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



 
                    WORKING WITH STATE REGULATORS TO
                INCREASE INSURANCE CHOICES 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

                             SECOND SESSION

                               __________

                             MARCH 31, 2004

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-77






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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          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California                 RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut       STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona             MIKE ROSS, Arkansas
VITO FOSSELLA, New York              CAROLYN McCARTHY, New York
GARY G. MILLER, California           JOE BACA, California
MELISSA A. HART, Pennsylvania        JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio              BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
TOM FEENEY, Florida                  DAVID SCOTT, Georgia
JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey            CHRIS BELL, Texas
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          MICHAEL E. CAPUANO, Massachusetts
DONALD A. MANZULLO, Illinois         HAROLD E. FORD, Jr., Tennessee
SUE W. KELLY, New York               RUBEN HINOJOSA, Texas
ROBERT W. NEY, Ohio                  KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona             JOSEPH CROWLEY, New York
JIM RYUN, Kansas                     STEVE ISRAEL, New York
VITO FOSSELLA, New York,             MIKE ROSS, Arkansas
JUDY BIGGERT, Illinois               WM. LACY CLAY, Missouri
MARK GREEN, Wisconsin                CAROLYN McCARTHY, New York
GARY G. MILLER, California           JOE BACA, California
PATRICK J. TOOMEY, Pennsylvania      JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
MELISSA A. HART, Pennsylvania        BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
PATRICK J. TIBERI, Ohio              DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida           NYDIA M. VELAZQUEZ, New York
KATHERINE HARRIS, Florida
RICK RENZI, Arizona












                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 31, 2004...............................................     1
Appendix:
    March 31, 2004...............................................    73

                               WITNESSES
                       Wednesday, March 31, 2004

Ahart, Thomas, Ahart, Frinzi & Smith Agency, on behalf of the 
  Independent Insurance Agents & Brokers of America..............    40
Counselman, Albert R., President & CEO, Riggs, Counselman, 
  Michaels & Downs, Inc. on behalf of the Council of Insurance 
  Agents and Brokers.............................................    45
Csiszar, Ernst, Director, South Carolina Department of Insurance, 
  on behalf of the National Association of Insurance 
  Commissioners, Accompanied by Gregory W. Serio, Superintendent, 
  New York State Insurance Department, and Mike Kreidler, 
  Washington State Insurance Commissioner........................    14
Dickson, Anthony, President, NJM Insurance Group, on behalf of 
  Property Casualty Insurers Association of America..............    47
Hunter, J. Robert, Director of Insurance, Consumer Federation of 
  America........................................................    49
O'Connor, Phillip R., Constellation New Energy, Inc..............    55
Ochenkowski, Janice, Vice President External Affairs, Risk and 
  Insurance Management Society, Inc..............................    52
Singer, Roger, Senior Vice President & General Counsel, OneBeacon 
  Insurance Group, on behalf of American Insurance Association...    42

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    74
    Fosella, Hon. Vito...........................................    76
    Gillmor, Hon. Paul E.........................................    77
    Kanjorski, Hon. Paul E.......................................    78
    Ahart, Thomas................................................    80
    Counselman, Albert R.........................................    86
    Csiszar, Ernst...............................................   100
    Dickson, Anthony.............................................   107
    Hunter, J. Robert............................................   116
    O'Connor, Phillip R..........................................   146
    Ochenkowski, Janice..........................................   161
    Singer, Roger................................................   171

              Additional Material Submitted for the Record

Bachus, Hon. Spencer:
    National Association of Insurance and Financial Advisors, 
      prepared statement.........................................   177
Kanjorski, Hon. Paul E.:
    Written testimony of Hon. E. Benjamin Nelson a Senator from 
      the State of Nebraska......................................   187
Property Casualty Insurers Association of America, prepared 
  statement......................................................   191











                    WORKING WITH STATE REGULATORS TO
                INCREASE INSURANCE CHOICES FOR CONSUMERS

                              ----------                              


                       Wednesday, March 31, 2004

             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 10:07 a.m., in 
Room 2128, Rayburn House Office Building, Hon. Richard Baker 
[chairman of the subcommittee] presiding.
    Present: Representatives Baker, Ose, Shays, Gillmor, 
Bachus, Castle, Royce, Oxley (ex officio), Kelly, Shadegg, 
Ryun, Biggert, Miller of California, Hart, Kennedy, Tiberi, 
Renzi, Hensarling, Kanjorski, Sherman, Inslee, Ford, Frank (ex 
officio), Lucas of Kentucky, Clay, McCarthy, Baca, Emanuel and 
Scott. Also present were Representatives Hensarling, Maloney 
and Pomeroy.
    Chairman Baker. [Presiding.] I would like to call this 
meeting of the Capital Markets Subcommittee to order.
    Today, the committee meets to hear testimony with regard to 
the continuing effort of the committee to provide regulatory 
relief for consumers and the insurance industry in providing 
services to consumers. As the committee has conducted now 14 
meetings in the past 2 years on this subject, there really is 
little need for a lengthy introduction of the subject matter to 
committee members.
    It is clear--and I think all parties affected agree--that 
some changes are not only in order but necessary. And the 
difficulty is in reaching the level of change that should be 
suggested to ensure market stability and additional choices for 
consumers.
    It is very clear, at least to me, that as the regulatory 
structure becomes less burdensome and complicated, there are 
more providers of product, there is more competition in the 
relevant market and consumers win by paying lower prices by 
having many choices. Where we find the reverse structure, there 
are limited numbers of providers, premiums generally are higher 
and consumers lose.
    This is a mission which all on the committee agree has to 
be undertaken. And we wish to go as far as we reasonably can go 
in providing a streamlined market structure that enables it to 
work effectively.
    What has concerned me, to a great extent, in reviewing the 
financials of this sector of the financial marketplace, the 
industry does not enjoy a very comparable return on equity, as 
contrasted with others in the financial marketplace. To some, 
that would seem to indicate victory in regulating the industry. 
I look at it slightly differently.
    I know that without adequate capital and resources, you 
cannot provide the needed services. And our economy suffers.
    Where the most competitive insurance product is not made 
available, that ultimately costs us all in lost opportunity. I 
do believe that Chairman Oxley has directed and we have worked 
hard to provide a list of recommended reforms which we hope the 
various stakeholders will find to be warranted and necessary.
    Today, we will receive comment from various perspectives on 
the advisability of moving legislatively in this direction and 
to receive any recommendations or modifications that may be 
deemed advisable in light of the current market structure. I am 
appreciative for those who are here today and willing to 
participate and want to express my appreciation to all who have 
worked with the committee over the past months in coming to 
this hearing today.
    This could well be our last hearing before the committee 
considers adoption of legislation.
    With that, I would like to call on the ranking member, Mr. 
Kanjorski, for his opening statement.
    Mr. Kanjorski. Thank you, Mr. Chairman. And thank you for 
the opportunity to offer my thoughts about regulatory reform in 
the insurance industry before we hear from our distinguished 
witnesses.
    First and foremost, I commend you for continuing to focus 
our committee on issues of insurance regulation. During the 
last 3 years, our panel has met on multiple occasions to 
discuss a wide variety of issues related to the insurance 
industry.
    As a result of these proceedings, we have developed a 
better understanding of the insurance marketplace. We have 
additionally begun to form a growing consensus in the Congress 
about the need to improve insurance regulation in the United 
States.
    In the attempt to advance these efforts, Mr. Chairman, you 
also recently developed an initial outline for achieving 
incremental regulatory reform in the insurance industry. This 
evolving proposal has already sparked considerable debate in 
the insurance community.
    Although it merits receiving our collective attention, I 
suspect that we will eventually conclude that this reform plan 
to impose a new federal bureaucratic network over an existing 
state regulatory structure will produce unintended 
consequences. Later today, for example, one of our witnesses 
will detail the shortcomings of this outline, with respect to 
the protection of consumers and the needs of small businesses.
    By inserting the federal government into insurance 
regulation, this plan will also almost certainly create new 
unfunded liabilities for our country. Additionally, I suspect 
that many will conclude that this initial proposal falls 
considerably short of achieving permanent and genuine reform in 
the insurance industry.
    The outline under consideration today, for instance, 
envisions a weak federal coordinator with little enforcement 
authority. Calling for greater uniformity in insurance 
regulation, but then giving a new federal overseer limited 
powers, is much like watching an old man trying to eat an apple 
after removing his false teeth.
    Some have also suggested that the federal regulatory 
presence envisioned by this proposal could do more to confuse, 
rather than clarify, regulatory responsibilities. During our 
previous hearings on insurance reform, we have received 
extensive testimony from many witnesses advocating the creation 
of an optional federal charter.
    Although the plan before us today does not address this 
important issue, the consensus for creating an optional federal 
charter continues to grow. Earlier this year, for instance, the 
National Association of Insurance and Financial Advisors 
decided to embrace certain federal initiatives that would work 
to improve the regulation of insurance, including the 
development of an optional federal charter.
    A study released earlier this week also advanced the idea 
of creating an optional federal charter. The reform package 
under consideration today would create a system of joint 
regulation between the federal and state governments.
    Rather than overlaying a federal bureaucracy on top of the 
State regulation, an optional federal charter would create a 
separate, streamlined regulatory system. Such dual oversight 
has worked generally well for the banking industry for many 
decades. And we should now consider applying it to the 
insurance industry as well.
    Moreover, because of its standardized products in a 
nationwide marketplace, the life insurance industry, in my 
view, is particularly ready for the adoption of an optional 
federal charter.
    Mr. Chairman, the devil--as we often say--is in the 
details. Because much of the proposed regulatory reform outline 
is currently conceptual, it is difficult this time to 
anticipate how the legislative language would actually work.
    Despite my initial doubts, I want you to know that I am 
approaching today's hearing with an open mind because I share 
your goals of making insurance regulation more efficient, 
uniform and effective for consumers.
    In closing, Mr. Chairman, we have reached a fork in the 
road and must decide which path to take. Ultimately, we might 
decide to modify and adopt this concession plan before the 
108th Congress completes its work.
    We might alternatively decide to create a commission to 
study these matters. We might also decide to begin the 
considerable work needed to create an optional federal 
chartering system in a future session.
    These are important discussions for us to have and 
important matters for us to resolve. Thank you, Mr. Chairman.
    [The prepared statement of Hon. Paul E. Kanjorski can be 
found on page 78 in the appendix.]
    Chairman Baker. Thank the gentleman.
    Chairman Oxley?
    Mr. Oxley. Thank you, Mr. Chairman. Let me begin by 
thanking you and Oversight and Investigation Subcommittee 
Chairman Sue Kelly for holding, between the both of you, 14 
hearings and roundtables over the last 3 years on the need for 
insurance reform.
    Your hard work and commitment to increasing competition and 
effective oversight for insurance consumers created the 
foundation we are building on today.
    In addition, I want to recognize one of the real leaders of 
our time: our first witness and president of NAIC, Ernie 
Csiszar. President Csiszar has served with bipartisan 
distinction for both Democrat and Republican governors in South 
Carolina. And he has worked closely with our committee in 
forging some central goals and concepts for improving insurance 
regulation.
    Too often, the legislative process gets bogged down in turf 
protection, partisanship and political conflict avoidance. Rare 
is the leader who can overcome self-interest in the status quo 
and help create the opportunity for change to achieve a greater 
good.
    I also want to thank New York Commissioner Greg Serio and 
past NAIC President Mike Pickens, who have also been of 
enormous assistance in working together to build a foundation 
for a consensus, middle-ground approach to reforming insurance 
regulation.
    All three leaders have been steadfast advocates of 
retaining the strengths of State-based insurance oversight and 
have helped us think through alternatives to federal regulation 
as we forge a path towards uniformity.
    And Mr. Chairman, I would also like to recognize our former 
colleague, Mike Kreidler, who of course is the insurance 
commissioner now in the State of Washington. And it is good to 
have you back here in Washington, Mike.
    Achieving uniformity will not be easy. At the first meeting 
of the NAIC, the New York insurance commissioner and founder of 
the NAIC, George W. Miller, stated, ``The commissioners are now 
fully prepared to go before their various legislative 
committees with recommendations for a system of insurance law 
which shall be the same in all states--not reciprocal, but 
identical; not retaliatory, but uniform.''
    That, Mr. Chairman, was in 1871, 6 years after the Civil 
War ended. And since then, the NAIC has testified before this 
committee and its predecessors numerous times that we are 
almost there, that new programs have been developed, new models 
agreed to. In just a few more years, we will be closer to the 
illusive goal of uniformity promised back 133 years ago.
    As a former state legislator and member of NCOIL, I have 
been one of the strongest proponents for the NAIC and its 
efforts. As we have demonstrated through the 14 hearings in 
this committee over the past 3 years and the numerous hearings 
held previously in the old Commerce and Banking Committees, the 
States cannot get the job done by themselves.
    The collective action barrier to getting 56 state 
legislatures and regulators to act in complete unison is--and 
will always be--insurmountable absent congressional 
legislation.
    Representatives Kelly, Chairman Baker and other senior 
members of this committee and I worked together during the 
Gramm-Leach-Bliley legislation to establish what is now 
referred to as NARAB, a targeted, State-based reform proposal 
enacted into law that required a majority of states to adopt 
reciprocal or uniform licensing regulations.
    NARAB has been an enormous success. And all but a handful 
of states have met the goal.
    Agents can now become licensed and sell insurance to their 
customers nationwide, generally within 1 to 3 months, with 
greatly reduced red tap and cost. In contrast, company 
licensing takes a majority of the States over 6 months to 
review, with 17 percent of the States, according to one study, 
requiring more than 2 years to complete their reviews.
    While the NAIC has tried to create a uniform application 
form and coordinated process for company licensing, without a 
congressional mandate, the effort suffers from incomplete 
participation, numerous deviations and unenforced deadlines. We 
can do a lot better.
    The success of NARAB can be a model for bringing the States 
closer to fulfilling their own goals. After 3 years and 14 
hearings, we need to move from oversight to building 
legislation.
    We are just beginning this process. Chairman Baker and I 
have offered some goals and general concepts for reform. But 
these are intended to be a starting point for discussion.
    We want to strongly encourage members on both sides of the 
aisle and our witnesses here today to fully participate and 
provide input in this early stage of working through a 
legislative approach. It will not be easy. We have a few 
issues, such as the role of a state-federal partnership to 
coordinate uniform insurance policy, that still need to be 
worked out.
    But we have the opportunity, like President Csiszar and 
Commissioner Serio, to demonstrate a commitment to leadership 
and accomplish something meaningful and lasting for consumers. 
I hope that you will all join us in this effort and that we do 
not have to wait another 133 years.
    I yield back.
    [The prepared statement of Hon. Michael G. Oxley can be 
found on page 74 in the appendix.]
    Chairman Baker. Thank the chair for his leadership on this 
issue and for his continuing interest in seeing reform move 
forward. And the Capital Markets Subcommittee, Mr. Chairman, 
has actually had 14 meetings in the last couple of years. Ms. 
Kelly's work has been in addition to that, as well.
    So the committee should be fully versed on the controversy 
at hand. I thank the chair for his participation.
    Mr. Scott?
    Mr. Scott. Thank you very much, Mr. Chairman.
    Chairman Baker, Ranking Member Kanjorski, Chairman Oxley, I 
thank you for holding this important hearing today regarding 
the effectiveness and efficiency of state insurance regulation. 
I also want to thank the distinguished panel of witnesses we 
have before us today for your testimony on this important 
subject.
    While I have not yet seen evidence for the need to create a 
federal insurance regulator, I understand that efforts to 
streamline insurance regulation by the States have, indeed, 
been slow in development. However, since Chairman Oxley and 
Baker have announced that they are not considering an optional 
federal charter in the road map for insurance regulation and 
modernization, I am interested in understanding what targeted 
areas of reform can be considered for streamlined regulation.
    This committee must balance reforms between streamlined 
regulations for businesses with consumer protections. I believe 
that state insurance regulators best know how to respond to 
consumer complaints.
    For example, in my own home state of Georgia, our insurance 
commissioner, John Oxendine, has helped tens of thousands of 
Georgia consumers address complaints about their insurance 
providers. These actions have resulted in over $20 million 
being returned to those consumers in 2003.
    Consumers can call Commissioner Oxendine's Division of 
Consumer Services from 8:00 a.m. to 7:00 p.m., Monday through 
Friday. The commissioner also sends field representatives to 
each of Georgia's 159 counties at least once a month. I cannot 
imagine a national regulator being able to provide for a local 
connection or as much access to consumer advocates or 
investigators.
    Today, I look forward to hearing from our panel about 
practical recommendations to earnestly begin streamlining 
insurance reform between the States.
    Thank you, Mr. Chairman.
    Chairman Baker. I thank the gentleman.
    Mr. Shays?
    Mr. Shays. Thank you, Mr. Chairman. Thirty-second comments 
to say: one, very important hearing; two, I know you have done 
and others have done a tremendous amount of work on this issue.
    I have an open mind about what needs to happen. But I will 
be looking at these types of issues. I want to see more 
competition and more choices.
    I would like to see uniformity. I would like to see it 
easier to enter into the marketplace. And however that can be 
accomplished, I will be supportive.
    Thank you.
    Chairman Baker. I thank the gentleman for his statement.
    Mr. Lucas?
    Mr. Lucas of Kentucky. Mr. Chairman, let us let the 
hearings begin.
    Chairman Baker. Thank the gentleman very much for his 
astute insight.
    Ms. Kelly?
    Mrs. Kelly. I want to thank Chairman Baker for holding the 
hearing. The hearings that the chairman mentioned, we found 
many strengths and many weaknesses with the current regulatory 
system. So it is clear that improvements of some sort need to 
be made.
    There are advantages to the State regulatory system. There 
is a regulatory expertise that currently exists at the State 
level. And in addition to that, the States are sometimes more 
responsive to the needs of the local marketplace and the local 
consumers.
    The committee has located, though, many areas that really 
need improvement. One is speed to market for the new products. 
Market conduct reviews are sometimes exhaustive and 
duplicative.
    Price controls are well intended, but sometimes ill-advised 
and reduce availability in certain markets. The states are 
still not able to achieve nationwide agent licensing 
reciprocity that we ask for in NARAB.
    We are close. But we need the rest of the States into 
NARAB.
    The insurance commissioners and companies, consumer groups, 
agents, brokers--we have had a lot of witnesses here. And they 
have all agreed that there is a need to modernize the current 
regulatory system.
    I think we need to consider reforms to reflect the 
marketplace changes and allow the institutions to better serve 
our customers. The greater focus on improving regulation was 
promising when we passed Gramm-Leach-Bliley.
    But the ideas have only gotten us so far. And I think the 
American people are in a position now where they really expect 
and deserve some action on our part.
    It is clear that the NAIC will continue to struggle with 
many of the programs. Unfortunately, consumers continue to 
suffer because the State legislatures fail to act on the good 
ideas of both the NAIC and the NCOIL.
    It is clear that the time has come, that we have to have 
some new federal legislation to help the States modernize their 
own insurance regulation. We need consistency. We need an ease 
for the people in the business to reach their customers. And we 
need an ease for the customers to understand what is going on.
    Prior to NARAB, the States had been trying to get some kind 
of a reciprocity with licensing for years. And as the chairman 
pointed out, the insurance industry itself recommended that 
that happened way back in the 1870s.
    So the success on NARAB is only going to come if we get all 
of the States in. We have to build on that model in other areas 
of state insurance regulation. And we have to help the NAIC get 
their goal of more efficient and more effective regulation.
    I look forward to our witnesses today. And I commend 
Chairman Oxley and Subcommittee Chairman Baker for a lot of 
hard work and leadership on these issues.
    Thank you, Mr. Chairman.
    Chairman Baker. I thank the gentlelady for her statement.
    Mr. Sherman?
    Mr. Sherman. Thank you, Mr. Chairman. As an old tax 
commissioner, I am thrilled that we are joined today by my 
distinguished friend from North Dakota, Mr. Pomeroy, a former 
state insurance commissioner. And if his interest in insurance 
is such that he would like to switch committees, we will talk.
    [Laughter.]
    Mr. Chairman, it seems to me that there are at least four 
different areas that are grouped together as insurance 
regulation. The first is getting a product approved so that we 
know that that product, contract or form is in the best 
interest of consumers.
    The second is the safety and soundness of the company, so 
that those who are insured know that they will be paid. And 
that involves both the auditing process and setting standards.
    The third is dealing with consumer complaints against an 
individual company, dealing with how a particular consumer is 
being treated.
    Then the fourth, as the chairman of the full committee 
mentioned, is professional licensing and enforcement, dealing 
with the individual agents and brokers. And as the chair 
pointed out, that is an area where we have had some success.
    It appears to me that it is only in the first category that 
I am told that we really have problems; and that is, getting a 
product to market. It will be interesting to go through these 
hearings and see whether there are problems in other areas.
    I would hope that, whether it be a federal bureaucracy or 
better coordination of the State bureaucracies, that we will be 
able to get products to market quickly so that consumers will 
have the maximum choice and that choice will be relevant to 
their needs at the time.
    I yield back.
    Chairman Baker. I thank the gentleman.
    Mr. Royce, did you have a statement?
    Mr. Royce. Thank you, Mr. Chairman. I want to just take a 
moment and commend you and also Chairman Oxley for your 
leadership on this issue.
    Consumers, I think, of insurance products are going to 
benefit from more efficient regulation. And it is clear to me 
that the leadership of this committee is trying to help the 
marketplace for the better.
    But I also have a parochial perspective on this. I am very 
deeply troubled by the insurance regulatory environment that we 
have in my home state of California. And I would just like to 
share with you, Mr. Chairman, the homeowners' insurance market 
as an example.
    The regulatory environment in California, in my view, would 
make the old socialist, East Bloc, command and control planners 
proud. Because we have ended up in a situation in California 
where we have the largest marketplace in the United States. And 
yet, California homeowners pay some of the highest premiums in 
the United States.
    I think our experience has been that insurance firms are 
more likely to leave than to expand their businesses in 
California. And that is because of the price control-based 
regulatory regime that we have there.
    And this means that a bad situation in California has the 
potential to get worse.
    Now California has the largest economy of any state. And it 
is frankly one of the largest economies in the world.
    And I think this committee and this Congress should be 
deeply concerned about the negative economic effects of 
California's price controls, as well as their limits on new 
product innovation. But there is also the global perspective on 
this because our Byzantine insurance regulatory policy is 
deterring foreign capital from entering our own markets.
    Effectively, if you are an overseas firm and you are 
looking to do business in the United States, you are not 
entering one market. You are entering 50 markets. And for this 
reason, our trade negotiators, when they go in to trade or to 
negotiate to open up markets overseas, they run into resistance 
every time they attempt to expand markets for U.S. financial 
services products abroad because the response is, ``Well, you 
have 50 markets in the United States.''
    So I am a strong supporter of increasing efficiency in our 
insurance marketplace. I think consumers will be the greatest 
beneficiaries. But our economy is also going to benefit as a 
result of that.
    And the last point I would like to make is that enforcement 
has to go hand-in-hand with reform; otherwise, any positive 
legislative package will not be implemented in a number of 
states.
    And again, I thank the chairman for his leadership. And I 
yield back.
    Chairman Baker. I thank the gentleman.
    Mr. Emanuel, did you have a statement?
    Mr. Emanuel. I am just going to second Mr. Lucas' 
recommendation.
    Chairman Baker. Terrific.
    Mr. Bachus? Mr. Bachus, did you have a statement, sir?
    Mr. Bachus. Yes, thank you, Mr. Chairman.
    And I thank you for holding this hearing. I think this is 
an important legislative hearing to discuss your Baker-Oxley 
State-based insurance regulatory concepts, to make state 
insurance regulation more efficient.
    These proposals go a long way to expedite a variety of 
insurance products to consumers and lower the cost of insurance 
premiums for small businesses. So I commend you and Chairman 
Oxley.
    As you know, Chairman Baker, Walter Bell, our Alabama 
insurance commissioner, was appointed by Commission Csiszar. 
And he is one of our witnesses today. He was appointed to chair 
the NAIC's Speed to Market Task Force.
    And the task force addresses one of the major issues that 
you are addressing in the Oxley-Baker reform concept; and that 
is product approval. They have met regularly. And I believe 
they are making progress toward the goal of national standards 
in this area.
    And I for one would advocate giving them the opportunity to 
do this and would hope that they would continue to make 
substantial progress.
    In addition, Mr. Chairman, I want to thank you for your 
commitment to try to modernize and uniform reinsurance 
regulation. As you know, the U.S. reinsurance industry competes 
on a global basis. Reinsurers are sophisticated entities. And 
they are disadvantaged when trying to compete on a world stage 
without uniform regulation across all 50 states.
    I look forward to working with you on identifying areas 
that will allow the reinsurance community to compete more 
effectively on a global basis.
    And lastly, I want to take the opportunity to include 
testimony from the National Association of Insurance and 
Financial Advisors for the record and would like to do that.
    Chairman Baker. Without objection.
    [The following information can be found on page 177 in the 
appendix.]
    Mr. Bachus. Thank you.
    Thank you, Mr. Chairman, again for holding the hearing. I 
look forward to hearing from the witnesses.
    Chairman Baker. I thank the gentleman.
    Ms. McCarthy, did you have a statement?
    Mrs. McCarthy of New York. Thank you, Mr. Chairman. I will 
hand in my statement. But I do want to welcome Mr. Serio, who 
originally came from West Hempstead, which is in my district, 
and has a great deal of respect in New York.
    So I appreciate you being here. And I am looking forward to 
your testimony.
    Chairman Baker. Thank the gentlelady.
    Mr. Castle?
    Mr. Castle. Thank you, Mr. Chairman. I have no statement. I 
look forward to hearing the witnesses.
    Chairman Baker. Thank you, sir.
    Mr. Inslee?
    Mr. Inslee. Just want to welcome our friend, Mike Kreidler, 
who has become even wiser after leaving Congress.
    [Laughter.]
    Chairman Baker. Ms. Biggert, did you have a statement this 
morning?
    Mrs. Biggert. Yes, thank you, Chairman Baker. And thank you 
for holding this series of hearings on insurance regulation. I 
think the thoughtful and deliberate hearings that are being 
held by the subcommittee will more than adequately prepare us 
for any future course of action that we will be taking.
    I did want to thank one of my colleagues from Illinois, Dr. 
Phil O'Connor, for coming to testify today. He served as our 
Illinois insurance commissioner for 3 years and for another two 
as its research director.
    He has a wealth of experience in this and many other policy 
fields. And we did work together on several commissions while I 
served in the Illinois General Assembly. So I am delighted that 
he is here.
    I do want to take a moment to point out this morning that I 
believe the open market system for insurance in my home state 
of Illinois is an example of a system that works well--not just 
for regulators, not just for insurers, but most importantly, 
for the consumer.
    I understand concerns that some of my colleagues may have 
about a change from a prior approval to an open market system. 
But let's look at what this system has produced. Illinois has a 
very small residual market and significantly more auto and 
homeowners insurers competing for business than states with 
stringent price regulation.
    Illinois attracts the largest share of operating property 
and casualty companies of any state in the nation. And that is 
good for consumers.
    The premiums and loss ratios in Illinois are well below 
most other states with large populations, high traffic density 
and urban concentrations. With no rate controls, regulatory 
resources have been freed up in Illinois, allowing state 
regulators to initiate other innovative safeguards, such as 
early warning systems and computerized market conduct exams.
    An open market system does not mean a wild or unfettered 
system; quite the contrary. The Illinois Department of 
Insurance has oversight authority and is required to monitor 
the marketplace and report to the General Assembly.
    The department plays an important role. But it does not 
determine rates. Rates are driven by economic demands, not 
politics.
    There are numerous stringent consumer protections in place 
as well. The benefits of an open market system have been 
recognized by consumers in Illinois for 30 years, which is why 
no one has ever tried to change the rate system.
    Some of my colleagues may believe that price controls 
magically lower prices below competitive market levels, while 
at the same time stimulate an adequate supply of coverage. To 
me, this is just a myth.
    We have seen the reality of price controls in markets like 
those in New Jersey. A large number of insurers pulled out of 
New Jersey entirely, citing the unique burdens posed by the 
State's auto insurance regulatory system.
    A regulatory system that drives insurers out of the market 
is not an ideal regulatory system. An open market system like 
that in Illinois, in my view, is closer to the ideal.
    So putting all parochial interests and personal bias aside, 
I can objectively state that Illinois has one--if not the 
most--efficient systems in the country. Illinois has delivered 
more choice, better prices and a stable market to consumers.
    So the open market competition works in Illinois and has 
worked very well for 30 years. My hope is that Illinois can 
serve as a model for other states that want to serve consumers 
better.
    I look forward to the testimony of Dr. O'Connor.
    And thank you, Mr. Chairman. Yield back.
    Chairman Baker. I thank the gentlelady for her statement.
    The committee has the pleasure today of having two ringers. 
On the Democrat side, we have the former insurance 
commissioner, obviously knowledgeable in matters of insurance 
and is expressing today his deep interest in the subject by 
attending our hearing.
    Welcome, Mr. Pomeroy. Would you care to make an opening 
statement?
    Mr. Pomeroy. Mr. Chairman, thank you for allowing me to 
attend. I look forward to hearing from the witnesses and I will 
have some thoughts on this matter that I would like to share 
with the committee at a later time.
    But I commend you and Chairman Oxley and Ranking Member 
Kanjorski for advancing this issue in a very thoughtful and 
substantive way. I remember being on the witness side of the 
table in the room when I thought the topic of federal 
regulation was being advanced in a less thoughtful way. I 
appreciate the way this issue is proceeding, and I thank you 
for allowing me to participate.
    Chairman Baker. I thank the gentleman for his interest and 
participation.
    And on the Republican side, we have a member of Financial 
Services, but not on this subcommittee. We welcome the 
gentleman from Texas, Mr. Hensarling. Would you care to make an 
opening statement, sir?
    Mr. Hensarling. Yes, thank you, Mr. Chairman. And thank you 
for allowing me to attend.
    The title of this hearing is ``Increasing Insurance Choices 
for Consumers.'' As a former student of economics and a small 
businessman, I understand that when we are talking about 
increasing choices for consumers, we must of course discuss 
decreasing the regulatory burden on businesses.
    The best and most effective consumer protection will always 
be a competitive marketplace. And I believe this committee and 
Congress can play an important role in ensuring that American 
consumers have access to the most affordable and most varied 
insurance products available.
    Now I do not trust any single company to make their 
products affordable and varied. And I do not trust any 
particular industry to make their products affordable and 
varied.
    I do, however, trust competition in the marketplace to do 
just that. One only has to look at history to show the 
possibilities that exist by stripping away excess regulation.
    When Congress decided to deregulate the airline industry in 
1978, the number of cities served by more than one airline 
increased by 55 percent. And service was extended to more than 
140 additional airports. The impact on airline travelers was 
estimated at $11 billion in savings.
    When Congress deregulated the trucking industry in 1980, 
the number of carriers doubled, while rates for small shipments 
decreased by approximately 25 percent.
    From airlines to trucking to natural gas--and the list goes 
on--history has shown us that deregulation can bring down real 
prices--by 25, 30, even 40 percent over time. Thus, history 
also shows us, in order to get to a point of effective 
competition in the insurance industry, we must carefully 
examine what has been inhibiting choice and driving up costs 
for consumers.
    I believe the most important factors have been the price 
controls and the large, expensive regulatory burden imposed on 
the insurance industry by many state governments. The sooner we 
can move to a more competitive market-based system, where 
financially sound companies have low barriers of entry and are 
free to compete with minimal interference, the better off 
consumers will be.
    I happen to be a homeowner from Texas, the State that the 
Census Bureau deemed in their last survey to have the highest 
average premium for homeowner's insurance in the nation. Thus, 
I understand the negative impact price controls can have on 
competition and how this can ultimately adversely affect the 
consumer.
    My constituents in Texas are paying, on average, more than 
double for their homeowner's insurance than what consumers pay 
in states with limited or no price controls. And they 
frequently contact me and ask me to help do something to help 
them find more options for cheaper insurance products.
    Recent studies have shown that consumers living in states 
with minimal or no price controls pay significantly less for 
most types of insurance than do consumers residing in states 
with significant price controls.
    I look forward to working with you, Chairman Baker and 
Chairman Oxley, to address the problems that price controls and 
other government-imposed regulations have had on the insurance 
industry and the availability of affordable insurance products 
for consumers.
    I thank the chairman and yield back.
    Chairman Baker. I thank the gentleman for his statement and 
for his interest in the matter and giving his time today to the 
committee.
    Is there any member wishing a further opening statement?
    If not, Mr. Kanjorski wishes recognition for a unanimous 
consent. Mr. Kanjorski?
    Mr. Kanjorski. Mr. Chairman, it seems like insurance--or 
former insurance--commissioners are falling out of the 
woodwork. But I would like to offer for the record a statement 
from the former state insurance commissioner of Nebraska and 
now the outstanding Senator from Nebraska, Ben Nelson, for 
purposes of insertion into the record.
    [The following information can be found on page 187 in the 
appendix.]
    Chairman Baker. Without objection, so ordered.
    I thank the gentleman.
    At this time, we would wish to proceed to our distinguished 
panel of witnesses. I have a deep appreciation for the 
difficulty of the task each of you have undertaken and want to 
express my true appreciation for the level of work and effort 
committed to trying to resolve the concerns that many have 
outlined this morning in their opening statement.
    I do believe we have made significant progress. I believe 
we are on the verge of adopting legislation, which all 
stakeholders can view as being very constructive and moving in 
an appropriate direction for the consumers we all serve.
    Director Csiszar from the South Carolina Department of 
Insurance has been steadfast and continued in his leadership. I 
have great regard for your work.
    I also want to welcome the other two gentlemen to the table 
this morning. Before I proceed though, I think Ms. Kelly from 
New York has a word she would like to offer at this time.
    Ms. Kelly?
    Mrs. Kelly. My word to offer is that it is a great pleasure 
to have Greg Serio back with us. He is the superintendent of 
insurance from the great State of New York.
    Greg was confirmed as New York's 39th superintendent back 
on May 9, 2001. He served 6 years prior to that as first deputy 
superintendent and general counsel of the department for 3 
years.
    In addition to being a very well respected member of the 
NAIC where he serves in a leadership capacity, Superintendent 
Serio is a good friend. And we feel he is a great asset for the 
State of New York.
    It is a pleasure to see you here today, sir. And I look 
forward to hearing from you.
    Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Ms. Kelly.
    And also to introduce to the committee formally Mr. Mike 
Kreidler, from Washington State, who is also a former member. I 
wish to extend our welcome to you today, sir.
    Today, Mr. Csiszar appears not in his capacity as the 
director of insurance of South Carolina, but in his capacity as 
spokesperson for the National Association of Insurance 
Commissioners. Please proceed at your leisure. Your formal 
statement will be made part of the record.

STATEMENT OF ERNST CSISZAR, DIRECTOR, SOUTH CAROLINA DEPARTMENT 
    OF INSURANCE, ON BEHALF OF THE NATIONAL ASSOCIATION OF 
                    INSURANCE COMMISSIONERS

    Mr. Csiszar. Thank you, Mr. Chairman. It is indeed a 
pleasure for me and my colleagues--Mike and Greg--to appear 
before you this morning.
    And I can without any hesitation begin this statement by 
affirming to you that not only are we desirous to become 
partners in this process, to offer our expertise to the 
committee in this process. We are eager to do so.
    We are eager to participate as we move forward from what 
you have generously shared with us, this conceptual framework 
that we currently have in front of us, and moving from that 
conceptual framework to a more detailed legislative kind of 
agenda.
    So I want to restate and reaffirm the fact that we are also 
of an open mind. We have a good deal of expertise that I 
think--all of us and the committee members in particular, we 
offer it to them--that will help in this process.
    We are by nature problem solvers when we deal with our 
constituents. And we know we have some problems in this 
regulatory system. And we know, as commissioners, as much as 
you as members of the committee realize, that reform is needed.
    We are of course particularly pleased that the framework 
for this reform is not a dual charter of an optional or non-
optional type. We are pleased to see that this is the so-called 
``federal tools'' approach.
    And while we are really in no position to comment on the 
details, because it is all conceptual at this point, as I said, 
we are very eager to be at the table and to work with you in 
developing these concepts, flushing out these concepts into 
what will eventually, presumably, be legislation.
    I think the spotlight that this committee, through its 
hearings, has brought to the issue has been good. I think it 
has instilled a sense of urgency amongst commissioners, as well 
as amongst others who have an interest in this, such as our 
legislatures and our governors.
    And I think we welcome just that very process. The 
congressional oversight, I think, is always welcome. And we are 
eager, as I said, to continue with this process.
    Now let me just review very briefly--I know some of you 
have heard many of these things before--but let me just 
reaffirm and review briefly what is in progress at the NAIC and 
why we think that a State-based system of regulation is, 
indeed, better than any other form of regulation if the State-
based regulation can indeed be reformed with the vision, with 
the concepts that we have in front of us.
    We have not been, as you know, standing still in the years 
since Gramm-Leach-Bliley. On the speed to market, which Mr. 
Bachus so kindly mentioned, yes, Walter Bell is indeed in 
charge. We have a very aggressive agenda.
    We have the interstate compact. It is three different 
issues really: the interstate compact and the implementation of 
that compact in the States; the development and implementation 
of standards for the product to go through that compact as the 
single point of entry; and then of course our electronic filing 
system, which is an integral part of this as well.
    Let me just briefly give you some updated numbers. As you 
know, the interstate compact has been endorsed both by NCOIL, 
the National Conference of Insurance Legislators, as well as by 
NCSL, the Conference of State Legislators.
    Roughly 20 jurisdictions are looking at introducing that 
compact in their legislative sessions. Two of them have 
actually passed it--Colorado and Utah. I understand there are 
two more--Virginia and West Virginia--where the legislation is 
sitting on the governor's desk, but has not been signed yet.
    We are aggressively pursuing the introduction of that 
compact this year and in the year to come. Very personally, I 
can tell you in South Carolina, we are going to be introducing 
that compact in the coming legislative session.
    As regards standards, this is again key. The compact is 
nothing but a skeleton unless you have those standards that 
apply to the particular products.
    We have identified 24 different product categories. These 
24 product categories are working their way through this group 
headed by Walter Bell. Our timetable is that by our December 
meeting this year--which will be in wonderful Louisiana, in New 
Orleans--by New Orleans, we are going to have those standards 
in place.
    They will, in essence, flush out the interstate compact. 
And between the two, there you have your single point of entry. 
There you have your uniformity and, as I said, aggressively 
pursue that compact for adoption.
    On SERFF, by the way, I can only report that our filings 
have tripled this year. In fact, in 2004, we expect somewhere 
around 140,000 to 150,000 filings to come through that 
electronic system.
    The average turnaround date on those, by the way, is 17 
days. So I think we have made very, very good progress. And I 
can assure you, we will continue to make good progress by year 
end.
    As regards company approval, we have our alert system. We 
are continuing to work on making that system more user-friendly 
and developing a more uniform approach to certificates of 
authority. And I think we have made good progress.
    And again, by year-end, I expect to report back to you that 
we are in good shape on company approval.
    On the NARAB issues, here actually you have a clear example 
where the licensing of agents and brokers is an area where 
there is in fact some federal help needed. Here is a case where 
a good many of the difficulties we have had in moving from 
reciprocity or even inter-reciprocity and from reciprocity to 
uniformity, where a good deal of the difficulty has arisen 
because of our inability to tap into the FBI database.
    Here is clearly a case where Congress, I think, can help us 
overcome that. And we will be, I can assure you, in step with 
you in making progress towards uniformity in this area.
    On market conduct, we have most recently proceeded to 
implement a handbook that is now a standard procedure for 
market conduct. That has always been one of the problems that 
different states did things different procedurally, not just 
substantively.
    We are implementing an analysis process. This analysis 
process will be uniform. We are collaborating between states.
    While there is no resolution to this issue, we are actively 
looking at how the new NCOIL model in market conduct overlaps 
with our work and to what extent we can make ourselves run in 
parallel with the NCOIL mode. That is currently under 
consideration. I cannot report to you a final result yet. But I 
can assure you, again, that we are making progress in this 
area.
    On the financial side, we realize that on the financial 
side, which is the crown jewel of what we do, the solvency 
issues, we know that reform is needed there. We know that we 
can update, for instance, our risk-based capital figure. We 
know that we need to move from the traditional post-review, 
looking back for 3 or 4 or 5 years to a forecasting approach, 
to a risk-assessment approach, if you will.
    Kevin McCarthy, who is the commissioner in Florida, he and 
Tom Gallagher are chairing that group. And we are very, very 
actively making good progress in that area, even on the rating 
issue, the personal lines rating issue, which is clearly the 
most contentious issue, I think.
    This whole notion of where competition fits in all of this, 
even here I can report to you that 36 states actually have 
competitive rating models in place. Fifteen states, however, 
have a very strict prior approval process.
    But that is a contentious issue, has been a contentious 
issue for the last 100 years and continues to be one today. And 
it is good to keep in mind that on those issues, Mr. Chairman, 
we also, regardless of what we as commissioners may think, we 
also have other constituents to deal with, ranging anywhere 
from our legislature to our governor to the attorneys general. 
And in some states, the trial bar has also actively become 
involved on issues of that kind.
    I might also point out that even though we realize that 
significant reforms are needed, the system has actually worked 
fairly well. I think it is interesting to note that we have not 
had the same kinds of problems that we have seen with Tyco and 
Enron and the others, where directors, auditors, bankers, 
executives have compromised themselves really through self-
dealing, sometimes to the point of criminal activity.
    We have not seen that kind of activity in the insurance 
industry. And I think in many ways state regulation, because it 
is closer to the market, it is closer to the consumer, to some 
extent, at least, I think we can attribute that result to the 
effectiveness of state regulation.
    So in summary, rather than going into details, I will leave 
it open to questions, but in summary, we are with you. We want 
to be at the table. We will help you. We offer our expertise to 
you.
    Please take advantage of it. And we will walk step in step 
with you as we make progress in this entire process, in this 
entire federal tools approach.
    So that is where we stand. Mike and Greg, I think, want to 
make some brief comments. And I will stop with that.
    [The prepared statement of Ernst Csiszar can be found on 
page 100 in the appendix.]
    Chairman Baker. Please proceed as you choose.

    STATEMENT OF MIKE KREIDLER, WASHINGTON STATE INSURANCE 
                          COMMISSIONER

    Mr. Kreidler. Thank you, Mr. Chairman. I come in part here 
because I think I reflect the diversity of what we see in 
membership of the NAIC. I think it represents the diversity 
that you have in the Congress, you will also find diversity 
among the commissioners across this country of ours.
    As I look at it, I come from a slightly different 
perspective. I come from a perspective of not being somebody 
that has spent their life working in the insurance industry or 
as a regulator.
    And I think I can stand back and look at it from much the 
same perspective of many of the members who had the opportunity 
to serve in their state legislatures and view what took place 
in insurance regulation and the role that states play and then 
also to take a look at it from the perspective of the problems 
and challenges that we face.
    No one is saying that there are not problems and changes 
that are necessary and we agree that there are places where the 
Congress can effectively assist as we go forward in making 
changes in the system. I would however point out that there are 
areas where the need is more acute, from the standpoint of the 
nature of the products then in other areas. The areas that have 
been identified by the committee certainly are very much 
recognized by members of the National Association of Insurance 
Commissioners, are in life insurance products. These very much 
are products that need a standardization and a uniformity.
    I am proud of the success that we have shown and are 
exhibiting in the area of an interstate compact. We also have 
three states currently that are in the process of beginning the 
process of accepting applications through a memorandum of 
understanding. And they are three of the largest states that we 
have.
    I would believe that we will wind up having one uniform 
system for those particular types of products. And we are 
moving aggressively in that direction.
    I would commend the committee for helping to put pressure, 
so to speak, on the insurance regulators to recognize that 
these changes are necessary and needed. There are always going 
to be forces that would like to go slower rather than faster, 
that change sometimes comes hard.
    But the pressure that we feel and the changes that we are 
bringing about are ones that are very consistent with what you 
have heard before this committee and what we feel as insurance 
regulators.
    One area where I am particularly concerned as we approach 
this tools list of various items is: where do the consumers fit 
into this equation? I really do believe that the issues related 
to consumer protection are of an acute nature.
    Let me give you some idea. We had over 200,000 contacts 
with my office in the last year from consumers. We have over 
700 cases that we are currently working with consumers.
    This is an issue where you have a promise by insurance 
companies to fulfill an obligation that is very different from 
that of financial services associated with banking. They are 
changes that need to be approached cautiously.
    When we get into some of these areas that we have before us 
right now in the area of property and casualty, for example, 
whether it is homeowner's insurance of automobile insurance, 
there is a great deal of difference between the States--whether 
it be their tort laws or whether it be because of the kind of 
urban versus rural distribution; whether it be because of any 
number of factors that cause the rates to be very different 
from one locale to another.
    In the area of commercial forms in commercial insurance, I 
think there are some changes that you could help us with. One 
of the challenges that we face right now is getting some of the 
agents that are independent agents in the State of Washington 
comfortable with deregulation. For example, striking a balance 
of their needs with the larger agents and brokers and the 
companies, is being able to strike that bargain as to where 
does the consumer need protection? And where does an 
unregulated market take effect?
    States would like to go further, but frequently run into 
resistance because there is a bit of a provincialism here of 
trying to keep that standard too high. I think that is one 
place where you could essentially further help us to address 
that problem by pushing on that issue. But again, do not push 
it too low.
    If you are a business that does not have a professional 
risk manager on staff, you are not going to be in a position to 
go into a market that is unregulated and be able to make the 
sophisticated choices. You are much more like the homeowner or 
the automobile insurer that is going to be concerned about what 
your product has and you do not have the sophistication to make 
a determination. So that threshold of deregulation is important 
to us.
    When it comes to the issues related to agent licensing, 
Commissioner Csiszar pointed it out. One of the problems that 
we face there when it comes to agent licensing is that there 
has been resistance here at the national level to do what we 
have done in the State of Washington for years, which is to 
give the insurance regulator the authority to take a look at 
the FBI database.
    In fact, our independent agents aggressively supported to 
make sure, when the FBI came through and we questioned whether 
we had direct statutory authority in the State of Washington to 
access that database, they actively supported us doing so. I 
can tell you right now that there are out-of-state licenses 
that have been requested in the State of Washington where you 
have individuals with felony convictions in the financial 
services area that are agents in good standing in some states 
and we quite frankly would not like to see them doing business 
in our state.
    You could help us by making sure that all states have that 
kind of access and are doing that kind of FBI fingerprint check 
on every individual who does business in their state.
    These are some places where you can assist us in doing 
those changes. I would urge caution in the breadth of what is 
outlined right now in the tools, in no small part because of 
its impact on consumer protection.
    What may be good for the companies may not be good for the 
consumers. And consumers need a seat at this table that is very 
strong and making sure that their rights are adequately 
protected.
    Thank you, Mr. Chairman.
    Chairman Baker. Thank you very much.
    Superintendent Serio?

  STATEMENT OF GREGORY SERIO, SUPERINTENDENT, NEW YORK STATE 
                      INSURANCE DEPARTMENT

    Mr. Serio. Good morning, Mr. Chairman. And thank you for 
having us again.
    Mr. Kanjorski--and thank you to Ms. Kelly and Ms. McCarthy 
for the kind introductions earlier.
    Let me take a perspective that one of your members took a 
few minutes ago and amplify that just for a minute; and that is 
on: what is the end goal of the modernization? We want 
competition in the marketplace. And I think we share that with 
you.
    We want consumer protection, as Commissioner Kreidler 
indicated. We want that. And I think we all share that issue as 
well.
    Just to give you a context that this is the right thing to 
be working on and focusing on, in terms of modernization of the 
insurance regulatory system, the activities that we have 
already undertaken, both in partnership with the Congress, as 
well as individually through the NAIC, have yielded those kinds 
of consumer protections that we are all benefiting from right 
now. And this is a context. And this is an objective that I 
think we are trying to keep in mind as we go forward, working 
with you, on the concepts of the design and on the design of 
the details of your conceptual draft.
    And that is that in New York and in other states, we have 
been able to retask a lot of our insurance resources--scarce 
state resources. And everybody knows the difficulties the 
States are having with respect to their budgets.
    But by taking on the modernization initiative, largely at 
the impetus of the House Financial Services Committee in the 
Gramm-Leach-Bliley bill a few years ago, and then taking on 
that with the Statement of intent with the NAIC an the 
restatement that we issued last year, we have been able to make 
firm inroads into added consumer protections by retasking.
    A lot of our human resources at the department, our staffs 
that used to open up envelopes, handle paper, take phone calls, 
as opposed to the types of modernizations that we have been 
able to do, leveraging technology, leveraging uniformity 
between the States and really making it a more efficient 
system, we have been able to retask those resources into added 
consumer service representatives, into added frauds 
investigators, into added and real-time financial surveillance.
    There is an end result here that I think sometimes we miss 
as we talk about the details and getting through the devils of 
the details and things of that nature; and that is that is a 
laudable objective that we subscribe to entirely. Because we, 
as the managers of the 51 or 54 state regulatory insurance 
agencies and in the District of Columbia and in Puerto Rico and 
the Virgin Islands, we know the need to retask and reuse and 
retool our existing agencies to make them better at what we are 
asked to do--and that is, protect the consumers and do better 
in the job of financial surveillance, real-time, market 
monitoring to make sure that those things that have been filed 
are being used the way they are supposed to be in the 
marketplace.
    This is one of the things we have already found by the 
activities we have undertaken at the NAIC, by the uniformity 
and the reciprocity that NARAB really pushed us to do. And I am 
very pleased and probably would not have been asked to come if 
New York had not passed a producer licensing bill, as we did 
last year. That is having real tangible benefits.
    So as we go forward, and as we create the balance between 
what is good for the companies, good for the consumers, let's 
realize at the end of the day that this is also good for the 
efficacy of the regulatory process because it is allowing us to 
put our resources where they need to be the most, in terms of 
protecting those consumers.
    Thank you.
    Chairman Baker. Thank you very much.
    Commissioner Csiszar, as Superintendent Serio was just 
outlining in his New York case, where the transition from prior 
regulatory structure to a more streamlined structure had a 
couple of benefits to his constituency. Viewing the South 
Carolina experience, having gone through the regulatory 
modifications from your view, it appears that there are two 
different distinguishable changes that have occurred. And I 
would like you to speak to those.
    On the one hand, it seems as though more product is now 
available for consumers and that the competitive market results 
in better pricing opportunities for consumers, which is the 
direct goal we hope would occur. But along the line of limited 
state resources, it would seem that getting your staff out of a 
stricter regulatory oversight posture with regard to, say, 
product approvals and shifting those individuals over to 
enforcement is the real secondary benefit because it enables 
you to do the real consumer protection advocacy that you might 
have had more limited resources in the prior model.
    Are either or both of those observations accurate?
    Mr. Csiszar. Well, let me speak first of all as the 
commissioner of South Carolina in responding to that. Clearly, 
in South Carolina, we reached the realization that our market 
is not the same as the California market, for instance.
    Companies do not trip over themselves to write in South 
Carolina; not least because we are a rounding error on an 
income statement or a balance sheet. So we realized that we had 
to do something different if we wanted to make our market more 
attractive.
    And the route we chose, the route the legislature chose--it 
was not me. The legislature chose the route of, in essence, 
moving from a prior approval to what is nothing more than a 
rate man system on the automobile side. And we are trying to 
replicate that on the homeowner's side this year by actually 
going through a transition from rate man's into a file and use 
or use and file system.
    Now having said that, a California market may very well be 
different because if you are a company--a large company in 
particular--you probably cannot afford not to do business in 
California, just because of the size of the market. But 
certainly, what we have seen in South Carolina as the primary 
benefit is availability, affordability impact--clear 
availability and affordability impact.
    And the second issue, I think again, to some extent, this 
is driven by Gramm-Leach-Bliley. But to some extent it is also, 
I think, the realization that when you look at what is it that 
is essential about the insurance product?
    And yes, while there are many things that can be expected 
from the purchase of the product, the most fundamental thing to 
be expected is the payment of the claim when a claim comes due. 
And that claim may come due tomorrow or the day after the 
purchase or it may come due 25 years from now.
    So when you look at fundamentally what is it you have to do 
to protect the consumer from the standpoint of the company 
being there when that claim needs to be paid? Solvency, of 
course, immediately comes to mind.
    So we have managed in South Carolina to focus much more on 
solvency, number one, and at the same time also dealing with 
consumer complaints. Because as my colleague from Washington 
stated, we too in a small state like South Carolina, we had 
50,000 either inquiries or complaints; 50,000 over the phone.
    And that does not count emails. And it does not count mail.
    And by the way, each one of those does get answered. They 
do not disappear into the cracks.
    So it has allowed us to really focus on those two areas. 
And that has been the benefit in an environment--a state 
environment--where yes, the budget dollars are scarce these 
days.
    Chairman Baker. My time is just about expired. But I want 
to do one follow up. Advocates of optional federal charter 
rightfully claim that by establishing an alternative federal 
mechanism for the marketing and sale of insurance product, you 
have the absolute assurance that you can operate in all states 
in a similar fashion.
    One of the problems in an incremental approach comes on the 
enforcement side. If you look at the fair degree of success of 
NARAB, there are still elements that have not yet come into 
compliance some years after its adoption.
    So it gets us to the question of if we are to seriously 
consider incremental, the appropriateness of some federal 
enforcement ability to ensure that states participate in a time 
certain. Is that, given the argument between optional federal 
charter and incremental, incremental with weaponry maybe, 
doesn't that seem to make some sense?
    If we are really going to move the ball forward in a fixed 
period of time, to enable legislatures to act, to enable 
commissioners to conduct their review professionally, you 
cannot have it immediately. But after some period of time, if 
states have not adopted what generally all parties have agreed 
to as an appropriate method of conducting business, do we not 
have to have some enforcement ability in whatever we do?
    Mr. Csiszar. Let me start by saying that from my 
standpoint, Mr. Chairman, the dual optional charter is the 
worst of all possible solutions, really. I would rather at that 
point say, ``Let the States get out of this business and have 
the federal government take the whole thing.''
    You have all kinds of complications, from premium taxes to 
guarantee funds to so on. To me, the dual optional charter 
really is not the solution.
    Forget about bureaucracies now and costs and so on, just 
from a purely business standpoint. I think I am not an advocate 
of that approach at all.
    Having said that, yes clearly I think you have to make sure 
that states take this seriously and enforce it. And I can only 
speak again from my state on this one. I know when Congress 
speaks in our state or when our congressional delegation 
speaks, state legislatures listen and the governor listens and 
the attorney general listens.
    So I think the very, very fact that you are engaging in 
this process and maybe producing a piece of legislation will 
speak louder than anything.
    Chairman Baker. I thank you. I appreciate your attorney 
general. I wish I could get another attorney general to listen, 
but that is another subject.
    Mr. Kanjorski?
    Mr. Kanjorski. Thank you, Mr. Chairman. Following along on 
that question, Mr. Csiszar, is there any reason why, taking 
just life insurance, that it is not uniform across the country? 
Is there something distinctive about the people of South 
Carolina that they are different from California?
    Mr. Csiszar. Quite frankly, Mr. Kanjorski, I think the 
greatest case, the best case for uniformity can be made by 
looking at life products.
    Mr. Kanjorski. Okay.
    Mr. Csiszar. There is no question about it.
    Mr. Kanjorski. Well, let's follow that along. I do not have 
the numbers, but you probably could tell me. What portion of 
the insurance business written in South Carolina--or 
nationally, if you know--is represented in the life business?
    Mr. Csiszar. I cannot give you the figure on a national 
level. But I know in South Carolina, it would be significant, 
probably equal though with property and casualty, about 50-50 
or 60-40.
    Mr. Kanjorski. Well, it would seem to me that life 
experience in life insurance is not too dissimilar in all the 
States. And listening to some of the comments of my colleague 
before--and yours--that really you are interested in protection 
of the consumer in the difficult areas.
    I do not imagine that there are an awful lot of people that 
are calling an insurance commissioner about their life 
insurance policy. Or am I mistaken about that?
    Mr. Csiszar. I disagree there. I mean, for instance, we 
have had significant cases of churning, for instance, in the 
life industry. We have essentially market conduct-related types 
of cases.
    I would say the volume on the life side is probably no 
different than the volume on the property and casualty side.
    Mr. Kanjorski. Okay. That is very interesting. And that is 
a good observation that I was not aware.
    What would you say if the Congress does nothing or if we 
pass the proposed conceptual proposal, that we do not quite 
know how it will work yet? If we just do that, when would you 
think that life insurance would be uniform throughout the 50 
states? How fast do you think we are going to get there?
    Mr. Csiszar. Well, I think this is where clearly we are 
taking the view that we can deliver on that issue. We can 
deliver. And that we can deliver before 2008 on that.
    Mr. Kanjorski. Am I to understand then that it is your 
testimony that by 2008, regardless of where you live in the 
United States, you would be able to get a uniform policy of 
life insurance?
    Mr. Csiszar. I think between the pressure that you are 
exerting on us and the effort that we are making to implement 
the interstate compact and the national standards, under that 
compact I think we can get it done.
    Mr. Kanjorski. How do we resolve this question of a global 
market when we have our trade representative meeting around the 
world and he is representing 50 sovereign entities with most of 
them clearly smaller than most of the other nations in the 
world he is dealing with? How does it get some uniformity there 
in terms of the impact our trade representative can have on 
globalization?
    Mr. Csiszar. The answer I would have there is really a 
question, Mr. Kanjorski. I will be interested to see how the 
expanded European Union is going to treat that very same 
question because they are the ones who have been making this 
argument for uniformity in the 50 states.
    With the expansion of the union later on this year, they 
are going to have the similar situation. In fact, our trade 
representatives will be empowered to ask them that same 
question.
    Mr. Kanjorski. Well, I am just wondering why? I am not a 
person that is anxious to get to federal regulation of 
anything. But it would seem to me, from some of the past 
testimony that we have heard from particularly the life 
insurance companies, that there is sort of uniform agreement 
that there is nothing peculiar about this industry that is not 
national in scope and subject to a national standard and 
subject to national uniformity.
    If that is the case and as we are moving along this 
regulatory process, if we singled out the life insurance 
business and offered an optional federal charter there, why 
would that not have a positive impact for the various state 
commissioners, to have more resources to regulate the 
difficulties that they may have in the other categories of 
insurance that are more parochially related to the jurisdiction 
they have control over?
    Mr. Csiszar. I think I go back, first of all, to my earlier 
comment that you do have the same kinds of problems--consumer 
issues, for instance--on the life side that will still require 
treatment at a local level, number one. Number two, I think 
even though you speak of it as a uniform kind of industry and 
perhaps the dual charter in response to that uniformity, my 
response to that, Mr. Kanjorski, is that we can deliver at the 
State level. And the expertise currently is at the State level.
    If we can come back to you and say we have implemented the 
interstate compact. We have these standards across the 24 
product categories--by the way, those are life product 
categories that we are speaking of, life products and long-term 
care products--if we can deliver on those, then there is the 
solution to the uniformity issue.
    Mr. Kanjorski. Would you feel your association and the 
majority of the commissioners would be adamantly opposed to a 
national life optional charter?
    Mr. Csiszar. Very much so. Very much so.
    Mr. Kanjorski. Based on the fact that you are losing some 
of your jurisdiction? Or it is just the wrong thing to do?
    Mr. Csiszar. Look, I for one, this is the first time I am 
in public service. I come out of the private sector. I do not 
have a turf issue.
    As I tell people, whether I work in this job or not, my 
dogs will get fed when I get home at night, you know? So it is 
not a turf issue.
    Mr. Kanjorski. You are lucky to have dogs.
    Mr. Csiszar. But to me, it really is an issue of where can 
the best job be done? I have often maintained publicly that the 
issues we are discussing, we really should not be discussing 
state versus federal here? We really should be discussing 
regulation that is outmoded and requires reform and that 
improved regulation that comes from that reform.
    I have called it good regulation versus bad regulation.
    Mr. Kanjorski. The other thing--and I will just take one 
more--the only observation I want to make is that I heard the 
chairman of the committee mention those promising words made 
133 years ago. And it seems at this point that we are always 3 
to 5 or 10 years down the road.
    We are already 5 years from H.R. 10. So it has been a long 
time in coming. And I probably personally now am starting to 
lose my confidence that the 50 states--all 50 of them--are 
capable of coming together and resolving some of these 
problems.
    I wish they would. I wish they had already. But I am not 
terribly optimistic anymore.
    Mr. Ose. [Presiding.] The gentleman from Connecticut?
    Mr. Shays. Thank you, Mr. Chairman. I would like you 
gentlemen to outline to me the most serious challenges you 
think face consumers today because we do not have uniformity.
    Mr. Csiszar. I apologize, Mr. Shays. I only heard part of 
the question.
    Mr. Shays. The question was this: I want you to outline to 
me where the consumer suffers today because we do not have 
uniformity and we do not have speed to market and so on.
    Mr. Csiszar. I am not sure that suffering is really the 
right word because when you look at uniformity, the part of the 
industry that seems to have the greatest need for uniformity 
really is on the life side. And there seems to be a plethora of 
products out there on the life side.
    Now that is not to say that you cannot find new products 
and more innovative products and release them into the market 
quicker, if we speed to market. But we certainly do not see any 
sign of suffering on the consumer's part.
    And that is the side that is driving the uniformity issue. 
On the property and casualty side, certainly we have 
availability and affordability issues, as we heard in 
California for instance, on homeowner's. But uniformity is 
really more a life issue than a property and casualty issue.
    Mr. Shays. I served in the State House for 13 years and I 
understand why we wanted state regulation of banks. I 
understand why we wanted state regulation of insurance.
    Tell me why the arguments for banking, why insurance would 
be different than banking? Because state regulation of banking 
turned out to be a total and complete disaster in New England.
    Mr. Csiszar. I think the nature of the product makes this 
very different. What we have is, in many ways, insurance is a 
mandated product. It is treated as a nuisance purchase by 
consumers. They really do not want it, but they get it because 
they have to.
    They have to because either the law requires it or their 
mortgage company requires the purchase of the product. When 
they purchase the product, it is not like they are opening up a 
bank account or getting a loan in order to buy something 
desirable like an automobile or a home.
    What they are really hoping for is, when they buy the 
product, is that they never have to use that product. And 
really, what they are getting from the insurance company, even 
though it is this 40-page piece of paper, what they are really 
getting is nothing more than a promise.
    And here the issue is then what can the process or what 
kind of regulatory process can you bring to the table that 
assures that promise will be fulfilled, as indeed promised? So 
I think it really is a different kind of product from a banking 
product. The nature of the purchase, the nature of the buyer's 
expectations are very different here from a typical banking 
product.
    Mr. Shays. I wrestle with this bottom line. And what I 
wrestle with is that I want consumers to get the latest 
products as quickly as possible. And I want there to be as much 
competition as there possibly can be.
    And I am struck by the fact that that is not the case under 
our current system. Why do you think this legislation would 
resolve that?
    Mr. Csiszar. I think certainly the pressure that you are 
exerting through this legislation and the fact that we are at 
work on an interstate compact--well, we have the interstate 
compact; we need to implement it--the fact that we are working 
on those standards of uniformity, the fact that we are turning 
things around through our SERFF system in 17 days and not 2 
years, the fact that that message is getting through to the 
larger states. As Mike said, for instance, we have an MOU now 
between Texas and California and Florida on some of the life 
products. That very fact, I think, is going to change things.
    Secondly, if you look at new products and introducing new 
products, again I go back to the fact that I think the State-
based system is much preferable to a federal system because it 
allows you to experiment without betting the ranch. If you have 
a new product and an innovative product, you can test that 
product in a state and see how it works.
    Mr. Shays. I do not understand the last point. I mean, you 
could test a product whether or not you had national or not.
    Mr. Csiszar. That is true. But on the other hand, the 
State-based system allows some flexibility in terms of only 
introducing it in that state, if it is permissible in that 
state, and testing it in that state.
    No, I understand what you are saying. You are saying you 
could take and introduce the product anywhere. That is true.
    But I really think that there is a flexibility in that 
State-based system, much as what we have seen with our welfare 
system, where the ``one size fits all'' does not always fit, 
where a state has to be allowed to, in essence, do its own 
thing.
    Mr. Shays. I thank you. And I likewise will be very curious 
to see what the EU does as we try to penetrate that market 
more.
    Thank you, Mr. Chairman.
    Mr. Ose. The gentleman from Georgia?
    Mr. Scott. Thank you very much, Mr. Chairman.
    Mr. Csiszar, could you tell me how state price controls 
have harmed small business owners? For example, are consumers 
restricted in their ability to have auto collision repair in 
highly regulated states?
    Mr. Csiszar. I do not think I can really answer that 
question with any hard evidence, other than evidence out of 
South Carolina again. And I can tell you in South Carolina, it 
was not even the issue of whether they could get it repaired or 
not. In South Carolina, we had a real availability issue.
    We had a reinsurance facility that covered both personal 
automobiles, as well as commercial automobiles. That market, 
that residual market, that reinsurance facility became the 
largest insurance company in the State.
    And the end result was that, while insurance was available, 
it was not really competitive because very few other companies 
wrote in the State because of this large residual market. So we 
had to solve our problem in South Carolina based on the size of 
the residual market.
    The losses, by the way, from that residual market were 
charged back to the consumer. So if you are asking how did the 
consumer suffer? He suffered, either on the personal auto or a 
commercial auto, by having to pay something called the 
``recoupment fee.''
    And that recoupment fee, the losses in the facility were at 
$240 million, $250 million every year. That all got charged 
back. So that is probably the direct impact that we experienced 
in South Carolina, at least.
    So I can only answer it from that perspective.
    Mr. Scott. But do you see that this is may be one of those 
areas where there may be some evidence where the cry for 
national regulation might have some substance?
    Mr. Csiszar. Again, the problem with national regulation, 
as we see it in South Carolina, the homeowner and the 
automobile owner in South Carolina does not want to pay for the 
losses of that individual in California or in Florida.
    Mr. Scott. Okay. Are property and casualty insurance 
inherently state and local issues, in your opinion?
    Mr. Csiszar. Sorry, I missed the last part.
    Mr. Scott. Are property and casualty insurance inherently 
state or local issues?
    Mr. Csiszar. They are inherently state issues, local 
issues. As Mike said, torts come into the picture. And tort law 
is on a state basis.
    Coverages are very local. For instance, in our state, we 
only need earthquake coverage in one particular part of the 
State and that is the Charleston area because it experienced an 
earthquake in the late 1900s.
    Nowhere else in the State do we have that kind of 
earthquake activity. So there are some peculiarities, both 
based on geography, also based on population. As Mike said, 
rural versus urban, for instance. Automobile insurance in an 
urban area is a different creature from one in a rural area.
    Mr. Scott. What is the effectiveness of rate controls in 
the States?
    Mr. Csiszar. Those who have them in place will tell you 
that they are God's gift. And those who do not have them in 
place think they have a better market. There is no unanimity on 
this issue, Mr. Scott.
    Mr. Scott. Do you think they are holding down rates? Or are 
they restricting competition?
    Mr. Csiszar. Again, I can only speak for my state. In our 
case, the reinsurance facility became a method of rate 
suppression. And hence, we had to get rid of it.
    In other states, others tell me, my colleague in North 
Carolina tells me that his prior approval system is working 
just fine. And if you look at the statistics, he is somewhere 
around average always, much like Illinois is.
    So it is hard to tell. Different models.
    Mr. Scott. One final question. What do you think of the 
idea of creating a self-regulatory organization to oversee 
insurance matters, similar to the securities industry?
    Mr. Csiszar. I think the industry would love it. But I do 
not think it would be the right solution to the problem.
    I really think that our regulatory system, Mr. Scott, has 
worked fairly well. While I am the first one to sit here and 
admit that God, yes, we do need some reform on the uniformity 
issue, for instance.
    In other respects, it has worked quite well. We have not 
had a savings and loan fiasco. We have not had a BCCI in this 
industry.
    We have not had the problems that the mutual funds are 
experiencing. We have not had an Enron in this. So I can go on 
and on. I think in that sense, we have really served the 
consumer well.
    Mr. Scott. Our Ranking Member Kanjorski, as I understand 
his opinions on this, is not necessarily clear that the States 
can handle this and that we may have to look at a national 
reform, a national regulator. Could you tell us, in your own 
opinions, what damage a national regulator would do?
    Mr. Csiszar. It will eviscerate the State system. You might 
as well start from scratch. And I feel that there is such 
expertise at the State level. And I think there is such good 
response to the consumer at the State level, that that step is 
not necessary.
    Now I will agree with Mr. Kanjorski that the proof will be 
in the pudding. We better deliver on this one. I would be the 
first one to say that if I come before this committee 2, 3 
years from now--God forbid I should still be in this position--
but if I do come before this committee 2 or 3 years from now, 
you can hammer me over the head because we do need to deliver.
    But I think the timing is such that we can deliver. And we 
want to be given the chance to be able to deliver, to prove to 
you.
    So we welcome the oversight. I welcome the pressure that 
this exerts because it instills a sense of urgency in us to do 
this and to get it done.
    Mr. Ose. The gentleman's time has expired.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Ose. The gentlelady from New York?
    Mrs. Kelly. Thank you, Mr. Chairman.
    I chaired a hearing on market conduct oversight in the 
Oversight Subcommittee last May. And I was amazed at some of 
the requirements that contribute to the cost of doing business 
in some of these states.
    Like I am going to just give a few examples. Massachusetts 
has a checklist for their speed to market initiative that is 
230 pages long. Wisconsin requires companies to put a slash 
through all zeros on policy form transmittal, which requires 
going over the form by hand to put the slash in.
    Nevada requires their filing fee document to be on the top 
page. Arizona requires insurance company names to be fully 
spelled out. There are no abbreviations.
    Colorado requires an original signature on every state 
form. Missouri requires a stamp of an insurance company's name 
on each attachment of a rate filing.
    Nevada requires pink paper to be used when submitting the 
filing fee document page--pink paper. It is Nevada. Kentucky 
has requirements for stapling. But if you file in Kentucky and 
in Ohio, you have to pull the staples out because Ohio does not 
allow paper clips or staples in their filing.
    Now this is ridiculous. And it is a cost-consuming kind of 
thing to have this kind of stuff going on.
    So my question is: if Congress required a nationwide 
uniform documentation and market conduct review, would the 
consumers benefit in the immediate future? I am asking all of 
you that question.
    Mr. Csiszar. I will begin and I will let Greg take over as 
well. But I will add another one to you. It took me about 3 or 
4 years to find out that we were not accepting parentheses in 
our documents because somebody 20 years ago decided that that 
is the way to slip in things into an insurance policy, by 
putting it into parentheses.
    It is embarrassing when I listen to something, to that 
litany, it is absolutely embarrassing to me that we sit here to 
even have to discuss this sort of thing. This is sheer, utter 
nonsense--utter nonsense. And I do not think you will get any 
disagreement from the commissioners on this.
    Part of the problem has always been the bureaucracy. You 
know, as I said, it took me 3 years to find out we were not 
accepting parentheses.
    Part of it I think is the bureaucracy and driving that 
change through the bureaucracy. Part of it I think has to do 
with the fact that you have these desk drawer rules.
    So I think the market conduct process, as we envision it 
now, whether it be ultimately through a model we are developing 
or in the midst of developing or through the adoption of the 
NCOIL model, will specifically avoid that sort of thing, plus 
the fact that fact that you have SERFF in place now. And it is 
a common filing through SERFF. You do not have all these added 
little rules, unless you file on a state-by-state basis without 
using SERFF.
    But we now have what, 50 states? All states are on SERFF. 
So I think a lot of this will go away. But I have heard these 
things. And I blush and I am embarrassed when I hear about 
them.
    Mrs. Kelly. Well, my basic question is: do you think the 
consumers would benefit in the immediate future if we require a 
uniform documentation? SERFF may be the answer to that, but is 
that going to help consumers? I am really looking at how this 
is going to help folks.
    Mr. Serio. Yeah, I think it will. Whether you do the 
uniformity approach or we do it through the interstate compact 
and other initiatives and get out of the paper business 
altogether. It cannot be overstated the importance of SERFF, 
both for the States and for the companies to together be a part 
of this.
    We have to balance this out. And you heard all the horror 
stories in market conduct. And we were enforcing the law of 
pink paper against the companies.
    At the same time though, you have the balancing of the 
incomplete applications, the applications that had things in 
parentheses because they were trying to do something else other 
than what the product was purported to be. Getting to uniform 
standards, getting to uniform mechanics of filing and approving 
these products cannot do anything but help the consumer, from a 
couple of perspectives.
    Number one, the cost that is built into the product of 
designing the product and getting the product approved, right 
off the bat, that is a built-in cost of the product.
    Second of all, it is the cost to the consumer as taxpayers, 
not just of the insurance department where we are largely 
funded by assessments on the industry, but it is all the other 
apparatus in state and federal governments--the consumer 
protection boards, the attorneys general, the others who will 
undoubtedly get into the middle of this consumer issue--where 
the taxpayer is paying for this several times over.
    Bringing uniformity, bringing clarity--maybe that is almost 
a better word for it--bringing clarity of the process and the 
requirements on each side, what is required of the departments, 
as well as what is required of the companies, I think that 
clarity can only help the consumer.
    When Governor Pataki was first elected in 1995, his second 
executive order was to shed all of our regulations of the type 
of things that you just spoke about: get rid of the desk drawer 
rules; get rid of the commas and the paper clips and all those 
other issues that did not bring any value added or any added 
value to the protection of the consumer and the delivery of the 
business in the State of New York.
    And other states have done this. Other governors have done 
the same thing.
    That is really what has to happen in terms of this 
wholesale approach to clarity. And I think the electronic 
processing certainly goes a long way to getting that.
    Mrs. Kelly. Thank you very much.
    Mr. Ose. We have heard a lot about Kentucky. Now we are 
going to hear from the gentleman from Kentucky.
    Mr. Lucas. Thank you, Mr. Ose.
    I am an old life guy. And I come from those prejudices. And 
I admit those upfront. But after 31 years of frustration with 
getting product to market, that is sort of in my craw.
    And I guess one of the things, when I came to Congress, I 
thought there was a lot more knowledge here with the body 
corporate of insurance matters, both P&C and life. And I was 
surprised to find out there was not a lot of knowledge.
    Mr. David Woods in his NAIFA testimony brought out one 
thing that I thought showed the lack of understanding here in 
this body about life insurance in particular. In the victims' 
compensation settlement after 9/11, we passed a law that people 
who provided for their families with life insurance--and 
really, for the price of a set of golf clubs, you could have 
bought a couple of boatloads of insurance to protect your 
family.
    But the victims' compensation did not take into account 
stocks, bonds, savings accounts, inheritances. But if you had 
life insurance, then that was subtracted from your settlement, 
from people who were responsible about their families.
    That has always bothered me a whole lot. That does not have 
anything to do with anything here, but I feel better about 
having said that.
    [Laughter.]
    And also, the other thing, we talked about 1861 and it is 
2004. And according to my math, that is 144 years instead of 
134 years, but what is 10 years? It is like a nanosecond when 
it comes to insurance regulation, right?
    But you know, I have been for the optional federal charter. 
And I stated that. And it is probably the most astounding thing 
I have said since I have been here in Congress, the reaction I 
got.
    But basically, I think what we need to do is to level the 
playing field. And frankly, I do not care how we do it. Just 
let's do it.
    And, I mean, for all the duplication there is in the 50 
states about the same duplicitous things that people go 
through. It might take a couple of years to approve a product 
when in fact the banks--and I have been involved with banks and 
mutual funds, I have been involved with those too--you know, 
they can go have a product right away and the life insurance 
company takes forever. That is not right.
    And so all I am suggesting that we need to do is let's just 
do something. And let us level this playing field.
    And my thought is, if we do not do something about it, we 
might do something up here that you may not like. And so let's 
move.
    And I do not know that I have a question. And I might state 
too that the Kentucky Insurance Commission modernized back in 
the 1950s and went to paper clips. So I want you to know that 
we are moving right along.
    [Laughter.]
    Mr. Ose. The chair recognizes the progress in Kentucky.
    The gentleman from Alabama?
    Mr. Bachus. Thank you, Mr. Ose, for recognizing me.
    I would start with Mr. Serio. Mr. Serio, do you think that 
properly targeted federal legislation may either assist or 
encourage or push certain states to coordinate and achieve more 
full participation in some of the key NAIC programs that you 
all have?
    Mr. Serio. Yes. I do not think there is a question about 
it. I think we saw it with NARAB. And I think you were very 
helpful with that.
    I think we have seen the States acknowledging that the 
partnership that they have with the federal government and with 
the Congress as the policymaking body specifically, where we 
dealt with it in the Fair Credit Reporting Act reauthorization 
and the preemption in that case because in that case, that was 
the best way to go. But I think that, again coming back to the 
old line of the devil is in the details, we want to make sure 
that whatever we work on together makes sense back at that 
local level.
    Because so much of this business--and I will even go so far 
as to say even with the discussion we have had so far today, 
that even life insurance, while uniform in terms of its product 
design--and that is why the NAIC has been focusing on life 
products in the interstate compact standards as the first place 
to go--it is still largely a locally distributed product. So I 
think that balance between federal policy, state 
implementation, state regulation, is a good balance that I 
think we have seen the success of that formula several times 
over.
    Mr. Bachus. And let me ask you and Mr. Csiszar both, Walter 
Bell's committee is working, other committees, is it possible 
for you all to actually, if you run into a road block, to 
actually recommend to us some specifically-targeted federal 
legislation that might actually you may find needed to break 
through on some of these?
    Mr. Serio. I think that is part of the ongoing dialogue. I 
can tell you that the NAIC and the individual states have had 
what has been an unprecedented level of involvement, 
cooperation and partnership particularly with the House 
Financial Services Committee.
    So I think before we can come in and advise the committee 
that there is a problem, I think the committee will know it 
because of the ongoing dialogue that we are having and because 
the chairs have made themselves available to come to the NAIC 
and speak to the commissioners directly and because the NAIC 
has been expending as many resources as it has to have New 
York, South Carolina, Washington and other commissioners--
Delaware is here today--come to Washington and pursue this 
dialogue. I think it will almost become unspoken that when you 
see if there is some difficulty, you will see that as a 
recognition that we can probably use some assistance in terms 
of moving forward on what has been the uniform goal of 
uniformity, both between the States and the federal government.
    Mr. Bachus. All right.
    Anybody else?
    Mr. Kreidler. If I could just offer a quick comment 
relative to Commissioner Walter Bell's work on speed to market? 
One of the real challenges was to be able to come up with 
product standards for life and annuity products. They have done 
a commendable job.
    And we are in the process of approving those product 
standards by the NAIC. And it is a critical part of moving 
forward with the interstate compact.
    Because once you have product standards, you have something 
that state legislators can take a look at and say, ``We are not 
going to disadvantage consumers if we go to these particular 
product standards. Therefore, we are willing to step into an 
interstate compact.''
    I mean, we all know that interstate compacts have not been 
warmly received by a number of states as a general concept, 
particularly if they are going to be a depository for nuclear 
waste or something of that nature. But in this case, we have 
product standards.
    And it is the work of Commissioner Bell through speed to 
market, where we have those now. And I think you are going to 
see states moving aggressively now to join the interstate 
compact because they have something in hand now. They have 
these product standards. And that means speed to market.
    And so I am very optimistic right now we are going to see a 
lot of progress. And Commissioner Bell from your state has 
played an incredibly important part of making that happen.
    Mr. Bachus. Okay. And my next question to any of you all 
that care to answer: does it make sense to have some sort of a 
state-federal council to help coordinate certain areas of 
insurance policy or to speak for the industry? I will give you 
an example.
    Now we have the federal government regulates insurance in a 
number of fields, like the terrorist insurance. On legislation, 
we had flood insurance, health insurance.
    And I often hear that there is nobody at the table 
representing the insurance industry, say in trade talks. You 
know, there is someone that speaks for the financial industry. 
But there is no one at the table for the insurance industry.
    Does some sort of federal-state council, I mean, if we 
could establish that with your input, would that be something 
you would be willing to pursue?
    Mr. Csiszar. Let me take that question and my colleagues 
may want to comment on it as well. A couple of things about 
that.
    I think one of the reasons why we are even discussing this 
issue of representation at the federal level has to do with the 
fact that--blame us. In years past, not until very recently, 
the NAIC has not been at the table.
    There has not been anyone really here in Washington; and I 
think deliberately so. When you look at the Gramm-Leach-Bliley 
process, for instance, we did not get involved until the very 
end. You know, by then, the train had left the station.
    So I think the first comment I would make is I do not think 
you are going to have as many of these representation issues as 
we did in the past because we are here now and the industry is 
here and the consumers are here as well. That is number one.
    Number two, the fear that I have about setting up any kind 
of separate federal body is that it becomes the prototype for 
something like what we have with the OCC. And quite frankly, as 
you know, there are a great many of the problems, most recently 
this preemption of predatory lending laws, stemming from the 
fact that you have had someone like the OCC representing the 
banks here.
    What I would propose to do and what I have proposed to the 
industry--and in fact, the industry approached us. I should not 
say the industry--the ACLI and I have had discussions. Many of 
these representation issues come down to tax issues.
    Why don't we form a joint NAIC industry group to address 
these tax issues in Washington? We are here for you. We have 
the expertise. I think that representation can come as a 
natural part of that.
    So rather than having this risk of an OCC confusion between 
what does that coordinator do? And where does coordination stop 
and regulation begin, for instance? Rather than having that 
take place, my suggestion would be that the industry and the 
NAIC get together and do this themselves.
    Everybody else does it the same way, really. I mean, you do 
not see a manufacturer represented by an OCC on a tax issue, 
for instance. So I think we can----
    Mr. Bachus. But of course, you have the Department of 
Commerce with manufacturers. With the financial institutions, 
you have the Treasury, the Fed. There is no one.
    Mr. Ose. The gentleman's time has expired.
    Mr. Bachus. Okay. Could I change subjects and ask one more 
question?
    Mr. Ose. The gentleman asks unanimous consent for one 
further question.
    Mr. Bachus. And I am just making this almost more of a 
statement to preserve time. I mentioned in my opening statement 
the reinsurers. You know, reinsurers contract with insurance 
companies, not with consumers.
    So I would simply say--and I hope you agree--that it could 
meet, the States could meet more uniformity in how they treat 
the reinsurers and that you do not have the consumer component.
    Mr. Ose. The gentleman's time has expired.
    Mr. Bachus. And they are all nodding their heads in 
agreement, I think.
    [Laughter.]
    Mr. Ose. Let the record show.
    The gentleman from Washington?
    Mr. Inslee. Thank you. I wonder if you can talk, just sort 
of from the consumer's side of the coin for a minute, about the 
prospects of specifics on protecting consumer's rights if we do 
have legislation? Just one idea, there are numerous ones I 
suppose could be considered, but this issue of privacy.
    You know, we are outsourcing a lot of functions overseas 
now of a lot of back room operations. And there have been 
concerns expressed about maintaining consumer privacy. There 
are 1,000 other things that we might incorporate in a consumer 
bill of rights or a consumer's kind of interest specifically.
    Is that something that we ought to at least think about if 
there is legislation? If so, how should we think about it?
    General question for the wisdom of the panel.
    Mr. Kreidler. Mr. Inslee, I would say that having some 
statement here of assurances that changes are put forward by 
the Congress to make sure that consumers, with these changes, 
are not disadvantaged, that they have protections under the 
current state system. And as changes are being advocated, 
hopefully on a very targeted basis.
    But even with those changes, if you could make sure that 
there are not compromises made for consumers. I think that is 
an important part of making sure that what might be good for 
the sellers of insurance is also good for the people who 
purchase them and that their rights are adequately protected.
    Mr. Inslee. I think I missed some of your testimony. You 
talked about access to FBI files or at least fingerprints.
    Could you give us an example of why that may be important?
    Mr. Kreidler. We had a very good example--actually, many of 
them, but one of them in particular--where had an individual 
who was in good standing in one state that does not require a 
fingerprinting background check as a part of being licensed as 
an agent or a broker in their state, that applied for a non-
resident license in the State of Washington from that state. 
And when we did the background check--this is a person who 
completed the form and said they had no felony convictions in 
their history.
    And when it came back, I believe the number was nine felony 
convictions, several of which were in the financial services 
area. This is somebody that obviously never responded when we 
pointed this out to them, so they did not attempt to get 
licensed in our state. But in that state where they are a 
resident and are an agent in good standing, they continue to do 
business.
    I think that is one reason why I think that there should be 
uniformity in order to achieve that producer or the agent 
licensing standard uniformity across the country. This is one 
of the things that, quite frankly, should be there in order to 
make sure that we do not have some bad actors out there that 
are going to cause some real problems for consumers.
    Mr. Inslee. Thank you.
    Mr. Ose. The gentleman yields back.
    The gentleman from California?
    Mr. Miller of California. Thank you, Mr. Chairman. This is 
an issue that I have great passion about. I used to be on the 
legislature in California and the insurance commission. And we 
have talked about things. And I think you have been very 
articulate talking about insurance regulations and the need for 
more efficiency and uniformity and basically to become more 
effective to consumers.
    And in the past 5 years, I have grown more passionate about 
the concept of an optional federal charter. And I know you 
disagree with that.
    So talking in the direction you are about coming up with 
some form of uniformity, although it seems like legislatures 
have been a barrier to that in a past, and effort toward a 
system that is more systematic in reforms and regulatory 
uniformity from state to state to accomplish what you are 
talking about, sounds good. But I have a letter from John 
Giramendi in California. And he is not interested in this.
    So in order to have some form of national uniformity in the 
industry, you have to have an agreement that everybody is going 
to be willing to participate. Now in an optional federal 
charter, it is optional.
    If an insurance company wants to be an optional federally 
chartered insurance firm, like banks are, they can. If they 
want to be a state, they can.
    But how do you expect to achieve any kind of uniformity 
based on what you said in your opening comments? And I applaud 
you for your concept. I do not disagree.
    But how do you expect to have any form of uniformity when 
states like California, with large populations, have already 
announced their opposition to this concept?
    Mr. Kreidler. One thing I would point out is that several 
of the very large states are already in the process of 
considering an interstate compact. And I think it is only a 
matter of time--shortly--of being able to convince their 
legislatures to participate, particularly now that we have the 
product standards.
    It has been introduced in the State of New York. It is 
going to be introduced in Florida and Texas.
    I think we are going to see a number of those larger states 
coming in. At some point, there may be a need to address the 
problem federally to make sure that some of the outliers come 
in, if in fact that happens.
    Mr. Miller of California. So you are acknowledging that 
there might be a little more requirement of a federal 
participation in this process as it goes along?
    Mr. Kriedler. I think if you get to the point where you 
have that almost near unanimous already, it may be necessary. 
There are always legislatures that can be a little bit more 
cantankerous in addressing uniformity than others. They had the 
same kind of problems that the Congress has among its members 
in trying to get unanimity on complex issues.
    But if I might just say about the issue of an optional 
federal charter, we have a good example of what happens when 
you have the ability to effectively forum shop for regulation. 
In the State of Washington, there is currently--and it has been 
written about in the New York Times--a large company that deals 
with financial services, that was going to be put out of 
business a decade ago in the State of Washington and really 
reigned in. That company made the jump to a federal regulator 
by being listed on one of the major exchanges and then coming 
out from underneath the State regulation.
    They are currently, just recently within the last year, 
have gone into federal bankruptcy court. The major asset of 
that corporation is a life insurance company, which I now have 
in receivership.
    This did not need to happen. It would have stopped way back 
10 years ago if you did not have the chance to effectively shop 
from one forum to another.
    Mr. Miller of California. But on that vein, I will give you 
a great current example in California--worker's compensation 
insurance. And you have businesses lining up to move out of 
California. This is one example of one state, that their 
insurance commissioner said they do not like the approach we 
are taking today in this hearing.
    And you have other states that are not having a problem 
with it. Yet even though it is recognized that it is costing us 
jobs, it is killing businesses in California, you have state 
legislators that are in a mindset that they are just not 
willing to change because they do not want to change.
    And you have insurance commissioners who like having total 
control over what goes on in their state and legislators who 
want to have total control and do not want anybody outside 
influencing or dictating to them what they are going to do. How 
do you change that in reality, in the way you are proposing to 
go, when it is very optional on their part?
    Mr. Kreidler. Well, one item I can point to right now, 
California is participating in a memorandum of understanding 
with Texas and with Florida. And from the standpoint of premium 
volume nationally, it is a very large percentage, where you can 
make one filing on a life product and you will be able to be 
approved in three states at one time.
    So they are showing progress in that----
    Mr. Miller of California. Life products are much simpler. 
But that is a good start.
    Mr. Kreidler. Life products is where we have the biggest 
issue relative to uniformity across the country. Property and 
casualty are much more regional and state driven.
    But I believe that you are going to wind up with some 
states, as I said, that are, just because they take a very 
provincial interest, who may need a nudge in order to finally 
get them----
    Mr. Miller of California. Or a gun.
    Mr. Kreidler. But I would not be surprised to see 
California, quite frankly, join the interstate compact.
    Mr. Miller of California. I am anxious to see this process 
as it proceeds. I applaud Chairman Baker and Oxley for starting 
these hearings because I have come to believe strongly in the 
past 5 years. Ten years ago, I did not believe it. But 5 years 
ago, I started to believe there was a need for an optional 
federal charter.
    Maybe this is an option to that. And I am anxious to watch 
us go through the process because I believe there is a very 
severe problem out there nationally in this industry.
    I think we need to do everything we can to help them and 
help consumers at the same time. They go hand in hand, the way 
I look at it. And so I am anxious to see any proposal that can 
come forward to help alleviate some of the situations we are 
in.
    Mr. Ose. The gentleman's time has expired.
    The chair would advise members we have one vote on pay 
parity on the floor at the moment. We have a couple more 
speakers, including Mr. Pomeroy, who has joined us.
    The chair's pleasure is to continue for as long as we can, 
then we will take a short recess, to the extent we have to, and 
then reconvene accordingly.
    The chair would recognize Ms. Maloney.
    Mrs. Maloney. First of all, I would like to welcome Mr. 
Serio from the great State of New York and congratulate him on 
his work. But I would like to ask the last speaker, if I heard 
you correctly, you were saying that this company that went 
bankrupt, it was because of moving from various charters that 
they went bankrupt. Is that what you are saying?
    Mr. Kreidler. What they had the option of doing is 
essentially moving out of state regulation by effectively 
coming under federal regulation that would preempt the State 
from having a regulatory responsibility.
    Mrs. Maloney. And then you allege that that was the reason 
that they were in receivership. Is that what you said?
    Mr. Kreidler. They would have been stopped 10 years ago. 
And the risk to ..
    Mrs. Maloney. So you feel that if it had been under the 
State only and not able to shop--as you said, go to federal or 
whatever--this problem within the company would have been 
found. Is that what you were saying?
    Mr. Kreidler. My point would be that if you go to an 
optional charter, there inevitably is going to be forum 
shopping involved, relative to how they do business and how 
they believe that they will be more favorably treated. I would 
say this relative to insurance regulation: either leave it with 
the States or take it all to the federal government. But trying 
to find something in between will invariably open the door for 
that kind of forum shopping that will be a disservice overall 
to the financial services community.
    Mrs. Maloney. I yield my time to the distinguished former 
insurance commissioner from North Dakota, Earl Pomeroy. And I 
would like his comments on this.
    Mr. Pomeroy. Thank you very much, Congresswoman Maloney. I 
just have a couple of observations. And I know we have a vote 
on.
    I believe state insurance commissioners have started down a 
dead end by advancing multistate compacts. I have never seen 
one passed. Superintendent Serio, if you can get the New York 
legislature to adopt participation in a multistate compact for 
purposes of bringing their filing standards into line with 
other states, that would be one tremendous legislative 
achievement. And I will be shocked.
    But I look forward to seeing it. So much has been achieved 
over the 150 years of State-based regulation by state 
coordination: common policy forms, something as sophisticated 
as common risk-based analyses for purposes of determining 
reserve requirements, a national network of guarantee funds to 
help consumers when companies are insolvent. All of it achieved 
without actually requiring each state legislative body to take 
their own step.
    When we established the standards, legislative action was 
required at the State level if a state was to comply with the 
standards and get the beneficial treatment that flowed from 
that. But to actually expect through the compact route we are 
going to get uniformity, I think is unlikely.
    You have also given a flat bulls-eye for Congress to 
evaluate, in a simplistic and maybe not particularly fair 
representation, what is occurring at the State levels. They 
will see three, four states and they will say, ``It does not 
work,'' without really looking further at all that has been 
achieved through the State level.
    On the other hand, I believe that the chairman's proposals 
would require members like the sitting chair, Congressman Ose, 
to vote at the federal level to lift state consumer protection 
authority from their state insurance commissioner. That also, I 
believe, is a stretch, to believe that that is likely to be 
achieved federally.
    Over my 8 years of being insurance commissioner in North 
Dakota, I came to believe that the regulatory format designed 
initially by Dr. Phil O'Connor, who will be testifying in the 
next level, and implemented in Illinois, did achieve a very 
functional marketplace. The results were evident through the 
way that market worked. I admired it.
    I am not sure it is Congress's job to save a state from 
themselves. I generally like to think the market takes care of 
this.
    If I screwed up when I was insurance commissioner, we had 
capacity ramification. I had to un-screw up so that the market 
came back.
    I think that we do achieve some significant tension to make 
states move toward having their markets function. I think 
people looking for a federal response that is going to save 
them from state legislatures are unlikely to see it, especially 
in short order. I mean, it is just unlikely that we are going 
to preempt, I believe, such a wholesale authority of consumer 
protection that exists at the State level.
    On the other hand, I think there are other parts of the 
chairman's proposals that maybe do allow us an expedited way to 
truly put in place a uniform speed to access system without 
this cumbersome, unwieldy and unlikely state compact. And that 
is where these talks could really have some interesting 
outcomes as they proceed.
    Thank you for indulging me, Mr. Chairman. And I yield back.
    Mr. Ose. The gentlelady yields back.
    Mr. Shays?
    If the gentleman from North Dakota wishes, we would be 
willing to give him time, having been so patient.
    Mr. Pomeroy. That is very kind. And I would be interested--
quickly, because we are going to have to run and vote and it is 
a good long ways from here.
    Mr. Ose. We have about 7 minutes to go on the vote.
    Mr. Pomeroy. President Csiszar, I would like your response 
to my thoughts.
    Mr. Csiszar. I do not think anyone has any misconceptions, 
certainly the commissioners, how difficult it is going to be to 
get the interstate compact in place. However, the very fact 
that I think, under the umbrella of the interstate compact, we 
are developing national standards essentially for products, 
those national standards will be there regardless of whether a 
state adopts the interstate compact or not.
    So the collaborative effort that you are describing that 
has worked in the past is not precluded by an interstate 
compact. In fact, I think it will be eased.
    One of the problems we have had with even discussing the 
interstate compact is the fact that we do not have the 
standards to go with that compact, okay? But the compact and 
the standards, in a sense, are independent of each other. So 
the collaborative effort that we can undertake once we know 
what those standards are going to look like, that can continue, 
I think.
    But at the same time, the fact that you have pressure 
coming here from Washington does not hurt, so far as we are 
concerned, you know?
    Mr. Pomeroy. Superintendent Serio, what do you think?
    Mr. Serio. Since the interstate has been introduced in the 
State senate at the request of the insurance department, I have 
maybe a little more faith that the New York legislature will 
look at it. And I think one of the things we have tried to do 
and by the NAIC taking on the interstate compact as a model, 
that was actually originally put forward by NCOIL so many years 
ago, we have taken some of the mystery out of it.
    In New York, which is involved in dozens of interstate 
compacts, both policymaking and operational, I think we are 
working towards reducing the mystery of this as an insurance 
policymaking mechanism. So I think on the one hand, we have 
good hope. Three states have already passed it and signed it 
into law. I think there are two or three others that have it on 
their governor's desk or will be shortly.
    So within its first 4 months, it has had some positive 
developments. But as Commissioner Csiszar said, the bottom line 
is that the uniformity push is already happening. And whether 
it comes through an interstate compact or comes through some 
assistance from the Congress or just through the regular 
activities of the NCSL and NCOIL in the State legislatures, we 
are already well on our way to that uniformity standard in 
whatever way it manifests.
    But I think the interstate compact, because it has been 
done with the cooperation of the NCSL and NCOIL and the NAIC, I 
think the interstate compact has a better than fair chance at 
this point because of that coordination, maybe for the first 
time, between the commissioners and the State legislators who 
are going to be asked to act on it.
    Mr. Kreidler. One feature here that does not require any 
legislative action right now is a memorandum of understanding. 
And we already have three of the largest states already 
essentially beginning the process of accepting filings for life 
products right now. And that is not going to require any 
legislative change in order to see that process work.
    And they represent something like 20 to 30 percent of the 
premium volume in the whole country. So this is one where we 
are already seeing some progress in this direction.
    Mr. Pomeroy. See, I actually think, had interstate 
cooperation been based on pemorandums of understanding, as 
opposed to interstate compact requiring legislative action, you 
might have been better off. Of course, legislators want to get 
their hand in insurance regulation, but not for the purpose of 
conforming with national models, but to tinker in the business. 
That is what state legislators do.
    Mr. Ose. The chair is going to intercede here. We have 
about 4 minutes.
    Mr. Pomeroy. I yield back. Thank you, Mr. Chairman.
    Mr. Ose. The gentleman yields back.
    We are going to take a 5-minute recess. Mr. Baker is on his 
way back.
    In that period of time, if we could get the second panel 
together. We thank the first panel for their testimony and 
participation. We are adjourned--we are recessed for 5 minutes.
    [Recess.]
    Chairman Baker. [Presiding.] If I can ask everyone to take 
seats, we will reconvene our hearing. I wish to welcome 
participants on our second panel. As is the usual custom, your 
official statement will be made part of the record.
    We request that, to the extent possible, your statement to 
the committee be limited to 5 minutes. And be assured that 
members will be coming and going through the course of the 
afternoon.
    The combination of the vote and the lunch hour, I think, 
has caused our numbers to be decimated a bit. But they shall 
return.
    But not to unreasonably detain anyone, I felt it 
appropriate to proceed with our witness and to first welcome 
Mr. Ahart of the Ahart, Frinzi and Smith Agency, but appearing 
here today on behalf of the Independent Insurance Agents and 
Brokers of America. Welcome, sir.

 STATEMENT OF THOMAS AHART, AHART, FRINZI AND SMITH AGENCY, ON 
   BEHALF OF THE INDEPENDENT INSURANCE AGENTS AND BROKERS OF 
                            AMERICA

    Mr. Ahart. Thank you, Mr. Chairman.
    As mentioned, I am an insurance agent from New Jersey. I 
have been in the business for about 30 years. And I am also a 
past president of the Independent Insurance Agents and Brokers 
of America, which I served as president from September 2001 to 
September 2002.
    I think that being in the business for 30 years puts me in 
a pretty good place to speak as far as consumers and agents go. 
As agents, we are in between both the consumer and the 
companies.
    We deal with companies every day. We sit and listen to 
consumers and work with their problems every day.
    To begin, I would just like to say that the IABA strongly 
supports the approach that you, Mr. Chairman, and Chairman 
Oxley have developed. Specifically, we praise the approach of 
targeting the use of federal legislation to modernize the core 
areas of state insurance regulation. Also, we strongly support 
state regulation. It has worked well for years in areas 
including consumer protection. Consumers want and like to deal 
with someone in their own state who understands the problems 
and the needs in their specific regions.
    But even though state regulation has worked well over the 
years, global modernization and improved technology have 
created demand for more uniformity among states. The demand for 
more uniformity has created a need to modernize state 
regulation.
    Again, we agree with the Oxley-Baker reform road map that 
is using targeted, focused and limited federal legislation, 
while at the same time preserving state regulation.
    Let me address some of the major issues in need of reform; 
specifically, speed to market issues and licensing issues. With 
respect to speed to market issues, there is a need to improve 
the ability of new products to be introduced.
    With technology, there are a lot of businesses now that are 
creating new exposures for themselves that are not able to be 
protected because new products are not able to be approved 
quickly enough. And so we would like some kind of reform that 
helps those issues where products can be developed quicker and 
approved quicker.
    We would look to use a file and use proposal, whereby 
companies could begin using--could file a product and then use 
it after 30 days. It would give time for the States to still 
regulate, look at a product. But it would speed up the approval 
process.
    In addition, we would like to eliminate price controls. 
Being from New Jersey, I have a pretty good background on price 
controls, especially in the auto insurance market. In the 30 
years I have been in business, I can go from JUAs to excess 
profit laws to all kind of different laws that have created 
problems in availability and competition in the area of New 
Jersey.
    This past year, we have actually had some reform, whereby 
some of the price restrictions have been reduced. And companies 
are starting to come back into the marketplace. And it is 
becoming better. But we definitely need more help in that area.
    As far as agent and broker licensing, most states have 
enacted licensing reform statutes that provide reciprocity to 
licensed agents and brokers. However, various difficulties 
still remain.
    Some larger states have not enacted the licensing 
reciprocity. And some states adopting reciprocity have deviated 
from the NAIC model; and therefore, are not uniform.
    The bottom line is it is still very tough and time 
consuming to be licensed in multiple states. And yet, there is 
an increased demand from our consumers, both personal and 
businesses, to be licensed in multistates--where they are 
having branches in different states, where people are buying 
homes in different states. And we are continually asked to be 
licensed in more states to comply with their needs.
    In addition, insurance companies still have a very 
difficult time expanding their licensing into other states. And 
it often takes years--not weeks or months.
    Therefore, we propose the following with respect to agent 
broker and company licensing. With respect to national license 
reciprocity, we urge the subcommittee to expand the NARAB 
reciprocity mandate to all states.
    Next, we need licensing uniformity. Additional uniformity 
is necessary in certain licensing areas. And a targeted federal 
proposal should help establish greater consistency for agents 
and brokers.
    Third, we seek the outright preemption of all remaining 
mandatory counter-signature laws and similar barriers to 
effective multistate commerce. And with respect to insurance 
company licensing, we support a move toward a uniform set of 
standards or a common process for licensure of insurance 
companies that would apply in every jurisdiction.
    If Congress enacts the law based on the road map, IABA 
recognized that a dispute mechanism is necessary to address 
disputes that arise under the act. Some arbiter will likely be 
needed to determine whether the States are acting in a manner 
consistent with a new law.
    We believe in any such process or mechanism must be limited 
in its power and authority. Also, any new structure must not 
become a back door federal regulator.
    Perhaps more than any other area, we would be interested in 
working with the committee on this portion of a proposal. And 
we look forward to working with you to make sure that no 
federal entity takes on any formal regulatory or licensing 
power.
    So in conclusion, we would just like to say that we 
recognize that there are problems within this current state 
regulation. We believe strongly in the fundamentals of it. 
There are good things about state regulation.
    We believe in your road map, which would attack specific 
areas; namely, speed to market issues and licensing issues. And 
with that, we thank you for letting us testify and look forward 
to helping you put together any formal legislation.
    Thank you.
    [The prepared statement of Thomas Ahart can be found on 
page 80 in the appendix.]
    Chairman Baker. Thank you for your statement and your 
assistance.
    Our next witness is Mr. Roger Singer, senior vice president 
and general counsel of OneBeacon, who appears here today on 
behalf of the American Insurance Association. Welcome, sir.

 STATEMENT OF ROGER SINGER, SENIOR VICE PRESIDENT AND GENERAL 
COUNSEL, ONEBEACON, ON BEHALF OF AMERICAN INSURANCE ASSOCIATION

    Mr. Singer. Good afternoon, Mr. Chairman.
    Thank you. As you said, my name is Roger Singer. I am the 
general counsel of OneBeacon insurance group. It is a multi-
line property and casualty insurance company--companies, 
really. We have 28 companies in our group, licensed in all 50 
states.
    We sell products throughout the country, but mainly in the 
northeastern states. On behalf of OneBeacon and the American 
Insurance Association, thank you very much for inviting us to 
testify here today.
    I also want to thank the subcommittee for leading the 
charge on the fundamental issue of state insurance regulatory 
reform. The concepts outlined in the subcommittee's action 
plan, particularly speed to market, if implemented correctly 
with enforceable national oversight, will protect consumers 
while bringing them the important benefits of an open, 
competitive marketplace.
    I have been general counsel at OneBeacon for 15 years now. 
Prior to that, from 1987 to 1989, I was the Massachusetts 
insurance commissioner and spent approximately 10 years before 
that in various state government roles and I worked for the 
Federal Trade Commission on trade issues.
    I have agonized on both sides of this issue, both in the 
public sector and the private sector. And I hope my perspective 
will be useful to the Subcommittee.
    OneBeacon's national scope and regional focus gives us 
experience with the full range of insurance regulatory systems 
employed and administered by the States and the District of 
Columbia. Let me start with a few numbers we assembled.
    Fifty-six, the number of U.S. insurance regulatory 
jurisdictions operating independently of one another. And I 
think I have personally dealt with 53.
    Five hundred and fifty, the number of state requirements 
relating to the filing and review of rates and forms. Four 
hundred and fifty-four, the number of filings made by OneBeacon 
last year, just in our eight core states in the Northeast.
    Add up the months and even years that it takes to review a 
company rate or form filing and one does not have to be an 
actuary to calculate the cumulative inefficiency the State 
insurance regulatory process imposes on the marketplace.
    With this regulatory backdrop, I would like to focus my 
remarks today on three concepts outlined in the subcommittee's 
action plan: first and most important, speed to market; that is 
rate and form approval; secondly, national oversight; and 
third, company licensing.
    Like other AIA members, OneBeacon supports a market-based 
optional federal charter system as the best way to achieve 
needed reforms with the least disruption to the State system. 
However, we are pragmatic about the pace of reform in the short 
term.
    Done correctly, with appropriate reliance on market forces, 
the types of targeted reform the subcommittee is advancing 
could and would lead to national uniformity, reduced regulatory 
red tape and enhanced consumer protection. We understand the 
subcommittee's goal with respect to rates is to eliminate price 
controls and to instead rely on Illinois-style free market 
competition.
    We applaud the goal because government price controls do 
not work to the benefit of anyone, especially the consumers of 
the insurance product. The Massachusetts automobile insurance 
market provides a stark example of the unintended consequences 
of price controls.
    In Massachusetts, auto insurance rates are set by the 
insurance commissioner unless the commissioner determines that 
sufficient competition exists to assure that rates will not be 
excessive. The determination often turns on whether a finding 
of competition will result in immediate rate increases.
    Inevitably, because of the political risk that rates might 
rise in the short term, such a finding is never made and rates 
continue to be set by the commissioner. This was the case when 
the very first decision under this law was made in the 1970s. 
It was the case when I was insurance commissioner in the late 
1980s and is still the case today.
    There is plenty of evidence that eliminating Massachusetts' 
price control system would result, over the long term, in lower 
auto premiums and a healthier market. Compared to Illinois, 
Massachusetts falls far short on a number of counts, including 
average annual auto insurance premium, number of drivers in the 
residual market and the number of insurers actively competing 
for business in the State.
    These differences are not surprising. Price controls can 
have the politically expedient short-term effect of holding 
insurance rates down. However, if left in place, the controls 
act as an artificial pressure cooker that hurts competition, 
masks systemic costs and leads to higher prices.
    I would like to spend just a minute talking about the 
regulation of policy forms. In jurisdiction with strict product 
controls, government review can take months or years from 
filing to approval. Product denials are often based on 
unpublished, arbitrary desk drawer rules with tenuous 
connections to state law.
    This process is especially frustrating for companies trying 
to roll out products regionally or nationally. The system 
provides no incentives for insurance product innovation. In 
turn, consumers have fewer marketplace choices and no real 
basis to compare insurers by the products they offer.
    Three principles should underlie the Subcommittee's review 
of policy form regulation. First, if premarket form regulation 
must be retained as a general rule, a market-friendly construct 
should be adopted, whether that is an informational filing or 
file and use system.
    Second, government review of forms must be based on clear 
and specific statutory standards.
    Third, commercial policy forms should not be subject to any 
state review or approval. Any commercial policy holder should 
be able to buy insurance products tailored to their specific 
needs. And those products should be available without delay.
    I believe you will hear concurrence on this point from my 
colleagues representing RIMS and CIAB. The reason I brought 
this large stack of paper--it is not my testimony--on the table 
here today is when I came down here, I went looking for a 
filing that represented a product from my company.
    We have a subsidiary that is a true Internet-based auto 
company. And it probably would not be--it is not--attractive to 
all consumers. But tech-savvy consumers like it.
    It is truly Internet-based. You just go on the web. You do 
not talk to anybody on the phone. You buy your product. You get 
your policy and print it on your home printer.
    You pay by credit card. Many consumers would not be 
comfortable with that; but many are. And we are building a 
pretty good business.
    However, for that company--it is called Esurance, a sub of 
OneBeacon--for Esurance to do business in this state and each 
of the 50 states where it wants to file a form--and one of the 
advantages of the Internet is that it can make changes quickly 
and consumers can benefit from changes in product design and 
changes in price and the efficiency of Internet production--it 
has to make a filing.
    And this is an example of a filing recently made by 
Esurance in one state. If it wants to change to a new product, 
it has to make a filing in all 50 states.
    Some will be more extensive--not many--than this; and some 
will be simpler. But the issue is that this product that is 
available to customers all over the country is tied down to a 
pretty antiquated system of form approval.
    Turning to the issue of national oversight, attainment of 
the subcommittee's goals for true marketplace reform will 
require strong national enforcement of preemptive federal 
standards. It is unrealistic and raises constitutional problems 
to expect states to enforce federal standards, let alone to 
enforce them uniformly and consistently.
    Insurer experience with the Gramm-Leach-Bliley Act of 1999 
provides ample evidence of the need for national oversight and 
dispute resolution. As a result, we strongly encourage creation 
of a national enforcement mechanism.
    Finally, I will just say a word or two about company 
licensing. I am often involved in getting companies licensed. 
And as we have heard here earlier today, it is a process that 
varies from state to state.
    Many states have windows in which you have to apply. And if 
you do not make the window that year, you wait until the next 
year.
    What is being decided by the State in almost every case--
well, what should be being decided--is simply whether the 
company is appropriate--a very, very important decision--and 
solvent and, financially and in other ways, responsible to 
write insurance in the State. For that to have to be decided 
individually by 50 different states with strapped resources 
seems to us an extreme inefficiency, which does nothing to 
benefit insurance consumers.
    Finally, I would just like to say I want to thank the 
subcommittee for addressing these much-needed reforms in key 
areas. And thank you for the opportunity to testify. And of 
course, I would be willing to answer any questions.
    [The prepared statement of Roger Singer can be found on 
page 171 in the appendix.]
    Chairman Baker. Thank you, Mr. Singer.
    Our next witness is Mr. Albert R. Counselman, president and 
CEO, Riggs, Counselman, Michaels & Downs, Incorporated, 
appearing today on behalf of the Council of Insurance Agents 
and Brokers. Welcome, Mr. Counselman.

   STATEMENT OF ALBERT COUNSELMAN, PRESIDENT AND CEO, RIGGS, 
COUNSELMAN, MICHAELS AND DOWNS, INC., ON BEHALF OF THE COUNSEL 
                OF INSURANCE AGENTS AND BROKERS

    Mr. Counselman. Thank you, Mr. Chairman. I am Skip 
Counselman. And as the CEO of RCM&D in Baltimore, I represent 
an organization which is Maryland's largest insurance 
brokerage. We provide risk management, commercial and personal 
insurance and employee benefit programs to a wide range of 
clients.
    I also represent today the Council of Insurance Agents and 
Brokers, as a past chairman of that organization, the CIAB. We 
heartily embrace your road map, Mr. Chairman, to insurance 
regulatory reform.
    Years of work have led to this proposal. And we believe it 
lays the groundwork for aggressive reforms that will go a long 
way toward providing desperately needed modernization in 
insurance regulation.
    The pace of financial services convergence and 
globalization are far outstripping the pace of individual 
reform efforts by the States. Even though the States have made 
some strides in simplification and streamlining, as we have 
heard this morning, thanks to what you, Mr. Chairman, and to 
Chairman Oxley and to what Congresswoman Kelly have 
accomplished in the enactment of NARAB, there still remain 
glaring irregularity and inefficiencies despite those efforts.
    There are three major areas that could greatly benefit from 
immediate reforms, all of which are consistent with your road 
map. The first is to make the NARAB licensing reciprocity 
requirements apply to all 50 states.
    The NAIC, despite its reform agenda, is not in a position 
to force dissenting states to adhere to any standards it sets. 
We believe the reform proposal should build on the NARAB 
provisions, taking it a step further by mandating that all 50 
states enact uniform licensure laws or laws permitting an agent 
or a broker licensed in one state to be licensed in all other 
states on a reciprocal basis and preempting all state insurance 
laws that discriminate against non-resident agents and brokers.
    While life is better for insurance firms such as ours 
because of NARAB, we still have to maintain in our firm 458 
licenses. And there are many, many inconsistencies, none of 
which really have anything to do with standards of 
professionalism.
    We encourage and are certainly for the highest standards. 
As we heard testimony this morning about the need for FBI 
record access that some states require, we certainly also agree 
with that, that we want the highest standards to apply 
throughout the country. So let's finish that job.
    The second area is speed to market. My firm sells and 
services primarily commercial property and casualty insurance. 
This part of the industry faces severe challenges, due to a 
number of factors: 9/11, increased liabilities for asbestos, 
toxic mold, D&O liability, medical malpractice, years of 
declining investment returns and consistent negative 
underwriting results.
    The end result has been increased prices and declining 
availability of insurance, all of which is exacerbated by the 
current state-by-state system. The worst examples are the 
policy form and rate pre-approval requirements still in use in 
many states.
    More than a dozen states have completely deregulated the 
commercial marketplace for rates and forms. But many other 
states still have them.
    We think the Illinois model is a good model. One quick 
example that I have personal experience with, with our 
association, we sponsor a captive insurance company that 
provides errors and omissions insurance to 65 of our member 
firms who are located in 35 states.
    A couple of years ago, we needed to raise our rates and 
revise our coverage form to broaden the coverage. We had to 
refile the form in all of those states. And it took 2 years to 
get the approvals.
    It also cost us over $200,000 to achieve the refiling. That 
was a waste of resources.
    As I said, we support the complete deregulation of rates 
and forms for commercial lines of insurance and elimination of 
command and control regulation. Mr. Shays asked earlier: how do 
consumers suffer from overregulation? And the answer is: both 
in cost and in limitation of the insurance coverage forms that 
are available as a result of the slow process that we go 
through to get a rate regulation filing done.
    Third, we think you should explore ways that alternatives 
to the traditional regulated marketplace can be fostered to 
provide a viable alternative for sophisticated insurance 
consumers. Increasingly, business is done through the surplus 
lines marketplace, which offers coverage for risks that are not 
available from admitted carriers.
    The regulatory structure governing surplus lines coverage 
is a morass. When activity encompasses multiple states, 
regulatory compliance is almost impossible. The rules, 
particularly with respect to collection of premium taxes, are 
conflicting and inconsistent.
    There should be incentives or requirements for the States 
to rationalize their irrational surplus lines requirements. As 
an example, this is 36 pages from the State of New Jersey, 
available on their website, which explains how to do a surplus 
lines filing premium tax filing, which is something agents and 
brokers must do when they place a surplus lines policy.
    It is very specific with their instructions, including 
exactly how to keep the pages in order and how to number each 
item on each page. That would be fine if all 50 states abided 
by these same rules. But unfortunately, there are different 
rules in every state.
    Finally, we think that risk retention groups have created a 
very good alternative market for liability coverage. And we 
would urge you to expand the risk retention act to allow 
coverage of property damage, as well as liability exposures.
    Mr. Chairman, all of the regulatory modernization efforts 
put forward by the NAIC in the past years have been the direct 
result of major external threats--either the threat of federal 
intervention or the wholesale dislocation of regulated markets. 
The states' progress on producer licensing reform, thanks to 
NARAB, is a prime example of this.
    We believe your road map is an excellent vehicle to keep 
the pressure on and force the States to make the reforms 
necessary to address the glaring deficiencies of the State 
system.
    Thanks for the opportunity to work with you and your fine 
staff as you move forward. Thank you very much, Mr. Chairman.
    [The prepared statement of Albert R. Counselman can be 
found on page 86 in the appendix.]
    Chairman Baker. Thank you, Mr. Counselman.
    Our next witness is Anthony Dickson, president, NJM 
Insurance Group, appearing here today on behalf of the Property 
Casualty Insurers Association of America. Welcome.

 STATEMENT OF ANTHONY DICKSON, PRESIDENT, NJM INSURANCE GROUP, 
 ON BEHALF OF PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA

    Mr. Dickson. Good afternoon, Mr. Chairman. And thank you, 
members of the committee. I am Tony Dickson, president of the 
New Jersey Manufacturers Insurance Group and here as chairman 
of the board of governors of the Property Casualty Insurers 
Association of America.
    PCI is the most diverse national property casualty trade 
association. This diversity provides PCI with a unique 
perspective on insurance regulation.
    PCI's board of governors unanimously authorized the filing 
of our statement and my presence here as an indication of our 
willingness to continue to serve as a resource to this 
committee. As an example of PCI's membership diversity, Mr. 
Chairman, the NJM Insurance Group writes 99 percent of its 
business in New Jersey, with premiums in 2003 totaling just 
under $1.3 billion.
    NJM is one of the largest property casualty insurers in the 
State. New Jersey Manufacturers Insurance Company operates in 
the fashion of a mutual insurer, returning dividends to its 
policy holders.
    PCI members share the common vision that competition and 
market-oriented regulation is in the best interest of the 
industry and the customers that they serve. PCI members believe 
that the current insurance regulatory system must improve.
    Mr. Chairman, PCI shares your goal of strengthening and 
improving the State regulatory system without creating an 
optional federal charter, a federal regulator or a dual 
federal-state regulatory system. PCI believes that the greatest 
chance to achieve our shared goal of State-based improvement is 
a narrowly targeted package designed to address the core 
problem of the current regulatory system: namely, antiquated 
price controls that impose barriers to market-based pricing 
systems.
    While other areas of reform are important, the single most 
significant element, overshadowing all other reform proposals, 
is the goal of insuring a truly competitive marketplace with 
open rate competition. PCI urges the subcommittee to place its 
highest priority on these reforms.
    PCI supports open competition rating laws, as exemplified 
by the Illinois model, as the most desirable approach to rate 
regulation for the entire industry. Studies verified that 
consumers in states where competition is the primary regulator 
of price benefit from expanded choice, innovative pricing and 
improved insurance availability.
    For example, Illinois, which has had competition-based 
pricing since 1971, has an exceptionally healthy personal lines 
insurance market. More recently, South Carolina has shown that 
competitive market reforms produce significant benefits for 
consumers.
    In 2003, Mr. Chairman, my own state of New Jersey enacted a 
package of reforms of its automobile insurance regulatory 
system. Led by Governor McGreevy, legislators of both parties 
and supported by Commissioner Bakke, the Automobile Insurance 
Competition and Choice Act included: better information and 
choices for consumers, toughened anti-fraud measures, 
enhancements of the expedited rate filing statute, changes in 
the excess profits law and other positive regulatory 
provisions.
    We are already seeing some improvements in competition as a 
result of these reforms. And New Jersey drivers now have access 
to more companies and, in several instances, at reduced rates. 
PCI urges the inclusion of the strongest open competition 
provisions in any reform legislation.
    The existence of regulatory rules that have not been 
codified or formally adopted--often referred to as ``desk 
drawer rules''--is also particularly frustrating to insurers. 
PCI supports the elimination of these inefficient and arbitrary 
obstacles to effective market operation.
    Access to credible aggregate prospective loss data through 
required reporting by all insurers is essential for both small 
and large companies to ensure effective and competitive 
markets. PCI commends the chairman for reaffirming the 
McCarren-Ferguson Act, including the limited antitrust 
exemption for such loss-cost data.
    We appreciate the chairman's efforts to pursue a 
coordinated system of standardized market conduct review based 
on market analysis to identify a pattern of abuse and on-site 
review of company systems and controls. PCI believes that 
market analysis must be the cornerstone of any market conduct 
action.
    With respect to producer licensing, PCI urges the 
subcommittee to reduce regulatory burdens by providing a single 
level of licensing. Varying state standards for company 
licensing can serve as a market entry impediment and limit 
consumer choice. As a result, PCI supports efforts to 
streamline market entry.
    With respect to enforcement, Mr. Chairman, there is no 
clear consensus among the property casualty industry on the 
appropriateness of a federal or NAIC supervisory or management 
role in insurance regulation. However, all agree that the 
greatest threat to efficient markets is dual or multiple layers 
of regulation.
    Creating new oversight institutions or layers of reporting 
will drive up the cost of insurance products, make it harder 
for smaller companies to compete and ultimately reduce consumer 
choice. Attempts to unnecessarily expand the regulatory or 
oversight role of the NAIC or to create new or duplicative 
layers of quasi-regulatory authority at the federal level are 
almost certain to introduce needless controversy into any 
reform measure.
    Mr. Chairman, PCI stands ready to work with the committee 
on State-based insurance reforms that achieve our shared goals, 
as fully outlined in our prepared statement, and avoid 
duplicative layers of regulation.
    Thank you, sir.
    [The prepared statement of Anthony Dickson can be found on 
page 107 in the appendix.]
    Chairman Baker. Thank you very much, sir.
    Our next witness is a returning veteran witness: Mr. Robert 
Hunter, director of insurance for the Consumer Federation of 
America. Welcome, Mr. Hunter.

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

    Mr. Hunter. Thank you, Mr. Chairman, Mr. Bachus. I am Bob 
Hunter. And I am the director of insurance for CFA. And I 
formerly served as federal insurance administrator under 
Presidents Ford and Carter and as Texas insurance commissioner.
    Attached to my statement is a letter signed by over 80 
groups, representing consumers, labor organizations, low-income 
Americans, housing groups and minorities, asking Chairman Oxley 
to reconsider the road map for legislation to override state 
regulation. The standards proposed in the road map are, in our 
view, startling in their anti-federalist sweep.
    They do away with decades of deliberations by state 
legislators, largely eliminating their role in the future in 
preempted areas. The road map would override the vote of the 
people of California in adopting the regulatory system of 
Proposition 103 and regulators would become functionaries 
carrying out federal standards.
    How Congress would force state compliance with these edicts 
without the threat of a federal takeover, which was also 
promised, is unclear to me. The road map does not tell us what 
the sticks or carrots might be to entice a commissioner to 
enforce a federal standard that he or she might think would 
disadvantage the consumers of the State.
    The road map makes grievous error, we think, in overriding 
all state price controls. It ignores the differences between 
insurance and other products.
    And serious attempt to increase competition in the 
insurance industry and protect consumers must take into account 
these differences. Some of the steps that must be taken to 
ensure that free markets could function well are first, a 
degree of imposed uniformity of insurance forms is required for 
consumers to understand and compare the complex legal document 
that is the insurance policy. People cannot read it and compare 
them. They just do not understand them.
    Second, better information about policy prices, the level 
of service and financial soundness must be provided to 
consumers, as the NAIC also said in their written statement. 
Unlike other products, insurance has inelastic demand because 
states require auto insurance and lending institutions require 
property insurance of businesses and individuals.
    If competition is to be effective, supply and demand must 
be balanced, perhaps by requiring limits on underwriting such 
as mandating offers of insurance to drivers who meet good 
driver qualifications and to home and business owners who meet 
building codes. The road map proposes none of these things to 
make competition work for the benefit of consumers.
    It would leave consumers, including small businesses, 
vulnerable. And I have to remind you that, of the 5.7 million 
businesses in America, 3.4 million or 60 percent have fewer 
than five employees. And therefore, they are not sophisticated 
buyers of insurance with risk managers and so on. They really 
need help.
    Other people who are at risk are low-and moderate-income 
consumers and minorities. The road map, I think, puts them at 
more risk.
    A crucial aspect of rate regulation that the road map would 
eliminate is the approval of classifications, which is part of 
price regulation. Many states have moved to ban and limit the 
use of credit scoring, for example, or redlining by certain 
territorial definitions and control of other criteria that 
disadvantaged poor and minorities; the latest one being that we 
are going to charge you more if you previously bought the limit 
of liability required by the State, but did not buy higher 
limits, we are going to charge you more for that.
    A lot of states are very upset about that. But who would 
stop that under the road map? These protections would be 
eliminated.
    Insurers would also be free to imagine whatever classes 
they would choose, including intrusive classes, that are on the 
horizon, such as the use of the human genome for life 
insurance. Congress has already acted on health. But life 
insurance could be human genome-based.
    And tracking drivers with global positioning satellite 
systems for auto insurance, that has already been tested.
    The road map points to Illinois as a regulatory model. 
There are almost no states with fewer protections for consumers 
than Illinois.
    Illinois does not regulate rates at all, under its non-
system, as I am sure Mr. O'Connor will tell you. It is a non-
system because the Illinois legislature did not pass it; they 
just became deadlocked and the existing legislation expired 
under sunset.
    Since 1989, in Illinois, auto insurance rates have risen by 
35 percent, greater than the national average of 30 percent, 
while California's rates, under the prior approval system put 
into effect by a vote of the citizens of the State, have fallen 
by eight percent. That is like 45 percent difference between 
California and Illinois.
    Prior to modernizing its system, California had the same 
old, tired deregulatory system that the road map now proposes 
for all states. America deserves better than the weakest 
consumer protection. Americans deserve the best.
    If you go forward with the road map, we would urge you to 
look at the nation's best system, California, as your model.
    Under the road map, businesses would benefit from a single 
choice of law, probably the home state of the policy holder. 
But if a state tries to attract large corporations by weakening 
its laws, it could be to the detriment of its residents and 
consumers across the country.
    You should also be made aware, as I have told you this 
before Mr. Chairman, that as you move on these areas--and I 
think it is good that you do move--but as you move, some good 
changes are occurring and some bad changes. Consumers support 
changes that get rid of unnecessary red tape like yellow pages 
and pink pages and all that. We do not like that either. We pay 
for it.
    And we have helped work at the NAIC, with coming up with 
30-day limits on how long it would take to approve policies and 
so on. We are for all that.
    But we are very worried about harmful change. States do not 
always act because they think it is proper, because insurers 
are telling them the only way to keep their support, to head 
off a federal takeover, is to gut consumer protections. And 
that is dangerous. And we hope that the subcommittee would 
speak out against that sort of activity.
    I have responded to your three questions in my printed 
testimony, Mr. Chairman. In a nutshell, CFA supports expanding 
the risk retention act to spur the creation of private 
alternatives to overpriced insurance that occurs in period hard 
markets.
    We also offer a number of proposals to improve uniformity 
of regulation and protect consumers. The implementation of 
national standards should not be done in a way that stifles 
innovation of the States or undermines needed regulatory 
variation. Thus, CFA supports minimum national standards that 
would improve uniformity and better protect consumers, while 
allowing states to exceed those minimum standards.
    Some of the model bills proposed by NAIC and NCOIL would 
provide adequate minimum consumer protection at the national 
level, as I indicate in my testimony--things like getting rid 
of the final counter-signature law problems. We would support 
deregulation of property casualty rates for truly large 
commercial risks, as long as small-and medium-sized businesses 
were protected.
    And we would consider endorsing the NCOIL market conduct 
model bill if and when NAIC adopts it and we then discuss 
together how to make sure that works well.
    Finally, I analyzed the road map's concern with property 
casualty profitability and the fear of a collapse in my written 
statement. And I conclude there is no chance of that happening.
    On behalf of the over 80 groups that signed the letter, I 
ask that this subcommittee not move forward with the ill-
advised road map concept. CFA looks forward to working with the 
members of the subcommittee and with state regulators on 
proposals that will improve uniformity of regulation and speed 
to market without sacrificing consumer protections. 
Unfortunately, the road map does not achieve that balance.
    Thank you, sir.
    [The prepared statement of J. Robert Hunter can be found on 
page 116 in the appendix.]
    Chairman Baker. Thank you, Mr. Hunter.
    Our next witness is Ms. Janice Ochenkowski. Did I pronounce 
that correct?

   STATEMENT OF JANICE OCHENKOWSKI, VICE PRESIDENT EXTERNAL 
      AFFAIRS, RISK AND INSURANCE MANAGEMENT SOCIETY, INC.

    Ms. Ochenkowski. Absolutely.
    Chairman Baker. Thank you. Vice president, external 
affairs, Risk and Insurance Management Society, Incorporated. 
Welcome.
    Ms. Ochenkowski. Thank you. And good afternoon, Mr. 
Chairman, Mr. Bachus.
    Mr. name is Janice Ochenkowski. And I am the vice president 
of external affairs for the Risk and Insurance Management 
Society, known as RIMS. It is the largest professional 
organization for the risk management community.
    In addition, I am also a senior vice president responsible 
for risk management at Jones Lang LaSalle, which is a global 
commercial real estate company based in Chicago. And I have 
been working there for over 20 years.
    I appreciate the opportunity to appear before you today on 
the issue of insurance choices for consumers. RIMS is in a 
unique position to participate in this hearing, as we represent 
commercial consumers of insurance that we have all heard about 
so much today.
    RIMS members, which number over 4,000, support the 
advancement of efficient insurance purchasing abilities. RIMS 
membership spans the country and consists of entities of all 
different industries and sizes, including 84 percent of the 
Fortune 500 companies, but also 950 small businesses, which we 
define as those with fewer than 500 employees.
    Nearly 2 years ago, RIMS spoke before this committee on the 
different insurance vehicles that are available to risk 
managers in their search to provide as much protection as 
possible for their companies' assets. We made a case for 
immediate and significant reform of the State insurance system.
    RIMS also expressed its hope that one day an optional 
federal insurance charter would be made available for insurers 
operating in different states.
    It is still RIMS' belief that an optional federal charter 
will streamline insurance purchasing for consumers and make the 
U.S. insurance system significantly more efficient. However, 
the reality is that some view an optional federal charter as 
too extreme a solution. And it seems to be an idea whose time 
has not yet come.
    Chairman Oxley and Subcommittee Chairman Baker's proposals 
to reform state regulation are reasonable and attainable. And 
they will provide a much-needed opportunity for national 
uniformity and free market competition, without excess 
regulation.
    RIMS fully supports the Oxley-Baker reform proposal and 
urges Congress to enact these reforms as soon as possible.
    In this increasingly competitive marketplace, commercial 
insurance consumers like myself need choices, flexibility and 
speed. Operating throughout the country as the insurance buyer 
for Jones Lang LaSalle, I witness every day the numerous 
inefficiencies in the current state insurance system.
    Insurance policies have pages of state regulatory language 
that do not really affect the consumer and do not provide 
protection. These inefficiencies must be addressed. And I 
applaud the members of this committee for presenting us with a 
meaningful blueprint for reform.
    RIMS also recognizes the efforts of the NAIC in moving the 
U.S. system fully into the 21st century. The NAIC has made real 
strides in personal lines insurance reform. But much more needs 
to be done for commercial consumers.
    You see, the NAIC can only develop model laws; it cannot 
force state legislatures to adopt them. And even when models 
are adopted, inevitably, changes are made, which results in 50 
different approaches to the regulation of the industry.
    The Oxley-Baker proposal offers a chance to bring the best 
of state regulation and federal oversight together in a way 
that will preserve the State's role, yet streamline and 
modernize the system for the benefit of the consumers.
    I would like to address some areas of concern for RIMS and 
the risk management community, including market rates and forms 
and lead state concept for multistate companies. Several years 
ago, there was momentum at the NAIC to adopt a model law and 
regulation with respect to commercial lines and form 
deregulation. The NAIC adopted one short version of commercial 
lines regulation; however, a more comprehensive version has not 
been adopted.
    A few states have no requirements at all for filing rates 
and forms for commercial lines of insurance. RIMS supports the 
Oxley-Baker principle that a uniform standard be adopted that 
provides for free market competition of rates and forms for 
commercial lines of insurance.
    Our experience is that in a free, open and competitive 
market, risk managers will be able to negotiate the best rates, 
the best terms and conditions for coverage needed by our 
companies. RIMS believes that a national standard of freedom 
from form regulation should encompass surplus lines policies as 
well.
    Currently, surplus lines policies and rate forms are not 
regulated by the States. However, we think it would be prudent 
to include freedom from rate and form regulation in any federal 
statute governing commercial property and casualty insurance.
    My home state of Illinois has been cited frequently as a 
model for commercial lines modernization. In Illinois, the 
insurance market is strong and competitive. And insurance is 
widely available for consumers.
    Some states have requirements that, before an insurance 
buyer can obtain insurance from a surplus line market, a 
diligent search of authorized insurers must be made to 
determine if insurance is available. We believe commercial 
consumers should be allowed to access the surplus lines market 
without having to make this determination.
    RIMS recommends that legislation permit commercial 
consumers to purchase insurance from any eligible authorized 
insurer without making a diligent search of authorized 
insurers, as required by some state laws. Most RIMS member 
companies are entities like Jones Lang LaSalle that do business 
throughout the United States. In placing insurance, we as risk 
managers have to consider all of our exposures, no matter where 
they are located.
    When we purchase insurance, however, we are subject to the 
individual state requirements with respect to our exposures in 
individual states, even if it is something as minor as a single 
vehicle that is a part of a large fleet program. RIMS supports 
the Oxley-Baker concept of a leading state regulator for 
commercial policies covering multistate exposures.
    Under this concept, the State of the company's principal 
place of business would govern the insurance transaction, 
including the terms and conditions of the policy and the 
requirements that the producer be licensed.
    Finally, I would like to address the issue of a federal 
enforcement mechanism to ensure state compliance with the 
proposed federal standards. The Oxley-Baker proposal calls for 
a federal coordinator with little or no real influence to work 
with the proposed federal-state advisory council.
    RIMS supports the concept of a federal coordinator, but 
believes that for national uniformity to work, this individual 
should have some authority to determine that state laws comply 
with federal uniform standards. Obviously, this will be a 
sensitive area, yet one that must be addressed if these reforms 
are to be given a chance at producing national uniformity and 
free market competition without excess regulation.
    RIMS looks forward to working with your committee and the 
Congress on these critical issues. Thank you for the 
opportunity to speak today. I appreciate your time, interest 
and leadership and welcome any questions.
    [The prepared statement of Janice Ochenkowski can be found 
on page 161 in the appendix.]
    Chairman Baker. Thank you very much.
    And our next witness is Mr. Phillip R. O'Connor with 
Constellation New Energy, Incorporated. Welcome, Mr. O'Connor.

 STATEMENT OF PHILLIP O'CONNOR, CONSTELLATION NEW ENERGY, INC.

    Mr. O'Connor. Mr. Chairman and members of the committee, 
thank you. I am Phillip R. O'Connor. I testified in June of 
2001 to your subcommittee.
    I should note I am not here on behalf of Constellation New 
Energy. That is my day job. I am really here, having been the 
director of the Illinois Department of Insurance at one time 
and as someone who has, over the past 20 years or so, conducted 
a lot of research in this area of comparing prior approval and 
open competition states.
    First of all, just in terms of the general work of the 
committee, I think on the road map, its great merit is that you 
have managed, through the past couple of years of hearings and 
analyses, to separate out those issues and those areas where 
the States have made an enormous amount of progress the past 20 
or 30 years--financial solvency, guarantee funds, a whole host 
of things--and on the other hand, areas where there remain 
quite a bit of lack of harmony, lack of uniformity and so 
forth.
    And it seems to me that 60 years ago, in the same week that 
allied forces landed on Normandy and liberated Rome, the U.S. 
Supreme Court made the decision that insurance was interstate 
commerce. And this is really the first systematic review of how 
well the States have handled the delegation of regulatory 
authority that came in the wake of that decision.
    And I think the committee deserves a great deal of credit 
for having taken that job on and for narrowing down the issues.
    My job here, I think, is to talk just very quickly about 
the general distinctions or performance outcomes of those 
groups of states that are prior approval versus those groups of 
states that are competitive. The academic literature is really 
unanimous on at least one point; and that is you cannot find 
any systematic benefit from prior approval regulation.
    Now people may be able to find some case study or some 
anomaly. And they may be able to point to some particular 
alleged benefit.
    But when you compare the two systems, there is a long list 
of distinctions. So really, at best the finding can be that 
prior approval does no good; raising the question of: why is it 
that we do it? Why do we spend millions of dollars on it?
    On the other hand, the general tendency of the academic 
literature is to point out that there is a variety of 
dimensions, upon which competitive states tend to perform 
better than prior approval states as a group. And I list those 
out in both this testimony today that I have filed and that in 
2001.
    But let me talk a bit about the Illinois system because it 
has received so much currency in the past couple of years. And 
I have to admit that sometimes when I hear my friend Bob Hunter 
talk about the Illinois system, I get the sense that my state 
has some evil twin out there that I am not familiar with.
    The truth is, it is a system. Now Bob is right that it was 
an accident. But I would contend it is a happy accident. And 
leveling criticism at the Illinois system for having been an 
accident is a little bit like criticizing penicillin because it 
was accidentally discovered.
    The point is it has worked--and it has worked 
extraordinarily well--the past 30 years.
    Now let me identify the main elements of the Illinois 
system because indeed it does hang together quite well. The 
fundamental point is that the Illinois system has, in effect, 
opted for antitrust principles in insurance pricing so that 
insurers cannot agree or collude on their prices.
    There are a variety of other things though where the State 
has stepped in to regulate very specific elements where the 
General Assembly believes that there is either potential for 
abuse or where they thought a particular problem had to be 
remedied.
    Now it is true in work comp and in medical malpractice, we 
have competitive systems. But those are a bit different. They 
are like the competitive rating laws in other states where if 
there is a finding of non-competitiveness, there can be 
regulatory oversight.
    The Illinois law prohibits unfair discrimination. You 
cannot base a rate on race, color, religion, national origin. 
You cannot reject an auto insurance application in the 
underwriting area solely by reason of a physical handicap.
    And the Department of Insurance and the attorney general 
can pursue other unfair competitive practices related to rating 
that have not been specifically defined. But if they can 
demonstrate in court that these are unfair competitive 
practices, the State can step in.
    For auto liability rates, a municipality cannot be 
subdivided for rating. That was to recognize the obvious point 
that in Chicago--a big city--we have one court system that 
applies to everybody. And therefore, liability is addressed on 
a unit basis there.
    The General Assembly has targeted discounts in various 
public policy areas where there was a desire for some kind of 
promotion or recognition--auto anti-theft devices, senior 
citizen, driving training. Insurers can, through state licensed 
data collection agencies, mainly groups like the ISO and so 
forth, collect their loss data together. And they can do 
trended loss cost data on that.
    But they cannot agree on final pricing. Only each group and 
insurance company have to set their own prices.
    In auto and homeowner's, companies have to file with the 
insurance department illustrative rates so that consumers and 
the insurance department can take a look and get a feel for 
what is happening in the market. And they have to file non-
renewal and new policy counts by zip code.
    In addition, a cancellation and non-renewal information is 
filed by zip code in homeowner's, for instance, which is one of 
the tools we used back in the late 1970s to solve what was 
thought to be the residential insurance redlining problem. And 
we solved that back well over 20 years ago. And we did it 
through market mechanisms.
    Our residual markets--yes, those rates indeed are prior 
approved. But they are prior approved on the basis that the 
director is going to avoid creating underpricing so that those 
residual markets act as a kind of magnet for too much market 
share. The FAIR plan and the auto assigned risk pool have 
infinitesimally low populations. And the work comp pool, even 
in the hard market in 2003, had well under 10 percent of total 
premium.
    My point to you is that the Illinois system, in reliance on 
the antitrust principles of no agreements on final pricing and 
no regulation of final pricing, is nonetheless able to target 
very specific areas where a public policy case has been made 
and the Illinois General Assembly decides to take action or 
where the General Assembly has given discretion to both the 
director of insurance and to the attorney general to take 
action.
    One final point on California. The interesting thing in 
California is, in my view--and we can argue about this all day 
long--is that California inadvertently did in 1989 with 
insurance rates, freezing them at extraordinarily high levels 
that resulted from a peculiar set of circumstances, where that 
circumstance was in great part cured and the rates would have 
come down anyway.
    They froze the rates at these very high levels and 
unfortunately repeated that mistake in the spring of 2001 when 
the State intervened in the electric market and went out and 
bought huge amounts of forward electricity at extraordinarily 
high prices; thus, freezing for consumers anomalous prices in a 
very short period of time.
    But again, we could argue about that all day long. The 
point is the Illinois system has worked over 30 years 
extraordinarily well.
    The Illinois General Assembly, whether under Republicans or 
Democrats, has never seen fit to pass out of either House 
legislation that would reverse that course.
    [The prepared statement of Phillip R. O'Connor can be found 
on page 146 in the appendix.]
    Chairman Baker. Thank you very much. I appreciate each of 
your perspectives. It is very helpful.
    I know, Mr. O'Connor and Mr. Hunter, we have a rather 
dramatic departure in the analysis of the data. And I can 
understand how that analysis can differ.
    The one thing I would be interested to know from either or 
both, with regard to levels of consumer complaints, I often 
want to know from a company, for investment purposes, what the 
customer satisfaction surveys look like. If people are buying 
their TV sets and they are bringing them all back in 30 days 
for a full refund and if you knew that, you would probably have 
a pretty good outlook about where that company was going over 
the next quarter.
    I think equally valuable from a regulatory perspective is 
how many people write letters, show up with complaints, file 
actions and what the history in Illinois versus California 
might be. If the system is working in the competitive market as 
well as I think it is and if the California model is convoluted 
and unreasonably constrained, those numbers ought to be 
reflective of that analysis.
    Do either of you happen to have any access to information 
of that sort or numbers that might help build a case one way or 
the other?
    Mr. O'Connor?
    Mr. O'Connor. Well, I do not have them on hand. However, I 
would point out that both Illinois and the California Insurance 
Departments operate fairly similar policyholder and consumer 
complaint systems.
    I believe Illinois and I believe California publishes the 
ratios. And I believe there is a classification system in 
Illinois where there is an effort to identify, generally 
speaking, what the complaints are about.
    During my period of time when we initiated those systems, 
generally speaking, price was not the thing people complained 
about, nor availability. It was usually issues about claims and 
that kind of thing.
    One of the terrific things in Illinois--and this has been 
true for a long time--is that because of the system of pricing, 
it is extraordinarily easy for a consumer to shop right through 
the yellow pages and get indicative quotes over the phone from 
any number of agents or insurance companies. And that has been 
something that I think has been recognized in any number of 
reviews of the Illinois system.
    But the Illinois Department of Insurance, I think, is 
perfectly able--as are other states--to provide the information 
that would answer your question.
    Chairman Baker. Thank you.
    Mr. Hunter?
    Mr. Hunter. ON the NAIC website now, because we pushed for 
it for years and they finally have adopted it--is something 
called a consumer information source that has the data by 
countrywide, by state, broken out by company, all different 
ways you can look at it. It has been my experience that what 
drives complaints more is the individual company than where 
they are. It is corporate culture.
    For example, on my right here is New Jersey Manufacturers. 
Their complaint ratio is almost nonexistent. They are a very 
excellent company.
    They come in with low rates. If I lived in New Jersey, I 
would be dying to be one of their insureds. They have very few 
complaints.
    Chairman Baker. Mr. Dickson ought to be paying you for 
that.
    [Laughter.]
    Mr. Hunter. Same true for USAA, for example. And it does 
not matter whether they are in a regulated or a non-regulated 
environment, they always have great results.
    New Jersey Manufacturers is an example of a great company 
does great even under tremendous regulatory constraints. And so 
I would say you could go on the NAIC website and get that 
information. I did not have that question or I would have done 
it for you.
    But if you go on www.NAIC.org and look for the consumer 
information source, you can get that data.
    Chairman Baker. But could I conclude from your observation 
that if we had a non-regulated file a new system and you had 
good companies, consumer complaints would remain low? Or is it 
your allegation that if you go to that system, that is going to 
automatically trigger anti-consumerism activities?
    Mr. Hunter. I do not know that it matters a tremendous 
amount. A lot of the complaints have to do with claims. That is 
not going to change based on the type of regulation you have 
upfront, although better market conduct might cut those number 
of claims.
    So that is one of the reasons we have supported here 
possibly federal involvement in some market conduct areas.
    Chairman Baker. Thank you.
    Mr. Singer, from your perspective from a Massachusetts 
view, what do you attribute the loss of auto insurance 
providers in any--the numbers of folks who are leaving? What is 
it that causes them to assess the marketplace environment and 
withdraw from providing that coverage any longer?
    Mr. Singer. Mr. Chairman, I think the reason that today 
there are only 20 insurance companies writing automobile 
insurance in Massachusetts, as opposed to over 250 in Illinois, 
is because the very, very rigid rate control has driven capital 
away. Companies do not want to expose their capital to what 
they see as--what is--a very restrictive rate control regime 
that at times makes it unable for them to earn a profit. And 
they do not want to expose their capital to that.
    The result is, with so little capital available in the 
market, I think the impact is that rates are higher than they 
would be otherwise if there were more competitors. It has 
impacts in other markets too because we do not have personal 
lines, auto carriers, those large personal lines companies do 
not write homeowner's in the State. So it has an iterative 
effect on other coverages also.
    Chairman Baker. Thank you.
    Mr. Counselman, you may not have this information readily 
available. It appears, at least from a non-expert view looking 
in, that states imposing price controls on auto insurance seem 
to have more of their consumer base in the residual marketplace 
than states with a free market pricing system. Can you speak to 
that?
    Mr. Counselman. Mr. Chairman, you are correct. I do not 
have figures with me. But from experience--and we do write 
insurance and the council's members write insurance throughout 
the United States--that where there are price controls, our 
experience has been there is less availability of market 
because fewer companies are willing to operate in that given 
state under those circumstances.
    We know, for the last number of years, commercial insurance 
companies and personal insurance companies have had serious 
profitability problems. And they have looked at where they feel 
they had the best opportunity to be successful and where they 
had the least opportunity to be successful.
    And more often than not, it is in the regulated, price 
controlled areas they choose to exit. So there is less market 
available. So for those of us who are agents and brokers, we 
find ourselves with fewer solutions for our customers in a 
price controlled environment.
    Chairman Baker. Yes, Mr. Dickson?
    Mr. Dickson. Thank you, Mr. Chairman. I just wanted to 
amplify a bit on my neighbor's remarks here. When companies are 
not present in a marketplace, it causes tremendous strains on 
those of us who remain to try to provide a market.
    New Jersey, over the years, has been an example of that. We 
are committed to that state. But we cannot do it alone.
    We cannot be the last lifeboat in the water. There has to 
be a competitive marketplace. We need help. We cannot see our 
resources strained so that the service to our policyholders 
suffers.
    Chairman Baker. Thank you. My time has expired. But I will 
be back.
    Mr. Kanjorski?
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Maybe I will start with this first question. As you see the 
conceptual outline that is presently being floated, Mr. Hunter, 
what do you think the effect would be on a small business, if 
you have any?
    Mr. Hunter. I think it would be very dangerous for small 
businesses because the same kinds of problems that impact 
individuals impact those very small businesses. The artisan 
truck and so on has to go buy auto insurance for its truck.
    It has to go buy property insurance for its place of 
business, if it has one. It has to buy comp insurance for its 
employees.
    They need help. They do not understand the complex product 
any more than the person on the street. They do not have risk 
managers helping them.
    They are not sophisticated buyers of insurance. And 
therefore, they are subject to all of the same kinds of 
classification games or being misled into taking the wrong 
product. They need the same kinds of protections. We think the 
road map would eliminate them.
    Mr. Kanjorski. You were in the hearing room during the 
other panel. And I am not sure if I could distill exactly what 
the panel's testimony was. But I seemed to understand, for Mr. 
Csiszar at least, that there would be some movement in this 
compact situation by 2008, particularly since the Congress is 
giving some impetus now by even considering doing something.
    But what if we were to change that perspective and instead 
of going with the present conceptual outline that we lay down a 
dual course, establish a commission to study the federalization 
of insurance at different levels or with different industry--
the charge to prepare an optional federal charter, say for the 
life insurance industry, as a starter--and then giving them a 
drop-dead date, 2007 or 2006. Either the compact is complete 
and in operation and effectively on its road to solving the 
problem so we do not have to take federal jurisdiction, or a 
kick-in that at least we would establish an optional federal 
charter for life insurance.
    And the question that I really have for you from a 
consumer's perspective: how detrimental or how advantageous 
would an optional federal charter be for consumers?
    Mr. Hunter. Obviously, the devil is in the details, we have 
heard several times today.
    Life insurance is not a simple situation. I think life 
insurance has a much different picture than the property 
casualty insurance industry. And I think the property casualty 
insurance industry is a millstone around the life insurance 
industry's neck in terms of getting federal relief.
    The life insurance industry is much more uniform across the 
country, much more subject to having a workable federal 
charter. We do not like optional charters because we think that 
it produces the rates to the bottom.
    But if you did a federal minimum standards or a federal 
takeover with decent consumer protections, we could consider 
that. But we do point out, there are differences between life 
insurance products that are very important to consider.
    One would be, for example, term life insurance, I think you 
could totally deregulate. And people understand term life 
insurance and so on.
    You get into some of the cash value products, people are 
very confused. They need help. They need information. It is a 
very difficult product.
    The third product I would cite would be credit life 
insurance, where you have a reverse competition driving the 
rates up. States have had to cap those rates. You have to have 
some kind of a control on the rate in that area.
    So they have three totally different products within the 
life insurance industry that would have to be dealt with in any 
bill that you might propose. But otherwise, I do not like the 
optional charter. But I do understand that life insurance has 
different needs.
    If you divorce life insurance from property casualty, I 
think we could talk. I am a little worried about setting up 
something that would cause the race to the bottom. But if we do 
the consumer protections and do that somehow, then I think we 
would have something we could talk about, yes.
    Mr. Kanjorski. Well, I am just rolling in my mind the idea 
that we would use this triggering mechanism to drive the 
process now. If I remember, we were here about 5 years ago when 
the national insurance commissioners were telling us that they 
would have everything solved by now.
    And here we are. And they moved the goalposts off another 4 
years.
    Mr. Hunter. I would defer to Mr. Pomeroy, who was president 
of the NAIC. I think he is right. I think it is very hard to 
get legislators to pass all those things.
    I think he is correct. I think getting a national basis 
would be pretty hard to do. And I do think that they need some 
kind of federal help.
    Mr. Kanjorski. Did anyone else on the panel have any idea 
of what I am talking about, this triggering mechanism to run 
concurrently with what the plans are by the State commissioners 
now? That if they do not adhere to a certain time schedule or 
get an accomplishment, it kicks in. But in the meantime, we get 
a commission working and studying how we would implement a 
federal charter, particularly life insurance?
    Mr. Counselman. Congressman?
    Mr. Kanjorski. Yes?
    Mr. Counselman. I would like to comment on that. Also from 
the standpoint of the small business owner, the small business 
owner is at a disadvantage in the market where it is difficult 
to obtain insurance, obviously. And one of the things that we 
experience with the small business owner is it is a competitive 
market if you are doing something that is very standard.
    There are many insurance companies--large ones and small 
ones--wanting to write insurance for small business owners. But 
if you are doing something that is not so ordinary and 
standard--let's say software developers, for example, but there 
are many examples--then it is more difficult to get insurance. 
And then there needs to be a mechanism to respond to those 
specific needs.
    One of the issues is in that particular niche, there may 
only be 500 or 1,000 or 5,000 of them total in the United 
States, scattered in different states. And they need a 
mechanism to respond to their insurance need.
    It is not practical for a huge insurance company that is 
writing a multitude of risks to decide that they will file a 
special program just to satisfy a few hundred or a few thousand 
insureds. And so they do not. They do not respond to that need.
    If they had a mechanism that they could respond to that 
specific need--and that might be a federal charter, for 
example--then that small business owner has an opportunity to 
buy insurance that they otherwise would not have. So that is 
why I would comment that a dual look at that, at the federal 
issue, the federal charter issue, while not eliminating what is 
going on in the States, can make a lot of sense and actually 
can protect a lot of small business owners who currently are 
not getting what they need.
    Mr. Kanjorski. Yes?
    Mr. Ahart. Just a quick comment. I am not sure why you 
would wait to see, like in 2007 or 2008, whether something was 
working or not. Under the current road map, it seems that life 
insurance is really no different than property and casualty and 
that what they need is uniformity for products, uniformity for 
licensing.
    And that can be done through the road map by having federal 
legislation target that specific area which can give the 
uniformity that it needs through the States, therefore 
preempting the States on those issues. And you could get 
results right away, rather than waiting to see if something is 
happening in 2007, 2008 and then at that time doing something.
    Mr. Kanjorski. Well, I am not suggesting not doing 
something. But as I gather these conceptual things, there are 
not any triggering mechanisms or actual standards or federal 
charters that would be put into place. It would be merely 
keeping a coordinated view, advisory view of what is happening.
    And my own sense is that it is not going to move many 
people to really get down and dirty and decide to do something 
about the corrective mechanism. So what I am thinking about is 
to build right into it; that as we are monitoring, we establish 
a commission to report back to the Congress with some ideal 
legislation that we could pass at a given time, or in fact 
would be enacted if not passed.
    It would make it actionable within 30, 60, 90 days of the 
report so we could move right into the thing. But give the 
States this opportunity of a couple of years, but not 
indefinitely.
    If we wait until 2008, they are going to come back and say, 
``Well, we have 45 members of the compact. We are still working 
on five.'' Then we are back to 4 years.
    It is going to take us 2, 3, 4 years to move into this 
area, it would seem to me. So we probably should look at doing 
it.
    But I appreciate your responses, gentlemen.
    Chairman Baker. Thank you, Mr. Kanjorski.
    Mr. Bachus?
    Mr. Kanjorski.--and ladies.
    Mr. Bachus. Thank you, Chairman Baker. Chairman Baker's 
staff did some research on this, how long we have been waiting 
for uniformity. And at one of our very first insurance reform 
hearings--this was 3 years ago--Michigan Insurance Commissioner 
Fitzgerald stated that ``uniformity or a very high level of 
standardization, I think is the goal, not only of the 
commissioners, but certainly of the industry and would benefit 
the consumers of this country.''
    Chairman Oxley then asked both Commissioner Fitzgerald and 
Ohio Commissioner Covington the question: ``If Congress sets a 
goal of 3 to 4 years for achieving comprehensive uniformity by 
NAIC for product approval, do you and Mr. Fitzgerald feel 
confident you can meet that goal?''
    Mr. Covington responded, ``Chairman Oxley, I think we have 
to meet that kind of goal. As we have said before, the current 
system is not good for consumers. And it is not good for 
insurance companies. We must meet that goal.''
    Then Mr. Fitzgerald responded, ``I agree with that. If over 
the next 2 or 3 years,''--that is now gone--``you have not seen 
significant progress, then I think there needs to be questions 
raised about whether we can be effective at the State level or 
solve the problems that you have identified and that we have 
identified.''
    So I mean, I think that may give you an answer of what may 
happen in 2008. And I know that Chairman Oxley--I mean, 
Chairman Baker--has waited 2 or 3 years.
    He has held 14 hearings. He has heard from over 100 
witnesses. And yet, the unanimous opinion appears to be that 
NAIC has still not achieved significant uniformity, although 
everybody agrees it needed to be done 3 years ago and it could 
probably be done in 3 years.
    So that is just a bit of encouraging news.
    [Laughter.]
    But I think that may tell you why----
    Chairman Baker. Do not bring me a problem, would you 
please.
    [Laughter.]
    Mr. Bachus. And you are still being urged--Chairman Baker 
is still being urged to be very cautious and go slow because we 
are on schedule.
    Let me direct this question to Mr. Ahart. Could you explain 
how congressional passage of targeted federal legislation that 
improves the core aspects of state insurance regulation would 
benefit your agency and consumers?
    Mr. Ahart. Sure. It really would get to the speed to market 
issues, which pretty much would be the licensing issues for 
both companies and agencies and also the issues on new products 
and on price controls. And first of all, on the licensing 
issues, as I mentioned in my testimony, we have more and more 
consumers all the time, personal lines that are buying homes in 
another state or on businesses that are opening branches in 
other states.
    And even though their home base is where we are in our 
state--New Jersey--we still are required to be licensed in 
those states to be able to handle all their needs. And they do 
not want to be dealing with different agents in every state 
that they operate in.
    And so as they expand--and it is so easy to expand anymore 
with technology--as they expand, we need to be licensed in 
those states. Even businesses with worker's comp, they have 
people that travel that technically can bring suit in some of 
those other states or be hired in those states.
    We need to be licensed in those states to take care of them 
so we would be able to provide the protection the consumers 
need. And it would certainly help the agency keep those 
consumers.
    As far as the product development and the rate controls, 
again New Jersey is a great example. As more restrictions we 
have, availability is down.
    And the competition is down. And pricing goes up. And our 
residual market goes up.
    And as Congress, under this road map approach could take 
those specific issues and pass legislation just to address 
those issues and yet keep consumer protections under state 
regulation and things like that. So it is not doing everything. 
It is keeping the good stuff with the State and attacking those 
specific problems that need it.
    Mr. Bachus. Okay. Thank you.
    Mr. Counselman, you testified about the success of NARAB. 
Do you think replicating that success in the area of speed to 
market reforms would be possible without legislative action or 
congressional action?
    Mr. Counselman. Congressman, I think congressional action 
would be necessary because I think there has to be an outside 
impetus for states to cooperate and feel it necessary to pass 
the required amendments to their laws. And I think NARAB proved 
that that formula works because there was a specific goal set 
out and the States knew that they needed to accomplish that.
    They have still not accomplished it in 50 states. They only 
had to achieve it in 29 states. And some of the largest states 
still have not complied in all aspects of NARAB by passing 
uniformity.
    So even NARAB can be improved upon. But I think in speed to 
market and the ability to file forms, the same sort of carrot 
and stick relationship can be developed with the States so that 
we actually can make use of what the States have already 
established and encourage them to improve that. And that is 
good for the consumer.
    Mr. Bachus. Okay. Thank you.
    Mr. Baker, I would just like to maybe mention, I do not 
know if it is a question, but I did hear two things that the 
panel said, one of which I would just maybe like a 
clarification on, and that is from Mr. Singer.
    You talked about eliminating review and approval of forms 
for commercial lines. You sort of focused on that, not personal 
lines, whether I guess it is at the State level or the federal 
level.
    But is it not equally important for personal lines for 
consumers to benefit? I mean, is there any valid reason for the 
distinction? Or are you not saying it is not necessary for 
individual lines?
    Mr. Singer. Congressman, I guess what I would say is that 
commercial line businesses, even small businesses, are more 
capable, I would think----
    Mr. Bachus. The sophisticated buyer type?
    Mr. Singer. And we sell a lot of small business products. 
And we try to make that product very easy to understand. We 
have to sell it on price.
    We have to sell it on understandability. We have to web-
enable it so the agent and the customer can see it very easily.
    I think there is much less justification in that context--
in a business context--to require all the process that is 
necessary for rate and form approval. It slows up delivery of 
the product to the customer.
    Mr. Bachus. Would you agree that consumers would also 
benefit greatly from access to product without delay too?
    Mr. Singer. I think in every case where you can reduce the 
process, what I really testified about was the going through 
the lengthy process in 50 different states to bring a product 
to market.
    Mr. Bachus. Yeah, and that is in commercial lines. But the 
same problems in personal lines would----
    Mr. Singer. Yes. Same problem.
    Mr. Bachus. Okay.
    Mr. Dickson. We would certainly agree. PCI recognizes that 
the Illinois model is one that has worked. It would help 
availability in personal lines all across the country and 
particularly in some difficult states such as we have 
experienced in the past in our own state of New Jersey.
    Mr. Bachus. Okay.
    And Mr. Hunter, I know you are going to respond. Let me ask 
you this.
    Mr. Hunter. Okay.
    Mr. Bachus. As you are responding to that--and I will close 
with this--you made the Statement that minorities are 
disadvantaged by the use of credit scores.
    Mr. Hunter. Yes.
    Mr. Bachus. How about an individual who is a minority that 
has a good credit score? Is that sort of stereotyping? I mean, 
does that assume----
    Mr. Hunter. No, there is research that shows that there is 
a disparate impact on minorities of the use of credit scores in 
insurance. Missouri has just published it. The State of 
Maryland did too.
    Mr. Bachus. But how about a member of a minority that has a 
good credit score?
    Mr. Hunter. They would probably get a break. But the 
problem is, many minorities are impacted adversely by the use 
of credit scores.
    And credit scores, there is no basis for it. There is no 
thesis. All they have is a correlation. There is no argument.
    I have debated Fair Isaac and Allstate and all these 
people. No one can tell me why, if I am laid off because of the 
bad economy and it takes me 9 months to get my job back and I 
fall behind on a couple of bills because of that, why I am a 
worse driver next year or a worse homeowner. It just is not 
true.
    And they say, ``Well, we have a correlation.'' Well, 
California Department of Motor Vehicles found a correlation 
between hair color and driving record.
    Mr. Bachus. I guess what I am saying, are you saying that 
insurance companies, if they get a credit score from a person 
and he happens to be a minority and he has a good credit score, 
that they would use, that they would----?
    Mr. Hunter. They get a better break on the basis of a 
credit score----
    Mr. Bachus. But it is not because of the color of their 
skin?
    Mr. Hunter. Yeah, but minorities are way more adversely 
impacted, according to the studies. Plus CFA's very careful 
analysis of credit scoring shows that it is a horrible 
situation of error. The credit scores are just dead wrong.
    We looked at 500,000 credit scores. And we found that 
around just the prime, sub-prime lending number of 620, 20 
percent of America was misclassified. I mean, there are just so 
many errors. It is just a very bad system.
    Mr. Bachus. You are aware, you know we passed legislation 
overwhelming which ought to help address that and let people 
repair their--in fact, I think you all supported that.
    Mr. Hunter. We did. And we appreciate that.
    Chairman Baker. Thank you, Mr. Bachus.
    Mr. Hunter. But I do want to comment though, I agree with 
the NAIC on the personal lines question. The NAIC's testimony 
today states this: ``Based on many years of effort, we do not 
believe a single national rating or product regulation model 
for personal property casualty lines is appropriate or 
feasible, whether imposed by the States or the federal 
government.'' And I agree with that.
    Chairman Baker. Okay.
    Mr. Frank?
    Mr. Frank. I have one important question that I had not 
intended to ask. But I cannot leave here still wondering. Which 
hair color are the bad drivers?
    [Laughter.]
    Mr. Hunter. Gray.
    [Laughter.]
    No, actually darker is worse. And it may be correlated----
    Mr. Frank. That is a pro-blond statement then.
    Mr. Hunter. Yeah, pro-blond.
    Mr. Frank. That would be welcome, the anti-stereotype 
thing.
    I noted--and I apologize for not being able to be here 
earlier, but I did read through the testimony--a clear 
statement of disappointment with, almost exasperation with the 
States' record here--that they have taken too long. There was a 
reference to difficult states.
    And apparently the general sense here is that the insurance 
industry lobbied very successfully in the 1940s to have this 
industry be a state regulated industry and now is telling us, 
from the representatives here and others I have heard from, 
that they are unhappy with the States, that the States are not 
doing a very good job.
    Is it incompetence? Are they not trying? Why have the 
States so disappointed with this? Why the need for a fairly 
drastic change in the federal-state relationship?
    Yes, sir?
    Mr. Ahart. Yeah, congressman, I think first of all, they 
are still doing a very good job for the most part of it. The 
problem is, with changes in our society--with new technology, 
the modernization and globalization.
    People are moving. It is easier for people to operate in 
more than one state. And therefore, it brings into play the 
need for uniformity, rather than just dealing with----
    Mr. Frank. It is solely because people operate in more than 
one state?
    Mr. Ahart. What is that? I am sorry.
    Mr. Frank. This is solely a problem of multistate 
operations.
    Mr. Ahart. I think it is a problem of uniformity.
    Mr. Frank. Well, no. But uniformity is a response. That is 
not the problem.
    I have to tell you, with regard to uniformity, do not be 
surprised at a lack of uniformity from what were intended to be 
50 separate decision making entities. I mean, indeed, 
uniformity is at one end of the pole. Federalism is at the 
other.
    And I have to say, as I have been listening to this 
committee's work more closely in the last year since my job 
changed, about all aspects of it than before, I am struck by 
this pattern that we hear. And this may be a fundamental change 
in America, with regard to even the business community.
    We hear it with regard to the Office of Comptroller of the 
Currency needing to reemphasize his preemptive powers. We had 
it last year with the emphasis on preemption. Some people 
wanted to go even further in credit scoring.
    Now the insurance industry really is asking us to begin the 
process of reversing a decision it initiated 60 years ago with 
regard to where the focus is. I mean, have we reached a point 
where, because of technology and other factors, the States are 
not to be given much economic power?
    You know, after the Supreme Court's redistricting decision, 
Everett Dirksen said--inaccurately at the time--``pretty soon 
the only people who will care about States is Rand McNally.''
    [Laughter.]
    I mean, it does sound to me like, from the economic 
standpoint, that is what we are talking about--no uniformity 
and they are difficult and they are not making good decisions. 
So maybe we ought to look. Because we do not want to just do it 
piecemeal.
    Is this in fact part of a general view that the States have 
become increasingly irrelevant economic decisionmakers?
    Mr. Counselman. Congressman, if I may?
    There is a fundamental change in our business--especially 
in the last 10 years, but it has been going on for 20 years--
and that is what Mr. Ahart was talking about. Our businesses 
that we insure, our customers, they are operating throughout 
the country or in different parts of the country.
    And it used to be that they operated primarily in one 
location, except for a handful of Fortune 500 companies. But 
now everybody, even the small guy, is operating----
    Mr. Frank. Okay, well that helps me. So if it is that 
thing, but that would deal with most business, but would not 
affect residential property though and even, to a great extent, 
to private automobiles.
    I mean, if it is a question about sort of accommodating the 
multistate operations, that is one thing. But there are clearly 
a lot of things in the property and casualty business in 
particular and also in life insurance. I mean, people are who 
they are. And I do not understand what globally has changed 
about a certain individual who bought life insurance.
    Yes, sir?
    Mr. Dickson. Thank you, congressman. I think there are 
several themes that you have heard today. There is a desire for 
efficiency.
    Mr. Frank. No, I am not asking. I understand what you want. 
But I am trying to get at why you want it.
    Mr. Dickson. Well, I think in part there is a recognition 
on the part of the industry, a significant frustration on the 
part of the industry, that in a number of states, there has 
been a failure to recognize----
    Mr. Frank. No, I understand that. Excuse me. You have said 
that. I understand that. I have heard that.
    I am asking: why do you think the States have done the 
things that frustrate you? I am trying to understand.
    Is it bad governance on the part of the States? Are they 
not able to do this? Is this too hard for them? Or have they 
been having changes?
    You need not restate the problem. I understand what you 
think the problem is. But you cannot solve a problem unless you 
understand why it is there.
    Mr. Dickson. Well, they are not using market-oriented 
regulation or competitive factors.
    Mr. Frank. Why not?
    Mr. Dickson. Perhaps because there are other less objective 
considerations that the political system dictates.
    Mr. Frank. Okay. See that, I think, weakens your case. In 
other words, you do not like the political outcomes in the 
States. Frankly, I do not always either.
    You know, I was not dancing in the streets yesterday with 
my own state. I would have voted against that amendment.
    But that is what federalism is. And you cannot cherry pick 
it. And I appreciate your honesty in this. You do not like the 
political decisions in the States.
    But then let's be honest about that and say: what do we do 
about that? You cannot give people the right to make only 
correct decisions. And if states, you say they are not using 
good political judgment, I think we ought to be very careful 
before we decide that we are the federal appeals court for bad 
political judgment at the State level.
    Mr. Hunter?
    Mr. Hunter. Yeah, I was just going to say when I was first 
briefed on the first optional federal charter bill by the 
industry proponents, I asked the question: how come, for the 
last 25 years, when the consumer groups have been yelling that 
state regulation is inefficient and ineffective, you guys did 
nothing to help us? And their answer was: Gramm-Leach-Bliley 
has changed everything.
    We did not care when it was inefficient before. We 
controlled it. We liked it.
    But now, it is different because now we are competing more 
directly with the banks. And I think that was a very honest 
answer.
    And the insurance industry historically has been for 
federal regulation at times and for state regulation at times. 
Wherever the laissez faire was the laziest, they were for that. 
They lost lawsuits back in the Supreme Court trying----
    Mr. Frank. By the way, I think it is entirely legitimate to 
say, ``Look, sometimes we want to go federal and sometimes we 
want to go state, depending on the outcome.'' That is what most 
people--most people here prefer that issues be decided at that 
level of government where they are likeliest to agree with the 
outcome.
    But then we should all stop pretending that we are either 
for states' rights or not for states' rights. And there is no 
moral imperative in that it be done one way or the other.
    Two other quick questions because I noticed, I very much 
agreed with the Statement of Ms. Ochenkowski about this. And I 
think there is a real hole in this that has to be filled.
    You support the concept of a federal coordinator, but 
believe that for national uniformity to work, this individual 
should have some authority. This will be a sensitive area, yet 
one that must be addressed.
    I mean that, it seems to me, is sort of the sine quo non. 
It does not make sense to take some power away from the States 
and create this move and have nobody to run it.
    And until and unless we can come up with that, I think we 
have a very serious problem here because, in fact, if it does 
not work in the State by state thing, giving it more power and 
less ability to make a decision could make things worse, rather 
than better.
    Let me just throw on one other thing and I would be 
interested in comments on this mechanism; and that is, I have 
to say, I mentioned Massachusetts. I have not been in the 
Massachusetts Legislature for a long time and I do not plan to 
go back, but----
    [Laughter.]
    ----tell me again that they cannot do the way they do rate 
regulation. I find that very hard to justify, for my state or 
any other.
    And we are not here talking obviously about globalization. 
We are not talking about multistate operations when we talk 
about automobile insurance rate setting. We are talking about a 
political judgment that people disagree with.
    And I may or may not disagree with it. But I do not 
understand, in our system, how we just cancel it out.
    So I think that one, just saying to the States, ``You are 
wrong, stupid. And we know better. And you cannot do that 
anymore,'' is a very hard sell in our system.
    But now let me get back, people, in closing, I would be 
interested: where are we on the question of a mechanism? And do 
you agree that we have to have a less ambiguous mechanism if we 
are going to expect this thing to function?
    Anybody?
    Mr. Counselman. I will respond to that. I think we need to 
say what needs to happen.
    Mr. Frank. Who is we?
    Mr. Counselman. I think Congress----
    Mr. Frank. Okay.
    Mr. Counselman.----I think needs to say what needs to be 
done because the commissioner of Massachusetts or the 
commissioner of New Jersey, he does not have to be concerned 
about what is going on elsewhere in the country. He is 
concerned about what is going on in----
    Mr. Frank. But how do we enforce that? I understand that. 
But my problem is I do not--I mean, the goal setting, I tend to 
agree with mending the goals, not overriding the regulation. 
But the enforcement mechanism, I am afraid without an 
enforcement mechanism, we may just be adding to the confusion.
    Mr. Counselman. Well, perhaps our mechanism needs to have 
something that we would do, some action that the federal 
administrator would be able to take if, in fact, the standards 
were not met by a given date.
    Mr. Frank. Yes, I would advise you to work on that because 
I think that, again, is what you need.
    Anybody else? Yes, sir?
    Mr. Singer. Well, congressman, a simple solution would just 
be a preemption of rate setting. I mean, there is a reason 
that----
    Mr. Frank. Only that and nothing else? None of the other--
--
    Mr. Singer. No, but that would be a solution to the 
Massachusetts and New Jersey problem. And I think the 
politicians and the administrators in Massachusetts and New 
Jersey do a very, very good job on most things they do.
    Mr. Frank. But you just disagree with their value decision? 
And you want us to cancel it.
    Mr. Singer. What I think is they have forced themselves 
into a position where there is so much political risk in 
letting the steam out of the rate system that they cannot do 
that.
    Mr. Frank. By political risk, you mean public reaction?
    Mr. Singer. Public reaction----
    Mr. Frank. So it is not the politicians we should overrule, 
it is the public.
    Mr. Singer. I think in fact the public would not be hurt. I 
think ultimately----
    Mr. Frank. Do you think the politicians do not understand 
what the voters would do? I mean, you said the politicians will 
not do it because they are afraid of voter reaction.
    I have to tell you, one thing about Massachusetts 
politicians, please do not suggest that they misunderstand 
voter reaction. They tend to be very good at that.
    Mr. Singer. Yes.
    Mr. Frank. I do not think you understand. But is that not 
your problem? I do not want to play games with you. What you 
are basically saying is there is a decision made by the 
electoral forces in Massachusetts with which you disagree. And 
Congress ought to cancel it.
    And that is a hard sell for me.
    Mr. Singer. I think the political mechanism in 
Massachusetts, unfortunately, has itself into a very difficult 
problem.
    Mr. Frank. But you realize that political mechanism is 
called democracy?
    Mr. Singer. Yes, I understand that. I understand that. But 
I also understand that some economic decisions sometimes are 
made at different levels of government. And I think simply it 
is not working now.
    We are strangling an economic market to the disadvantage of 
consumers in Massachusetts.
    Mr. Frank. And the consumers are too dumb to understand to 
understand that?
    Mr. Singer. The consumers have no choice. There is only 
one----
    Mr. Frank. No, they have a choice politically. They have a 
choice.
    What you said is the consumer reaction to doing away with 
regulation intimidates the politicians into keeping it, so the 
consumers are forcing the politicians to do something which is 
bad for the consumers. Consumers are the voters, after all.
    Mr. Singer. And the consumers and the voters probably will 
change it at some point.
    Mr. Frank. I am afraid you are going to have to wait for 
them. I am not going to short circuit the democratic process 
with regard to my state or any other in that regard.
    Mr. Singer. I understand.
    Mr. Frank. Thank you, Mr. Chairman.
    Chairman Baker. The gentleman yields back his time.
    I do have follow-ups, which I will provide in writing to 
each of you at a subsequent time, as I am sure other members 
may as well. I just want to thank each of you for your 
participation. This has been a helpful step in our work. And we 
look forward to our continued conversation.
    Our meeting is adjourned.
    [Whereupon, at 2:05 p.m., the subcommittee was adjourned.]



                            A P P E N D I X



                             March 31, 2004




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