[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
U.S. GOVERNMENT PRINTING OFFICE
95-011 WASHINGTON : 2004
_____________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing
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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
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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
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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