optional 
Federal charter, and using Illinois, which I think is a good 
competitive system as a model, I want to make sure that we are 
not actually deregulating in the process.
    Because when you get down to it, looking today at what has 
happened after the repeal of Glass-Steagall and what's 
occurring in the commercial banking area, you have really got 
three major banks that are lending and they are holding 
corporations over the head here in a way that nobody previously 
envisioned. So, I want to be sure that if we end up legislating 
rules, we aren't really just national deregulating under the 
rubric of modernization. It is what some mean by modernization 
that worries me. And if we do address national charter issues, 
in my view we have to include, property and casualty, not just 
life insurance.
    So, we need to avoid deregulation in the name of 
modernization, and any solution must strongly consider the 
interests of consumers and ``mom and pop'' insurance firms.
    Mr. Pickens. Mr. Emanuel, that is an excellent question. It 
is one that we have struggled with----
    It is one that we have struggled with at the NAIC, frankly. 
You have got some sectors of the industry that I think many of 
us believe their ultimate goal is total deregulation, and that 
is something that causes Commissioners concern. Then you have 
got other sectors of interested parties. For example, the 
consumer groups. Mr. Hunter I know has testified here before. 
He wants something totally different than deregulation; he 
wants something on the other far extreme, which is total 
regulation and strict price controls at the Federal level and 
things of that nature. And I think many of us are concerned 
that both of those things would be bad.
    What you are looking for is something like the chairman 
talked about, I believe, competitive rating in the marketplace. 
In my State we have a competitive rating law, as Illinois does. 
It works well. I promise you if every State in the country 
could have as competitive an insurance marketplace as Illinois 
has, every consumer in the country would be much better off, 
and you all are not deregulated.
    Mr. Emanuel. In Illinois, we have a number of insurance 
companies competing in the marketplace. How do we do that at 
the national level, so we don't end up like the situation in 
commercial banking, where only three major banks are really 
doing the lending? How do you find the combination that unlocks 
the marketplace so you get competition without----
    Mr. Pickens. Yes, sir. A quick comment, and then I will 
defer. I don't think you do. I think you are exactly right. 
That is what could happen. And it could be worse, I think, in 
the insurance industry. Insurance is a different business than 
banking in many, many ways. And I think if you end up with 
three or four companies, what you end up with is what we had 
prior to the passage of McCarran-Ferguson in the 1940s, where 
you had large insurance trusts that were effectively setting 
rates and violating antitrust laws, and that is why you ended 
up with State regulation that you have now.
    Mr. Breslin. I think, too, your statement was essentially 
the reason that we sit here and talk about State regulation, 
because one size doesn't fit all, and it is what has happened 
in Illinois because of the competitive structures there, the 
companies that are there, it has fit well. But translate that 
to another State under the same set of circumstances, and you 
could have what you don't want, one or two companies 
controlling the marketplace.
    Mr. Emanuel. The only thing I will say again is the 
observation that about 10 or 15 years ago on this subject all 
those who are now calling for a national charter of some 
capacity all wanted only state regulation. And sometimes I feel 
in these hearings lately, on this and a number of other 
subjects, it is like an out of body experience, because 
everybody that used to be for States are now for national 
standards, and everybody who used to be for national standards 
is now for State rules. So I am properly confused.
    Thank you very much for being here.
    Chairman Baker. Thank you, Mr. Emanuel.
    Mr. Bachus.
    Mr. Bachus. I thank you, Mr. Chairman.
    Let me--I will do like some of the other members and start 
out just with a statement.
    I see an optional Federal charter is almost undoable from a 
practical and a political standpoint. I guess it is helpful to 
continue to discuss it. And I am not making any judgments as to 
what we ought to do, but I think as opposed to that, a much 
more practical approach is to identify some areas where we can 
have Federal uniform standards similar to what we have done on 
other legislation. And whether we pick those off, maybe speed 
to market, but I am not sure that we can do more than one at a 
time even, you know, market conduct, examinations licensing, 
and gradually take that approach.
    But to me--and I read Mr. Fitts' testimony from Progressive 
on the second panel, and I would like--I mean, at least my 
impression is the same as his impression, that the idea of 
going to dual charter or creating a Federal insurance 
commission and assimilating all this is more than this Congress 
with other issues facing us is going to want to do. And from a 
State standpoint, I think that as a realistic matter it is just 
not something that is a burning issue.
    Having said that, I am going to switch gears totally and 
just ask, Mr. Pickens, ask you about something quite different. 
Up here we have certain issues that people sometimes try to 
characterize as a trade issue. And one of those in the 
reinsurance business is your foreign reinsurers have argued to 
the U.S. Trade Representatives they weren't successful, that 
the collateral requirements that they had to put up, that that 
was a trade issue and not a solvency issue. And my concern is 
that I think it is definitely a solvency issue, and that they 
should have to--I know right now 100 percent collateral or 
either a State license.
    And I would just like your comments on that. And I know 
that at this time the U.S. Trade Representative has ruled 
against Prudential, and which I think obviously is a correct 
ruling. But would you like to comment on that?
    Mr. Pickens. Sure, Mr. Bachus. I would be happy to. And 
first I commend you on really knowing about a fairly esoteric 
issue. You almost sound like an insurance regulator, and I mean 
that as a compliment, not a criticism.
    Mr. Bachus. A State or Federal insurance regulator?
    Mr. Pickens. No. State. State all the way, sir. But that is 
an important issue to us. It may be esoteric, but it is 
important. And what the Europeans are asking in essence is that 
they be allowed to create a special list that would have--I 
mean, it would be based supposedly on reinsurers that had the 
strongest financial stability, and they want to be able then to 
give Commissioners in the States the discretion to say, okay, 
Mister European Reinsurer, you don't have to have 100 percent 
collateral, you can have less than that.
    There are some problems with that that we are working 
through at the NAIC even though we are under a lot of pressure 
from the Europeans to make a decision quickly, and we have 
resisted that because we think it would be wrong to do so.
    Number one, this is a solvency issue primarily; it is not a 
trade issue. Could it impact trade and have ramifications? 
Ultimately, it could, but it is certainly more a consumer 
protection and solvency issue than it is a trade issue.
    Number two, the three significant concerns we really have 
are, number one, the lack of international accounting 
standards. It is difficult to look at the balance sheet on this 
side of the ocean and compare it with that side of the ocean 
and determine the financial stability of a European reinsurer. 
We also have a problem in many European countries with 
enforcing United States' judgments against European reinsurers 
in those foreign courts. We get a judgment in a U.S. court, 
take it to some jurisdictions, you can't get it enforced. And 
the biggest concern really we have, Mr. Bachus, is A.M. Best 
and other rating agencies already have told the regulators that 
this will result in a greatly increased credit risk for our 
American insurance companies and American reinsurers, all of 
whom, by the way, are opposed. This is one thing they all agree 
on, they are opposed to reducing the collateral requirements 
right now. They think--the rating agencies say if we increase 
the credit risk that they will have to downgrade some of these 
insurers probably. At least that is something that would be 
taken into consideration.
    So it is a major concern for us, and we can't make a 
decision prematurely. We really need to look at all these 
issues.
    Mr. Bachus. Thank you.
    I thank the Chairman.
    Mr. Breslin. I might also add, Congressman, that that has 
been--many of the issues that Commissioner Pickens discussed we 
have been discussing on an ongoing basis at NCOIL. And it isn't 
an either/or issue; as Mike Pickens said, it is one country 
might be very good in enforcing judgments and another might be 
a country that will never enforce a judgment of the accounting 
standards of the company. And it is just one that although we 
can pick out--we could all sit here and pick out a company in a 
country where it should be different, but it can't be an 
either/or situation.
    Mr. Bachus. I thank you.
    Chairman Baker. Thank you, Mr. Bachus.
    Mr. Scott?
    Mr. Scott. Thank you very much, Mr. Chairman.
    While I agree that there are problems with the current 
regulatory system, I must say that, to each of you dealing at 
the State level, that there is one area in which I believe that 
the States have done an excellent job, and that is in consumer 
protection. I think at the end of the day that, to me, is the 
number one top priority.
    State insurance Commissioners have done an excellent job in 
insuring that disputed claims are paid to policyholders. I 
worry that a distant regulator here in Washington, a Federal 
regulator here would not be as sensitive to consumers' needs as 
would a State or local insurance Commissioner. I have a fear 
that a Federal regulator who is dependent on the fees that 
carriers pay into the system would be more sensitive to the 
needs of the carriers than they would be to the consumers. 
Similar to the OCC, I could see an insurance regulator taking 
the side of companies over the consumers.
    While I say all of that, this problem still remains: 
Largely as a result of September 11th, our tax cross-sector 
competition, increased loss costs, dwindling investments have 
indeed put the insurance companies in a bind. Issues still 
remain, albeit the protections that you give at the State 
level, which I support. But these issues still remain of the 
concerns of the insurance companies, because clearly the 
consumer wouldn't--there would be no need for the protections 
if the insurance companies weren't there to provide the 
products and the services and the coverage.
    But how do we modernize the insurance regulation? How do we 
secure your State-based reform? And the fundamental question: 
How do we increase the efficiency and uniformity of regulation 
and market conduct and oversight product approval and all of 
those things with 50 different States?
    That is the sort of the bind that I am in here. While you 
do an extraordinary job of consumer protection, we still have 
these other issues of uniformity and regulatory efficiency that 
calls for us taking a look at this Federal regulator. How do 
you address those other concerns that would keep us away from 
the Federal regulator?
    Mr. Breslin. I think we would first of all say that we are 
working on those concerns, producer licensing, speed to market, 
market conduct. And I think you are correct. We were chatting 
before that in our offices in the States, and we frequently ask 
this question, what kinds of calls do we get from our 
constituents--because we represent people in local areas--our 
constituents about problems with their insurance, whether it be 
homeowners or life, renter's insurance, car insurance. We don't 
get the calls, which is evidence that they are okay and they 
are being treated well, and that the insurance department in 
our State, represented by Superintendent Serio, does a great 
job. I don't think the Federal Government would be able do that 
kind of a job. And we are working on the other side to make 
sure that we satisfy the needs of the insurers.
    Mr. Pickens. Mr. Scott, in Georgia you really do have a 
very active consumer protector in Commissioner John Oxendine. 
We all know John, and he works with us.
    Mr. Scott. Let John know I spoke highly of him and I called 
his name.
    Mr. Pickens. I will do that.
    Mr. Scott. Because he is doing an extraordinary job. And as 
you can imagine, we did have a conversation beforehand. But I 
really think you are doing a great job on protecting.
    You do not think that, to answer these other things on 
uniformity of efficiency and those things that we are asking 
for the Federal regulator to take a look at, that consumer 
protections would go down with the Federal regulator?
    Mr. Pickens. I think there is a danger they could go down 
if it was not handled correctly, and that is what we have been 
struggling with at the NAIC, and exactly how the chairman 
framed the committee hearing today, and that is that it is 
important to have strong consumer protection but you also have 
to facilitate business development and commerce in the 
marketplace. And I agree that the two notions are not mutually 
exclusive, and I believe all our members agree.
    And just to answer your question though, Mr. Scott, I would 
point to the document that is attachment A. We have got a plan. 
This is our plan. We believe this plan takes care of consumers 
and also takes care of the legitimate concerns that the 
industry has raised.
    Mr. Scott. What plan is that?
    Mr. Pickens. This is our reinforced commitment regulatory 
modernization action plan, attachment A. And it goes through 
all the five or six primary areas that I mentioned in my 
opening remarks and lets you know exactly what we are doing, 
what our deadlines are, where we are in accomplishing those 
deadlines. And, again, I would go back, Mr. Chairman. We 
appreciate the oversight, the attention you all are giving us, 
we appreciate the pressure. I think it is a positive thing; you 
have heard me say that before.
    But one thing you could really help us with is putting some 
pressure on the industry to come play ball. We have built this 
surf stadium. Everybody hasn't come to play in it yet. We have 
got the National Insurance Producer Registry. Everybody is not 
willing to play. I wonder why that is. Maybe it is because they 
think they can get a better deal somewhere else. But if you 
help us hold their feet to the fire, I think we can make 
progress even quicker than we have made it so far.
    Mr. Scott. Can you give us some examples of how you feel 
consumer protections would go down if we went to the Federal 
regulator?
    Mr. Pickens. Sure. For example, and all of our States have 
laws that say you have to have certain provisions in an 
insurance policy. We have got a law in my State that says you 
can't cancel or non-renew somebody based solely upon the 
occurrence of a natural catastrophe or natural event like a 
tornado or hurricane. We passed that because we had a series of 
tornadoes sweep from the southwest part of the State through 
the central part of the State all the way up to the Northeast, 
and the next thing we knew we had insurance companies saying, 
hey, it is time to cancel these policies. They pay that claim, 
and then the next thing the consumer got was a non-renewal 
notice. That is an individual problem we had in my little State 
that our legislature had to address. And if we had a Federal 
regulator, I don't think they would have been as attentive to 
passing a law like that that deals with such a specific 
concern. That is a legitimate concern. This law doesn't hurt 
the companies, they can operate just fine with it. But now they 
have to find legitimate reasons to cancel or non-renew a 
policyholder rather than just saying, sorry, you had a big 
claim we had to pay and now we are going to cancel you. So I 
think that is a concrete example.
    Mr. Scott. Do you think timeliness is another, the timing 
of the responses?
    Chairman Baker. And that will be the gentleman's last 
question, his time has expired. But please respond.
    Mr. Pickens. Yes, sir, I do. I think it is very important. 
And we all have laws, prompt payment laws with health insurance 
that relate to all lines of insurance that say a company has to 
pay claims within a certain period of time. And also the 
regulators are there to help work out any differences between 
the consumer and the insurance company, which I think is--you 
can't put a dollar value on that, which I think--that is that 
personal touch again.
    Mr. Serio. If I could finish a comment on this. There is 
almost a good analogy on this, and it actually would go back to 
Mr. Kanjorski's question earlier, and that analogy is how we 
respond to disasters or after a disaster, the FEMA and local 
emergency managers, how they coordinate. We don't leave it to 
FEMA to do the work on the ground even though the Federal 
Government provides a lot of the money in the aftermath of a 
disaster. But the way that the emergency structure is set up, 
it is still left to the local emergency manager down to the 
local government or State government to really deal with those 
local issues. And that is what we do, and we do that best. And 
we are able to understand what the implications are, whether 
big disasters or small, big issues or small issues. But to get 
down to that localized level and having it closer to Main 
Street really gives an added value to the local constituents. 
And it really is that same kind of a setup where, just because 
the Federal Government does provide the resources, it is still 
left to serve the locals with the local managers, whether they 
are insurance Commissioners or emergency managers or any other 
type of analogy like that. And that has worked very well, and I 
think we are suggesting the same thing.
    Mr. Scott. Thank you.
    Thank you for extending my time, Mr. Chairman.
    Chairman Baker. Yes, sir, Mr. Scott.
    Mr. Miller.
    Mr. Miller of California. Thank you, Mr. Chairman.
    To begin with, I want to say I don't support government 
getting in the insurance business. I don't think we should do 
that. I don't believe in total deregulation. But a lot of what 
I am going to say, you are probably not going to agree with. My 
favorite committee when I was in the State legislature years 
ago was the Insurance Company Committee, and 10 years ago I 
would never have thought a Federal charter was something that 
was needed. But I have somewhat changed my mind watching the 
way things have gone. Some of the comments arguing against that 
is, well, you could see a decline of State charters. Like 
banks, that could be true, but that doesn't make it bad. That 
just could be a reality.
    One other comment was, well, it would probably take a long 
time to develop regulations for a Federal charter, and it is 
going to take some time, but NAIC has set up uniformed agent 
licensing regulations nationwide every year for 132 years, and 
it still hasn't happened. So I think we can beat that time 
frame right off the bat. I think that is something that is 
doable.
    Another thing that I caught, we were talking about changing 
the system and the words we used, if we can get a reform--if we 
can get the reforms enacted by the States. But the operative 
word that stands out is ``if.'' and that just doesn't seem to 
happen, because herding State legislators is like herding cats. 
I mean, to get all these different States going in the same 
direction is very, very difficult. And insurance companies just 
have this incredible patchwork of regulatory filings and 
approvals, and that really impacts the bottom line in the 
services and its cost based on delays, because equally 
important, it dictates the pace of developing new products. And 
that is something I think we need to be very, very careful of.
    Even efforts to regulate uniformity consistently failed. I 
have not seen anything that makes me believe that if we don't 
have an optional Federal charter--and I say optional, because 
nobody is mandated to do it. But more than 3 years ago NAIC 
unveiled--you called it a new modernization effort designed to 
improve State insurance regulations. But even then it wasn't 
new, because you have been talking about that same process 
since 1871, and the effort has yet really to prove to be 
successful. And I am not trying to be critical. Please don't 
take it that way. But I did read all your paperwork, and I have 
been looking at this issue very seriously for the last probably 
4 or 5 years and I think it is time that we look at an optional 
Federal charter, because, Mr. Chairman, I don't think we really 
have much of an option but to do that.
    By your own account, NAIC does not believe you can fully 
implement a compact--I read here on interstate compact 
attempts--until January 2009, and then there was a qualifier, 
at earliest. And that is your paperwork, not my paperwork. I 
think we can do a Federal charter by then, an optional Federal 
charter. I really do.
    Chairman Baker. Will your gentleman yield for one moment, 
just to make the observation. I had to go back and clarify, but 
that is with regard to life only. That doesn't include the 
broader insurance industry.
    Mr. Miller of California. So we are going to really get 
farther out, the time. I was giving them the benefit of the 
doubt there. We are getting farther out when we consider 
everything that is not even being considered right now.
    Chairman Baker. I just wanted to be helpful.
    Mr. Miller of California. Well, Mr. Chairman, I would 
really like to sit down and--we talked about this before. And I 
am from California, and I watch some of these States--and I am 
not trying to impugn the States, because everybody has the 
right to do what they want to. But they call them consumer 
friendly bills. And all it does is attempt to regulate the 
insurance industry, which is fine. But understand, any time you 
place a mandate on business, that cost is passed on to 
consumers. And some States for some reason don't realize that 
when they continually mandate that insurance companies must 
provide more and more and more and more and more, the people 
are going to have to pay for it, because you cannot mandate 
that businesses lose money. They are not going to do it. They 
are going to leave the marketplace. I mean State Farm Insurance 
almost pulled--they aren't writing any new policies in 
California, and they have about 20 percent of the policies.
    This is a very serious issue. And I applaud all of you, 
because you have a real tough job. I mean, it is a nightmare. I 
can't imagine doing what you are trying to do and you have to 
do. But even when you come up with a concept that you believe 
will work, you have got to hope everybody agrees. And if they 
don't, there is really not much that can be done about it. At 
least with an optional Federal charter we can do something 
about it. And if we are wrong, if it is not good, people are 
not going to use companies that are using the optional Federal 
charters; they will use the companies that are a State charter. 
If the State charters can provide a better service, better 
rates, and the consumers are happier, they are going to stick 
with that. But if some of us are right and an optional Federal 
charter can come in with a program and they can do it quickly 
and rapidly and they can come in with new procedures and new 
programs that benefit consumers rapidly, instead of spending 18 
months, 2 years as they try to implement throughout the 
States--if that proves to be right, consumers are going to 
benefit, and if it is not right consumers will continue with 
the State charter.
    So it doesn't eliminate options, and the part I am having 
difficulty understanding is what is wrong with creating another 
option? If competition is usually proved to be good, those who 
compete the best and provide the best tend to succeed. And 
years ago the Japanese auto industry proved that to our 
industry. You know, Chrysler and Ford and GM all took it for 
granted that everybody is going to buy American, and they 
created junk, and nobody bought it. And then when they had to 
compete, they created a product that people wanted.
    Well, I think we are trying to create competition here, and 
you are kind of hamstrung in many fashions because you are 
asking States to do what you think is good and they can just 
turn their back and decide to do what they want to do and you 
really don't have any teeth.
    So I am not trying to criticize you, I applaud you. I think 
you are trying to do the right thing. But I just think, you 
know, like in the time when they talked about optional Federal 
charters for banks, I am sure there is a lot of people saying, 
oh, it is a bad idea. I think it proved to be a pretty good 
idea, and yet there are still State banks out there operating 
today that can compete if they want to. And, yes, there has 
probably been a decline because you have seen Federal charters 
do a pretty good job.
    And with that, Mr. Chairman, I thank you.
    Mr. Lucas of Kentucky. Mr. Chairman.
    Chairman Baker. Mr. Lucas.
    Mr. Lucas of Kentucky. I may be out of order, but I would 
like to completely associate with my colleague from California. 
I agree with everything you say, Mr. Miller.
    Mr. Miller. Lord love you. Thank you.
    Chairman Baker. Pass the collection plate.
    Mr. Sherman.
    Mr. Sherman. Ken, you don't know him like I know him.
    Mr. Hannon. Mr. Chairman, can I make a comment?
    Chairman Baker. Certainly, Senator.
    Mr. Hannon. You, both you and Representative Miller have 
rightfully referred to some comments in the NAIC testimony 
apparently about 2009. Having been part of the leadership of 
trying to get this compact together--and believe me, herding 
cats would have been easier--I do think that this committee 
needs to take note of the major achievement in doing that and 
the fact that it was only really adopted this summer. And 
legislatures have not been in session since then, so they have 
not even had a chance to have the bills introduced much less 
entertain them for action. It would be like someone asking you 
on December 1 why aren't you acting on the 2004 budget? It is 
not the right time yet. So I think there is a need to recognize 
that.
    Second, NCSL has not put any deadline of 2009. We are 
looking to try to get immediate action and try to get people to 
address these issues. I would hope that we might--you have 
taken great leadership in these issues. I hope we might enlist 
you in that because of getting this adopted. There is a need. 
There is a need if you keep talking about other options, of 
people will say those other options are more viable and the 
compact is not. I believe this compact offers some major good 
governmental policy. And so I just wanted to say, A, 2009 is 
not the NCSL number; and, second, we could use your help.
    Chairman Baker. And just a brief response, Mr. Miller. I 
would say that we are not in any way belittling the compact 
effort. We are appreciative of progress in any form or 
direction.
    Mr. Miller of California. Mr. Chairman, if you would allow 
me. I in no way intended to impugn anybody's effort. I think 
you are doing a wonderful job. I want to make that very, very 
clear.
    Chairman Baker. I think you did, sir. And all we are 
suggesting, I believe, is that whatever the deadline might be 
today in the agreed-upon, discussed, internal view of the 
various organizations, there is--and by way of record, Mr. 
Emanuel referred to our second hearing this year. We have had 
11 in the last 3 years. We have been pretty busy on the topic. 
And it is symptomatic of members' interest to have some 
material progress demonstrated that affects rates at the 
consumer level. And whatever that time constraint is, that is 
really one of the issues that I raised at the outset is how 
long is enough time to get an appropriate response. I think Mr. 
Kanjorski's view in learning of the date of the compact was a 
bit surprised, and I think Mr. Miller's view basically is that 
it may be too long. And we are trying to be helpful here in 
saying that we can understand the clock is running and progress 
has been made, but we are trying to help speed it up a bit, is 
really the point.
    And I am sorry, Mr. Sherman. You are recognized.
    Mr. Sherman. Thank you. Mr. Chairman, my own experience is 
shaped by the Northridge earthquakes, since I represent 
Northridge. Some of you will remember that some of our 
consumers were not paid, that our State regulator found it 
unnecessary to impose fines on those insurance companies that 
made voluntary contributions to his foundation, when this led 
to that foundation putting on all these God awful commercials 
with this guy's face on them telling us that he believed in 
consumer protection and then his unceremonious departure from 
State government. This illustrates a few things. First, that 
you need regulation. Second, that State regulation doesn't 
always work all that well. It also illustrates the fact that 
whether it is tornadoes in Arkansas or earthquakes in 
California, when it comes to property and casualty there is a 
special sensitivity to different types of natural disasters, 
and that any regulator in Washington would have to be imbued 
with that sensitivity or defer to the States involved, although 
I guess we ought to have good tornado insurance provisions and 
rules in California notwithstanding the absence of any 
tornadoes.
    Mr. Bachus brought up the idea that maybe we could have a 
Federal role take place in one area of insurance or another 
rather than try to do the whole package, and I am trying to 
understand what the different pieces might be that could be 
dealt with more or less separately.
    It occurs to me that you have got the chartering of an 
insurance company which invariably involves dechartering them 
if they abuse consumers. You have got rating the solvency of 
that insurance company, which plugs again into their charter. 
You have got approval of different products, and life and 
annuity being the area where you have the least local input. 
That is to say, we have earthquakes, you have tornadoes, but, 
you know, we have got heart attacks in both States. But you 
have got product approval, and then finally you have got agent 
regulation.
    Are there other pieces in this puzzle that I haven't 
identified? Perhaps the Commissioner from Arkansas could tell 
me if I have left something out.
    Mr. Pickens. No, I think you have identified practically 
all of them, and I would refer you to our modernization plan 
that I think in great detail sets out our plan in great detail 
and, again, addresses each and every one of the points.
    Mr. Sherman. Now, as far as agent regulation, I don't 
detect any push to have the Federal Government take that over, 
but I am less involved in this--I guess I am not supposed to 
ask the Chairman questions--but is there much effort here in 
our subcommittee to get involved in agent regulation, or is it 
more the company----
    Mr. Ose. If the gentleman would yield, I think the 
principal thing is as much uniformity on all fronts as is 
practicable. Many agents now do so multi-state, and the more 
flexibility we provide--the traditional Republican response, 
the less bureaucracy we can have, the better.
    Mr. Sherman. So that is an issue we need to look at. Is 
there general agreement that the life and annuity area is the 
area where there has been the most problems or disadvantages of 
having to go to each of the 50 States to get approval every 
time somebody comes up with some nifty new product to allow 
investors to avoid income taxes by investing in insurance?
    Mr. Pickens. To directly answer your question on that 
point, the pressure I guess from our own State insurance 
regulators from the industry is primarily aimed at the life 
insurance product approval process.
    Mr. Sherman. That includes the annuity process?
    Mr. Pickens. Yes, sir.
    Mr. Sherman. I might add, annuity should be called life 
insurance and life insurance should be called death insurance, 
but I never took a marketing course.
    Mr. Pickens. And the wait there. And the other issue is 
producer licensing, speed to market and producer licensing, and 
I would add a third----
    Mr. Sherman. Producer licensing, is that agent----
    Mr. Pickens. Yes, sir, same thing. That includes agents, 
brokers and all involved, producers.
    And then market conduct reform where we monitor and take 
action where necessary, the relationship between the insured 
and the insurer, and this goes back a little bit to your 
question, but you mentioned what I would characterize as kind 
of the politization of insurance in California from time to 
time. I mean, you have had some diametrically opposed theories 
of regulation in California, you really have. You have got Prop 
103 that, you know, is at least a model that some of the 
nationwide consumer representatives like Mr. Hunter point to as 
being the model. I respectfully disagree with him on that 
point, because it wouldn't work in my State. But what would you 
have if you had a Federal regulator? The politics involved in 
insurance aren't going away, because, you know, we all need 
health insurance, we all need life insurance, we need our auto 
insurance and homeowners. Folks are still going to be mad if 
their rates go up. They are still going to want to call 
somebody and get those problems taken care of. And I think you 
risk further politicizing the insurance business, which I think 
is a bad thing. I think that is a bad thing. I think you need 
to take politics out of regulation as much as you can.
    Mr. Sherman. On the other hand, the idea of 50 different--
doing a job 50 different times. Of course, there is not a lot 
of efficiency here in Congress where each of 435 offices does 
the same thing, but the idea that the same product needs to go 
through 50 different processes, as part of government that 
drives me crazy.
    Mr. Pickens. We agree with you. It shouldn't have to do 
that.
    Mr. Sherman. And I was not here earlier, but I gather that 
the idea of this compact, should all the cats be herded, is to 
go through just one process for approving product or----
    Mr. Pickens. Yes, sir. We have got a single point of filing 
up and running right now, SERFF, System for Electronic Rate and 
Form Filing. Companies can file electronically. The average 
turnaround time right now through SERFF is 17 days, and we 
estimate 75,000 filings coming through that process this year.
    That is currently available to----
    Mr. Sherman. So we could just have hearings and pound the 
table and not ever do anything, and then inspire you folks to 
get your act together and be of great service.
    Mr. Ose. And that is the gentleman's last question. His 
time is expired, too.
    Mr. Pickens. It has proven to be helpful, as the Chairman 
pointed out, yes, sir.
    Mr. Ose. So you are doing good work, Mr. Sherman.
    Mr. Inslee.
    Mr. Inslee. Thank you. You probably are pretty fortunate to 
be here this week when we had a demonstration of one of the 
most feckless regulatory performances in Federal Government 
history from the SEC. So you have come at the right time to 
talk about this issue. You are a bit fortuitous.
    Our experience in Washington--we have got a great 
Commissioner, Mike is doing some great work. He has done great 
work on trying to protect consumers from predatory single-
premium credit insurance, and it has really been rapacious in 
some circumstances. So we are kind of jealous of protecting 
that.
    But I want to ask you as far as this effort, what should be 
the first goal of trying to have a more nationally uniform 
system? And what is the most difficult one to achieve that and 
still maintain State charter? That is a broad question.
    Mr. Serio. I suppose the goal is to come up with a system--
and I think we have--that allows for uniformity across the 
States, like I think we have had based upon an agreement as to 
what that baseline should be and then allowing where a company 
wants to go into a particular jurisdiction and operate in that 
market, give them the most expedient way to operate in that 
marketplace where that marketplace may have some unique rules.
    What has been the concern--and I will let the industry 
speak for itself--hasn't so much been that there is not 
uniformity, but there is not even a baseline in most cases 
between--from one State to the next to the next for those that 
operate on a multi-state platform. But creating that baseline, 
creating that foundation of uniformity across the spectrum, and 
then going to the legislators and to the unique needs of New 
York or Washington or any other State, making it as effortless 
as possible for a company to operate within that market, where 
they clearly know what those specific rules are, not wide and 
varying deviations but those things that are just unique to 
that environment, giving them a pathway to do it in the most 
expeditious manner.
    And that is the thing we have been focusing on in New York 
between leveraging technology, making it easy, transparency of 
process so that the companies know that they are not going to 
get questions at the end of the day, the so-called desk drawer 
rules or unwritten rules of regulation, and all the things that 
they used to complain about with respect to State regulation.
    One of the curiosities in this entire discussion, both 
today and in the previous proceedings, has been that the things 
they complain about today have nothing--are different, and 
completely different than what they complained about 5 years 
ago. They complain about unwritten rules, desk drawer rules, 5 
years ago and how they can't understand what is required of 
them in an individual State. So we lay it out, put it on our 
Web site, tell them follow these rules and you will get a 
product. And to this day, we cannot get the companies to follow 
those rules and get a product. They will not follow the rules 
that we lay out for them, that we will not deviate from, and 
that has been part of the frustration for us.
    But I think the baseline, creating that uniform system of 
getting to product approval, getting to producer licensing, I 
think is the first step, and then we can go and talk about the 
individual and unique needs of the individual States.
    Mr. Inslee. What do you think, from what many in the 
industry would want to achieve, is the most difficult to do 
without a Federal charter?
    Mr. Serio. I think the most difficult thing to do without a 
Federal charter is--from their perspective--I think is that 
they want a rule to apply to all jurisdictions. And that is the 
challenge that I think comes back both to the subcommittee and 
to the committee and to the Congress as a whole: How do you 
change the rules? Do you do it by a matter of process where you 
simply say, okay, they can have a Federal license? Or do you 
have to affirmatively change the rules that they are currently 
operating under?
    One of the challenges for us has been to work through the 
differences between the major markets. Florida, California, New 
York, Texas, Illinois have been the biggest market shares in 
the country, and we also happen to have among the strongest and 
most stringent rules with respect to this.
    They would say, well, we want to get away from that, and 
then I think the biggest challenge would be how does the 
Congress then say the rule is going to be something less than 
they are already in the major markets where they are operating, 
and I think that is what they are asking for.
    Mr. Inslee. Thank you.
    Mr. Ose. I thank the gentleman.
    Mr. Royce, do you have questions?
    Mr. Royce. Yes. Thank you, Mr. Chairman.
    I wanted to ask Commissioner Pickens, first of all, in your 
opening remarks you mentioned that we should ask our 
constituents what they think about the Federal regulation of 
insurance, and I think that is a good idea. I frequently talk 
to constituents in my district, and they are concerned, because 
many of them have a very difficult time getting new homeowners 
policies because of excessive regulation in California, and 
major insurance companies just can't do business there right 
now. And I would ask, what is your solution for that regulatory 
problem in California?
    Mr. Pickens. Good question, Mr. Royce. Tell you what; 
California is a different market than the Arkansas market. I 
think that is one thing to point out. And it is difficult for 
me to sit here and say what would work in California just 
because it works in my State, because you all have particular 
problems that we don't; and, again, I think that points to one 
of the strengths of State regulation.
    Californians to date, I mean, California passed Proposition 
103. It was passed by a majority of the consumers out there, 
and from my standpoint--again, I know there are others, in our 
organization probably, and I know Mr. Germandi would disagree 
with this, but I think Prop 103 has resulted in a distortion of 
that marketplace, and that is a lot of the problem that was--
but that is what people wanted at that level, and I just don't 
know how--if you passed a Federal law that is going to make 
Californians more happy.
    Mr. Royce. Well, let me ask another question of our panel 
of witnesses here, and that goes to another aspect of this, and 
that is the fact that in business, firms like to have as much 
certainty for returns as possible before they go through the 
process of investing in new products. And in the current 
regulatory structure, why would insurance companies want to 
allocate capital to develop new products and then go through 
the process of hiring more salespeople or spend money on 
marketing if they can't sell those products on a national 
scale? It seems to me that is fundamental.
    We are asking insurance companies to wait until 2009 for an 
interstate compact. However, they still do not have any 
guarantees that if they show that kind of patience they are 
going to be rewarded in 6 years with the ability to go through 
and market on that.
    And so how is this process helpful for purchasers of 
insurance products, given the time line?
    Mr. Pickens. You mean the----
    Mr. Hannon. If I could answer it, having done just from the 
NCSL standpoint, the compact, we did not put any impediment 
towards that compact being adopted sooner. We would hope it 
would. We recognize, especially when it comes to annuities--now 
that the market for annuities is recovering after a lull of 2 
years, we would recognize that people need to have all of the 
elements that you rightfully outlined of certainty and being 
able to calculate their rate of return on investment, et 
cetera.
    If you have a compact with a central filing, an ability to 
file at one place in product approval, then once gain that 
approval, sell in any of the States that are part of the 
compact, we feel it would be quicker than any other mechanism 
that could be adopted.
    Someone estimated that just based I guess on their watching 
the States, it could be as late as 2009. That is not a view I 
share. I think that with an appropriate presentation, with the 
fact that the NAIC, in order to give people a sense of what the 
compact would be like, has established a working committee to 
come up with proposed rules, suggested rules, so people can 
take a look at it and not just buy a compact per se, but buy a 
fully fleshed out entity, something like that could be 
implemented much sooner.
    Mr. Royce. Any other observations?
    Mr. Serio. Mr. Royce, you asked a great question, and I 
think you hit the nail on the head. That is really what we are 
faced with, whether we are talking about homeowners insurance 
or New York commercial liability after 9/11 or earthquake 
insurance or anything else.
    You pretty much have summed it up like this. This is a 
question of how are they going to invest their assets, commit 
their assets to a particular State, when each of those States 
have differing challenges.
    Part of the problem has been that a lot of insurance 
regulation had been built upon what you call rate regulation 
rather than cost regulation. We have said many times over, rate 
will follow the cost. You keep the costs of insurance down and 
the costs of the risks down, the rate will follow. But for many 
years that had always been rate regulation that we are going to 
keep the rates artificially low. Companies say I can't get 
enough of return, my capital costs too much, so I can't 
possibly operate in your jurisdiction.
    I think we have gotten away from that. We have talked about 
competitive rating systems. So long as we keep an eye on the 
costs, unreasonable rules that increase the costs of insurance 
or the costs of covering those risks really is where the focal 
point should be.
    As you have said, if you keep those costs under control, 
the capital will come in, because the companies are always 
trying to figure out where are they going to invest their 
assets next. We have a rule in New York pertaining to 
construction that is--that most companies won't even get into, 
because it is an absolute liability-type of standard. I am not 
saying yea or nay on that issue itself, but the answer we got 
from the companies was how could I possibly commit scarce 
capital to an absolute liability line of insurance?
    It is a fair question. It has nothing to do with speed to 
market. It has nothing to do with producer licensing, but goes 
down to the very essence of whether a company can and will want 
to operate, whether it is in my State or any other State.
    And that is what this really comes down to. If we make it 
competitive and profitable within reason for them, they will 
come in and they will operate in New York or any other State. 
And that is really the bottom line to this.
    Mr. Ose. The gentleman's time has expired.
    Mr. Royce. Thank you, Mr. Chairman.
    Mr. Ose. Thank you, Mr. Royce.
    Gentlemen, we do appreciate your participation in the 
hearing today. It has been most helpful. Our message is still 
pretty clear. I know we are making progress, but hurry up. 
Thank you very much.
    I would like to ask our second panel to come up, and while 
you are coming to the witness table, make sort of an 
unfortunate advisory. I have been given notice by those 
managing the process on the floor that we can expect a series 
of votes probably beginning shortly after 5 o'clock that will 
be of some duration.
    My request is--I know this flies in the face of fairness, 
having taken so long with the first panel--is that to the 
extent practicable, that if you can minimize your statement to 
a goal of perhaps 3 minutes as opposed to the traditional 5, we 
can get through everyone's testimony and actually proceed with 
committee questioning before we are interrupted.
    It would be my intent that when the votes are finally 
announced, that the committee would conclude its work, because 
we are likely to be on the floor for about an hour, and I would 
not want to withhold each of you from your important business 
for an hour waiting on us to come back.
    So with that advisory in mind, let me welcome Mr. John T. 
Fitts, Deputy General Counsel, Progressive Insurance Company.
    Also state that everyone's written testimony, of course, 
will be made part of the record. And please proceed at your 
leisure.

STATEMENT OF JON T. FITTS, DEPUTY GENERAL COUNSEL, PROGRESSIVE 
                       INSURANCE COMPANY

    Mr. Fitts. Thank you, Mr. Chairman, members of the 
committee. In light of the circumstances, I will certainly try 
to be brief and direct you to my written testimony which I 
think certainly lays out the essence of our position.
    I talk to you from the perspective of a national group of 
companies that writes automobile insurance in 48 States. We are 
collectively the third largest writer of automobile insurance. 
We support the need for regulatory reform. Our concerns today 
primarily relate to the cost of the variance in State-by-State 
regulation, our ability to get product to market on a timely 
basis and adequately priced, and making the market conduct and 
financial examination processes more efficient.
    If I can leave you with one thought, it is this: that 
insurance companies spend millions and millions of dollars 
dealing with regulatory and compliance issues, and most of that 
money is spent dealing with the variance that we find in State-
to-State regulation. And so for national companies like 
Progressive, the notion of uniformity and consistency is 
absolutely appealing.
    So this leads us to the question of can the State 
regulatory system deliver a uniform national regulatory policy 
that will help us cut costs out of our system and that will 
help us hold down the price of our product?
    And much as we are supportive of State regulation and 
believe that it has a vital role to play in things like 
solvency and consumer protection, believe that it has value in 
being close to the marketplace and being able to help to 
address the periodic stresses that come upon our industry, we 
have great reservations about the ability of the State 
regulatory system to deliver consistency and uniformity on a 
50-State basis. And primarily that arises from many of the 
comments that have been made earlier; that in the end, the NAIC 
or NCOIL or NESL can recommend positions to States, but they 
really do not have the power to force States to adopt them.
    And so we, like other companies, think about whether there 
are Federal solutions to this issue. We are not a proponent of 
optional Federal chartering, nor are we a proponent of 
federalizing the insurance marketplace, but we do see real 
opportunity in the use of Federal standards, which would 
preempt the field, not a floor but a floor and a ceiling both, 
which would be interpreted by the Federal courts, which would 
preserve the benefits of State regulation but at the same time 
provide the uniformity and consistency which I think will 
benefit consumers and will benefit our industry.
    We are concerned that if we continue down the current path 
and the NAIC and the States are not successful, in 2 or 3 years 
there may be no stopping an optional Federal charter. It may be 
the only thing that--there may be consensus among at least the 
larger companies, the national companies and the regional 
companies, that this is the only approach that will really 
work. So we would encourage Congress to consider optional 
Federal standards.
    In our testimony we raise agent and company licensing or 
producer and company licensing, market conduct and speed to 
market. I think that is a quick rendition of my testimony, and 
I will respond to questions later if you have any.
    Mr. Ose. Thank you very much for your courtesy, sir.
    [The prepared statement of John T. Fitts can be found on 
page 79 in the appendix.]
    Mr. Ose. Mr. Jaxon A. White, Chairman and CEO, Medmarc 
Insurance Company Group. Welcome, sir.

    STATEMENT OF JAXON A. WHITE, CHAIRMAN AND CEO, MEDMARC 
                        INSURANCE GROUP

    Mr. White. Good afternoon, Chairman Baker and members of 
the subcommittee. I am the Chairman and CEO of the Medmarc 
Insurance Group. This is a position I have held for the last 19 
years. We are a small insurance company, 60 employees. We will 
have about $75 million in written premium this year.
    My objective in the following comments is designed to 
educate and inform about the lack of uniformity among State 
regulatory mechanisms and how that really impacts a small 
property and casualty insurance company.
    I would like to make some quick points about company 
licensing, rate and form filing and market conduct, because in 
my view the inconsistency of regulatory requirements from State 
to State is more than a distraction. It is a competitive 
barrier that disadvantages small insurers much more than large 
insurers.
    We entered business in 1979 by partnering with a large 
insurer in numerous States. That large insurer issued the 
policies and they dealt with the regulatory compliance matters. 
For our part, we supplied that large insurer with underwriting 
and rating decisions. This is sometimes referred to in the 
industry as a ``fronting'' relationship.
    That business relationship was far from ideal, but it was 
expedient, and it was necessary in view of the company 
licensing laws that existed in 1979 and are largely unchanged 
today.
    Now, that is a perilous business situation, because we are 
a mutual insurance company, and we were wholly dependent on 
that large insurer for the benefit of their State licenses and 
their willingness to continue in business with us on a year-to-
year basis. To become a completely independent company, we had 
to obtain our own licenses in all 50 States and the District of 
Columbia.
    When we looked at the situation in 1993, it became so 
obvious to us that the State insurance company licensing system 
was a de facto barrier to small property and casualty insurers, 
and we needed a nationwide business opportunity, because our 
policyholders, both current and prospective, are found in all 
50 States.
    We were looking at a 5-year process to get licensed in all 
States. So we made a very important business decision. We 
decided that the only option for us at that point was to 
purchase an insurance company shell. We spent $3.6 million for 
the purchase of that shell, and that consumed about 10 percent 
of our net worth in 1995. That was necessary because we had to 
get into the marketplace on a national basis, and we understood 
from the very beginning that we have no disagreement with State 
company licensing laws. It is just a matter of are they 
consistently applied for large and small insurers alike.
    Subsequent to purchase of that company, we found that we 
had difficulties in filing rates and forms. We use a form of 
coverage known as claims-made. Many insurance departments don't 
like that form of coverage. So we have had to manage to come up 
with several different variations on that. That makes our 
pricing, rating decisions difficult. It also impacts our profit 
planning.
    In order to get around that issue, that is, to provide our 
policyholders where we find them in all 50 States with an 
option to buy coverage from us, we purchased another shell 
insurance company, in this case a surplus lines insurance 
company, which is then allowed in all States to have rates and 
forms without formal filing approvals. The purchase price there 
was $3.5 million. So now we are up to $7 million over about a 
5-year period in order to acquire a national platform. Again, I 
don't quarrel against State sovereignty in insurance company 
licensing and in rate and form filing, but we sell a very 
unique commercial casualty product, and our policyholders are 
sued in all 50 States, but yet we have to deal with company 
licensing in all 50 States as well as rate and form. There is 
an inconsistency there.
    Finally, I would stress on the market conduct area, we have 
found that there are enormous inconsistencies in market 
conduct. Large States and small States can be quite different 
in the way they approach the issue, and our concern here is 
that perhaps there might be one area--and we are proponents of 
Federal standards--I can't describe them for you, and I am sure 
members of the company cannot enunciate them right now, but it 
may well be that Federal standards could help us with one 
principal area to start with, market conduct or perhaps with 
insurance company licensing.
    That is a very quick summary of some written testimony that 
I have supplied to the committee, and I would be happy to 
respond to your questions.
    Mr. Ose. Thank you very much, Mr. White.
    [The prepared statement of Jaxon A. White can be found on 
page 159 in the appendix.]
    Mr. Ose. Mr. William B. Fisher, Vice President and 
Associate General Counsel, Massachusetts Mutual Life Insurance 
Company. Welcome, Mr. Fisher.

 STATEMENT OF WILLIAM B. FISHER, VICE PRESIDENT AND ASSOCIATE 
  GENERAL COUNSEL, MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY

    Mr. Fisher. Thank you, Mr. Chairman and members of the 
subcommittee. I offer my testimony today from the perspective 
of one of the largest life insurers in the country marketing 
national products on a nationwide basis.
    Modernization of insurance regulation is one of the most 
critical issues facing both Mass Mutual and the entire life 
insurance industry. Increasingly, we compete with competitors 
who operate under far more efficient regulatory systems. The 
inefficiency and the lack of uniformity permeates virtually all 
aspects of insurance regulation, with the most pressing 
concerns being the issues discussed earlier.
    Our customers ultimately bear the cost of inefficient 
regulation. When we are not able to offer the latest and least 
expensive version of a product because a State has not approved 
it, our customers lose. Inefficiency also translates into lost 
opportunities and duplicative effort.
    For 2002 alone, we estimate that we lost up to $60 million 
in sales as measured by premium, due to our inability to bring 
products to market in a timely manner. Due to differing State 
requirements and interpretations, it is common for us to have 
anywhere from 30 to 40 versions of a given product in the 
States.
    Further, in the past 5 years, Mass Mutual has undergone 14 
separate State market conduct examinations, which is 13 too 
many.
    Mass Mutual commends the State regulators and legislators 
for their very good-faith commitment and dedication of 
extensive effort toward regulatory modernization, as evidenced 
by the original NAIC statement of intent in March of 2002 and 
their more recently released action plan.
    The action plan sets forth a very ambitious agenda to 
modernize State insurance regulation. Given the basic nature of 
a 50-State regulatory system, however, we doubt the ability of 
the States to accomplish the comprehensive uniformity and 
regulatory efficiency that is sorely needed.
    In our 50-State system where each State is responsible for 
protecting its residents, there will undoubtedly continue to be 
differences among the States on how best to accomplish that 
job, thereby undermining the unprecedented collaboration in 
home State deference called for in the action plan.
    The action plan also calls for enactment of legislation in 
the States, which introduces yet another level of political 
complexity. On what is perhaps our most pressing issue, 
inefficient and disparate regulation of product, the action 
plan falls far short of the mark, with a goal of only having 30 
States by year-end 2008.
    Mass Mutual supports congressional enactment of optional 
Federal charter legislation for insurers. This legislation will 
provide strong consumer protection by establishment of 
requirements as strong as those found in the States, including 
adoption of continued regulation of life insurance products. 
Optional Federal charter also represents the most immediate and 
best means of accomplishing comprehensive uniformity and 
efficiency, since it calls for a single regulator and a single 
set of standards for Federally chartered carriers.
    Finally, an optional Federal charter will provide the 
needed Federal insurance regulatory presence in Washington that 
again was discussed earlier.
    I appreciate this opportunity to testify before you.
    Mr. Ose. Thank you very much, Mr. Fisher.
    [The prepared statement of William B. Fisher can be found 
on page 68 in the appendix.]
    Mr. Ose. Next witness is Mr. Tom Ahart, President, Ahart, 
Frinzi & Smith Insurance Agency. Welcome, sir.

  STATEMENT OF TOM AHART, PRESIDENT, AHART, FRINZI AND SMITH 
                        INSURANCE AGENCY

    Mr. Ahart. Thank you very much. I would first like to say 
that Ron Tubertini was supposed to testify originally as an 
agent from Mississippi. I am a good friend, have worked with 
him with the testimony. Unfortunately he couldn't get out of 
Mississippi on his flight today. They were all canceled. So I 
was called and drove down from New Jersey because I worked with 
Ronnie on this. So the testimony we submitted would be my 
testimony as well, and I will give a summary on that right now.
    I am President of an insurance agency in New Jersey. I am 
currently licensed in seven States, and I think in all of the 
testimonies that I have heard today and in other days, there 
has really been agreement that there have been a couple major 
problems in the current regulation--State regulation. And 
number one would be the licensing issues; number two, the 
speed-to-market issues. And we would agree with that--with 
everyone else that there are major problems right now that need 
to be addressed.
    I think when I look at the ways they can be handled, I hear 
people say we could continue to be State regulated or we should 
shift completely to some kind of Federal regulation or optional 
Federal charter, and I would like to talk about both of those 
for a minute and then give my own ideas of the different way.
    First, on maintaining State regulation, I have been--always 
been a big proponent of State regulation, mainly with consumer 
issues. I think being an agent gives us a pretty good 
perspective to talk about these things. I work with insurance 
companies all the time. I know the problems that they get into, 
the problems that it causes us. I know the problems that as 
agents we have from day to day, and I know our consumer 
problems and what they complain about.
    So I think we have a pretty good perspective, being down in 
the trenches, of exactly what is happening out in the 
marketplace. And I would say that I have worked very closely 
with the NAIC, and I would commend them on their new action 
plan. However, on one side as I commend them, you know, I think 
they are trying--and I think in the last 5 years especially, 
they have made big improvements as to where they have come in 
being able to get some things done; but the fact of the matter 
is that things like producer licensing, for instance, they--
even though they might have 41 States currently complied with 
Gramm-Leech-Bliley, that doesn't help me with the other 9 
States and it also doesn't help me that on paper they are 
complied with, but yet when I try to get a license it doesn't 
work quite as easily as they have said.
    So uniformity and reciprocity has been a problem, and my 
problem with some of these issues being solved at the NAIC 
level is that they really don't have the power to make all the 
States comply, so they really can't guarantee uniformity. And I 
think, for example, it is an issue that needs to be done 
anymore with changes in the global marketplace, increases in 
technology. I have a lot of insureds that all of a sudden, 
instead of just having a business in New Jersey, they have a 
sales office in Georgia or in Maryland or in Massachusetts or 
Arizona or wherever it might be, and that is not unusual 
anymore to have that. And as soon as that happens, I have to be 
licensed in every one of those States in order to get them the 
proper coverage for those offices. And what I found is it is 
not nearly as easy as people say. In the last 6 months, as a 
matter of fact, we have had to be licensed in three additional 
States.
    One State, I can say it worked great. They used the 
national database. We filled out a form on the Internet, and 
within 2 weeks we got our nonresidence license. Another State, 
it took 6 months and was just constant paperwork, constantly 
sending stuff back to us, and our insureds were upset because 
we couldn't help them. I had to make them get a different agent 
in a different State which they didn't like.
    So there clearly are problems. I don't see how the NAIC, no 
matter what kind of plan they came up with, can change that if 
they can't mandate all their States to act.
    As far as Federal regulation goes, my problem with that is 
that it is complete overkill. In all the issues I have heard, 
it mainly is involved with licensing. It is mainly involved 
with speed-to-market issues. And the problem--and we can 
correct those problems in other ways without changing the whole 
State regulation system. And, you know, it has been mentioned 
that consumer protection is a great big plus for State 
regulation. Well, why would we go to something that is 
completely unknown in order to change that?
    So Federal regulation it will be--I have worked for 20 
years as an independent agent and have been very involved in 
the association, the Independent Insurance Agents and Brokers 
of America, and they have come up with a proposal that I think 
is a middle-ground, pragmatic approach which allows us to keep 
State regulation and all the good things that they do; and in 
those issues that can't be helped by State regulation, like 
speed-to-market licensing, we use Federal legislation, not 
regulation, but Federal legislation to pass laws that would 
actually create standards that States would have to comply 
with, not minimum standards.
    I mean, some people misconstrue, I think, what the bill is 
about, but it would be actual standards that States would have 
to comply with and it would create uniformity and reciprocity. 
And that could be handled as issues come up on an as-needed 
basis and not create all the problems with having a new Federal 
bureaucracy that has things that is completely unknown.
    So from our--from my proposal, I would just say that, you 
know, I believe in State regulation; but in those areas where 
it didn't work, we should use Federal legislation and preempt 
State laws.
    Mr. Ose. Thank you, Mr. Ahart.
    [The prepared statement of Ronnie Tubertini who was 
represented by Tom Ahart can be found on page 148 in the 
appendix.]
    Mr. Baker. Our next witness is Mr. Neal S. Wolin, Executive 
Vice President and General Counsel for the Hartford. Welcome, 
sir.

   STATEMENT OF NEAL S. WOLIN, EXECUTIVE VICE PRESIDENT AND 
                 GENERAL COUNSEL, THE HARTFORD

    Mr. Wolin. Mr. Chairman, thank you very much. Members of 
the subcommittee, it is a great pleasure to have been asked to 
provide some views on how Congress might reform insurance 
regulation.
    As you know, insurance has become a multibillion-dollar 
industry, and it is our view that the present structure of 
regulation adds unnecessary costs to insurance products and 
restricts our ability to meet consumer preferences.
    There are really three areas that seem most critical--most 
critically in need of modernization: forms, rates and solvency.
    With respect to forms, insurance companies must file forms 
for each of the product lines for which they seek to operate 
and in each of those jurisdictions in which they seek to 
operate. And for us as a national carrier, that means filing 
forms in each of the 50 States and the District of Columbia. 
And each of those jurisdictions have different standards for 
form approval.
    For us, for example, on the property and casualty side we 
file 5,500 forms a year, and on the life side another 2,500 
forms. This elaborate process is an enormous burden on us and 
on the rest of our industry, but most importantly, we think has 
negative effects on our ability to serve consumers.
    First of all, consumers ultimately pay the cost of our 
compliance with this regulatory burden. In addition, the 
complexity of the process interferes with our ability to bring 
new and better products to market.
    With respect to rates, the insurance industry is marked by 
robust competition, competition which we think should and can 
establish prices at the most consumer-friendly levels. 
Government price controls often distort the connection between 
risk and price and often ultimately hurt the consumer or lead 
insurers to withdraw from the market. Our view is that price 
controls should be used as a regulatory tool only as a last 
resort and only after market-based efforts have failed.
    With respect to capital adequacy, addressing rate and form 
concerns obviously doesn't mean ending all regulation. Strict 
solvency regulation is also needed to protect consumers from 
underpricing by companies willing to collect premiums now and 
avoid paying claims later by declaring bankruptcy. When States 
force companies to remain in markets and sell products at 
artificially low prices, companies flounder, State guarantee 
funds are forced to pick up the pieces and pass on costs to 
consumers, taxpayers and, more specifically, to insurance 
policyholders.
    Nearly 20 years ago, Mr. Chairman, a predecessor of this 
committee investigated the ability of State regulators to 
perform the twin missions of company solvency and consumer 
protection. The subsequent report and hearings produced 
headlines on deficiencies in both areas.
    Since then, the NAIC and many active individual 
Commissioners have strived in good faith to improve 
consistency, quality, efficiency and speed. Notwithstanding 
their good faith, however, the actual reforms have been too 
slow in coming. In fact, the NAIC's new action plan adopted 
less than 2 months ago echoes many of the initiatives announced 
and pursued over the past two decades. The plan strives for 
greater standardization and speed, but leaves the State 
structure and its multiplicity of rules still in place.
    At this committee's initiative, the GAO recently studied 
efforts of the States and the NAIC to streamline and modernize 
market conduct. The GAO study cautioned that it was uncertain 
not only when, but even whether the NAIC and the States could 
accomplish this goal. We share that concern and believe that 
any plan which lacks uniformity and consistency will not 
produce the modernization necessary for our consumers.
    The Hartford believes that the solution that best provides 
value to consumers and the economy overall is one that grants 
national insurers the level of Federal oversight offered to 
other large financial institutions. We believe that Congress 
should develop legislation permitting companies the option to 
be chartered and regulated at the Federal level. Policyholders, 
claimants, and taxpayers will all be well served by regulation 
that is standardized, efficient, and time sensitive.
    And the key word here is optional, Mr. Chairman. If some 
State, regional, or national insurers believe that their 
customers in the marketplace will be better served by State 
regulation, they should have that choice.
    Thank you again for the opportunity to appear today, and I 
would be delighted to answer any questions.
    Mr. Baker. Thank you very much, sir.
    [The prepared statement of Neal S. Wolin can be found on 
page 164 in the appendix.]
    Mr. Ose. The next participant is Mr. Markham McKnight, 
President, Wright and Percy Insurance, but, more importantly, 
my constituent. Welcome, Mr. McKnight. Good to see you, sir. 
Hope you are happy and things are well.

  STATEMENT OF MARKHAM McKNIGHT, PRESIDENT, WRIGHT AND PERCY 
                           INSURANCE

    Mr. McKnight. Things are well. It is good to see you as 
well. Thank you.
    Thank you, Mr. Chairman, for this opportunity and for your 
hard work on these issues. I am President of Wright and Percy 
Insurance in Baton Rouge. We are one of the largest insurance 
brokerage firms in Louisiana, providing an array of products to 
corporate individual customers.
    Earlier this year my firm was purchased by BancorpSouth, a 
large financial institution based in Mississippi which 
currently operates insurance agencies in three States. This 
marriage is a reflection of the huge consolidation and 
convergence of the financial services industry, not only 
nationally but internationally as well, particularly on the 
insurance agency brokerage side.
    Today, more than 80 percent of all business insurance 
premiums placed in the country are brokered by 250 firms. There 
was a time when those in my ranks fought bank insurance 
affiliations, but as a result of the reforms that Congress 
created through Gramm-Leach-Bliley, today we are finding we 
have a more competitive and a fair marketplace for the sale of 
financial products.
    I want to associate my remarks with Mr. Fisher and Mr. 
Wolin with respect to urging you to look toward the dual 
banking regulatory option as a model for treatment of the 
insurance industry. While no system is perfect, it is clear to 
almost everyone in the banking industry that their system has 
created a healthy competition among regulators and has enabled 
banks to operate across jurisdictions and introduce products in 
a far more streamlined way than our insurance system. And I 
don't believe there is any evidence to suggest that 90-some-odd 
regional offices of the OCC are any less responsive to 
consumers than the 50 State-chartered regulators.
    I believe that it is critical to the long-term viability of 
the insurance industry that Congress pass legislation creating 
the optional charter. There is also a more immediate need, 
though, for forms that can't wait for the resolution of the 
Federal charter debate.
    NARAB is an excellent template for Federal intervention and 
has had very good results. For decades NAIC has attempted to 
streamline the agent-broker licensing system with only modest 
achievements, results that were frankly outstripped by the pace 
of interstate and international convergence.
    The NARAB provisions gave the States 3 years to create 
licensing reciprocity and threatened a national license 
clearinghouse if they failed to do so. Many States responded 
positively to the threat of NARAB, and today the majority of 
the States have passed the model producer licensing statute, 
New York being the latest. Yet the NAIC's testimony here today 
does not even mention NARAB as the reason for these advances.
    Additionally, a Federal court has recently ruled that the 
countersignature laws, one of the last vestiges of 
protectionism in the States, are unconstitutional.
    The task on agent-broker licensing reform is unfinished, 
and we think that the goal should be 50-State reciprocity or 
uniformity. Nine States, including two of the largest, do not 
have reciprocity. Additionally, NARAB only addresses individual 
licensing and not agency licensing. We would encourage you to 
take the next step to that end, and we don't think this goal 
can possibly be met without Federal intervention.
    There are some other problems that deserve immediate 
attention that could also be stepping stones to the path 
towards the optional charter. Some studies have shown that it 
can take as much as 2 years for a new product to be approved 
for sale on a nationwide basis. Banking and security firms by 
contrast can get a new product into the national marketplace in 
30 days or less.
    Congress should address these problems by establishing some 
sort of NARAB-like incentives to encourage States to bring 
their speed-to-market initiatives into harmony.
    In conclusion, I strongly agree with your statements that 
Congress needs to consider short-term and long-term solutions. 
With need State-based reforms. We need continued Federal 
oversight and pressure to reach uniformity in State laws, and 
we need you to continue laying the foundation for an optional 
Federal charter.
    I urge this subcommittee to begin work now on those reforms 
that are easily attainable in the short term, such as further 
producer licensing reforms, speed to market, and increased 
access to alternative markets as well as the long-term reforms 
that may require fuller examination and debate before 
enactment. Thank you.
    Mr. Ose. Thank you very much, Mr. McKnight.
    [The prepared statement of Markham McKnight can be found on 
page 99 in the appendix.]
    Mr. Ose. Thank all of you. That was a stellar performance 
to give those six statements in that record time. For what it 
is worth among the members still here, that scores a few 
points.
    Let me start with what I consider to be obvious low-hanging 
opportunities for some improvement. If we are to assume that a 
new Federal building on K Street filled with employees may take 
a while, it seems that NAIC and their compact and NCOIL with 
its models have, at least at the national professional level, 
adopted some platform of enhancements which experts in the 
field agree are responsible. Their difficulty is they cannot 
unilaterally impose those recommendations on their membership, 
and they are then reliant on State legislatures to act in 
accordance with those practical recommendations.
    If we were to take the models of NCOIL, the elements of the 
compact, put it together in a sack and give a clock by which 
those improvements must be considered adopted at the State 
level to establish basically uniformity without a national 
charter consideration, is that a significant enough improvement 
from the various perspectives at the desk to warrant the effort 
to do that? And I will make the obvious caveat. There are some 
who feel that if we act at all, that then the inertia to move 
further goes away for a while.
    Other members can speak to that, but from my perspective, I 
think this is going to be a continual ongoing effort for some 
years to come. I don't think we can get a bill done in a short 
period of time that is a universal solution. I do believe we 
can get to a universal solution, but I think we have to 
demonstrate that the elements that many proponents of the 
national charter indicate can be validated by taking 
progressive steps.
    Now, whoever wants to jump in, please do. Yes, sir.
    Mr. Wolin. Mr. Chairman, it is, clearly, from our 
perspective, not and all-or-nothing question. We have been 
working with the NAIC and will continue to do so on reforms.
    I think that the goals that you have mentioned, the compact 
and other things, are certainly laudable goals, and if 
implemented as expressed would be meaningfully better than the 
current circumstance.
    Having said that, I think that it is going to be a long 
time in coming, some of these things, and even if the Congress 
were to put a clock on it as you suggest, it still leaves the 
possibility, maybe even the likelihood, that you will have 51 
different jurisdictions interpreting a Federal law in all kinds 
of ways.
    I would note that for NARAB, for example, 3 years on, we 
still have at least a third of the marketplace not affected, 
and also a number of States still with different rules, 
slightly different rules, but nonetheless creating a burden for 
those of us who want to operate in all of the jurisdictions of 
the United States.
    So I guess my bottom-line answer is that we would want to 
continue to work with Congress and with your subcommittee, as 
well as with the NAIC and others, but I think we are skeptical 
that those kinds of sort of partial solutions will really get 
to a place where we will be operating with the effectiveness 
and the efficiency on behalf of our customers that we would 
like to be at.
    Mr. Ose. Mr. Ahart.
    Mr. Ahart. I mean, I would agree, Chairman, with you 
completely, except I would say have no clock. I believe in 
reciprocity and uniformity completely, and I think that it 
needs to be established where States just have to do it. And, 
you know, the argument that, you know, States are going to 
interpret it differently or anything like that, we have 50 
different States right now, and they interpret a lot of things 
differently that the government does. But that all gets done, 
and so I don't think this would be any different.
    Mr. Ose. Yes, sir.
    Mr. McKnight. I would like to add that--kind of put it back 
in your terms, that if we put all these things in a sack and 
shook them around I would suggest, all due respect to the NAIC, 
being the hard--the NAIC and the hard work and effort that they 
have put in the last several years--nothing has come about with 
the NAIC unless there has been Federal intervention at this 
point in time.
    I would suggest that the compact would be a bottom line, 
nothing more than a confederacy of States, with no one being 
held accountable at any point, place, or time.
    If you want to look at some of the direct issues--and you 
said pinpoint some issues that you would approach--I would 
approach the uniformity and the licensing in the 50 States. 
That effort very frankly--because they have 41 States--that 
effort is complete by the NAIC. It is complete, but it is not a 
win. Although we have 41 in compliance, the remaining 
jurisdictions have a significant percentage of the property 
casualty premiums out there mainly coming to California and 
Florida.
    So the 3-year time period with the incentives that were in 
place with NARAB seem to work pretty well, and I don't see why 
there couldn't be a follow-up with like-kind incentives and put 
a 3-year time period on it and push through the reciprocity, 
address the speed-to-market issues by possibly limiting the 
preapproval systems that are in place in the States. And at the 
same time, I would also push for the alternative market 
solutions.
    Mr. Ose. Well, I appreciate that, and I am tending more 
toward uniformity than just reciprocity. Reciprocity still 
presents redundancy problems in meeting this 3-States' 
requirement or that 3-States' requirement. I think if we don't 
shoot for uniformity, we are going to wind up with a 
significant remaining hodgepodge at the end of the day if we 
make progress.
    Mr. McKnight. I agree with that a hundred percent.
    Mr. Ose. Mr. Fisher.
    Mr. Fisher. A few comments on that. I worked very hard on 
the interstate compact with the NAIC, and also testified three 
times before Senator Hannon's committee at the NCSL. I am 
pretty familiar with it.
    I think there are a number of things we have to look at 
with respect to the compact. First of all, it is, as Senator 
Hannon indicated, a compromise document. That being the case, 
for example, a State may join the compact by enacting 
legislation, but it still retains within the right--within its 
rights within the compact the right to opt out of product 
standards on an individual basis.
    We basically said, okay, we can go along with that on the 
theory that everybody is going to be operating in good faith, 
and we hopefully will not see too much of that.
    I think a more subtle concern has to do with the provisions 
of the compact that supersede conflicting State law. After a 
very long political process, those provisions were limited only 
to product content requirements, and that seems like it is the 
logical thing to do, but it is very difficult. And the NAIC is 
seeing this in connection with the standards which are being 
set right now, that it is very difficult to discretely excise a 
piece of State regulation in the product arena away from some 
of your market conduct laws, because the two are very heavily 
interdependent.
    So there are a number of challenges, but more importantly, 
I think I would just make the observation that from my 
company's perspective, we are really looking for comprehensive 
uniformity and efficiency of regulation, not on an incremental 
basis; and in our view, the Federal charter is really the only 
way of getting there in an efficient fashion. And we have--I 
testified 2 years--over 2 years ago before this subcommittee, 
and we are now--what we have is a failed CARFRA, an interstate 
compact that hopefully will be passed in the States, but the 
NAIC says it may only be 30 by the end of 2008.
    Mr. Ose. Mr. White.
    Mr. White. In 1981, Mr. Chairman, this Congress passed the 
Products Liability Risk Retention Act. It further strengthened 
that law in 1986, and it did that so that it was a market-based 
solution, that being that one State could then control the 
fortunes of an enterprise that wanted to sell its products in 
50 States.
    There was a certain amount of resistance among State 
insurance Commissioners, but you could see as that process 
unfolded that there was a Federal mandate there, that there was 
a law in place that they could consult, and although the NAIC 
did a nice job in coming up with handbooks and interpretive 
works, it still was a bit of a challenge over time to overcome 
the State's right philosophy. Yet the Federal Government knew 
in its full justification that that law had a specific purpose 
to solve a specific market-driven opportunity, and many of 
those organizations exist today and satisfy a variety of 
product needs and consumer needs. And yet they are not 
regulated by 50 States.
    So it is just an illustration I would bring to your 
attention.
    Mr. Ose. Thank you.
    Mr. Fitts, did you----
    Mr. Fitts. Yes. I might as well jump in. Everybody else has 
commented.
    As a property casualty company, we really have no opinion 
on the compact. You started out, though, with an example where 
we bundle up a group of NCOIL model acts and we throw them out 
to the States and say you have got X number of years to act on 
these.
    I have a couple of comments about that. I don't think what 
you are saying is the same as NARAB and NCOIL--excuse me, NARAB 
and GLB. That didn't work for a couple of reasons, one of which 
you really put your finger on, and that is that it didn't 
really press the uniformity. And in the end uniformity is where 
we are ultimately going to gain the cost gains that are going 
to be able to make us more competitive.
    I am also a little bit concerned about the notion of just 
wrapping together model laws from NCOIL or the NAIC. I think 
that it might make some sense to slow down, for Congress to 
identify the areas which it wants to address and then reengage 
both regulators, consumers,and insurance companies in 
determining what might be the best model, the optimal model, 
for insurance regulation as opposed to taking something that 
may have been done 2 or 3 years ago, that was never done as a 
national standard, and give us an opportunity to be a part of 
the deliberative process.
    But I do agree that we need to be careful, to move slowly 
so there are no unintended consequences and so we do this 
right.
    Mr. Ose. If I may, I am going to recognize Mr. Lucas, and 
if Mr. Shays wants to get in before we have to go vote.
    Mr. Lucas. I will be brief, Mr. Chairman.
    I listened to all the testimony today, and, you know, I can 
understand why property and casualty people would want to be 
held at the State level and regulated. I understand that 
totally. But as being in the insurance business for 30 some 
years and going through the frustrations of trying to deal in 
three States and more at times, again, the speed to market was 
really a major, major issue. I can appreciate the fact that the 
people from the States, you know, there are some jurisdiction 
protections. We understand that fully here in Congress about 
protecting our jurisdictions, but I really have a difficult 
time seeing why the optional Federal charter does not work well 
where people choose to utilize that.
    You know, the consumer wins because, let's face it, any new 
additional cost always goes to the bottom line, and in a 
competitive situation--and our insurance companies are all 
going to be competitive--who is going to win here? It is going 
to be the consumer. And I think we need to look out for that.
    So I really don't have any questions other than I am still 
not convinced that having the ability for an optional Federal 
charter, particularly for the life companies, isn't the way to 
go. Thank you.
    Mr. Ose. Thank you, Mr. Lucas. Mr. Shays.
    Mr. Shays. This is not a hearing that--I only have had 3 
hours of sleep, given that I was watching elections last night 
back in my district and not liking the results.
    But I am wrestling with the bottom-line fact that I feel 
that the message is if you really want proper oversight--I 
mean, in the whole hearing--it has got to be done by States, 
because the Federal Government can't do the oversight. It is 
going to take a long time either way, and I think that it is 
impossible ultimately to be a competitive industry if you have 
got to work with 50 States.
    And so I would like to know how I can see quick action that 
enables our companies to be competitive internationally and not 
having to have so much stupid paperwork throughout the country. 
I mean, it doesn't make sense to me ultimately. It seems to me 
like it is just a practice that existed for a long time.
    So I understand, you know, as we look at it, three or four 
Federal, a dual system, and all of you would like some Federal 
action. But I guess the question I want to ask is why does it 
have to be this way? Why do we have to have this kind of bait? 
Why does it take so long? Why does it have to be this way in 
this day and age?
    Mr. McKnight. I don't think it has to take that long. 
During the first panel's testimony by Commissioner Pickens, he 
referred to the nationwide filing and how that was going to 
solve a lot of the problems, being able to file at one point 
and move forward. And while those filing efforts may be more 
efficient, it still does nothing to speed the preapproval 
processes that go on in every State.
    So I agree with your comments in that regard and I don't 
think that is being properly addressed in the compact that is 
being put forward. I think that does have to--I think that is a 
stepping stone. When you address speed to market, it is a 
stepping stone to Federal chartering.
    Mr. Ahart. I would just like to say that I think there is 
an easier way to do it, and that is to use the Federal laws 
approach, the Federal tools approach, to handle speed-to-market 
issues. For instance, you could have a Federal law where, you 
know, forms are filed and used in 30 days. They are approved 
after 30 days. If they are not----
    Mr. Shays. Even under a State-chartered system?
    Mr. Ahart. Yeah, because I think what is happening is you 
are doing Federal laws which the States would have to comply 
with. So right now you have a political system in 50 different 
States where they don't all listen to the NAIC, and for their 
own political reasons they do certain things, but for the most 
part the State regulation works very well.
    So those areas where it doesn't work well, like in speed-
to-market issues or in licensing for one reason or another, you 
pass a Federal law where they have to comply, and it takes it 
out of the political arena at the State level. Yet the States 
could still actually regulate it and make sure that it is 
complied with.
    Mr. Shays. Give me the best argument against that.
    Mr. Fisher. Perhaps I can help there.
    First of all, on the light side at least, a lot of States 
have those so-called ``deemer laws'' and they have not worked 
all that well, partly because companies are not all that 
willing to take a so-called ``deemer approval'' if they have 
not heard from the State within 30 days.
    In many cases, the regulators view the deemer approval as 
not being real approvals and feel they can talk to you after 
the 30 days are up.
    I can give you an example for my company and my industry in 
my home State many years ago. Our deemer law has been in effect 
as long as I have been with Mass Mutual, which is over 30 
years. We had a Commissioner who had a pet peeve on something.
    Mr. Shays. A what?
    Mr. Fisher. A pet peeve. I do not remember what his issue 
was.
    For a year and a half every product filed was automatically 
disapproved as being in violation of the law. That was it. No 
company could get any product approved in that State.
    So I am not sure the deemer laws really go far enough, but 
more importantly, they also do not achieve uniformity. They 
really go to the process of filing, not to the substance of the 
contract.
    Mr. Shays. Yes, sir.
    Mr. Ahart. The filing use was an example; it could be 
whatever the Federal law deemed to be done to be the best law 
possible. So, you know, I would say the one problem with the 
argument, you know, about how it is done in certain States 
right now is, if you had a Federal regulator, which was the 
State he was talking about, and then they disapproved 
everything for everybody, you would be in a lot worst case. 
There is nothing to show that the Federal regulator would be 
any worse or any better than the State regulator, so instead of 
creating another level of Federal bureaucracy, you are 
determining what the best possible solution is and then 
creating uniformity by passing that and making all comply.
    Mr. Shays. Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Mr. Shays.
    Let me make a request for a slightly early Christmas 
present, and let me restate my initial observation and not just 
the NAIC compact, but the NCOIL models that they outlined--even 
the one they hadn't yet adopted, if that is publicly available.
    You bundle all of that, can each of you from your various 
perspectives, if you choose to comment, give us something which 
indicates where those generally agreed-upon reform principles 
are deficient from your perspective? And what other additional 
reforms might you consider if we were to consider within the 
Congress the adoption of a proposal that would have immediate 
operative effect?
    Take that for what it is. It is a request for you to 
analyze what the State leadership has come up with their offer; 
and we, as a committee, need to understand where that State 
offer is deficient if, in fact, it would be by combining them 
all.
    It would seem to be in just making a public debate here 
with NAIC and the NCOIL folks, and my question to that panel in 
fairness was: Why can't we do what you recognize nationally 
instead of waiting on the legislative bodies to act 
voluntarily; and the response wasn't particularly strong, and I 
got the response, no Federal action was the goal.
    I am suggesting that Federal action might be appropriate, 
but if we use the recommendations the State professional 
organizations have contemplated themselves--if they are, in 
fact, reasonable--that would seem to be persuasive with many 
members of the committee.
    But I would like to request, you know, by the middle of 
December perhaps, you know, take a month, if you could get 
something back to the committee for us to consider as a 
response to that, it might be helpful. And then for those who 
are advocates of the national Federal charter, which I 
recognize, please give us the reasons why you think that 
approach is not responsive. And we'd be happy to get that.
    I am reaching no conclusions here. I am just asking for 
professional help to analyze what is out there on the table 
from the various perspectives, to see if we cannot get the 
committee to come forward with something in the next session of 
the Congress, whatever that might look like, making no 
judgments, making no proclamations.
    I am not suggesting we have a bill. I am just talking to my 
friends in private, so--which, of course, you will read about 
tomorrow.
    And let me express my appreciation to you. We are down to 
just a few minutes remaining on this vote. As I indicated, we 
have a series of votes that will keep us about an hour. I wish 
we had more time; I regret this has happened, but at this time 
I have to state, our committee hearing is now adjourned.
    Thank you, gentlemen.
    [Whereupon, at 5:32 p.m., the subcommittee was adjourned.]


                            A P P E N D I X



                           November 5, 2003

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