[Senate Hearing 108-900]
[From the U.S. Government Publishing Office]
S. Hrg. 108-900
EXAMINATION AND OVERSIGHT OF
THE CONDITION AND REGULATION OF
THE INSURANCE INDUSTRY
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
ON
THE CONDITION AND REGULATION OF THE INSURANCE INDUSTRY
__________
SEPTEMBER 22, 2004
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina DEBBIE STABENOW, Michigan
LINCOLN D. CHAFEE, Rhode Island JON S. CORZINE, New Jersey
Kathleen L. Casey, Staff Director and Counsel
Steven B. Harris, Democratic Staff Director and Chief Counsel
Mark F. Oesterle, Counsel
Martin J. Gruenberg, Democratic Senior Counsel
Dean V. Shahinian, Democratic Counsel
Alexander M. Sternhell, Democratic Staff Director,
Subcommittee on Securities and Investment
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
C O N T E N T S
----------
WEDNESDAY, SEPTEMBER 22, 2004
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Johnson.............................................. 2
Senator Sununu............................................... 3
Senator Dole................................................. 4
Senator Corzine.............................................. 5
Senator Crapo................................................ 6
Senator Dodd................................................. 6
Senator Hagel................................................ 8
Senator Allard............................................... 17
Prepared statement....................................... 53
Senator Sarbanes............................................. 27
Senator Schumer.............................................. 40
WITNESSES
Gregory Serio, Chair, Government Affairs Task Force, National
Association of Insurance Commissioners and Superintendent, New
York Department of Insurance................................... 9
Prepared statement........................................... 53
Arthur F. Ryan, Chairman, American Council of Life Insurers and
Chairman and Chief Executive Officer, Prudential Financial..... 11
Prepared statement........................................... 58
Response to a written question of Senator Crapo.............. 95
William H. McCartney, Senior Vice President, Government and
Industry Relations, USAA Group on behalf of the American
Insurance Association.......................................... 13
Prepared statement........................................... 59
Response to a written question of Senator Crapo.............. 96
J. Robert Hunter, Director of Insurance, Consumer Federation of
America........................................................ 15
Prepared statement........................................... 63
Alan F. Liebowitz, President, OMNIA (Bermuda) LTD. on behalf of
the American Bankers Insurance Association..................... 17
Prepared statement........................................... 73
Thomas B. Ahart, President, Ahart, Frinzi & Smith Insurance
Agency on behalf of the Independent Insurance Agents and
Brokers of America............................................. 19
Prepared statement........................................... 79
Albert R. Counselman, CPCU, Past Chairman, the Council of
Insurance Agents + Brokers and President & CEO, Riggs,
Counselman, Michaels & Downes, Inc............................. 21
Prepared statement........................................... 84
Brian K. Atchinson, Executive Director, Insurance Marketplace
Standards Association.......................................... 23
Prepared statement........................................... 92
Additional Material Supplied for the Record
Letter from Senator Richard C. Shelby and Senator Paul S.
Sarbanes to David M. Walker, Comptroller General, U.S.
Government Accountability Office dated September 22, 2004...... 98
Statement of the American Land Title Association dated September
29, 2004....................................................... 99
(iii)
EXAMINATION AND OVERSIGHT OF
THE CONDITION AND REGULATION OF
THE INSURANCE INDUSTRY
----------
WEDNESDAY, SEPTEMBER 22, 2004
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 2:05 p.m., in room SD-538, Dirksen
Senate Office Building, Senator Richard C. Shelby (Chairman of
the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The hearing will come to order.
I want to first thank our witnesses for appearing here this
afternoon. It looks like we have a full house, not just at the
witness table, but in the room.
This hearing is an outgrowth from an earlier hearing in
which we examined conditions in the financial services sector 5
years after the passage of the Gramm-Leach-Bliley Act.
After hearing some of the witnesses touch on insurance-
related issues, I came to the conclusion that it would be
important for this Committee to dedicate additional time to
focus specifically on these matters--thus, today's hearing.
Based solely on its size and scope, the insurance industry
is of considerable importance to our economy. It employs
millions of people, safeguards the lives and property of
hundreds of millions of Americans, and holds trillions of
dollars in assets. Additionally, as stewards of substantial
amounts of premium dollars, insurance companies play a key role
as investors in our capital and real estate markets.
With insurance playing such a meaningful role for consumers
and the economy, I think it is our responsibility to consider
some basic questions about the industry. For instance: Is it
financially sound and able to meet its responsibilities, that
is, the industry? What is the nature of the prevailing business
and operational conditions? Finally, what challenges will the
industry face as it moves into the future?
As I noted previously, insurance is a very important
industry. Because of its importance to the economy, it has long
been subject to an intricate regulatory scheme. I look forward
to beginning a thorough review of it with our witnesses this
afternoon.
As an aside, I want to mention that Senator Sarbanes and I
are sending a letter to the General Accountability Office
requesting an examination of the troubling reports that
military personnel were sold insurance and mutual funds that
appear to have excessive premiums coupled with minimal
benefits.
Clearly, we all owe our fighting forces a debt of gratitude
and respect. It is incumbent upon us here to make sure that
military personnel receive financial services of the highest
quality, services that will truly meet their needs and the
needs of their loved ones. And we look forward to the GAO's
report in the future.
I also want to note that Senator Johnson, who is here with
us, has been very active in this area, and I wanted to commend
this, something you might want to touch on, too, at the right
time.
Senator Johnson, I will recognize you.
STATEMENT OF SENATOR TIM JOHNSON
Senator Johnson. Thank you, Mr. Chairman, and Ranking
Member Sarbanes as well, for your role in holding today's
hearing on the regulation of insurance. Insurance plays an
absolutely critical role in our lives, a fact we do not always
appreciate until it is too late, as residents of Florida and
the Gulf States or victims or survivors of September 11 or
farmers suffering from drought in South Dakota know all too
well.
Chairman Shelby. And Alabama, too.
Senator Johnson. And Alabama as well. In fact, particularly
in Alabama. Americans need to have access to affordable,
reliable insurance policies, and historically, unlike banking,
insurance has been regulated at the State level. I appreciate
the opportunity to hear today's testimony that will shed light
on how that regulatory structure is working and whether any
changes are needed.
Of particular concern to me, as Senator Shelby has alluded
to, are recent reports that men and women on our military bases
have been deceived and misled into purchasing unsuitable
insurance products. In these instances, not even the States
have been able to regulate or enforce against coercive selling
practices, and it has been reported by DoD, which apparently
has jurisdiction, has not adequately protected our soldiers.
According to news accounts, recruits are often invited to
``personal finance classes,'' where they are misled into
purchasing life insurance policies with high premiums and low
returns. Most of these investment products are no longer
available in the private market, and we should ensure that new
recruits and active-duty personnel are not a captive audience
for the sale of such financial products.
While I would hope that such practices are not widespread
but, rather, the work of a small handful of bad-faith actors,
three Pentagon studies conducted on this issue over the past 10
years revealed instances of this practice at each of the 11
military bases investigated. Furthermore, despite these
findings, such sales abuses have been allowed to continue to
the personal detriment, both financial and emotional, of the
men and women and their families in the armed forces.
Clearly, we need to improve the regulatory supervision of
insurance sales in the military market if only to clarify the
complex jurisdictional issues governing their regulation.
Last week, I wrote this Committee to encourage the
oversight needed to improve our current regulatory framework,
and I greatly appreciate today's hearing since it is an
opportunity to discuss this issue in the context of some of
today's broader questions about the regulation of insurance
products.
Unfortunately, I will be unable to stay for the entire
hearing, but I will be examining the record from today's
hearing with great interest. And I would appreciate it if
relevant witnesses would be willing to address this issue.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Sununu.
STATEMENT OF SENATOR JOHN E. SUNUNU
Senator Sununu. Thank you very much, Mr. Chairman. I
appreciate you holding this hearing and to a certain extent
appreciate the degree to which you have tolerated my nagging
questions about this issue, broadly speaking.
Chairman Shelby. I did not think they were nagging. I
thought they were probing.
[Laughter.]
Senator Sununu. Thank you very much. I hope my mother is
watching.
This is an important issue, and it is very nice to see the
degree to which we have been able to pull together so many
stakeholders, people with different ideas and interests in the
insurance industry, broadly speaking, and in any legislative
remedy that we might seek, because that is truly the only way
to arrive at some consensus about how we might approach this
problem. The industry is very complex, and it is also, as a
result of the State regulatory structure that has been
described, somewhat fragmented. Some States have recognized
this problem and have worked to establish either standards or
to reform or deregulate certain lines; others have not. And as
a result, we have a number of different playing fields all
across the country, and this fragmentation does cause problems.
Fragmentation discourages innovation. Fragmentation ends up
costing consumers more when they go to buy a product, costs
businesses more when they go to buy an insurance product. And
fragmentation limits competitiveness, I think both domestically
and in the international markets. And more and more we are
seeing the insurance industry, like any other industry, is a
global market, and we certainly do not want to encourage a
fragmented regulatory environment that results in U.S. firms
being somehow disadvantaged in that competitive market.
I think this is the beginning of a significant, I hope not
too long a process, but it is a very important process. We know
that the House has already begun down this road, has had
hearings, and there has been some discussion about legislation
to create standards, to reform the regulatory environment, and
as a result, to deal with the fragmentation of which I spoke. I
look forward to this hearing. I do not know exactly what the
right remedy is, but I know we need to strike a balance. At the
same time, I think that if we can head toward a system that is
more standardized, that is a little less heavy-handed than some
of the harsh price and form regulations that we see in the
industry right now, consumers will be better served, markets
will be more competitive, and our industry will be more
competitive overseas.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Dole.
STATEMENT OF SENATOR ELIZABETH DOLE
Senator Dole. Thank you, Chairman Shelby.
In 1871, the National Association of Insurance
Commissioners held its first meeting. At the end of the
meeting, founding member and New York Insurance Commission
George W. Miller said: ``The Commissioners are now fully
prepared to go before their various legislative committees with
recommendations for a system of insurance law which will be the
same in all States, not reciprocal but identical, not
retaliatory, but uniform.''
I wholeheartedly agree with Mr. Miller's clear desire for a
uniform insurance regulatory system and only wish the NAIC had
been more effective in realizing its goal. In today's economy,
it seems remarkably inefficient to require an insurance company
or insurance agent to comply with 50 different standards of
business from 50 different regulators. Indeed, at this time of
increasing global competition, it is hard to lecture to our
trading partners about opening markets when we still have these
kinds of barriers to interstate domestic commerce. By breaking
down the current State barrier, insurance providers and
producers will be able to offer consumers more choices at a
lower cost.
The insurance business of the 21st century spans State and
national borders with an increasing emphasis on national
insurance programs, multi-State clients, and cutting-edge
technology. However today's agent licensing and new product
approval for companies are based on yesterday's market, one in
which insurance companies, agents, and their clients did
business solely in their own region.
While all of this may sound like strong opposition to the
current system, this is not the case. I believe that today's
State regulatory system works well for the insurance industry,
and replacement with a system of Federal oversight is simply
unjustified at this time. However, I do believe Congress has an
important legislative role to play. As we are all aware, almost
5 years ago Congress approved, and the President, signed
financial services modernization legislation, entitled the
Gramm-Leach-Bliley Act. One of the provisions within this bill,
entitled the National Association of Registered Agents and
Brokers, created a literal ``Sword of Damocles.'' This
condition threatened to create a national license for insurance
agents if a majority of States did not pass laws that allowed
for reciprocal licensing.
Motivated by this incentive, States acted quickly. As of
last month, 41 States have been certified by the NAIC as
meeting the requirements of the Gramm-Leach-Bliley Act. It is
my hope that Congress will take the next step in this effort
and consider legislation to give States the incentive to adopt
a uniform model of insurance regulation.
This is a long-term goal. I hope we can all work toward
this. Until that time, I believe there is yet another issue
Congress should consider. I would hope we could agree to extend
the Terrorism Risk Insurance Act, TRIA. On July 22, Senators
Dodd, Bennett, Schumer, Hagel, Reed of Rhode Island, Bunning,
Carper, Crapo, Chafee, and I introduced the Terrorism Risk
Insurance Extension Act. I have heard from countless groups and
individuals in North Carolina who are very concerned about what
will happen when TRIA expires next year. I share their
concerns, and I am committed to working to ensure passage of
our bill as soon as possible.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Corzine.
STATEMENT OF SENATOR JON S. CORZINE
Senator Corzine. Thank you, Mr. Chairman, and I appreciate
very much your holding this hearing. The oversight and state of
regulation of the American insurance industry is an absolutely
essential topic for consideration, and I think personally for
modernization, which I will come back to in a second. But I
would like to go off the clock because we have two New Jersey
luminaries on the panel, people that I have great respect for,
and I have to say that Art Ryan, the Chairman and Chief
Executive Officer of Prudential, I consider a very good and
close personal friend. He leads one of the great companies
certainly in New Jersey, and I think in our Nation, and I
certainly respect the leadership he has shown in the business
community in general and in our local community in specific
about setting high standards of conduct and also with regard to
giving back to the community.
I also would point out that recently he had the
responsibility of leading his people through the events that
deal with terrorism as the headquarters building in Newark was
one of those identified, and the care and quality of leadership
he showed to his people and the stability he brought I thought
was extraordinary.
I want to welcome Mr. Ahart, who is also from New Jersey,
and has played a leading role in Insurance Agents and Brokers
of America. He has been also a very tireless leader in our
community, and I am pleased to have him join us and speak on
his views.
Back to the subject at hand, let me just say that the
importance of insurance to our society and our Nation goes
without saying, and I think all of us want to make sure that we
have the most efficiently running markets as possible. I know
the modernization acts that we have taken in other industries,
other aspects of the financial securities industry, I think
have been positive additions leading to positive allocation of
capital and work. And I am one that believes Congress should
consider a fundamental regulatory form that would establish an
optional Federal charter system for insurance industry
regulation similar to the current structure for banks financial
markets are national markets. In fact, they are international
markets. And I think consideration of this and implementation
of those programs would lead to lower-cost insurance products
on the whole, greater speed-to-market, simpler compliance
costs, and other elements across the industry. I know this is
one of those hearings that starts that discussion and overview,
and I am pleased to take part in it.
I also want to reinforce what I heard from Senator Dole. I
believe we should work very expeditiously to deal with the
terrorism risk insurance legislation. It is essential. I heard
about it regularly from a whole broad cross-section of the
community. As you know, we sent a letter yesterday with Senator
Dodd and other Senators. We are all prepared to work in a
bipartisan manner. I think this is an essential element that we
should deal with.
Again, I want to thank you, Mr. Chairman, as always
presenting a thoughtful approach to how we look at these thorny
issues.
Chairman Shelby. Thank you.
Senator Crapo.
STATEMENT OF SENATOR MIKE CRAPO
Senator Crapo. Thank you very much, Mr. Chairman. The
issues I think have been pretty well-framed here. Clearly, I do
not think there is much disagreement with the fact that the
insurance regulation system in our Nation needs to be updated
and modernized, and we need to find some solutions to the
issues that we face. Issues of the inefficiencies of
fragmentation and the barriers to markets that have been
already discussed are issues that we are all very concerned
with. At the same time, many of us are very concerned about
remembering that this is a Federal Government and that we
recognize States' rights and the importance of dealing with
these issues in a way that preserves the sovereignty of the
States to the maximum extent possible.
I am going to be very interested in the discussion of the
testimony that is presented today on these issues. The bottom
line is I believe there is a way we can find answers, achieve
the updating and the modernization, and develop really
positive, forward-looking solutions. But we are going to need
to put our minds together and find those solutions, and that is
what I look to hear from the panel here.
I also want to join with Senator Dole and Senator Corzine
in adding my encouragement to taking up expeditious handling of
the TRIA legislation. I think that is very important for us to
do, and that is one of the reasons I am a cosponsor of that
legislation.
I look forward to the testimony of the witnesses. Thank
you, Mr. Chairman.
Chairman Shelby. Senator Dodd.
STATEMENT OF SENATOR CHRISTOPHER J. DODD
Senator Dodd. Thank you, Mr. Chairman. And as Mo Udall used
to say, ``Everything has been said but not everyone has said
it.''
[Laughter.]
I will add a few more words here.
First of all, let me thank you, Mr. Chairman, and Senator
Sarbanes for holding this hearing. It is a timely hearing to
have, and I want to welcome our panel of witnesses here, all
very distinguished representatives of the important insurance
industry. And like my friend and colleague from New Jersey, I
want to welcome my collegiate friend, Art Ryan, whom I have
known for many years and have great respect for. He has been a
great pal, and I listen to him a lot when he talks about this
industry and the importance of it.
Senator Shelby, I know in particular you and other of our
colleagues who represent some of the Gulf States and the
shoreline particularly in the South have been devastated over
these last number of weeks, and obviously those are questions
that we will want to raise today with our panel here because so
many lives have been so terribly disrupted by the natural
disasters that have ripped the Gulf State area and the eastern
coastal areas of our country. Literally, people's lives have
been swept away and changed so quickly and so dramatically by
these events, and obviously this will impact the insurance
industry as well. So that is an important issue.
Insurance is a very important issue and a very important
part of our Nation's economy. In the past 10 years, employment
in the insurance industry has averaged about 2.1 percent of
total U.S. employment; 1 out of every 50 jobs in the United
States is insurance related. That ratio, I might point out,
having looked over this room, is probably a bit lower than the
ratio of insurance-related jobs that are in the Committee
hearing room today.
But, at any rate, it is something--we tend to think of
insurance only when disasters occur, things go wrong, but
obviously it is critical--I think it is obvious it is a
critical component to our overall health as an economy. By
protecting people, property, goods, services, every sector of
America's $11 trillion economy is related to the stability that
the insurance industry provides. And, again, the panel knows
this and I think most of my colleagues do as well, and that is
why I think the importance of reviewing in this hearing the
condition of the insurance regulation is an important one. And
I look forward as well to hearing from our witnesses in that
regard.
I would be remiss--and, again, I appreciate my colleagues,
as I heard them, Senator Dole, Senator Corzine, and Senator
Crapo, talk about the TRIA legislation. I know it expires more
than year from now, in December 2005, and so there is a sense,
I know, on the part of some that we have time on this issue.
But starting in less than 3 months, policyholders will be
unable to enter into standard 1-year contracts that have the
full benefit of the Federal backstop that the Terrorism Risk
Insurance Program has provided.
While it is true we have more than a year before the law
expires, we only have about 12 weeks, if you will, before it
really becomes important for industries and businesses out
there that this issue is so important to.
The uncertainty will have an impact on tens of thousands of
companies, literally, large and small across the country, who
will be forced to ensure the prospect of a terrorist attack
without critically important insurance coverage. Business needs
certainty, and the failure to extend TRIA will place tremendous
uncertainty in the business community. This is not a partisan
issue, as my colleagues have pointed out. The legislation that
I have introduced with Senator Bennett, Senator Schumer--20 of
us all together, 10 Democrats, 10 Republicans, have signed on
to this bill for an additional 2 years.
A recent study, Mr. Chairman, conducted by Glenn Hubbard,
former Chairman of the Council of Economic Advisers, strongly
supports the extension of TRIA. I suppose there could not be
any clearer test of the bipartisan nature of this bill than
having me quote Dr. Hubbard, I suppose.
[Laughter.]
It will give you some idea of where we are in all of this.
Anyway, he states that if TRIA is allowed to expire, the
GDP may be $53 billion lower and roughly 326,000 fewer jobs may
be created. And this is without any additional terrorist
attacks in the country. I know there is some reticence to take
this up soon, that we only have a few days left here, but we
continue to urge, sooner rather than later, consideration of
this legislation given the implications and, as I say, the
certainty or uncertainty that can exist if we do not act on
this.
Again, I thank you for listening, Mr. Chairman, and I look
forward to hearing from the witnesses.
Chairman Shelby. Thank you.
We have a distinguished panel, as everyone has noted here
today. I just want to introduce the panel.
Oh, we have Senator Hagel.
STATEMENT OF SENATOR CHUCK HAGEL
Senator Hagel. Well, actually we do have a former Nebraskan
on the panel, as you know. I welcome Mr. McCartney, who was our
Insurance Commissioner.
Chairman Shelby. I apologize, Senator.
Senator Hagel. I have no statement, so I really, as usual,
have nothing to say.
[Laughter.]
But just to say that we do appreciate all this fire power.
Senator Dodd. But you are going to say it, anyway.
Chairman Shelby. Omaha has no insurance, is that what you
are saying?
[Laughter.]
Senator Dodd. Mo Udall was really----
Senator Hagel. We have a little insurance in Nebraska.
Dodd, you had your time. Don't trespass over here.
[Laughter.]
Although I will say that I very strongly support the
comments of Senator Dodd and others who have talked about TRIA,
and the Chairman and I have talked about that as well, and I
know the Chairman is paying attention to it because it is
critically important for all the reasons you gentlemen
understand. And Senator Dodd made the point, I think, very well
as most of us understand.
So, I would add my thanks, Mr. Chairman, for your focus on
this issue and bringing together the kind of intellectual
insurance fire power that you have here today. So thank you. I
look forward to hearing the witnesses.
Chairman Shelby. Thank you, Senator Hagel.
Our distinguished panel: Gregory Serio, Superintendent, New
York Department of Insurance; Arthur F. Ryan, Chairman and CEO,
Prudential Financial; William H. McCartney, Senior Vice
President, USAA; Robert Hunter, Director of Insurance, Consumer
Federation of America--no stranger up here; Alan Liebowitz,
President, OMNIA Life, Limited; Thomas B. Ahart, President,
Ahart, Frinzi & Smith Insurance; Albert Counselman, President
and CEO, RCM&D, Inc.; and Brian Atchinson, Executive Director,
Insurance Marketplace Standards Association.
I welcome all of you, gentlemen. All of your written
testimony will be made part of this Banking hearing record in
its entirety, and if you would basically sum up your top
points. We will start with you, Mr. Serio.
STATEMENT OF GREGORY SERIO
CHAIR, GOVERNMENT AFFAIRS TASK FORCE
NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS AND
SUPERINTENDENT, NEW YORK DEPARTMENT OF INSURANCE
Mr. Serio. Thank you, Senator, and good afternoon.
Mr. Chairman, thank you for offering us the opportunity to
speak about insurance regulation in the United States today. As
you said, my name is Greg Serio. I am not only the
Superintendent of Insurance for New York, but I also represent
my colleagues from the States, the District of Columbia, and
the Territories, comprising the National Association of
Insurance Commissioners. And, Senator Dole, I can tell you that
the words of my predecessor, Superintendent Miller, back in
1871 go with me every day. If I can be one of the
Superintendents that gets it right, I think that would be a
good thing.
The power of the hurricanes that recently ravages parts of
your home State, Mr. Chair, as well as others on the Gulf Coast
and throughout the eastern United States, as powerful as they
were, they were no match for the power of the insurance
regulatory system and insurers themselves to respond to those
disasters, bringing immediate and meaningful, financial relief,
to millions who experienced unprecedented losses from an
unrelenting hurricane season. The level of interstate
cooperation has been significant and meaningful, bringing the
two critical components of State insurance regulation--consumer
protection and financial solvency protection--to bear for the
benefit of all insurance consumers who were affected by those
storms.
While hurricanes and other major disasters bring to light,
at least over the course of a few days, the true value of the
State-based regulatory system, its benefits are reaffirmed
daily. Pushing for greater uniformity and reciprocity in laws
and processes when necessary and appropriate, while retaining
the distinctly local flavor of insurance regulatory oversight,
insurance commissioners have responded to the challenge of
modernizing the system of State-based regulation without
compromising its most important attributes in the NAIC's
``Statement of Intent: The Future of Insurance Regulation'' in
2000. That has been followed up by an aggressive and largely
successful program of regulatory modernization, highlighted by
new uniform standards and agent and broker licensing, new
methods of financial surveillance that focus on risk-based
analysis, additional freedoms in product form and rate approval
processes throughout the States, and an unprecedented
leveraging of technology to the benefits of insurers, agents,
and consumers alike.
Before the end of this year, Mr. Chairman, your home State
regulator, Commissioner Walter Bell, will deliver the first
national standards for life insurance products, which, when
coupled with the NAIC's tireless pursuit of its Interstate
Compact for Insurance Regulation Initiative will be the
foundation upon which insurance regulation is based for the
21st century.
The speed of reform and innovation is unprecedented, but
largely unheralded. For some, it is a dogged determination for
the pursuit of Federal charters on the false hope that OFC's
are quick fixes to the problem as they see them. Rare is the
industry commentary, or the consumer commentary, for that
matter, that the efforts made to date have fundamentally
improved the State-based regulatory system in our
responsiveness to all of our constituencies. From our vantage
point, though, they have improved, and they have improved
notably. Where industry, consumers, and regulators have sat
down at the same table with the same objective of improving
State-based regulation, great things have, in fact, been
accomplished.
As the NAIC continues to travel down its own road map to
insurance regulatory modernization, which we have shared with
both the Senate and the House, the insurance industry, life and
property companies both, can greatly contribute to the
improvement of insurance regulation by doing the following
three things:
First, join within insurance regulators in the State
capitals to push for passage of the NAIC's Interstate Compact
legislation. Endorsed by the major State legislative groups
focusing on insurance, this legislation is crucial for giving
the industry what it desires most: Uniformity of standards
across State lines.
Second, use the improved system for product and rate
approvals that have been put in place by the NAIC and
individual State insurance departments around the country.
While the NAIC has seen an increased use of its State-based
electronic rate and form filing process, SERF has not been
measurably embraced by the industry as its single best
electronic portal for making multi-State form and rate filings.
Other speed-to-market initiatives also need greater buy-in by
the industry.
And, third, committing to a meaningful program of self-
regulation, Federal regulation has not been the missing link in
the efforts to modernize insurance regulation; rather, it is
the absence of an industry-wide, self-regulating mechanism
promoting the highest and best standards on corporate
governance, market conduct, and financial safety and soundness.
This is what represents the significant hole in the insurance
regulatory construct at this time.
Meaningful and effective self-policing, closely tied to and
measured against the regulatory system that we have in the
United States, will go a long way toward improving uniformity
and improving the relations between regulators and the
regulated. And I will note that with the presence of the
Insurance Marketplace Standards Association on this panel today
and its President, Brian Atchinson, who is a former regulator
from Maine, I can tell you that there are systems in place
already to make that happen. And greater buy-in by the industry
will go a long way toward improving the process.
Finally, as has been said by a number of the members of the
panel today, there is nothing more important that the Senate
together with the House can do for us at this time than
extending the Terrorism Risk Insurance Act. Both as a State
Superintendent of Insurance and as the representative of the
NAIC, nothing more important could be done to help stabilize
the economy, as Senator Dodd noted, more than by assuring
stability in the delivery of insurance products over the course
of the next 2 years. And I will just simply add one
clarification to what Senator Dodd noted, and that is that the
time is now because the renewal process for a lot of policies
starts next week. And so getting those renewals with the
clarification that TRIA will be extended will go a long way
toward extending the stability that we received from the TRIA.
But I think really time is of the essence in terms of promoting
and moving TRIA along.
Thank you, Mr. Chairman, and we look forward to further
dialogue.
Chairman Shelby. Thank you.
Mr. Ryan.
STATEMENT OF ARTHUR F. RYAN
CHAIRMAN, AMERICAN COUNCIL OF LIFE INSURERS
AND CHAIRMAN AND CEO, PRUDENTIAL FINANCIAL
Mr. Ryan. Thank you and good afternoon, Chairman Shelby,
Senator Sarbanes, and Members of the Committee. It is an honor
to be here today to represent the over 1 million individuals
who work in the life insurance industry in America. I am here
today not only as the Chairman and Chief Executive Officer of
Prudential Financial, but also as the Chairman of the ACLI,
which is the American Council of Life Insurers. With 368
members, the ACLI is the principal trade association
representing domestic life insurance companies.
I would like to briefly talk about three things: First, the
function of life insurers in the marketplace and the economy;
second, our role in retirement security; and, third, why
regulatory changes are important to the life insurance industry
and what ACLI has done and is doing to identify areas that are
in need of improvement.
Today, the life insurance industry competes in a national
as well as global marketplace. We have entered the 21st century
as a much more involved, dynamic partner with American
consumers and businesses. We provide financial security for
Americans in all stages of life, with products like life
insurance, annuities, disability insurance, and long-term care
insurance.
These products not only protect a family's finances, but
also enable Americans to save money, to accumulate wealth, and,
importantly, convert it into a lifetime stream of guaranteed
income. No other financial intermediary is able to do that.
Currently, there are over 395 million life insurance
policies in force, providing Americans with $17 trillion in
financial protection. In addition, Americans have saved close
to $2 trillion toward their retirement by investing through
annuity products. Our long-term commitments and investments
have placed us as one of the largest investors in the United
States. The industry has invested approximately $3.4 trillion
in the financial markets. Fifty-seven percent of the industry's
assets are invested in long-term assets--mortgages, real
estate, bonds, and the like.
That is only part of the story. The other part is,
notwithstanding the massive investment we make in the economy,
it is the area of long-term savings and retirement security
where we can probably make the greatest impact. With 76 million
baby boomers nearing retirement, we clearly face a retirement
crisis. We must confront the fact that the average American
nearing retirement has $47,000 in savings and assets, not
include his primary real estate. Industry research indicates
that 68 percent of Americans believe they will not be able to
save enough for retirement.
Future retirees will have fewer sources of guaranteed
income. This is due to the decline of traditional defined
benefit plans and the fact that Social Security, on average,
replaces about 40 percent of earnings. If nothing is done, a
real possibility of retirement crisis is before us.
Our industry is dedicated to supporting individuals to help
them retire. We continue to be a prominent resource in helping
both large and small employers provide qualified retirement
plans.
The industry also enables individuals to take control of
their own long-term savings through the purchase of annuities.
No single saving vehicle is going to solve this problem, but
our industry is positioned to offer your constituents, and all
Americans, an array of product choices to meet their retirement
needs.
However, for the insurance business to remain viable and
serve the needs of the American public effectively, our system
of life insurance regulation must become far more efficient and
responsive to the needs and circumstances of a 21st century
global business.
Today, life insurers operate under a patchwork system of
State laws and regulations that lack uniformity and is applied
and interpreted differently from State to State. The result is
a system that is characterized by delays and unnecessary
expenses that hinder companies and disadvantage their
customers. We believe it is appropriate, and we are asking for
your help, to modernize our regulatory structure to ensure we
are able to continue to serve our customers in the most
efficient and effective way.
To achieve that, the ACLI has been addressing regulatory
reform on two tracks. Under the first track, the ACLI is
working with the States to improve the State-based system of
insurance regulation. Under the second, the ACLI is beginning
to work with Congress toward a federally oriented solution,
which we believe can ultimately best be achieved through an
optional Federal charter.
Mr. Chairman, the ACLI is ready to work with this Committee
to put in place an appropriate Federal regulatory option
available to insurance companies, agencies, and producers. It
is in the best interests of our industry, your constituents,
and our overall economy to do so as quickly as possible. With
your help the life insurance industry will be able to help
American families and businesses meet their financial needs
today and beyond.
On behalf of the member companies of ACLI, I would like to
conclude by thanking you and the Members of the Committee for
the opportunity to express our views on this most important
subject. Thank you.
Chairman Shelby. Mr. McCartney.
STATEMENT OF WILLIAM H. McCARTNEY
SENIOR VICE PRESIDENT, GOVERNMENT AND
INDUSTRY RELATIONS, USAA GROUP
ON BEHALF OF THE
AMERICAN INSURANCE ASSOCIATION
Mr. McCartney. Mr. Chairman, Senator Sarbanes, Members of
the Committee, my name is Bill McCartney. I am Senior Vice
President, Government and Industry Affairs, of the United
Services Automobile Association in San Antonio. USAA is a
member of the American Insurance Association, and I am
testifying on behalf of USAA and the other 450 members of that
association. USAA and its 22,000 employees provide insurance,
banking, and investment products to more than 5 million current
and former members of the U.S. military and their families. It
is one of only three property and casualty companies in the
country that holds the highest ratings from all three
nationally recognized statistical rating organizations.
It is the firm belief of USAA and AIA's other member
companies that today's State-based regulatory system does not
allow the insurance needs of Americans or the businesses they
run to be efficiently and effectively met. In fact, many States
have hit the trifecta of regulatory failure that is the focus
of my testimony today: Lack of regulatory uniformity, pervasive
Government price controls, and entrenched Government product
controls.
I speak from ``inside'' experience. Before joining USAA, I
served as Nebraska's Director of Insurance for 7 years, as well
as President of the National Association of Insurance
Commissioners. I have been involved in years of State-based
efforts to bring more uniformity and efficiency to the current
system, and I only grow more convinced of the urgent need for
Federal action.
The mere existence of different State systems is a
significant obstacle for USAA and any other insurer attempting
to serve a national and highly mobile population. A limited
survey by AIA of State insurance filing requirements around the
country found approximately 350 that dictate how rates are to
be filed and reviewed and approximately 200 that relates to the
filing and review of new products. It is impossible to believe
that dealing with more than 500 separate filing and review
requirements could ever equate to efficiency and consistency.
USAA is a member-owned organization. Our policyholders bear
every penny we incur responding to these inconsistent
regulations. Each departure from uniformity and consistency
means higher costs for our members.
USAA has had a long compact with our active-duty members.
We will insure their families' special needs wherever they are
stationed. As a result, USAA operates in 54 distinct U.S.
insurance regulatory environments, leaving us with at least 54
different regulatory structures to navigate.
And unlike other insurers that have the ability to
defensively withdraw from a State due to a difficult regulatory
environment, USAA's commitment to serve our members wherever
they are sent takes away that option from us. The ``heavy-
handed'' regulatory systems in place in all too many States do
not mean better consumer protections. They mean limited choices
for consumers. The emphasis on price and product controls in
these jurisdictions forces USAA to devote enormous resources to
respond to ``premarket'' obstacles rather than developing
innovative, new insurance products for our members. The system,
in fact, discourages innovation because the timeline for
gaining approval of new products is often longer than the shelf
life of the innovation.
The rest of the USAA financial services family does not
face these regulatory obstacles, and it is confusing and
frustrating for our members who often use technology to access
our products and services. For example, whenever a member is
transferred to another location, a simple change of address
made electronically at our website is all that is needed for
most of our financial products. But for our property-casualty
insurance products, the member's change of address is the
beginning of a long process, not the end.
We are not advocating abrogating insurance regulation.
There is a vitally important role for regulators: Overseeing
companies' solvency. But there have been some recent notable
lapses at the State level on that front, and for insurers
operating in most or all jurisdictions, even solvency is better
overseen at the Federal level to address interstate ownership
and transactional matters. So, after much deliberation, USAA
and the other AIA members believe that a market-based optional
Federal charter would be the best route to true regulatory
reform. The optional Federal charter would eliminate the arcane
Government price and product controls that have been so
corrosive to the State regulatory system. The optional Federal
charter also would provide for uniform national oversight of
federally licensed insurers.
And, equally important, the optional Federal charter is
just that: A choice. Consumers desiring to transact business
with a State-regulated insurer would have that option since
many insurers would opt for continued State regulation. This is
not a new regulatory paradigm but one that is based on the
chartering system for U.S. banks.
Our preferred solution also does not place the Federal
Government in unfamiliar regulatory territory. There are
numerous examples of Federal involvement in property-casualty
insurance, and one that immediately jumps to mind is the one
that was mentioned earlier--terrorism risk insurance. While the
TRIA program expires in 2005, insurers, policyholders,
regulators, and even many Members of this Committee are
currently calling for a 2-year extension in order to gather all
necessary data about the risk, and for stakeholders to jointly
develop and implement a long-term public-private solution.
Finally, I would be remiss if I did not applaud the House
Financial Services Committee for its unyielding efforts to
address the problems I have outlined for the Committee today.
Over the past few years, the House has conducted 15 hearings on
State insurance regulation in a relentless drive to uncover the
ills that plague the State regulatory system. While enactment
of the optional Federal charter is our ultimate aim, we support
the House process, as well as the market-driven direction of
the legislative draft that has been widely circulated. In
particular, the draft takes a historic ``free market'' approach
to insurance rates, recognizing the negative legacy of State
government price controls. We look forward to continuing to
work constructively with both the House and the Senate as well
move forward with this important public policy issue.
Thank you, Mr. Chairman, and I welcome an opportunity to
respond to questions.
Chairman Shelby. Mr. Hunter.
STATEMENT OF J. ROBERT HUNTER
DIRECTOR OF INSURANCE,
CONSUMER FEDERATION OF AMERICA
Mr. Hunter. Thank you, Mr. Chairman.
Not long ago, we were all startled to find life insurers
were still charging blacks in Alabama and other parts of the
South more than they were charging whites. State regulation has
moved to end that abuse. Years before that, the States had to
end the massive market conduct abuse by the largest life
insurance companies, companies like Prudential, although it
took lawsuits to uncover the abuses in the first instance.
A decade ago, in the wake of a hurricane, those remembering
Hurricane Andrew, Allstate threatened to terminate coverage for
300,000 Floridians, but the State stepped in to protect the
homeowners until a new system could be created.
Regulators have had to act on redlining and other unfair
practices. In Maryland, after determining that credit scoring
abused low-income and minority homeowners, the State banned its
used. States require auto insurance. Banks require home and
other property insurance. To a consumer, insurance is a piece
of paper until they test it with a claim. Regulation is
necessary to assure that the insured does not become insolvent
or just walk away from the insured or low-ball the insured when
a claim occurs.
Regulation is needed to make sure that people are not
deceived by the fine print of policies or by outright fraud.
When you do not regulate, you end up with the military problems
that you are addressing.
Insurance is a complex legal document that many consumers
do not understand. It is difficult to shop for insurance in
that a consumer needs information not only to determine price,
but also service quality, solvency, and then they run into
underwriting. Insurance pricing is complex, up to 50 tiers for
one company for similar applicants. Beyond that, they have
thousands of classes, like age, credit history, claim history,
and other variables. And insurance companies collude on parts
of prices under the antitrust exemption of the McCarran-
Ferguson Act.
You cannot rely just on competition to regulate insurance.
One hundred and fifty years of State regulation has occurred
because of these facts. The people need protection, and that is
why democratically elected legislators or the people in direct
referenda have acted.
There are genuinely different needs in different States, so
California does not use exactly the same method as North
Dakota. That makes sense.
I served as Federal Insurance Administrator under President
Ford and President Carter and as Texas Insurance Commissioner.
I can tell you, both levels of Government can screw it up or
can do it well. I have done both.
[Laughter.]
Senator Sarbanes. You have done both levels of Government,
I take it.
Mr. Hunter. I have screwed up at both Federal and State
levels.
Here is an important thing to remember: Consumers do not
care who regulates, but we do care about the quality of
regulation. State regulation has many flaws. I have been a very
sharp critic. Not the least of it is insurance interests
dominate. In recent days, the States and the NAIC have weakened
consumer protection, particularly for small businesses, under
the threat of Federal moves into their turf. However, despite
their failures, State regulations have had some notable
successes. Solvency regulation is much stronger and good, and
some States, like California in its Proposition 103
regulations, which maximize both competition and regulation,
have amazing successes.
The burden of proof must be on those who would ask you to
radically change the current system to shift away from these
150 years of State regulation to an unknown, untested Federal
approach. They have to prove that this would not harm
consumers.
Insurers have been opportunistic in their willingness to
call for Federal control. They have done it before when they
thought the Federal Government was more laissez-faire than the
States. They did it in the 1800's in the Paul v. Virginia case.
Until very recently, they steadfastly maintained that their
allegiance to State regulation was forever, and now they have
changed because they sensed Federal regulation might be weaker.
They have worked to pressure States to weaken consumer
protections with the lure that they might be able to keep the
insurers in their camp in the upcoming turf battle.
The cure that the insurers propose is far worse than the
disease they complain about. Consumers agree with reducing
regulatory inefficiency. We pay for regulatory inefficiency.
But the insurer proposals of speed-to-market for lousy products
is a lousy idea. Front-end control is in place because it makes
no sense to allow bad products to come into the market when
consumers are not capable of sorting out fine-print differences
in complex legal documents. Insurers propose uniformity, and
consumer do not mind uniformity. We can be for that. But they
propose the weakest standards in any State as the point to
achieve uniformity. For them, consumer protection is not even
an afterthought. They propose setting up regulatory competition
between the States and the Federal Government to create a race
to the bottom in regulation that consumers must oppose with all
the strength we can muster.
They even proposed in the SMART Act deregulating cartel
organizations and leaving the antitrust exemptions of McCarran
intact. We suggest that if uniformity is the goal, why not the
best? Why not adopt something like the California system? If
competition is really the goal, why not get rid of the
antitrust exemption? Why do they desire a continuation of a ban
on FTC involvement in consumer protection if consumer
protection is their interest? Why are they against the CRA if
they want to have a bank-like system?
Consumers know that Federal regulation could be more
uniform, better funded, and have strong protections. State
regulation has advantages. It exists, and many successes to
point to.
We list in my testimony our principles for how we will
judge any bills that come forward, and so I would encourage you
to look at that. There are ways to achieve uniformity without
gutting consumer protections. The Committee should review
these.
I really need to mention TRIA. Here is a classic bait-and-
switch tactic. The insurers agree to Section 108 of the bill
that you passed that required Treasury to report to Congress by
June 30, 2005 regarding key questions such as: Is the program
needed after December 2005? Should the program be in its same
format, or should it be changed to require premiums to be paid
to protect the taxpayers? And so forth.
Now they say do not wait, as if they did not know they had
annual policies when they agreed to the studies 3 or 4 years
ago. There is no rush, Mr. Chairman. There is no rush. The
insurers have endorsements approved in almost all States that
allow them to end coverage for terrorism on January 1, 2006, if
TRIA is not extended, on those policies. So there is no rush.
The Treasury Department can complete its study and report to
you by next June, and you can act accordingly with facts in
hand. To act now will unnecessarily put taxpayers at risk when
the private sector can handle most, if not all, of the
terrorism risk in America. Remember, the Athens Olympics got
coverage privately with no Government backup.
Thank you, Mr. Chairman.
Chairman Shelby. At this point, before I go to the next
panelists, Senator Hagel has to go to another Committee, so I
want to recognize him.
STATEMENT OF SENATOR WAYNE ALLARD
Senator Allard. Senator Allard, Mr. Chairman. I just want
to briefly put my opening statement in the record.
Chairman Shelby. Pardon me, I named you ``Hagel.''
[Laughter.]
Hagel was here earlier. Go ahead.
Senator Allard. I would like to put an opening statement in
the record, and I apologize to the panel for this brief
interruption.
Thank you, Mr. Chairman.
Chairman Shelby. Without objection, it is so ordered.
Mr. Liebowitz.
Senator Sarbanes. Hagel is rushing back to the hearing to
correct this situation.
Chairman Shelby. He is. He is looking after Omaha.
Go ahead.
STATEMENT OF ALAN F. LIEBOWITZ
PRESIDENT, OMNIA (BERMUDA) LTD.
ON BEHALF OF THE
AMERICAN BANKERS INSURANCE ASSOCIATION
Mr. Liebowitz. Thank you, Mr. Chairman. My name is Alan
Liebowitz. I am President of OMNIA (Bermuda) Limited, an
insurance affiliate of the Old Mutual Financial Network, and I
appreciate the opportunity to testify before you.
I am here on behalf of the American Bankers Insurance
Association, which is a subsidiary of the American Bankers
Association.
I suspect this Committee might be somewhat surprised at
what might be a first, which is to see bankers and insurance
companies sitting elbow to elbow and on the same side for once.
And we all agree on one thing: That the current insurance
regulatory system is broken.
As you have heard from the insurance perspective, here from
the banking perspective, it is impossible for bankers to do
business in all 50 States, to offer insurance products to their
customers on a uniform basis when the insurance business itself
is subject to 50 different sets of rules enforced by 50
different regulatory bosses.
The effect of this regulatory morass on the bank/insurance
business is staggering. Some examples have already been touched
upon by preceding witnesses. There is continued disharmony
among the State producer licensing laws, despite Congressional
efforts to eliminate them. Despite Gramm-Leach-Bliley, many
States continue to impose different and more burdensome rules
on insurance sales by bank-affiliated agents than those imposed
on independent agents.
Gramm-Leach-Bliley also included provisions to promote
uniform producer licensing laws and regulations. These
provisions have been something of a hollow victory. Instead of
a nationwide system of uniform standards, we now have
reciprocal licensing laws in about 40 States that continue to
differ from State to State. In addition, because the threshold
was met, some of the largest States, like California, have been
able to avoid reciprocal licensing laws altogether.
Another problem with State insurance regulation which you
have heard about is price controls. Federal price controls on
banking products were eliminated over 20 years ago. Congress
realized that such artificial market constraints do more harm
than good. However, the insurance industry continues to be
subject to extensive price regulation to the disadvantage of
consumers. The consumer benefits associated with competitive
rates are more than just speculative. Several States, such as
Illinois, have moved away from rate regulation, and in those
States, rates have actually fallen on various products.
States' prior approval requirements for insurance forms,
that is, the benefits that the company can actually offer,
deprive consumers of innovative insurance products and the
ability to purchase them in a timely fashion. It can take
months, sometimes years, sometimes never, to get the approval
from a State insurance regulator to introduce a new product in
a particular State. Such delays are inevitable when every State
has an opportunity to review and approve products and apply
their own parochial views as to what is in the best interest of
consumers.
So what do we do about these problems? There is a consensus
among the banking and insurance industry, and others, that
Congress must step in. The remaining question is how. Together
with the ACLI and the AIA, we have developed a proposed model
after the dual banking system, which we call the optional
Federal charter. Our proposal would establish a Federal
insurance regulator to charter and regulate insurance companies
and agents. In one motion, this would solve the problem of
States' disparate regulatory schemes by enabling some to avoid
them altogether. Just like the dual banking system, State
insurance regulators will continue to regulate those companies
and those agents that wish to remain State-regulated. An
alternative Federal regulator would charter and regulate
companies and agents that elect and pay for regulation under
one set of uniform Federal rules.
Our optional Federal charter proposal is a comprehensive
solution to the problems of licensing, solvency, market
conduct, and consumer protection requirements. It is a
blueprint for modernizing a regulatory system designed more
than 150 years ago to manage an industry that at that time did
not cross State boundaries. We would like to work with you, Mr.
Chairman, and your Committee to enact legislation establishing
an optional Federal insurance charter.
On the other side of the Capitol, we are pleased that the
House has begun work on its own proposal to address this issue.
We also continue to support efforts by State legislators
through the National Conference of Insurance Legislators and
the NAIC to achieve uniformity and efficiency in regulation.
I thank you for the opportunity to be here today, and I
look forward to your questions.
Chairman Shelby. Thank you.
Mr. Ahart.
STATEMENT OF THOMAS B. AHART
PRESIDENT, AHART, FRINZI & SMITH INSURANCE
ON BEHALF OF THE
INDEPENDENT INSURANCE AGENTS
AND BROKERS OF AMERICA
Mr. Ahart. Thank you, Mr. Chairman. I am President of
Ahart, Frinzi & Smith, an independent insurance agency in
Phillipsburg, New Jersey, and I am a past President of the
Independent Insurance Agents and Brokers of America. I am proud
to be here representing the ideas and views of the IIABA today.
The IIABA supports State regulation of insurance, as we
have for over 100 years, for all participants and for all
activities in the marketplace, and we oppose any form of
Federal regulation, optional or otherwise. Yet despite this
historic and longstanding support for State regulation, we are
not confident that the State system will be able to resolve its
problems on its own. That is why we feel that there is a vital
legislative role for Congress to play in helping to reform the
State regulatory system. However, such an effort need not
replace or duplicate at the Federal level what is already in
place at the State level. IIABA supports targeted Federal
legislation along the lines of the NARAB provisions of the
Gramm-Leach-Bliley Act to improve the State-based system.
Most observers agree that State regulation has worked
effectively to protect consumers because State officials are
positioned to be responsive to the needs of the local
marketplace and consumers. Unlike banking and securities,
insurance policies are bound to the separate legal systems of
each State, and the policies themselves are contracts written
and interpreted under the laws of each State. Additionally, the
insurance needs of individuals and businesses can vary from
region to region, State to State, and even within a State. For
example, the insurance needs of consumers along the Gulf Coast
in Alabama can be different from the needs of consumers in the
northern part of the State, as evidenced by Hurricane Ivan.
The diversity of underlying State laws and varying consumer
needs from one region to another require local officials that
are on the beat.
Despite its merits, State insurance regulation is not
without its share of problems. It takes too long to get
insurance products to market, and there is unnecessary
regulatory oversight in licensing.
The speed-to-market issue is the most pressing from both a
consumer and an agent/broker perspective because we all want
new and innovative products.
There is growing consensus among observers, including State
and Federal legislators, regulators, and the insurance
marketplace, that insurance regulation needs to be updated and
modernized. There is disagreement about the most effective and
appropriate way in which to obtain needed reforms. Some support
pursuing reforms in the traditional manner, which is to seek
legislative and regulatory improvements on an ad hoc basis in
the various State capitals. A second approach, pursued by
several international and large domestic companies, calls for
the unprecedented establishment of full-blown Federal
regulation of the insurance industry. This call for an option
Federal charter concerns me deeply.
Although the proposed optional Federal charter regulation
might correct certain deficiencies, the cost is incredibly
high. The new regulator would add to the overall regulatory
infrastructure and undermine sound aspects of the current State
regulatory regime. The Federal regulatory model proposes to
charge a distant and likely highly publicized Federal regulator
with implementation and enforcement. IIABA believes that such a
distant Federal regulator would be completely unable to respond
to local insurance consumer concerns. Additionally, the
optional Federal charter proposal would force the State
guaranty funds to accept and backstop Federal-chartered
insurers. There is nothing optional about that.
This would be an unprecedented intrusion on State solvency
regulation. In the end, the State system would be responsible
for insolvent insurers, but could not regulate them to keep
them from going insolvent.
However, there is a third way to reform the State system
that overcomes the inability of the States to pass uniform laws
on their own and does not creates a cumbersome Federal
bureaucracy. It is the use of targeted Federal legislation to
improve the State-based system.
One of the most significant accomplishments of Gramm-Leach-
Bliley was the NARAB subtitle, known as the National
Association of Registered Agents and Brokers, which launched
agent licensing reform that continues today. Prior to GLBA,
there was no consistency or reciprocity among the States, but
licensing has improved significantly over the last 5 years as a
direct result of Congress's decision to address these issues in
Gramm-Leach-Bliley.
The Gramm-Leach-Bliley put the ball in the States' court by
threatening the creation of a new national NASD-style licensing
entity. The creation of NARAB was only averted when a majority
of the States and Territories achieved a level of reciprocity
within a 3-year period.
The success of NARAB is a perfect example of what the
Federal Government and the States can accomplish in partnership
and how Congress can assist the States to achieve needed
reforms. We now need to get to full reciprocity and the
ultimate goal of uniformity.
In conclusion, it is true that many State regulators and
legislators, many consumer groups, independent agents and
brokers, some life insurance companies, and most property-
casualty companies are strongly opposed to an optional Federal
charter. In fact, the Property-Casualty Insurance Association
of America and the National Association of Mutual Insurance
Companies, which represent property-casualty insurers of all
sizes, oppose an optional Federal charter.
IIABA believes a NARAB model can serve as a template for
further reform of State insurance regulation. Unlike the
creation of entirely new regulatory structure, the enactment of
targeted Federal legislation along the lines of NARAB to
address certain clearly identified problems with State
regulation is not a radical concept. The Senate Banking
Committee and the House Financial Services Committee have
already proven that this approach can work. Leadership of the
House Financial Services Committee has recently decided to take
the NARAB approach of targeted reform after conducting a 3-
year, in-depth review of insurance regulation. We recommend
such an approach to the Senate Banking Committee as well, and
look forward to working with the Committee.
Thank you very much.
Chairman Shelby. Mr. Counselman.
STATEMENT OF ALBERT R. COUNSELMAN, CPCU
PAST CHAIRMAN, THE COUNCIL OF INSURANCE
AGENTS + BROKERS AND
PRESIDENT AND CHIEF EXECUTIVE OFFICER, RIGGS,
COUNSELMAN, MICHAELS & DOWNES, INC.
Mr. Counselman. Thank you, Mr. Chairman, Senator Sarbanes,
and Members of the Committee as well. I am here today as the
CEO of RCM&D in Baltimore, which is Maryland's largest
insurance brokerage firm, but I am also representing the
Council of Insurance Agents & Brokers, of which I am a past
Chairman.
But more importantly, I am also chairman of a large
metropolitan area hospital, and I think about that and I think
about the hurricane exposure in Florida and Alabama because
just yesterday I was with the Chairman of the Sacred Heart
Hospital in Pensacola, who is experiencing what catastrophe is
all about and what it was like to operate a hospital with no
power, no water, and no air conditioning, yet stay in business
for the benefit of the community. That is what insurance is all
about, and that is what I care about and why I appreciate your
having us here today.
I think and our association thinks that insurance
regulatory reform is critical for the long-term health of the
insurance industry in the United States, and it is way overdue.
But I must say that a discussion of the condition of the
insurance industry must first address the risks that are posed
by terrorism and the importance of TRIA. The need for Federal
action in the area of terrorism coverage is a clear example of
the limits of State regulation. States could not have on their
own implemented TRIA, but thanks to the hard work of the
Members of this Committee and others, TRIA was adopted and it
did provide, and is providing, the necessary backstop which
stabilizes insurance markets, has enabled construction in real
estate projects to continue and to go forward and to insure
critical vulnerable infrastructure including facilities like
hospitals of which I speak.
The evidence is mounting that TRIA is effective, and that
purchase of terrorism coverage is increasing. Nearly one-half
of all insureds are now purchasing terrorism coverage.
A recent study by Marsh found that the largest percentage
of insureds buying terrorism insurance are not only in the
energy industry, but also media, food and beverage,
hospitality, health care, and the real estate industries, where
there are high percentages of those purchasing the coverage.
One of the most significant aspects of these findings is
that these industries operate all across our country. They are
not limited to one or two cities or geographic areas, and their
products and services are used by all Americans. It is
important to the energy industry, and to all of our
infrastructure to maintain the availability of this coverage.
Despite TRIA's success in stabilizing the market, it has
become evident that the private marketplace will not be
prepared to take on the full risk posed by potentially
catastrophic terrorism losses by the time the law expires in a
year. This is not a next-year issue, it is a this-year issue,
as policies are now being negotiated that will take effect on
or after January 1 and may not be able to provide protection
that is offered by that backstop.
I am not saying the sky is going to fall on January 2, but
there is every indication that market displacement will occur
and that consumers will pay the price of that.
While we appreciate Senators Bennett, Dodd, and Dole for
their leadership in introducing legislation to extend TRIA for
2 years, it is important that Congress consider more long-
lasting solutions and we are grateful for any co-sponsorship or
any other additional Members of this Committee to extend the
TRIA bill. We urge you to enact this law before you adjourn
this year.
On the subject of regulatory reform, the pace of financial
services convergence and globalization is far outstripping the
pace of individual reform efforts by the States, and demands
far more dramatic action than the States alone are able to
provide. Even though State regulators have made some strides in
simplification and streamlining, largely thanks to the pressure
put on them by the enactment of NARAB, there remain glaring
regulatory inefficiencies in the State-based system, not only
in the area of producer licensing, but also in product approval
processes, access to alternative markets, and many other areas.
Because of NARAB, the producer licensing process has
definitely improved in the last few years, but we are still
required to hold, in my firm's case, over 500 licenses in 50
plus jurisdictions, in addition to satisfying the inconsistent
underlying requirements and renewing them annually, many of
which requirements have little to do with standards of
professionalism.
Another area of needed reform is speed-to-market, and I
will give you one quick example. The Council of Insurance
Agents and Brokers sponsors a captive insurance company that
provides errors and omissions coverage to 65 of our member
firms, including my own, and we are located in 35 States.
A couple of years ago, we needed to raise the rates and
broaden the coverage form, so we had to refile the form in all
of those States, and it took 2 years to get the approvals and
the cost of doing that was $200,000. So it was more than was
necessary. All the improvements in State insurance regulatory
systems have come about largely because of outside pressure,
notably from Congress. NAIC is not in a position to force
dissenting States to adhere to standards that it sets, and it
is important that Congress provide the leadership and the
impetus for the NAIC to act.
The Oxley-Baker proposal is a comprehensive plan addressing
multiple insurance regulatory issues including producer
licensing, which is a specific concern to my firm and to the
Council, and we urge the support of NARAB provisions and
uniformity that is included in the Oxley-Baker proposal, and
urge you to take action on that bill similar to what we expect
the House to do, early next year.
Thank you.
Chairman Shelby. Mr. Atchinson.
STATEMENT OF BRIAN K. ATCHINSON
EXECUTIVE DIRECTOR, INSURANCE MARKETPLACE
STANDARDS ASSOCIATION
Mr. Atchinson. Good afternoon, Chairman Shelby and Members
of the Committee. Thank you for the opportunity to speak with
you today. I am Brian Atchinson, Executive Director of the
Insurance Marketplace Standards Association. We are an
independent nonprofit organization created in 1996 to promote
ethical business practices and strengthen consumer trust and
confidence in the marketplace for individually sold life
insurance, annuities, and long-term care insurance products.
IMSA-qualified member companies comprise more than 160 of
the Nation's top companies, representing nearly 60 percent of
the individual premium written in the United States. To obtain
IMSA qualification, a company must establish and maintain an
infrastructure of policies, procedures, and personnel and
demonstrate its commitment to high ethical standards by
undergoing a rigorous, independent assessment to determine the
company's compliance with IMSA's Principals and Code of Ethical
Market Conduct. IMSA-qualified companies stand as the benchmark
for excellence in the life, annuities, and long-term care
insurance industries.
As both a former regulator and company person, my views on
the regulation of insurance are based and come from different
vantage points. From 1992 to 1997, I served as the
Superintendent of Insurance for the State of Maine, and in 1996
also served as President of the NAIC.
Life insurers face very intense market competition from
other providers of financial service products, both
domestically and internationally. In this challenging
environment it is important that financial service companies
follow high ethical standards to best protect and serve
consumers and to make sure that the marketplace remains strong.
In an era when the practices of some financial service
companies have come under intense scrutiny, IMSA provides clear
ethical leadership through its principles of ethical market
conduct, which includes specific requirements for the
marketing, advertising, sales, and customer service of those
product lines. IMSA principles also contain a ``needs-based''
selling standard to ensure that every consumer is given the
opportunity to make an informed choice that meets their
personal and financial goals. We believe that all consumers,
certainly including our military service men and women, should
receive clear and honest information before they purchase any
type of insurance product.
A recent Financial Times article on the United Kingdom's
financial services industry cited IMSA as a successful example
of a principles-based, industry-led approach to raising ethical
standards. We appreciated the notoriety, but in fact our focus
is more here in the United States.
Insurance regulation is intended to ensure a healthy,
competitive marketplace and to protect consumers. The history
of market conduct regulation goes back to the early 1970's when
the NAIC developed its first handbook for market conduct
examinations and did its very first market conduct
investigation. Things have proceeded and progressed quite a way
since then.
Yet, as the GAO noted in its report issued last year, there
has been little consistency or uniformity in the way that
individual States perform market conduct oversight. For
example, each company writing business nationally must comply
with literally dozens of widely divergent State and Federal
standards regarding the replacement of policies. There are no
logical reasons for so many different and inconsistent
standards or to impose the inherent extra and superfluous cost
on companies and on the consumers.
The State-based system of market conduct regulation has
been in need of improvement and updating for some time. And
until a consistent nationwide system of regulation can be
established, insurers will continue to be subject to
simultaneous or overlapping market conduct exams from different
States applying different laws and regulations, while consumers
in some States receive little market conduct protection, as
documented in the GAO study. This lack of uniformity places
significant costs and human resource burdens on companies that
translate into higher costs, ultimately passed on to consumers
in the form of higher prices for their products.
There is a need for a uniform system of market conduct
oversight that creates greater efficiencies for companies while
maintaining appropriate consumer protections. There has been
some recent progress toward improving this system. We commend
the NAIC for its willingness to explore ways that regulators
and best practice organizations such as IMSA can work
collaboratively to improve regulation and advance the interests
of consumers.
We certainly note with interest and cautious optimism the
State regulators' current effort to establish a new market
analysis approach to regulation that will hopefully reduce
inefficiencies and better allocate resources to provide more
comprehensive consumer protections. While this represents a
step forward, the framework to implement this type of analysis
remains under development.
We certainly have been pleased to respond to requests from
the House Financial Services Committee regarding its efforts to
encourage State regulators to collaborate with best practice
organizations through the drafting of its smart document and by
proposing the introduction of a uniform set of standards.
Establishing a uniform system of market analysis should
focus on whether an insurer has a sound compliance
infrastructure in place to better protect consumers. Today's
market conduct exams all too often focus on technical instances
of noncompliance, rather than exploring whether a company has a
comprehensive system of policies and procedures in place.
IMSA qualification provides a consistent uniform template
of market conduct compliance procedures and practices at all
IMSA member companies that can serve as a national template.
Insurers that qualify for IMSA devote considerable resources to
maintaining these standards.
In the last 2 years, IMSA has gained greater recognition by
regulators, rating agencies, and others. A growing number of
State insurance departments use IMSA's qualification as a tool
when planning and conducting its regulatory work, and we
certainly applaud and note the efforts of the New York State
Insurance Department, under Superintendent Serio, in these
efforts. We would certainly like to see more States do so.
Consumers should be able to expect honesty, fairness, and
integrity in their insurance transactions. Neither regulators
nor companies alone can ensure that the marketplace is always
operating in a fair and appropriate manner at all times.
In conclusion, IMSA member companies believe market conduct
regulations should be more uniform and efficient. IMSA-
qualified companies stand as the benchmark for excellence in
the life insurance industry and would like to serve as a
valuable resource for this Committee and the House Committee,
and certainly to help others craft and implement true market
regulatory reform.
We appreciate the opportunity to participate in this and
will continue to work with you going forward.
Thank you very much.
Chairman Shelby. I want to thank all of you.
Mr. Serio, during my opening statement I raised the
threshold question about the overall soundness of the insurance
industry. Would you please, just for a minute, provide your
perspective on this matter, at least as far as things stand in
the State of New York? And perhaps others can answer.
Mr. Serio. In terms of financial soundness?
Chairman Shelby. Right.
Mr. Serio. In terms of financial soundness, I think not
only do we have a high level of confidence into the overall
safety and soundness of the insurance industry, both life as
well as property and casualty, but also the regulatory system
is actually taking on new ways of measuring it, adopting
standards from the banking industry and from other financial
services industries, and in fact, incorporating those standards
that are utilized in other jurisdictions as well, notably in
the EU and the United Kingdom.
What we are doing is we are getting a series of checks and
balances together that really are giving us a higher level of
confidence, not only as to the strength of the system, but that
we also have an accurate sense of the strength of the system. A
lot of air play between the States, early warning systems that
have been put into place have also helped out in that regard,
and early intervention in the event of an impaired insurance
company has also been developed over the last several years.
We think that we have staved off a number of troubling
insolvencies, as well as better managed the insolvencies we
have had to deal with.
Chairman Shelby. In other words, the system is working?
Mr. Serio. Yes. There is not a question about it.
Chairman Shelby. If I could, I will just continue with some
basic questions. The word ``insurance'' is often used in a
generic way. In practice, however, there is a wide variety of
coverages and profits that fall under the rubric of insurance.
Could you just speak on a few in greater specificity, the
nature of lines of coverage, and provide us with a better sense
about the wide range of products. We know there are many out
there.
Mr. Serio. If you could start with the general notions of
the property-casualty and work your way through, and the
interesting element of the regulatory system and what we think
the strength of the State regulatory system is now is that we
look at the industry as a whole instead of breaking it off,
life insurance being regulated in one place, property being
regulated somewhere else, maybe automobile insurance being done
on a regional basis, but financial guarantee being done
elsewhere. That is the range of coverage that you are talking
about.
In addition to the range of the coverages that are
currently under the regulatory umbrella of the State system, I
can tell you there is no better measure of the strength of the
State regulatory system to modernize itself. It has been the
global acceptance of alternative risk transfer mechanisms,
namely, captive insurance companies, that where the State
regulatory system once known as to not be receptive and
hospitable to alternative mechanisms, we are now appropriately
regulating self-insurance mechanisms, workers compensation
trust, and captive insurance companies. So we really are
running the full range of lines of coverage, as well as the
traditional versus the nontraditional.
Chairman Shelby. As you regulate so many product lines,
what are your specific challenges? Do they come and go, or is
it product to product?
Mr. Serio. Across the spectrum, the challenge has not so
much been on the products. In fact, if there is an appropriate
point of focus, and I think all of us mentioned it to varying
degrees, it is on this idea that we spend so much time on prior
approval of products that are largely already designated in
terms of what is supposed to be n them by law. Yet we spend
more time going through--and frankly, the regulator is doing a
lot of the work of the companies in making a product suitable
for the market.
What we have managed to do is kind of revisit what the
insurance regulator's job is all about, and that is, we are
financial surveillance monitors and we are market conduct
monitors. That is the job of the insurance regulator, and I
think we have gotten back to that across the spectrum.
Chairman Shelby. Mr. Ryan, how important is it in the
competitive marketplace for your company to develop new
insurance products, and how many new products do you produce in
a given year, or does it just depend?
Mr. Ryan. Well, a lot of my comments, Senator Shelby, were
really based on what the industry does and what in particular
my company does, and I was focusing on the competitive side of
it because I do not think anything that we are arguing is for
less regulation. We are talking for better regulation. We are
looking for uniform standards. We are looking for consistency.
That is what we want.
The big change that has occurred, and a lot of it from
Gramm-Leach-Bliley, is lots and lots of people sell insurance
products, not just insurance companies or independent agents.
Banks sell them, securities firms sell them. So while there is
a need to improve for all, there is also the issue of
alternative products that bank security companies and others
come up with that require a level playing field in terms of
speed-to-market, not to put bad products out there, not to
eliminate the regulatory process, but to be able to do
something in less than 2 years, as was described by one of my
colleagues earlier if you are going to make a change because
you have to go to 35 different States.
Chairman Shelby. Briefly, what process does your company,
and I am sure every company, have to go through to get new
products to market, assuming you have developed a product, you
believe it is sound, you believe it will market? You have to go
through the regulators, right?
Mr. Ryan. Most insurance companies are probably looking to
bring somewhere between 8 and 10 new products a year, or
modifications to their product. Some look to be even more
aggressive in terms of enhancing the product.
The process is cumbersome. Today, we go to all 50 States.
My company happens to do business in all 50 States. There are a
number of other companies that do as well. So it is a procedure
that we follow that is both time consuming and expensive and
that requires us to go to every State in order to do it, and I
would argue the distinction in life insurance and annuity
products is not significant enough to warrant 50 different
approvals.
Chairman Shelby. Do you sell the same product in all 50
States or are there some products you do not sell in certain
States?
Mr. Ryan. After the process they are different products
because there are tweakings, there are changes that are done at
each State in order to accommodate the requirements of a
particular State regulatory system. I believe at the heart of
the products they are fundamentally the same, but they turn out
to be different, which again is an added cost burden because we
do have to process for our clients against any changes that
occur on a State level.
Chairman Shelby. Senator Sarbanes.
Senator Sarbanes. I will yield to Senator----
Chairman Shelby. You will defer? Whichever.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. The New York Times in July ran a series
of articles about the abusive practices with respect to our
military in terms of the selling of insurance. I would like
each of you to address that issue. First of all, do you accept
the position that such abusive practices are taking place, and
if so, what should be done about it?
Mr. Hunter. There is no doubt that there has been abuses.
They were well-documented in those articles, but they have been
there for a long time and they have been ignored. They are
beyond the reach of the State regulators. I think you are doing
the right thing to ask GAO to look at it and come up with some
Federal requirements on DoD or whoever to regulate it.
Mr. Serio. From the regulatory community we have not
thought that they have been beyond our reach. I think there is
a significant issue of communication from Department of Defense
facility officers, to the State regulatory mechanism. It has
been our opinion that the agents who sell these products and
the companies that provide the products are licensed by the
States and they are doing the business of insurance within
those States. And so we have been pursuing. Notably, the
Georgia Insurance Commissioner has been pursuing this very
aggressively, and other State commissioners have been reviewing
sales practices, which is part and parcel of our daily job,
sales practices on military installations, and working with the
DoD to eradicate bad market kind of practices whether they are
by agents or by the companies.
We also are looking forward to working with you and with
the House in dealing with this issue on a more global basis so
that those problems that Mr. Hunter said have existed--and they
have--that they can be brought to light sooner. I think that
has been a real part of the problem, that these issues have not
been brought to light sooner to where there has been some
consumer harm done because the problems have not been brought
to the attention of the regulator sooner.
Mr. McCartney. Senator Sarbanes, USAA is particularly
concerned about this because our membership is the active duty
military. Our 5 million members consist of the active duty
military, former military, and their families. We have 168,000
members in your State. Ninety-six percent penetration among the
active duty officers, roughly 50 percent among enlisted. So
these are our members who are being taken advantage of, and we
are very concerned.
It points out to a degree how the current regulatory system
is not working for our members.
Senator Sarbanes. First of all, are industry people who are
doing the right thing simply looking the other way with respect
to those that are doing the wrong thing? And second, what
should be done about it?
Mr. McCartney. Well, USAA certainly is not looking the
other way. We are concerned about this. But I think there has
been some concern among the State regulators about
jurisdiction. Some believe that they do not have any
jurisdiction on military bases and that continues to be debated
in some quarters.
Our position is that we think DoD should have the assets
and the financing to be able to deal with this, and it has been
an area that has been cut back because of the need to respond
to the deployment of more and more active duty military.
Mr. Atchinson. Senator, if I may?
Senator Sarbanes. Yes.
Mr. Atchinson. There is certainly ample opportunity here.
For example, companies have a certain responsibility for the
education and training of those that sell on its behalf, and
certainly built into the IMSA template is various significant
requirements regarding the education and training of those who
sell on their behalf. And we have been very pleased in fact to
provide information to the Department of Defense regarding that
simply as a possible template to employ to in fact address
these sorts of issues.
Senator Sarbanes. Anyone else?
Mr. Serio. Senator, if I may. Any effort to help clarify
the issue of the State regulatory authority over sales
practices would be very helpful.
Senator Sarbanes. Should a company be banned from the bases
if its agents are engaging in these practices?
Mr. Serio. My answer to that would be yes.
Senator Sarbanes. What do the others on the panel think?
Yes?
Mr. McCartney. Senator, we see no reason for some active
duty private first class, who is 17-, 18-, 19-years-old, is not
married, does not have a family--he can purchase $250,000 worth
of Serviceman's Group Life Insurance for about $14 a month. We
see no reason why some life insurance agent needs to come in
and convince him to buy another $50,000 or $100,000. His life
insurance need is served completely by that SGLI policy.
Senator Sarbanes. Mr. Ryan, what do you think?
Mr. Ryan. Interestingly, our company is the administrator
for the Serviceman's Group Life Insurance business and has been
for about 50 years now. We, as a company, do not sell on
military bases.
But I would agree with all of the comments that were made
here. There seems to be a major gap between the Department of
Defense and the State regulatory system as related to these
practices. They seem to fall within the purview of State
supervision and regulation that should close the gap and fix
the problem.
Senator Sarbanes. I am having difficulty understanding why,
other than perhaps in an instance of absolute rogue agency, a
company with agents that engage in this practice as this
article detailed, keeps coming back around, why do we not just
say you cannot go on these bases any more? What is wrong with
doing that?
Mr. Serio. Actually, I think that would be helpful, except
that that would only solve half the problem, and what we do not
want to get into----
Senator Sarbanes. It is better than not solving any part of
the problem?
Mr. Serio. We do not want to get into an outside the gate
kind of sales practice, where they are doing this just beyond
the parameters of that Federal installation.
Senator Sarbanes. Well, that is where you come in.
Mr. Serio. That is true.
Senator Sarbanes. So you think you have a jurisdictional
problem outside the gate?
Mr. Serio. No, what I am saying----
Senator Sarbanes. You do think or at least some of your
people think you have a jurisdictional problem within the gate;
is that correct?
Mr. Serio. Some people are concerned about that. I do not
think we have a jurisdictional problem in or outside the gates.
But my point is this: We have to get to the underlying problem,
which is the aberrant market conduct behavior, whether it is of
the agent or the company itself. And by tightening that
communication link between DoD and the State regulators so that
you can cover both the inside the installation and outside the
installation sales practices so that you are protecting the
servicemen and their families wherever they may be buying
insurance, that is the best way to approach this.
Senator Sarbanes. Is there anyone at the table who would
have difficulty with a company being banned from the
installations if it is shown that their agents are engaged in
these abusive practices? Anyone have any problem with doing
that?
Thank you, Mr. Chairman. The record should indicate that no
one indicated they would have a problem.
Chairman Shelby. Senator Dodd.
Senator Dodd. Senator Dole is----
Chairman Shelby. Oh, excuse me again. I guess I am trying
to get you and Sarbanes together here.
[Laughter.]
Senator Dole.
Senator Dole. Thank you.
Senator Dodd. At least you did not call me Hagel.
[Laughter.]
Chairman Shelby. No, Hagel will not be mad at me. Just the
end of the day.
Senator Dole. Superintendent Serio, as the insurance
regulator from a State, that like my home State of North
Carolina, has passed a reciprocal licensing law, would it be
helpful if Congress passed follow-up legislation to NARAB to
make reciprocity a reality in every State? I know that two of
the States that have still not acted are Florida and
California, two States that represent a large portion of the
market. Should they not be brought into the fold, too?
Mr. Serio. Well, I think that the California and Florida
insurance commissioners have good reason, and their
legislatures have good reason for acting the way they have. It
does create or it prevents us from having a fully uniform
system and reciprocal system across the country.
But your question gets to the heart of whether we should
have legislation dictating these things. Part of this goes to
the economic competitiveness of one State versus another. Part
of it goes to the larger issues that are involved in the sales
of insurance in those States. We certainly, and I think the
NAIC has been pushing uniformity of agent licensing and other
processes across the spectrum, whether it is in Florida,
California, or even in New York, and there may be one or two
points where New York deviates from the rest of the
marketplace, but we have been reducing those.
But the fact is I think we have been working with both the
California and Florida insurance departments to get through
their issues with respect to that so we can get full compliance
on the uniformity and reciprocity for agents. There is nothing
that we could get better benefit from, particularly because of
its ease of applicability to technology to get uniformity and
reciprocity and make the agent licensing system a single stop
electronic process: No paper, no moving around from one State
to the next.
I think that would be ideal for all the States.
Senator Dole. Thank you.
I have two questions I would like to ask the entire panel
to respond to. I would appreciate a brief response. First of
all, Congress may not have set the bar high enough in NARAB,
and we still need to bring the last few States into the fold.
But has Congressional enactment of NARAB reforms made agent
licensing any easier today than it was prior to Gramm-Leach-
Bliley?
Mr. Ryan. Yes.
Senator Dole. Right down the line, please.
Mr. McCartney. Senator Dole, it has made it worse for us.
We do not use agents. We sell directly through our employees.
Before, we had about 150,000 licenses; now, we have about
250,000 licenses. And it makes it extremely difficult for us.
The categories of licenses in the NAIC Model Producer Act are
property and casualty.
So we are the fifth-largest writer of homeowners, the
seventh-largest writer of automobile insurance. We do not write
medical malpractice, workers compensation, boiler and
machinery, or any of the commercial lines. Yet, in many States,
our agents have to take tests over commercial lines in order to
get a license, and then, they have to take periodic continuing
education in those lines to maintain those licenses.
It is ridiculous. It is a bizarre system. For us, it has
gotten more expensive. We have had to have more licenses. It
has not worked; in fact, it has made it worse for us.
Mr. Hunter. I would say generally, it is better, but there
are these exceptions, and I think they need to be dealt with
and worked on but generally better.
Mr. Liebowitz. Senator, I really do not have any personal
information on this, but we will check with our membership and
get back to you with a written response.
Senator Dole. Thank you.
Mr. Ahart. Senator Dole, as an independent agent, it has
made it much easier in those States where it has been adopted.
With globalization, as you have mentioned before, we have
customers who are moving from State to State, opening offices
in different States, and we need, therefore, to be licensed in
more than one State, which we did not have to be. And in those
States that are complying, you can get compliance within 1 or 2
weeks sometimes now, which is very easy. But those States that
are not complying can still be 6 months, which is ridiculous,
and that is why I think it needs to be mandated to all those
States and be uniform.
Senator Dole. Thank you.
Mr. Counselman. Senator, the association I represent, the
Council represents eight places, 80 percent of property-
casualty insurance in the United States and overwhelmingly, it
has been easier for our group, and we feel that we need 100
percent reciprocity, but we are much ahead of where we were in
1999. Thank you.
Mr. Atchinson. Thank you, Senator. Our members are from the
life side, and I think, by and large, they would say it has
improved, but there is still opportunity for further
improvement, particularly with respect to oversight of
appointments and things like that which, at times, is
unnecessarily duplicative and extraneous.
Senator Dole. Yes.
Mr. McCartney. May I just offer one more anecdote? We have
an office in Tampa. The other day, Tampa was closed because of
the hurricane. So all of those phone calls, then, from that
area of the country rolled to our other regions. And somebody
might be calling in and want to deal with a mutual fund or any
one of the other products, and it is not a problem, because
those calls can roll from Tampa to Colorado Springs,
Sacramento, or anyplace else.
But when Tampa is closed, and somebody from Alabama calls
in, and we need an Alabama-licensed agent or a North Carolina-
licensed agent, and it rolls to Colorado Springs, that member
may be on the phone for three or four minutes while we find
somebody licensed in those States, so it really does present a
problem for us.
Senator Dole. Thank you. Appreciate your adding that
comment.
Can the NARAB approach be used to improve other areas of
State insurance regulation that are in need of modernization?
Could we go right down the panel again, brief answers?
Mr. Serio. I do not think there is a question about it. In
fact, I think the House SMART draft goes in that direction,
taking the benefits of the NARAB construct and putting it
across the line. The NAIC has been in concert with the House
road map; in fact, we had our own road map that looked a lot
like the House road map, because we did focus on uniformity and
using the NARAB-type process to get there.
Mr. Ryan. Yes, any activities that deal with agent
licensing or product approval or market conduct on a uniform
standard basis is highly desirable. And we would certainly
support that. As I mentioned, the ACLI, on track one, is
working very closely with the States to do that, but we also
believe that as long as there is going to be ability to opt
out, as long as there are going to be different
interpretations, having an optional Federal charter is a
reasonable alternative to State regulation.
Mr. McCartney. Senator, it would take a heck of a lot more
work than the current system. The two main problems with NARAB:
First, when it was enacted, it talked about State licensing
laws that are reciprocal or uniform. If it had said reciprocal
and uniform, we would have been in pretty good shape. But when
it said reciprocal or uniform, it really gave the States a
dodge, and they immediately decided, well, we will never get to
uniformity, so let us get to reciprocity. The standard is much
lower.
The second problem with it is that it gives to the NAIC the
power to determine whether or not a State is in compliance.
There are a lot of provisions that should be in those laws that
the NAIC has said no, they do not have to be in there; you are
reciprocal, and that is the fox in the hen house.
Mr. Hunter. This is not the first time that a Federal
interest has caused a positive change, at least some people
think it is positive. The guarantee funds were created because
Warren Magnuson was interested and pushed and talked about
legislation, and then they were improved when John Dingle got
very excited about solvency and guarantee funds.
The Congress has historically played that role, with or
without a specific legislative final product. And that is a
positive role. However, it can be very negative. The SMART Act
on the House side is terrible for consumers, and I have a
letter attached to my testimony. I have a letter attached; I
think it would be a very bad idea, and I think it would harm
consumers greatly if it were passed.
So it depends how you do it. I think there are ways to
achieve uniformity, in my statement, without gutting consumer
protections, and I think that is an important aspect of it.
Senator Dole. Thank you.
Mr. Liebowitz. I would agree with Mr. McCartney's
statement. The NARAB model as a solution is an inadequate
solution. It is a Band-Aid on what would be a very large wound,
and the reality is there are too many exceptions. We do not end
up with uniformity. No, I do not believe it is an adequate
solution at all.
Mr. Ahart. Senator, I, on the other hand, think it is the
perfect solution.
[Laughter.]
I think the insurance industry seems to make everything so
difficult and complicated at times. Everybody here and in other
panels that I have participated on really state three issues:
And it is licensing, speed-to-market issues, and market
conduct. Those things can all be handled by the NARAB approach.
And for those who say we should just continue with a State
approach and do nothing and hope it gets better does not seem
to make sense.
For those that say we should scrap the whole system and go
to a new system where we do not know what we are going to get
and all the other issues like consumer protection but to solve
those three issues does not make sense. But there is a middle
ground approach using legislative tools like the NARAB
approach, which will handle those specific problems and allow
the other things that are going well to keep working.
Mr. Counselman. Senator, in the commercial insurance
property-casualty marketplace, we definitely need surplus line
improvement. More and more of the market has become surplus
lines, the nonstandard types of coverages or high limits of
insurance, whatever it might be. And the State laws are
absolutely conflicting, and it is absolutely impossible to
comply with State laws where coverage is written across State
lines when there is a surplus lines filing that has to be made
in multiple States.
And so, that could be improved through legislation.
Mr. Atchinson. Senator, in my testimony, I noted and
commended the efforts of the NAIC currently underway to bring
about some greater efficiencies and to modernize the oversight
of market conduct. On the other hand, some of the concerns that
I expressed and others have raised is will all of the States
buy into this? Will all of the States start marching to the
same drummer while not in any way diluting consumer
protections?
I think that remains the question. So in theory, I think
the NARAB approach has a lot of viability. The question is can
one enhance the incentives, as well as enhance the
disincentives for States, in fact, to get on board and to do
what can be done and should be done.
Senator Dole. Thank you very much.
My time has clearly expired. Thank you, Mr. Chairman.
Chairman Shelby. It is okay. It is very important.
Senator Dodd.
Senator Dodd. Thank you, Mr. Chairman.
Let me commend my colleague from North Carolina. You have
some very good questions and cover a lot of the issues that I
was going to raise.
First of all, let me thank all of you, your comments about
TRIA, with the exception of Mr. Hunter.
[Laughter.]
Mr. Hunter. You are welcome.
Senator Dodd. No, no, I wanted to give you special
recognition, Mr. Hunter----
[Laughter.]
--for your observations, and I appreciate them as well, but
it is, I think, helpful to hear from across the spectrum on
such an important issue, and I mentioned earlier Senator
Schumer's participation as well and Senator Bennett and others
on this, so I appreciate that, and I will not dwell on that
here.
We have raised a lot of issues, and the speed-to-market
issue, I was going to ask you, Art, about, but I think you have
covered it pretty well, the importance of that issue and
questions and the licensing issues, as well. Your testimony,
Mr. Counselman, and your comments about the number of licenses
required out there is pretty overwhelming. While, certainly,
things may be improving, there still is a tremendous amount
involved.
And I think this is very important. I thank the Chairman
for having a hearing on this subject matter. Again, Senator
Schumer has had a longstanding interest in this subject matter
as well, and I have not formed any final opinions on the
subject matter, but I think having a discussion of this issue
is tremendously important for the Committee as to how we should
proceed on the issue of a Federal charter and how you work with
that in terms of the tremendous efforts to be made at the State
level and the importance of that as well.
I think we would be remiss in this hearing here if we did
not touch upon the more timely subject matter. I note that our
colleague from Alabama has been working tirelessly on behalf of
his constituency, who were hard hit by Hurricane Ivan a few
days ago, and I am very interested to know how well the
insurance industry is responding to that; obviously, there are
those of you here who can respond more directly to that
question, but I would like to know whether or not, in fact,
claims are being paid in a timely fashion; what are your
records showing, and are there any solvency issues that we
should be aware of here on this side of the dais about the
industry itself as a result of this rather heavy period we have
gone through now and the tremendous cost effect on the
insurance industry itself.
So we would be, remiss not touching upon it, but I want to
begin by commending the Chairman for his work on behalf of his
constituency. Would you address both questions? I realize some
are in a better position to address this than others, and I
will let you decide.
Mr. Counselman. Senator Dodd.
Senator Dodd. Yes.
Mr. Counselman. I would like to respond from the standpoint
that before the hurricane struck, a number of the insurance
companies had already positioned adjusters and notified agents
and brokers of that so that there would be an initial
opportunity to respond immediately through whatever mechanisms
would be available, knowing that there would be limited
communications.
The insurance companies anticipated this and tried to, as
best they could, stage their people and, in addition to that,
from a financial standpoint, most of them have the benefit of
purchasing reinsurance. And it is natural catastrophes,
fortunately, are more planned and more predictable than the
terrorism-type risk, so from the analyst reports that I have
been reading over the last week or week and a half, I have a
feeling of confidence.
Now, this is early on, and we do not know what might be
reported in the coming weeks, but at this particular point in
time, the property-casualty industry seems to be responding and
on time and has the financial resources to deal with this.
Senator Dodd. So you do not see any solvency issues at this
juncture.
Mr. Counselman. There may be from some companies but none
that have been reported from the standpoint of major companies
that are followed by the investment analysts. I daily read
reports, and I have not seen reports of concern about
insolvencies. It is obviously early.
Senator Dodd. Anyone else want to comment?
Mr. Serio. Senator, if you look back to after Hurricane
Andrew, approximately 10 companies went broke in Florida alone.
Senator Dodd. Hence the emergence of the reinsurance
industry.
Mr. Serio. Right, the backstops that were put into place
both on the primary side and on the reinsurance side really
secured the Florida marketplace, and that is why we do not have
those very same solvency issues today that we did 12 years ago.
In addition, the coordination of the response effort has been
greatly enhanced by, of all things, an interstate compact among
the emergency managers, where the flow of assets going into
Florida, Alabama, and other affected States has been far more
coordinated, far more organized, and so, you actually have a
better utilization of insurance industry assets and public
assets together, because it has all been done on a coordinated
basis, including the adjusters not only being put into place by
the industry but also then being allowed access into the
affected areas because they are now part of the disaster
response protocols in Florida and in the other Gulf States.
Actually, the system has worked out, particularly given the
gravity of the situation, the system has worked out much better
than it did during Andrew, and I think we have learned the
lessons that I think were put into place since Andrew,
September 11, and things like that.
Senator Dodd. Anyone else want to comment on that?
Mr. McCartney. Yes; Senator Dodd, as representing the fifth
largest homeowners company, and we have 77,000 members in the
Chairman's State, we are going to see a large percentage of
those members have claims. We have had people there since the
hurricane hit.
For us, even though we now have had three major hurricanes
hit this year, it will not be a major financial impact to our
company. What bothers me personally more than anything is
Professor Bill Gray from Colorado, who is the guru on this, who
says that after a period of relative quiet, we are moving into
probably 25 to 30 years of more advanced hurricane activity.
And we are fine this year, I think. There may be one or two
Florida only companies that might be in trouble; I do not know;
that is pure speculation, but speculation has never stopped
Hunter.
[Laughter.]
Senator Dodd. I am just curious: Has your company made any
preliminary decisions about whether or not you will write more
insurance in places like Alabama and Florida as a result of
that prediction? Are you going to see somehow a retreat from
that market because of the predictions of 25 or 30 years of a
hurricane season? Have you calculated that into your
decisionmaking business practices?
Mr. McCartney. Not that I know about.
Senator Dodd. I am sorry. Mr. Ahart.
Mr. Ahart. Yes, Senator Dodd, I would just like to say from
an agent's perspective that we have talked a lot to our agent
friends and brokers down in Florida and Alabama and those
areas, and they were hit as well as agents and brokers, and
people have sent staffing down there, and those people have
been servicing and been open weekends and nights, and things
seem to be working very well. Insurance companies are giving
advances for people to get themselves back on their feet and
start their cleanup, and I think it also shows that State
regulations actually worked down in Florida with the CAT funds
and that the markets are still available down there.
And now if we can just get them to do license reciprocity
down there, it would be great.
[Laughter.]
Senator Dodd. Take advantage of that opportunity.
Mr. Ahart. Exactly.
Senator Dodd. Anyone else want to comment on this?
Mr. Hunter. Let me just say one thing: We have been talking
to a lot of the consumer groups down in Florida and Alabama and
so on, and they report that, as we find in other natural
disasters, the initial response of the insurers has been very
good. They have been out fast into these places. The problems
that develop, if there are any, will usually be the ultimate,
final payments, which may be months away.
Senator Dodd. Yes.
Mr. Hunter. Normally, the first few months work out pretty
well, and it seems to be what is happening now.
Senator Dodd. I am sure the industry will be mindful of the
fact that the Chairman of the Banking Committee comes from
Alabama, has a passing interest in the subject matter at hand
here today.
Last, not asking for any response in this, but in my
conversations with a number of you, particularly my
conversations with Art Ryan, who I have known, as I said, at
the outset for so many years, the distinction between life and
property and casualty, obviously, I come from a State where
this industry is more than just a cottage industry, and believe
on the Federal issue, it is an easier question, I think, for
many of us here on the life issue in some ways than the P&C
issue, for all of the obvious reasons that have been raised by
many of you here, and I think it is important.
I think the Chairman raised that issue earlier, that we use
the word insurance rather generically, and there are a lot of
different products being offered, and you have to think about
this on a variety of different levels in order to respond to
one of the underlying questions before us today.
But I think I would be remiss if I did not mention that I
do appreciate the distinctions, and there is some universality
in the life issues that are less evident in the property and
casualty areas, for instance, that certainly, we would have to
keep in mind as we consider moving forward in this area. But
again, Mr. Chairman, I thank you for having the hearing. This
was very important. I know Chuck Schumer and I have talked
about this in the past. I have a discussion with people who
work in this industry every single day, and your contribution
to this, the body of evidence we will be building on this
debate is extremely important, so I thank all of you for being
here.
Chairman Shelby. I have recently toured parts of Florida
and Alabama both with Governor Riley and President Bush, and it
has looked to me like there were a lot of insurance adjusters,
insurance agents everywhere down there, and this is early on,
as someone said, but I think that the people were anticipating
what was going to come our way, and they are down there, and I
hope they continue until they make everybody happy.
Senator Sununu.
Senator Dodd. Thank you, Mr. Chairman.
Chairman Shelby. Yes, sir.
Senator Sununu. Thank you, Mr. Chairman.
Mr. Serio, how many different State price control laws or
rate review laws are there?
Mr. Serio. Depending upon what line of insurance, they will
vary.
Senator Sununu. Property and casualty.
Mr. Serio. Property and casualty, there are four essential
differences: Open competitive rating----
Senator Sununu. No, but how many different laws are there
nationwide?
Mr. Serio. There are dozens.
Senator Sununu. Dozens? Less than 100?
Mr. Serio. Less than 100 probably. I cannot say for sure,
but----
Senator Sununu. Anybody want to agree or disagree with that
number, Mr. McCartney?
Mr. McCartney. There are, if you include the District of
Columbia, there are 50. The only State that does not have one
is Illinois.
Senator Sununu. So one law for each State?
Mr. McCartney. That is right.
Senator Sununu. Mr. Serio.
Mr. Serio. Actually, that is different. There are different
rating laws for different lines in each of the States.
Senator Sununu. Thank you; yes, I think it is certainly
more than 50. How about product review laws?
Mr. Serio. There are different product review laws
depending upon commercial or personal lines within property-
casualty in each of the States. There has been movement away
from product approvals on the commercial lines and focusing
more on personal lines. There are generally uniform rules with
respect to product approvals in those specific areas like
personal lines.
Senator Sununu. So you have dozens of different rate review
laws and dozens of different product review laws. Explain to me
how, regardless of whether you want to make an argument for
this many laws, explain to me how industry-wide self-policing,
which you highlight as the key to better efficiency here, will
enable the industry to overcome dozens of different price
control laws.
Mr. Serio. I am not going to advocate for dozens of
different rating laws. Let us make that clear. There are a
couple of ways you can do this, but that self-policing issue,
and this kind of goes a little counterintuitive to what you
might typically think, but that self-policing and the
discipline with respect to rating laws goes as much to how far
rates go down as much as how much or how far rates go up.
And let me explain that in 30 seconds. The problems for the
marketplace have been, and the reason that there are rules in
New York and other States about adequacy or the fairness or
unfairness of rates is because since this is a financial
product that people are buying for a future promise to be kept.
You have to make sure that companies have adequate resources to
meet those obligations.
There have been instances where you have open rating where
there has been overheated rate competition, resulting in
insolvencies of insurance companies, because it was driving the
prices below where they really need to be. There has been
widespread success around the States using rate floors and rate
ceilings and flex bands, as we call them, to allow competitive
opportunities within those flex rating bands. We have used them
in New York for a number of years and in many other States,
allowing that level of competition to go on without rates
getting to such a point where they are actually financially
inadequate for meeting the promises going forward.
Senator Sununu. So you are making an argument for price
controls that they are needed so that insurance firms do not
compete too aggressively and lower their prices too much
because the shareholders and the management at those companies
cannot exercise sound long-term decisionmaking.
Mr. Serio. It goes to the question about self-policing. In
fact, there has been a lot of discussion as the property-
casualty industry has come out of the hard market, whether you
are talking about from the head of AIG, the Travelers, the
Hartford, Liberty Mutual, or any of the other companies, they
have spoken about the need to maintaining rate discipline. They
have acknowledged there has been a lack of rate discipline in
the property and casualty market.
Senator Sununu. I think that is a fair point to make if you
believe it, and obviously, you do. Now, but I have rarely if
ever heard someone arguing for price controls to prevent
consumers from getting the lowest price that would be offered
in a competitive environment, number one.
Number two, I do not want to ascribe motives to anyone, but
let us just say I am a large, successful insurance firm with
very strong market share. The idea of having a price band that
would limit competition and thereby reduce threats to my market
share would not necessarily be either a bad idea in the short-
term or against my shareholders' interests in the long-term,
but it would be anticonsumer. And you do not need to respond to
that. I just want to point out that there may be some other
motives driving some of the big firms, not necessarily the ones
you mention, but big firms that are well-positioned.
Let me ask you another question about the work that the
NAIC has done, and I absolutely recognize the Association cares
about this issue, has worked very constructively on this issue,
and to the extent that there is any frustration or interest in
looking at legislation, it has to do with the pace. And you
have been the first to recognize that, and I appreciate it.
Could you talk to me a little bit about the Statement of
Intent that was put out in 2000 by the NAIC and the action plan
that was put out last year? Just talk a little bit. I know we
do not have tons of time, but I guess I am only cutting into
Senator Schumer's time right now. I apologize.
[Laughter.]
Talk a little bit about what was in those plans and what
has really changed from 2000 to 2003.
Mr. Serio. As long as Senator Schumer does not hold it
against me as his domestic regulator, I will give you as much
detail as you like.
Senator Sununu. That is part of my plan is to drive a wedge
between you and Chuck.
[Laughter.]
Mr. Serio. We smoked him out.
Senator Schumer. You mean the free-market Democrat and the
regulation-oriented Republican.
[Laughter.]
I understand.
Mr. Serio. I said it was counterintuitive so----
Senator Sununu. I think there is only one person in the
room that has actually dropped an OFC bill.
[Laughter.]
Mr. Serio. It was important for us to do an update in 2003
where we have come from. If you go back to the 2000 Statement
of Intent and the things that were in it, you can find the
roots of a lot of the progress that now have made in that
Statement of Intent; for example, the CARFER process, which was
the rate and form review process, and has morphed into both the
interstate compact idea and the national standards work that
Commissioner Bell has presented to us in terms of the first
national standards.
That work was done specifically as a result of the
Statement of Intent, and the work started under the Statement
of Intent. Those national standards will be done by the end of
the year in life insurance, the first round of national
standards will be done, and we will have made significant
progress together with the industries. It is not the
commissioners bringing it down from on high or anything of that
nature; these are discussions that have gone on between the
industry, the consumers, and the regulators to make standards
that work. That is a direct consequence and a positive
consequence of the Statement of Intent.
The national treatment of companies, this has not been lost
on us in terms of needing to create uniformity where there is
clearly a need for uniformity across State lines. That
continues to work. I think NARAB really helped drive that, and
I think NARAB together with the Statement of Intent have made
that a reality.
The Statement of Intent, the restatement in 2003, and the
NAIC road map, which we put out in response to the House
dialogue that we have been very happily a major participant in,
really has shown the progression in the NAIC's responsiveness,
and in addition to the NAIC as the regulators, the State
legislative response to these things, the NCOIL market conduct
bill, quite frankly, it was something that the NAIC could not
do, but the State legislators got a market conduct bill done.
And now, again, taking it back to the State legislatures,
now, we can all coalesce around that and drive that in the
State legislative process, and I think that will be a real
positive development, again, coming out of not just a Statement
of Intent but the working coalition that we have had with the
National Conference of State Legislatures and with NCOIL but
not in any small measure because of the continuing interest of
the House and of the Senate in the progress that is being made
under the Statement of Intent.
Senator Sununu. Thank you.
Chairman Shelby. Senator Schumer.
Senator Schumer. My time has expired.
[Laughter.]
Chairman Shelby. We will give you a reasonable amount.
Senator Sununu. It was a great series of questions that you
had on your time.
Senator Schumer. Thank you.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Sununu yields you a little bit of
time.
Senator Schumer. A little bit of his remaining time.
STATEMENT OF SENATOR CHARLES E. SCHUMER
I want to thank you for holding this hearing, which is
timely and important. This is one of the major issues we are
going to have to grapple with in the next Congress, and I think
it is great to get people thinking about it now. I want to
welcome our two New Yorkers on the panel, our Superintendent,
Greg Serio, who does an excellent job in one of the premier
offices in the country in terms of insurance regulation and
also Mr. Alan Liebowitz from the great county of Westchester,
somewhat north of Brooklyn.
[Laughter.]
First, I want to get into a little bit of the substance of
this issue, but like some of the others who are here, Mr.
Chairman, the renewal of the terrorism insurance is really
important, and first, I guess could it be uniformly assumed
with the exception, as Chris Dodd mentioned, of Mr. Hunter that
everyone here would like to see TRIA renewed as quickly as
possible? Raise your hand if you do not feel that way.
[Laughter.]
Let the record show one hand against and all the others
for.
And I just wanted to ask Mr. Serio to outline briefly how
successful it has been in New York, where obviously, we had the
greatest impact given September 11 and given so many buildings
nearby and if there is any basis for believing that reinsurers
will rush into the risk insurance market next year, reducing
the need for a Federal backup, which is what some of those who
say we should not rush to do this should do?
Mr. Serio. I will take the second part first; no, I do not
think there is any reason to believe that there is going to be
a greater rush of the reinsurers than we have seen over the
last 3 years. In fact, going back to that notion of rate
discipline and underwriting discipline that the carriers are
all extolling that, in talking to colleagues, I do not think
you have seen that rush back, and I do not think you are going
to see that for the foreseeable future.
Here is the other thing that TRIA has done not only for New
York but also for the other States that have not made changes
to their laws with respect to exclusions for terrorism or with
respect to changes to the standard fire policy, and that
provides coverage regardless of the source of the fire.
TRIA has allowed New York to keep its laws largely intact.
We have not had to rely upon broad-based exclusions for
terrorism coverage, for biological, chemical, or nuclear,
things of that nature. We have not had to amend the standard
fire policy, which was started in New York State; other States
have felt they have needed to do that. Because of the
availability of terrorism insurance coverage, we have been able
to keep our laws intact; we have been able to continue
construction of new real estate projects in New York, and most
importantly, whether small businesses or large businesses, they
have been able to find the terrorism insurance that they have
needed, whether for their financial arrangements or for their
own peace of mind.
Senator Schumer. All right; and you do not see any change
next year. In other words, if, for some reason, we were not to
renew TRIA, things could go back to the way they were, or do
you think some people wanted TRIA to be temporary; that is why
it is a limited number of years and said we just needed it
temporarily. Tell me your feelings about that again.
Mr. Serio. The writing is already on the wall. The
property-casualty insurance industry has asked for conditional
endorsements or popup exclusions for terrorism coverage in the
event that TRIA goes away. That clearly is telling you where
this marketplace is going. In addition, if the bill for
extending TRIA extends to group life, which we really think it
must do that is a marketplace that the Treasury Department has
acknowledged has been largely devoid of reinsurance throughout
the last 3 years, and I do not see reinsurance capacity coming
back to the group life business anytime soon either. So and
group life only makes it that much more important to get it
done.
Senator Schumer. By those facts, which I have no reason to
dispute, it makes logical sense to renew it this year and avoid
all the pain, anxiety, uncertainty and let this hang out,
because we know what happened when we tried to get this done
the first time.
Mr. Serio. Without question.
Do you want to say something, Mr. Counselman?
Mr. Counselman. Yes, Senator, there has not been
reinsurance protection for the 10 percent retention, and next
year, it goes to a 15 percent retention.
Senator Schumer. Right.
Mr. Counselman. So, I expect that as those of us who are
selling the product to commercial insurers, primarily, we think
it is going to get worse.
Senator Schumer. I would just urge that we try if we can. I
know the gates are closing on this year's session, although we
may be back after Election Day to try and renew TRIA. It makes
no sense to delay it.
Okay; I know you probably disagree with that, Mr. Hunter.
Mr. Hunter. Totally. I have already explained why.
Senator Schumer. Yes, I know. God bless you.
[Laughter.]
Well, I meant that seriously on many issues.
Mr. Hunter. He has, thank you.
Senator Schumer. The basic issue that we are here about is
an optional Federal charter, and I agree here with my colleague
from New Hampshire, who always does an erudite and thoughtful
job on these issues when we agree and disagree. The bottom line
is, in this fast-moving world, where so many new products come
out so quickly, where international competition is much greater
than it has ever been, to have 50 State regulators at least as
a mandate does not make much sense from an economic point of
view anymore, and I do not think that is disputable.
I understand the State regulators have done a good job, but
it is a different world. The real issue here, is at least for
somebody like myself who believes that you do need some limits
and some regulation, how do you get to a Federal charter and
yet ensure consumer protection standards do not fall to the
lowest common denominator. We have had this in certain other
areas, where you get Federal regulation, banking, where we have
much more national regulation, and it is the same type of
industry. It is not any different in terms of being fungible
financial products; and yet, in certain areas, predatory
lending, there is an attempt to move to the lowest common
denominator standard when different States would want to do
more, and it really does not interfere with the free flow of
commerce of banking products and everything else, and we have
had a couple of pretty contentious hearings about that right
here in this room several months ago.
So my question to any of you and all of you is how do you
have the baby in the bath water, meet the new economic changes,
but give the States some flexibility on areas that do not deal
with the fundamental sinew of, if you will, interstate commerce
or even international commerce in a world where things move
very quickly? Can you have your cake and eat it, too? How do we
accomplish that?
That is the great dilemma facing people at least from my
point of view. We will just start from the right and move our
way to the left. Mr. Counselman had his hand up first.
Mr. Counselman. Yes.
Senator Schumer. You do not have to answer. Just as the
charter is not mandatory, neither is the requirement of an
answer mandatory here this afternoon.
Mr. Counselman. I would urge that the NARAB approach be the
approach, and that approach would set minimum standards, and
those standards should be high, so that an individual State who
does not care to set high standards would have to at least meet
the minimum, and what they do beyond that is another issue.
Senator Schumer. Do you think the politics of the Congress
would allow that?
Mr. Counselman. I am not an expert on that.
Senator Schumer. Right; that is my worry.
Go ahead; Mr. Ahart.
Mr. Ahart. I mean, I agree with Mr. Counselman that the
NARAB approach is the right approach. I mean, everybody is
trying to do the right thing and attack the right problems, but
the problem, as you mentioned, with a Federal charter, even if
it is optional, first of all, it is not optional for agents or
brokers. There are companies we are going to have that will be
Federal, there will be companies that are going to be State,
and we are going to be dealing with both of those, as are some
consumers.
But the issue is that throwing out the baby with the bath
water is that you are going to an unknown on those consumer
protection issues and other issues, and I would say that
banking and insurance are different in some ways, and for
instance, auto insurance in New Jersey is a lot different than
Alabama, and that is different than banking, where it is
probably pretty much the same with interest rates and things
like that.
I think you need to use a legislative tools approach, where
you attack those specific problems, and you could use the NAIC
models where the majority of States come up with a model, and
then, it is mandated that that is what the standard would be.
Senator Schumer. Did you say something, Mr. Liebowitz?
Mr. Liebowitz. Yes, the consumer issues can be addressed at
the local level even while still having the optional Federal
charter. We have a great track record to look at in terms of
where did we see abuses, both at the banking level and at the
insurance level. This is an opportunity to write fresh
legislation to determine exactly where the responsibility
should lie, and who is in the best position to be able
administer.
This is an opportunity to undo 140 years of patchwork type
of regulation and replace it with a modern system that will
help both the consumer as well as the providers.
Mr. Hunter. We have not seen an optional Federal charter
bill that did not encourage a race to the bottom that you had
mentioned. If you could create one with some minimum standards,
that might be the way to go or to use, to empower the NAIC to
do certain things. I think you can achieve uniformity without
going to the lowest common denominator standards. I think you
have to start with high standards.
Senator Schumer. Right; if you could avoid, ``the race to
the bottom,'' would you be supportive of an optional Federal
charter, Mr. Hunter?
Mr. Hunter. I do not know how you do it but if you----
Senator Schumer. Just assuming you could.
Mr. Hunter. What we would look at, we listed several pages
of principles by which we would judge a bill. If those
principles are met, we could support a bill.
Senator Schumer. Right; and I am not on top of those pages
that you put out. Would they undo the whole idea of one
national regulation?
[Laughter.]
Mr. Hunter. No, no, in fact, what we clearly said----
Senator Schumer. It is a give and take here. It really is.
Mr. Hunter. If you were here when I spoke earlier, you
would have heard me say if there is one thing we want you to
take away from this is consumers do not care who regulates.
Senator Schumer. Right.
Mr. Hunter. We do care about the quality.
Senator Schumer. Mr. McCartney.
Mr. McCartney. Senator, with our mobile membership, it
would not be unusual for somebody from Alabama to be stationed
in Georgia and sent to Alaska. And while he is in Georgia, he
buys a company issued by a Texas company from an agent licensed
in Georgia. He moves to Alaska and has a problem with that
policy, and the company is not admitted in Alaska. So the
Alaska regulator says I cannot help you. He goes back to the
Georgia regulator, and the Georgia regulator says you are no
longer a citizen of my State, I cannot help you either. And he
calls Alabama, and Alabama says well, neither the company nor
the agent is licensed here; I cannot help you.
The current system is not perfect. That member of USAA
would be better off being able to go to a Federal regulator and
saying hey, I need some help here. And we believe that an
optional Federal charter represents the best method to do that.
The State-based system stays in place for the companies that
want to be regulated there and consumers that want to deal with
a State-regulated company, and the national companies doing
business in 51 jurisdictions then have a single shop, and the
Senate and others, when they have a problem with a company,
have a single regulator to go to to get some answers.
Senator Schumer. And how frequent is the situation you
mentioned where one seller, agent, or whomever, falls between
the cracks in different States?
Mr. McCartney. It is not unusual for a mobile membership
like ours. You know, there are a number of companies that do
business in one State or three or four States; some that do
business only in one or two counties. So, you know, that is not
unheard of.
Senator Schumer. That's correct; Mr. Ryan.
Mr. Ryan. Ironically, what the State superintendents are
trying to do today is to try and answer your question, only to
do it among the 50 of them. There is absolutely no reason to
believe that an optional Federal charter has to be weaker in
this regard than a uniform set of standards across 50 States.
The notion that we simply want the weakest standard, fish to
the bottom or whatever the phrase is, is nonsense.
We understand the need for strong regulation. This is not
deregulation. This is uniformity, speed-to-market, and more
competitiveness.
Senator Schumer. And do you think some of the major
companies, the large national companies like yours that care
most, I guess, about this would be able to resist the race to
the bottom and say, well, when we actually put together
legislation that we will support some modicum of reasonable
standard? I think that is a key, and I hope it would happen.
Mr. Ryan. I think it has happened. I mean, working with
Superintendent Serio, who is an outstanding superintendent; we
have worked on national standards with the NAIC. We have worked
on various things. The compact was raised a little bit earlier.
The difficulty is there are only nine States in the compact.
Senator Schumer. Right.
Mr. Ryan. That is the dilemma that we face, not that we do
not want to have uniformity or work with the Greg Serios in
this world. It is a question of needing an option in order to
get all of what we are looking for, which is strong regulation,
but competitiveness as well.
Senator Schumer. Well put.
Mr. Serio, you get the last word.
Mr. Serio. If everybody wanted to go to the highest
standards, all the companies would be domesticated in New York
or in California.
[Laughter.]
I mean, there is a reality to that, that they go around;
there is a fair amount of forum shopping that goes on.
In fact, in the discussions that we have been having with
the House Financial Services Committee and with others inside
the NAIC, the discussion has been on how do we regulate it now,
whether we have an Federal charter or not, because there is
already some disparity between the home regulator and the
regulator who has the largest market share of a company.
Senator Schumer. Right.
Mr. Serio. And I think that is really getting to the
question of what portal do you want to use? The home regulator
is the portal; an electronic portal or manual portal, however
you want to do it, or should it be the commercially most
relevant State that is the portal, where the system then
becomes invisible to the company in terms of that you go to
that portal, whoever it might be; that your product approvals
or your product forums, because in New York, we do it on a
complete certification process now, without the so-called
``prior approval'' of the department after a lengthy review,
and you can go through that portal, get your products, get your
rates, whatever it is that you might want to do, and file it so
that the regulator can do the job that the regulator needs to
do, and that is to monitor market conduct, which some people
have said let us keep that with the States, to monitor
financial solvency, which some people have said keep it with
the States.
Now, the difficulty with the optional Federal charter is it
is going to become an all or nothing proposition, because they
want an optional Federal charter for marketplace activities but
maybe not for financial standards, maybe not for agent and
broker activities, and it is very difficult to divvy that up.
In the banking world, which is the common analogy, it is an
all or nothing proposition. You do not have half the bank being
regulated by the State managers or the State superintendents
and half the bank being regulated by the OCC or the OTS. The
fact of the matter is if you go the optional Federal charter,
it will be a full bore move to a Federal mechanism. And we
think that given what has already been built at the State level
and the move toward single portals, we do not think that the
optional Federal charter will be necessary, because the same
result will be accomplished through a single portal type of
approach.
Senator Schumer. Mr. Atchinson gets the last word.
Mr. Atchinson. My members, 160 companies, roughly 60
percent of the marketplace, some of them are for an optional
Federal charter; some of them do not support it. But my
organization grew out of some of the issues which Mr. Hunter
raised going back 10 or 15 years, when the life insurance
industry found it had self-inflicted a fair number of wounds
quite publicly, and it was essentially a set of industry
leaders who challenged the industry to establish a set of
fairly high and rigorous standards and challenge themselves to
try to attain those standards.
Effectively, we have a fairly significant component of the
industry that, in fact, have made that commitment of resources,
of people, and contrary to what some have said, I believe, a
national template for those companies that have established
within their organization a national template that works for
them that then accommodates all of the different State changes.
And certainly, something like that can be modified and be
made to be used more broadly. Superintendent Serio talked about
the efforts we have made to collaborate with them, and we
certainly appreciate that. I think with appropriate safeguards,
whether it is a State system or an optional Federal system, you
do need to protect to ensure that the standards never fall
below an appropriate level.
Senator Schumer. And you are arguing that the industry
itself, at least the larger companies, would have an interest
in keeping those standards high.
Mr. Atchinson. Our members are small, medium, and large
from all over. And certainly, Mr. Ryan's company has been one
of the leaders in both the creation of our organization and
throughout it in his organization. But probably 60 percent of
our members are small companies spread all over the country,
including Alabama, Texas, Florida, and elsewhere.
It is not about size. It is truly about leadership and a
commitment of management to doing business the right way. There
is that problem of how do you avoid whatever system you are
using that race to the bottom, and you need to incentivize both
company management with all the appropriate tools to avoid
that.
Senator Schumer. Thank you, Mr. Chairman.
I want to thank all of you. That was a very interesting and
good discussion.
Chairman Shelby. Mr. Ahart, what, from a practical level,
just quickly, what difference does the regulator make for
agents such as yourself ?
Mr. Ahart. It makes a huge difference. First of all, it
makes a big difference in licensing; it makes a big difference
in the different laws that we have in----
Chairman Shelby. Would it save a lot of money?
Mr. Ahart. Do we save a lot of money?
Chairman Shelby. Would it save a lot of expense?
Mr. Ahart. If we went to one regulator? No, as long as we
had uniformity and had the same----
Chairman Shelby. Okay; uniform standards.
Mr. Ahart. Uniformity is the key, right.
Chairman Shelby. Mr. Hunter, what difference would it make
for consumers?
Mr. Hunter. If you went to one regulator?
Chairman Shelby. Yes.
Mr. Hunter. It does not necessarily make any difference. It
depends on the quality of the standards.
Chairman Shelby. Is it the standards or the regulator or
both?
Mr. Hunter. It can be both, too. And obviously, there are
some very high standards that are not enforced very well in
some States, and there are some low standards where the
regulator comes in and is fairly rigorous. The regulator does
matter, but you have to have the legal system underneath it
that props it up. I have been told by ACLI and others that they
want to set up a competition and drive it down to the lowest
common denominator. And so that is why I fear that.
Chairman Shelby. Mr. Counselman, what difference does it
make for brokers?
Mr. Counselman. For brokers, it is important that we have
uniformity so that we do not have to refile multiple times, so
it is an expense issue primarily.
Chairman Shelby. Mr. Hunter, Mr. Ryan, both, what unique
characteristics of insurance, a product we call insurance,
require a different regulatory treatment from that given banks
or security firms? What unique characteristics? Mr. Hunter.
Mr. Hunter. Well, yes, it is a future promise that can
occur years in advance sometimes, particularly life insurance,
you may be 40 or 50 years out.
Chairman Shelby. It is a contract, is it not?
Mr. Hunter. It is a contract, it is a complex contract. A
lot of people cannot figure it out, and it may take many years
before you find out whether you have a good company or not,
because you have to file a claim to find out sometimes. It is
very complex pricing systems, incredibly complex pricing
systems in property-casualty particularly, that is very dense
and very difficult for consumers to figure out. There are a lot
of things I think are different.
Chairman Shelby. Okay; gentlemen, we thank you for--oh, you
have got another question? I was thinking that Schumer was
going to be the last word. Go ahead, Senator Sununu.
Senator Sununu. I am sorry, Mr. Chairman, and I apologize
to the panelists for dragging this out more than they would
like.
Mr. Ahart, you talked a little bit about the SMART
proposal, which in New England, we refer to as the smaht
proposal.
[Laughter.]
Could you describe how it would be enforced with States
that do not comply?
Mr. Ahart. I actually do not think I mentioned the SMART
proposal in my oral testimony here, but in being drafted, it
looks like there is a partnership being formed between the
State and the Federal that would have a board of seven people
or so, and they would not have complete authority, but they
would be more mediators to try to get it done.
Senator Sununu. Neither you nor the organization you are
representing today have endorsed or supported that proposal?
Mr. Ahart. We are in favor of it being proposed as it is
now, yes.
Senator Sununu. I do not feel like you actually described
an effective enforcement mechanism, though. What is the value
if there is not an effective mechanism for bringing States into
compliance?
Mr. Ahart. Again, I think the process has tried to stay
away completely from a Federal regulator; it is to keep State
regulation, so the mechanism is to get the bodies involved to
be able to mediate it and take care of it that way.
Senator Sununu. Mediation.
Mr. Ahart. Yes.
Senator Sununu. I do not know if that would work or not,
but I certainly would not consider mediation to be enforcement.
Mr. Ahart. And there always is the court system, as we have
now, in different areas.
Senator Sununu. So take someone to State court or Federal
court?
Mr. Ahart. You know, we can give a response. I do not think
it has been decided. It depends on where it would come about
and what the circumstances of the case would be, just as it is
now decided whether it should go to State or Federal court.
Mr. Counselman. Senator.
Senator Sununu. Yes, I will let you respond, because I
believe this is an important point, because you heard my
opening statement, although maybe you were not listening.
Mr. Ahart. No, I did hear it.
Senator Sununu. And I certainly appreciate that, and I
understand that.
In talking about the value of standards, I do not think it
is enough to have a piece of legislation that says we would
like to have uniform standards or we will have uniform
standards if there is no mechanism for enforcing that, and it
is hard for me to look around to find a situation where we have
Federal standards but no mechanism for enforcement, and not
being a lawyer and being a little bit concerned about the
current state of the legal system, to say this will be enforced
through the courts is not necessarily something I am
comfortable with.
Mr. Ahart. Right, but, I mean, I would just say that the
mechanism different than now is that there would be Federal law
that would make a uniform standard, and there are certainly
Federal laws now where there is conflict between State law and
Federal law in a gray area, and those things are handled in
court now.
Senator Sununu. Although oftentimes, at least, in fact,
most all the times I can think of, we have some Federal entity
that is responsible for enforcement: Telecommunications law,
you have the FCC. Securities law, we have the SEC. Federal
banking charter, we have the OTS, we have the OCC. Let me let--
--
Mr. Ahart. Let me just say, the ultimate enforcer is the
State. I mean, the State would still be the regulatory body.
Senator Sununu. So you would have Federal standards and
compel the State regulator to enforce the Federal standards.
Mr. Ahart. Right, correct, and then, you have this body
that would take care of any issues in between. There is the
question.
Senator Sununu. Okay; I do not know if that is a fair
characterization of the proposal.
Mr. Counselman.
Mr. Counselman. Senator, my understanding of the
enforcement mechanism that is currently in the proposal would
be the ability or inability of a State to collect nonresident
licensing fees and also surplus lines taxes; if they were not
in compliance, they would be prevented from collecting those
fees and taxes.
Mr. Serio. Only in certain specific areas.
Senator Sununu. Although I do not consider that
enforcement, I consider that a monetary threat.
Mr. Ahart. Right, correct.
Senator Sununu. Sometimes, it can be effective, depending
on the nature of the threat and your willingness to follow
through with it.
Does anyone want to comment on this specific line of
questioning?
Mr. Hunter.
Mr. Hunter. Yes, it is an unfunded mandate, and I do not
see an enforcement mechanism in there. I think you are right.
Senator Sununu. While I have you close to the microphone,
let me ask you a very quick question: Do you believe that
regulatory costs are passed on to consumers?
Mr. Hunter. Oh, absolutely.
Senator Sununu. Excellent.
[Laughter.]
Well, there was an earlier question about the benefit to
consumers, and I understand your point that consumers care most
about the quality of regulation, but if you believe, as I do,
and you may not, that a better set of standards or a
streamlined system is less costly, then, that will benefit
consumers.
Mr. Hunter. We pay the costs, and we want an efficient
system, but we do not want to lose protections that are
necessary.
Senator Sununu. I hear you.
Why do I not start this question with you, Mr. Ahart, also,
though you may not want to talk about the House proposal. But
it does, as I understand it, and I think as you describe it, it
would preempt State law. The standards would preempt State law.
We talked about the problem with enforcement. But it would seem
to me that the disadvantage of this kind of an approach is that
in preempting State law, it is at least as intrusive as an
optional charter that Senator Schumer was talking about and
that I have spoken to a lot of people about.
And I would like you to comment on that, and I would
certainly like Mr. Serio to comment on it, too.
Mr. Ahart. Sure; I think the difference is the extent that
it does that. I think ultimately, if a State was not part of
the majority that came up with that model law, they would be
forced to comply, so in effect, it would preempt State law on
that particular issue.
Where it is different from a Federal charter, optional
Federal charter, is that it is just tackling that one issue,
where an optional Federal charter is creating a whole new body,
and you have dual regulation and a Federal regulator.
Mr. Serio. As I said in response to Senator Schumer's
question, it is going to become an all or nothing proposition.
You cannot have the charter hang out there as a license on a
company's wall without there being some enforcement mechanism
behind it. I think the House bill already anticipates that by
creating this confluence of Federal policymaking plus State
regulation or State enforcement.
It has been done in other areas before. We think that that
is a viable alternative to creating an entirely new structure.
Senator Sununu. Has the NAIC endorsed the House proposal,
the SMART proposal?
Mr. Serio. We have not endorsed the bill. We have been in a
series of discussions with the House. We have found ourselves
in agreement on a wide number of uniformity proposals in it.
Senator Sununu. Have your members expressed concern about
the fact that it directly preempts States?
Mr. Serio. Preemption is an issue. The partnership, the
preemption, and the rate regulation are the three areas of
greatest concern, and we continue to discuss them. I do not
think we can say that we are yea or nay on any one of those
yet, because we think that the dialogue and discussion is still
going on, and it has been a productive dialogue at
understanding what the needs of the industry are, and we have
heard them, and we have talked about them for a long time, but
also what the needs are of the regulators, not so much the
regulators as themselves, and I understood your point earlier
that we are not supposed to be the ones in the middle of this.
We do not want to be in the middle of a market transaction.
But when you have a commodity that is not a price-driven
commodity or should not be a price-driven commodity, that is,
based upon a future promise, we stand in the role of the
monitor to make sure that that contract that is done today is
still viable 10 or 20 years from now, particularly in the life
insurance area.
Senator Sununu. Why shouldn't a life insurance product be a
price-driven commodity?
Mr. Serio. Why should it be or shouldn't it be?
Senator Sununu. I think you just said it shouldn't be.
Mr. Serio. Shouldn't be a price-drive commodity.
Senator Sununu. Why do you not think a life insurance
policy should not be a price-driven commodity?
Mr. Serio. Because if it is a price-driven commodity alone,
and we advocate to our residents that they need to shop for
life insurance and any kind of insurance with price being the
last issue. Service, financial solvency, and market conduct
experience or record are far more important issues in the
purchase of any life insurance or any insurance product than
price. You certainly do not want to be buying something for too
high a price.
Senator Sununu. I will make sure that this is underlined in
the record.
Mr. Serio. That is how I got this job, that kind of logic.
[Laughter.]
Senator Sununu. Let us stipulate for a moment that the
State regulators in New York have done their job in effectively
regulating and ensuring the safety and soundness of those
companies that are domiciled in the State. Provided that, I do
not think you have made an argument; I would think that life
insurance products, most basic life insurance products; I am
sure there are some very sophisticated products; this may not
be the case, but whose payout and value are based primarily on
interest rates and actuarial tables, they should be price-
driven products, where consumers can compare apples-to-apples,
find the best-priced product, and in doing so, I am sure they
take the service and the personal relationship into effect, but
those are effectively commodity products given their very
nature.
Mr. Serio. Price is a factor. Price should not be the
leading factor on it. It should be a factor. I will go to this
issue. Just a few years ago, we had this thing called vanishing
premiums, where people were given a promise that their premiums
were going to go away, and they were going to have this
insurance coverage forever or for as long as they were told
they were going to have it.
That did not pan out, because those interest assumptions
were wrong, because those other investment income assumptions
were wrong over the duration of that policy. And we had to go
back and rethink how it is that the companies are not only
structuring these products but how they are selling them. And I
think what has been happening is that this notion that the
public is going to save money a little bit here, a little bit
there is a hard thing to do when you are talking about a
product that you need to have guaranteed at the end of the day.
As Art Ryan noted earlier, I know as the ACLI President,
Governor Keating, has mentioned on a number of times, we are
talking about economic security here. We are not talking about
buying a car or a gallon of milk. We are talking about economic
security over the long haul, and you will have those
disparities in the financial conditions of these companies
happen over time.
Senator Sununu. And I appreciate that point, but we have
had a few hearings on products like mutual funds, pension
plans, and 401(k)'s here in this Committee room, all financial
products that are regulated by the Federal Government. And the
notion that they are regulated by the Federal Government, one,
has not created a race to the bottom but I do not think has
taken away from any of those important factors.
Mr. Ryan, I did want to hear your comments about the
optional charter proposal and the location of the regulator. I
think the optional charter proposal that I have seen and
discussed with a lot of people would put the regulator in the
Department of the Treasury. Could you describe what the value,
if there is a value to industry or consumers, would be of doing
that?
Mr. Ryan. Yes; as I mentioned in my testimony, by working
both tracks to work with the States in improving, as Greg has
talked about, and also having available the optional Federal
charter; the debate on the location is probably one of the last
things that needs to be finalized, but the logic that has been
proposed in terms of the Treasury Department really deals with
the need for the coordination between banking, securities, and
insurance.
As you know, there is a significant overlap. You take a
product like a variable annuity, where you overlap between
security and insurance. Certainly, there are a number of
banking products I could describe that have similar
characteristics. And so, the argument is that the Treasury
Department has a level of expertise around solvency and related
issues.
And without going to say a United Kingdom or a Japanese
system, where there is a single regulator over securities,
insurance, and banking, the opportunity for coordination would
exist greater if it existed within the Treasury or at least
provided for that degree of coordination. So, I think the drive
is more the coordination, and Treasury certainly could be a
reasonable solution to that need for coordination.
Mr. McCartney. Senator, perhaps the most obvious benefit is
that Senator Shelby would have jurisdiction over it.
[Laughter.]
Senator Sununu. You brought a smile to the Chairman's face,
and that is always a good time to bring a conclusion to the
hearing.
So, Mr. Chairman, I want to thank you very much for being
indulgent and giving me extra time for a second round of
questioning, and thank you very much to our panelists.
Chairman Shelby. This hearing was supposed to have been a
hearing on the state of the industry, but I think it got into a
lot of discussion and I think healthy discussion on Senator
Sununu would say an optional Federal charter or something to
that extent. We thank all of you for your testimony here today,
and the hearing is adjourned.
[Whereupon, at 4:40 p.m., the hearing was adjourned.]
[Prepared statements, response to written questions, and
response to written questions supplied for the record follow:]
PREPARED STATEMENT OF SENATOR WAYNE ALLARD
I would like to thank Chairman Shelby for holding this important
hearing today to examine the state of the insurance industry. There are
currently a variety of recommendations, proposals, and issues of
importance to all sectors of the insurance industry being discussed,
and I am pleased to have the opportunity to take a closer look at those
today.
The passage of the Gramm-Leach-Bliley Act almost 5 years ago
significantly changed the regulation of financial institutions,
reaffirming the regulation of insurance by the States as granted by the
1945 McCarran-Ferguson Act.
Recently, much discussion has occurred, and efforts are being made
to transfer certain regulatory authority of insurance to the Federal
Government. Such a consideration should be approached with caution and
deliberation.
Congress must continue to carefully examine the regulatory
structure to see that no group is ultimately put at a competitive
disadvantage with any changes that may be made to the existing
structure.
Terrorism Reinsurance is another area in which Congress must take a
deliberation approach. I supported Terrorism Insurance in 2002,
understanding that the circumstances were unprecedented, and the threat
to the economy grave.
Whether the Act, as a whole, should be extended beyond the end of
2005 will require extensive research as well as deliberation within the
Congress. We must determine whether or not this action would be the
most appropriate.
Specifically, I will be interested to hear how the commercial
insurance industry has taken steps to become less reliant on assistance
from the Federal Government.
I look forward to hearing from each of our witnesses today about
the progress they are making under the so-called ``functional
regulatory structure'' created by Gramm-Leach-Bliley.
I also look forward to hearing about challenges the insurance
industry is facing with particular regard to what barriers the market
may not be able to correct without Congressional intervention.
Thank you to each of our witnesses for agreeing to testify today.
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STATEMENT OF GREGORY SERIO
Chair, Government Affairs Task Force
National Association of Insurance Commissioners and
Superintendent, New York Department of Insurance
September 22, 2004
Introduction
Good morning, my name is Greg Serio. I am the Superintendent of
Insurance in New York. This year, I am serving as Chair of the
Government Affairs Task Force of the National Association of Insurance
Commissioners (NAIC). I am pleased to be here on behalf of the NAIC and
its members to provide the Committee on Banking, Housing, and Urban
Affairs with an overview of the Nation's State-based system of
insurance regulation, as well as an update of our efforts to modernize
State insurance supervision to meet the demands of the 21st century.
Today, I would like to make three basic points:
First, NAIC and the States are well underway in our efforts to
modernize State regulation where improvements are needed, while
preserving the benefits of local consumer protection that is the
real strength of State insurance regulation. With NAIC's adoption
in September 2003 of A Reinforced Commitment: Insurance Regulatory
Modernization Action Plan, State regulators are on time and on
target to accomplish changes needed to achieve a more efficient
system of State-based national insurance regulation in the United
States. In some areas, our goal is to achieve regulatory uniformity
nationwide because it makes sense for both consumers and insurers.
In areas where different standards among States are justified
because they reflect regional market conditions, we are harmonizing
State regulatory procedures to facilitate compliance by insurers
and agents doing business in those markets.
Second, insurance is a complex commercial product that is very
much different from banking and securities. Consequently, the
process for regulating insurance products must also be different.
Insurance policies are financial guarantees that are necessarily
rooted in the contractual and tort laws of each State to provide
protection against unexpected or unavoidable losses that can
cripple the lives of individuals, families, and businesses. In
doing so, insurance products inevitably touch a host of important
and often controversial social issues that are addressed by
specific statutory code language in every State. Current natural
disasters, including hurricanes in Alabama and fires in California,
highlight the advantages of State insurance oversight. State
officials are in the best position to respond quickly, and to
fashion remedies that are responsive to local conditions. We are
directly accountable to consumers who live in our communities, and
are more
likely to effectively police claims-handling, underwriting, rating,
and marketing practices. In addition, residual market mechanisms,
which become important as markets harden after catastrophic losses,
are more appropriately designed and administered by State officials
familiar with the insurance carriers, geography, and demographics
of their region.
Third, we strongly believe an effective system of national
regulation does not mean Federal regulation. Involving the Federal
Government will not simplify the complexity of insurance issues,
nor diminish their number, nor smooth the process of regulation.
Instead, Federal intervention in supervising insurance will simply
add additional layers of uncertainty, confusion, and cost for
policyholders and claimants regarding ``who is in charge'' of
supervising insurance payments when they are most vulnerable to the
stresses of life's disasters and personal losses. Any Federal
legislation dealing with insurance regulation carries the risk of
undermining State consumer protections through unintended or
unnecessary preemption of State laws and regulations. Creating an
optional Federal charter and its related regulatory apparatus would
have a serious negative impact on the State regulatory system,
including our efforts to make improvements in areas sought by
proponents of a Federal charter. Ultimately, a Federal regulator
would adversely affect State premium taxes and other revenues,
which totaled $12.3 billion in 2002.
State Regulatory Modernization: On Time and On Target
The State regulatory system is inherently strong when it comes to
protecting consumers because we understand local needs and market
conditions. However, we agree there is a need to make the system more
uniform, reciprocal, and efficient. Consequently, State regulators have
agreed upon a specific modernization plan that is now being implemented
across the Nation.
In March 2000, insurance commissioners committed to modernizing the
State system by unanimously endorsing an action plan entitled Statement
of Intent--The Future of Insurance Regulation. This important document
set forth a common vision of our response to the Gramm-Leach-Bliley Act
and how a State-based system of national regulation should develop in
each area where modernization is needed. In September 2003, State
regulators took the next step in the modernization process by setting
specific program targets and a common schedule for implementing them
through adoption of the Reinforced Commitment: Insurance Regulatory
Action Plan. This landmark document--the result of lengthy discussions
and negotiations--puts the States on a track to reach all key
modernization goals at scheduled dates within the next few years. A
copy of the NAIC's Insurance Regulatory Action Plan, together with an
update of our current implementation progress to September 2004, is
attached as ATTACHMENT A * to this statement.
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* Held in Committee files.
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Working in our individual States and collectively through the NAIC,
we have made tremendous progress in achieving an efficient regulatory
system for the business of insurance. Significantly, our specific
regulatory program targets were developed with extensive input from
industry and consumer representatives who are
active in the NAIC's open committee process. We strongly believe our
regulatory action plan satisfies every legitimate complaint regarding
inefficiency and redundancy in the State system. Even if an alternative
Federal regulatory system were set up tomorrow, there is no way it
could achieve these improvements on a schedule that comes close to the
aggressive timetable that State regulators have adopted voluntarily.
Specific Action Goals in the NAIC Plan
The NAIC's Insurance Regulatory Action Plan covers every important
area needed to achieve an effective national regulatory system, while
still protecting consumers and industry participants in each State:
Consumer Protection
``An open process . . . access to information and consumers' views
. . . our primary goal is to protect insurance consumers, which we must
do proactively and aggressively, and provide improved access to a
competitive and responsive insurance market.''
Market Regulation
``Market analysis to assess the quality of every insurer's conduct
in the marketplace, uniformity, and interstate collaboration . . . the
goal of the market regulatory enhancements is to create a common set of
standards for a uniform market regulatory oversight program that will
include all States.''
Speed-to-Market for Insurance Products
``Interstate collaboration and filing operational efficiency
reforms . . . State insurance commissioners will continue to improve
the timeliness and quality of the reviews given to insurers' filings of
insurance products and their corresponding advertising and rating
systems.''
Producer Licensing
``Uniformity of forms and process . . . the NAIC's broad, long-term
goal is the implementation of a uniform, electronic licensing system
for individuals and business entities that sell, solicit, or negotiate
insurance.''
Insurance Company Licensing
``Standardized filing and baseline review procedures . . .the NAIC
will continue to work to make the insurance company licensing process
for expanding licensure as uniform as appropriate to support a
competitive insurance market.''
Solvency Regulation
``Deference to lead States . . . State insurance regulators have
recognized a need to more fully coordinate their regulatory efforts to
share information proactively, maximize technological tools, and
realize efficiencies in the conduct of solvency monitoring.''
Change In Insurance Company Control
``Streamline the process for approval of mergers and other changes
of control.''
NAIC members understand these goals present difficult challenges.
However, with the active support and participation of governors and
State legislators, as well as industry and consumer advocates, we are
confident NAIC member States will achieve these goals.
Insurance is a Complex Financial Product that Demands Local Regulation
Paying for insurance products is one of the largest consumer
expenditures of any kind for most Americans. Figures compiled by the
NAIC show that an average family can easily spend a combined total of
$4,500 each year for auto, home, life, and health insurance coverage.
This substantial expenditure--often required by law or business
practice--is typically much higher for families with several members,
more than one car, or additional property to insure. Consumers clearly
have an enormous financial and emotional stake in making sure insurers
keep the promises they make.
Protecting insurance consumers in a world of hybrid institutions
and products must start with a basic understanding that insurance is a
different business than banking and securities. Banks make loans based
upon a straight-forward analysis of a customer's collateral and ability
to pay, whereas securities can be bought by anyone having sufficient
funds at a price set by open markets. In contrast, insurance is a
commercial product that offers consumers a financial guarantee that
takes into account each customer's potential claims for losses
(depending on variable circumstances), financial situation, place of
residence, type of business, ``risk management'' preparations, or
lifestyle choices such as smoking, exercise, education, and travel.
Insurance is thus based upon series of individual subjective
business decisions such as these: Will an insurance policy be offered
to a consumer? At what price? What are the policy terms and conditions?
Is a claim filed by a policyholder valid? If so, how much should the
customer be paid under the policy terms? All of these subjective
business decisions add up to one absolute certainty: Insurance products
can generate a high level of consumer backlash and customer
dissatisfaction that requires a higher level of regulatory resources
and responsiveness.
As regulators of insurance, State governments are responsible for
making sure the expectations of American consumers--including those who
are elderly or low income--are met regarding financial safety and fair
treatment by insurers. Nationwide in 2002, State insurance departments
employed more than 13,000 regulatory personnel and spent $947 million
to be the watchful eyes and helping hands on insurance problems. We
helped consumers collect tens of millions of dollars in claims
payments.
The States also maintain a system of financial guaranty funds that
cover personal losses of consumers in the event of an insurer
insolvency. It is important for Congress to note that the entire State
insurance system is authorized, funded, and operated at absolutely no
cost to the Federal Government.
There have been charges from some industry groups that the State
regulatory system is inefficient and burdensome, and that a single
Federal regulator would be better. However, the NAIC and its members do
not believe the consumers we serve each day think we are inefficient or
burdensome when compared to the agencies and departments of the Federal
Government. During 2002, we handled approximately 4.2 million consumer
inquiries and complaints regarding the content of their policies and
their treatment by insurance companies and agents. Many of those calls
were resolved successfully at little or no cost to the consumer.
Unlike banking and securities, insurance policies are inextricably
bound to the separate legal systems of each State. There is no way the
Federal Government could possibly replicate the specific expertise of
State legislatures, regulators, and courts to successfully interpret
the contractual and tort laws of 50 States and the District of
Columbia. Moreover, there is no reason for the Federal Government to do
so when the States have a specific modernization plan and timetable to
get the job done.
Congress Must Not Undermine State Modernization Efforts
The NAIC and its members believe Congress must be very careful in
considering potential Federal legislation to achieve modernization of
insurance regulation in the United States. Even well-intended and
seemingly benign Federal legislation can have a substantial adverse
impact on existing State laws and regulations designed to protect
insurance consumers. Because Federal law preempts conflicting State
laws under the U.S. Constitution, hastily drafted or vague Federal laws
can easily undermine or negate important State legal protections for
American consumers.
When Congress passed the Gramm-Leach-Bliley Act (GLBA) in 1999, it
acknowledged once again that States should regulate the business of
insurance in the United States, as set forth originally in the
McCarran-Ferguson Act. There was a careful statutory balancing of
regulatory responsibilities among Federal banking and securities
agencies and State insurance departments, with the result that Federal
agencies would not be involved in making regulatory determinations
about insurance matters.
Even though Congress tried very hard in GLBA to craft language that
would not unnecessarily preempt State laws, there have already been
disagreements about the extent to which federally chartered banks may
conduct insurance-related activities without complying with State laws.
Under GLBA, no State law may ``prevent or
significantly interfere'' with the ability of a federally chartered
bank to conduct insurance-related business permitted by GLBA. federally
chartered banks have aggressively asserted their perceived rights under
GLBA to conduct nonbanking business unhindered by State laws. As a
result, the entry of federally chartered banks into insurance has
become a source of uncertainty and dispute despite the best efforts of
Congress to avoid this very result.
We fully expect federally chartered insurers would insist that
State laws involving solvency and market conduct cannot ``prevent or
significantly interfere'' with their federally granted powers to
conduct insurance business anywhere in the United States. A Federal
insurance charter with its associated laws, regulations, and
bureaucracy must necessarily parallel every aspect of existing State
laws and regulations, meaning potential conflicts between State and
Federal laws will likely occur across the board. The result would be
years of protracted, costly litigation, as well as market and
regulatory confusion that will benefit the legal community rather than
insurance providers and consumers.
One of the great strengths of State insurance regulation is the
fact it is rooted in other State laws that apply when insurable events
occur. The NAIC urges Congress to avoid undercutting State authority in
considering any Federal legislation that would preempt important
consumer protections or create a Federal insurance charter. Federal
laws that appear simple on their face can have devastating consequences
for State insurance departments trying to protect the public.
The Impact of Federal Chartering on State Regulation Will Not Be
``Optional''
Some industry representatives have said a Federal charter merely
adds an optional choice to the insurance regulatory system in the
United States, and that it would not seriously affect the existing
State system. State regulators disagree with this assertion. A Federal
charter may be optional for an insurer choosing it, but the negative
impact of federally regulated insurers will not be optional for
consumers, producers, State-chartered insurers, State governments, and
local taxpayers who are affected, even though they have little or no
say in the choice of a Federal charter.
Let us be clear about the impact of a Federal insurance regulator
upon State regulation and our ability to protect consumers: The Federal
Government is not an equal regulatory partner because it can preempt
State laws and regulations. This simple fact contradicts the very
foundation of insurance in the United States; because
insurance products are uniquely intertwined and dependent upon State
law for everything from underwriting standards, to pricing, to claims
procedures, to legal resolution of disputes. There is no logical or
practical way to divorce insurance regulation from the State laws that
give rise to consumer insurance products.
Despite our different sizes, geography, and market needs, States
work together through the NAIC as legal equals under the present
system. We find solutions as a peer group through extensive discussion
and debate, give-and-take and mutual respect, knowing that no single
State can force its own will over the valid concerns and objections of
other States. Keeping in mind the original purpose of regulation is to
protect all consumers, we believe this participatory democracy and
State decisionmaking, based upon the political and business realities
of local markets, is a major strength of the State-based system for
protecting consumers and regulating insurers and agents.
Ultimately, a Federal charter and its regulatory system would
result in at least two separate insurance systems operating in each
State. One would be the current department of insurance established and
operated under State law and government supervision. This system will
continue responding directly to State voters and taxpayers, including
the statewide election of the insurance commissioner in twelve States.
A second system would be a new Federal regulator with zero
experience or grounding in the local State laws that control the
content of insurance policies, claims procedures, contracts, and legal
rights of citizens in tort litigation. Nonetheless, this new Federal
regulator would undoubtedly have the power to preempt State laws and
authorities that disagree with the laws that govern policyholders and
claimants of State-chartered insurers. At the very least, this
situation will lead to consumer, market, and regulatory overlap and
confusion. At worst, it will lead to varying levels of consumer
protection, perhaps even a ``race to the bottom'' to lower consumer
protection standards, based upon whether an insurer is chartered by
Federal or State government.
Granting a Government charter for an insurer means taking full
responsibility for the consequences, including the costs of
insolvencies and consumer complaints. The States have fully accepted
these responsibilities by covering all facets of insurance licensing,
solvency monitoring, market conduct, and handling of insolvent
insurers. The NAIC does not believe Congress will have the luxury of
granting insurer business licenses without also being drawn into the
full range of responsibilities and hard-hitting criticism--fair and
unfair--that go hand-in-hand with a Government charter to underwrite
and sell insurance. Furthermore, we doubt States will be willing to
accept responsibility for the mistakes or inaction of a Federal
regulator by including Federal insurers under State guaranty funds and
other important, proven consumer protection laws.
Conclusion
The system of State insurance regulation in the United States has
worked well for 125 years. State regulators understand that protecting
America's insurance
consumers is our first responsibility. We also understand commercial
insurance markets have changed, and that modernization of State
insurance standards and procedures is needed to facilitate less costly
and less burdensome regulatory compliance for insurers and producers.
We respectfully request that Congress, consumers, and insurance
industry participants work with us to implement the specific
improvements set forth in the NAIC's Insurance Regulatory Modernization
Action Plan through the State legislative system. This is the only
practical, workable way to achieve necessary changes quickly in a
manner that preserves the State consumer protections consumers demand.
The State-based regulatory reform approach far exceeds having an
``insurance czar'' in Washington, DC, along with the huge, costly,
isolated Federal bureaucracy that will accompany it. It also gives
citizens in each State control over important aspects of insurance and
claims procedures that affect their financial security in the
communities where they live.
The NAIC and its member States have fully cooperated over the years
with important inquiries by Congress into the adequacy of the State
regulatory system. We believe these inquiries have been productive, and
have clearly demonstrated why local and regional State regulation of
insurance is the very best way to meet the demands of consumers for
this unique financial product. We will continue to work with Congress
and within State government to improve the national efficiency of State
insurance regulation, while at the same time preserving our
longstanding, proven, and successful dedication to protecting American
consumers.
Insurance regulatory modernization and protection of insurance
consumers are not, nor should they ever be, mutually exclusive notions.
We can achieve both these important objectives.
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STATEMENT OF ARTHUR F. RYAN
Chairman, American Council of Life Insurers and
Chairman and Chief Executive Officer, Prudential Financial
September 22, 2004
Chairman Shelby, Senator Sarbanes, and Members of the Committee, it
is an honor to represent the over one million individuals working in
the life insurance industry in America. I am here today not only as
Chairman and Chief Executive Officer of Prudential Financial--one of
the world's largest diversified life insurance companies--but also as
the Chairman of the American Council of Life Insurers (ACLI). With 368
members, the ACLI is the principal trade association representing
domestic life insurance companies.
Today, I will discuss:
The function of life insurers in the marketplace and in the
economy;
Our industry's role in helping baby boomers and others provide
for their retirement security and financial needs; and
Why regulatory changes are important to the insurance industry
and what the ACLI has done to assess the current regulatory
environment and identify areas that are in need of improvement.
Today, the life insurance industry competes in a national and even
global marketplace. We have entered the 21st century as a much more
involved, dynamic partner with American families and businesses,
assisting them in protecting and growing their wealth. We provide
financial security for Americans in all stages of life with products
like life insurance, annuities, disability, and long-term care
insurance.
These products not only protect a family's finances, but also
enable Americans to save money, accumulate wealth for retirement and
convert it into a lifetime stream of guaranteed retirement income.
No other financial intermediary can do that. The life insurance
business is a vital component of the U.S. economy, providing a wide
array of essential financial and retirement security products and
services to all segments of the American public.
Currently there are over 395 million life insurance policies in
force, providing Americans with $17 trillion in financial protection.
In addition, Americans have saved $2 trillion toward their retirement
by investing through our annuity products. Our long-term commitments
and investments have placed us as one of the largest investors in the
U.S. economy assisting in economic growth. In managing these
obligations, the industry has invested $3.4 trillion in the financial
markets, representing 9 percent of the total capital. Life insurers are
one of the largest holders of long-term, fixed-rate commercial
mortgages in the United States. These long-term, financial commitments
are generally 10 years and longer in maturity, much longer than
commitments made by other industries.
Our most recent numbers show that life insurers invested more than
$304 billion in new net funds in the Nation's economy. Fifty-seven
percent of the industry's assets--or $2 trillion--are held in long-term
bonds, mortgages, real estate, and other long-term investments. This
includes:
$417 billion invested in Federal, State, and local government
bonds, helping to fund urban revitalization, public housing,
hospitals, schools, airports, roads, and bridges;
$251 billion invested in mortgage loans on real estate-
financing for homes, family farms, and offices;
$1.2 trillion invested in long-term U.S. corporate bonds; and
$791 billion invested in corporate stocks.
Notwithstanding the massive investment we make in the economy, it
is the area of long-term savings and retirement security where the life
insurance industry may have the greatest positive impact on public
policy in the coming years. With 76 million baby-boomers nearing
retirement, the United States faces a potential retirement crisis. We
must confront the fact that the average American nearing retirement has
only $47,000 in savings and assets, not including real estate. Industry
research indicates that 68 percent of Americans believe they will not
be able to save enough for retirement.
Future retirees will have fewer sources of guaranteed income than
previous generations. This is due to the decline of traditional defined
benefit pension plans and the fact that Social Security, on average,
replaces only 42 percent of earnings. If nothing is done, there is a
real possibility that millions of Americans will outlive their
retirement assets.
The insurance industry is dedicated and uniquely positioned to help
American workers prepare for their financial futures with life
insurance, long-term care, retirement and annuity products. Our
industry continues to be a prominent resource in helping both large and
small employers provide the right qualified retirement or savings plan
for their employees. Insurers act as asset managers and/or
administrators for defined benefit, 401(k), 403(b), 457 plans, and
other tax-qualified arrangements.
The industry also enables individuals to take control of their own
long-term savings through the purchase of annuities. Annuities offer
the critically important guarantee of a steady income stream for an
individual's lifetime. Although no single savings vehicle by itself can
address the retirement savings crisis, the insurance industry is
positioned to offer your constituents and all Americans an array of
product choices to meet their retirement security needs.
However, for the insurance business to remain viable and serve the
needs of the American public effectively, our system of life insurance
regulation must become far more efficient and responsive to the needs
and circumstances of a 21st century global business.
Life insurers today operate under a patchwork system of State laws
and regulations that lack uniformity and is applied and interpreted
differently from State-to-State. The result is a system characterized
by delays and unnecessary expenses that hinder companies and
disadvantage their customers. We believe it is appropriate, and we are
asking for your help, to modernize our regulatory structure to ensure
we are able to continue to serve our customers in the most efficient
and effective way.
Any solution must ensure:
greater speed-to-market for our products;
uniformity in agent licensing; and
efficient market conduct examinations.
To achieve that, and in keeping with a policy position adopted by
its Board of Directors and embraced by its membership, the ACLI has
been addressing regulatory reform on two tracks. Under the first track,
the ACLI is working with the States to improve the State-based system
of insurance regulation. Under the second, the ACLI is beginning to
work with Congress toward a federally oriented solution, which we
believe can ultimately best be achieved through an optional Federal
charter.
Mr. Chairman, the ACLI is ready to work with this Committee to put
in place an appropriate Federal regulatory option available to
insurance companies, agencies, and its producers. It is in the best
interests of our industry, your constituents, and our overall economy
to do so as quickly as possible. Gramm-Leach-Bliley and an increasingly
diversified financial services landscape have intensified this need.
With your help, the life insurance industry will be able to help
American families and businesses meet their financial needs today and
beyond.
On behalf of the member companies of the American Council of Life
Insurers, I would like to conclude by thanking you and Members of the
Committee for the opportunity to express our views on this most
important subject.
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PREPARED STATEMENT OF WILLIAM H. MCCARTNEY
Senior Vice President, Government and Industry Relations, USAA Group
on behalf of the American Insurance Association
September 22, 2004
Thank you, Chairman Shelby, Ranking Member Sarbanes, and members of
the Committee. My name is Bill McCartney, and I am Senior Vice
President, Government and Industry Relations at the United Services
Automobile Association (USAA) Group, a national, highly competitive,
and fully integrated financial services company headquartered in San
Antonio, Texas. USAA and its 22,000 employees provide insurance,
banking, and investment products to more than 5 million current and
former members of the U.S. military and their families. In fact, USAA's
mission, to which we devote our full attention, is ``to facilitate the
financial security of our members, associates, and their families
through provision of a full range of highly competitive financial
products and services.'' The company's net worth is greater than $9
billion and USAA owns or manages assets exceeding $79 billion. USAA is
known for its financial strength and outstanding service to its
members, and is one of only three property-casualty insurance companies
in the Nation to maintain the highest possible ratings from all three
major ratings agencies.
I am here to testify today on behalf of USAA and our property-
casualty insurance trade association, the American Insurance
Association (AIA), and its 450 members. The Committee is addressing an
issue that is vitally important to USAA and to AIA: The outdated and
dysfunctional nature of today's State insurance regulatory system. It
is the firm belief of USAA and AIA's other member companies that State-
based regulation does not allow the insurance industry to meet the
needs of Americans or the businesses they run.
As a national diversified financial services institution whose
members are mobile and may be ordered to change residences frequently,
USAA meets its members' insurance needs while navigating our way
through the burdensome, inconsistent, and often overlapping web of
insurance regulatory standards. This is not an easy task, due primarily
to the trifecta of regulatory failure that largely defines State
insurance regulation today: (1) lack of regulatory uniformity; (2)
pervasive government price controls; and (3) entrenched government
product controls.
I speak about the States' regulatory shortcomings from ``inside''
experience. From 1987 to 1994, I spent 7 years as Nebraska's Director
of Insurance and was privileged to serve as President of the National
Association of Insurance Commissioners (NAIC) in 1992. I have always
believed that the justification for regulatory oversight of insurance
rates was to make certain that they are not imperiling an insurer's
solvency--the primary and overarching role of insurance regulation. And
I used to believe that the States could achieve uniformity and
consistency of regulation without Federal intervention. But, over the
course of my 30-year career in insurance, I have come to know that the
existing regulatory approach at the State level is misguided, that the
system of price and product controls empowers regulators, not
consumers, that uniformity and consistency are not possible without
Federal intervention, and that continuing the current system will drive
companies out of business and capital out of the United States.
Let me take a few minutes to address these regulatory problem
areas. Lack of uniformity and inconsistency are hallmarks of the State
insurance regulatory system. The mere existence of different State
regulators presents a significant problem for any company serving a
national and highly mobile population. This problem is compounded by
the fact that, even within each jurisdiction, there are often differing
systems for different lines of business, making the process incredibly
cumbersome and unresponsive to consumer needs. A limited survey by AIA
of State requirements around the country found approximately 350 that
dictate how rates are to be filed and reviewed, and approximately 200
that relate to the filing and review of new products. It is illogical
to believe that compliance with more than 500 filing and review
requirements will lead to efficiency or consistency.
USAA has long had a compact with our active duty members: We will
insure their families' special needs wherever they are assigned. As a
result, USAA now serves 54 distinct U.S. insurance regulatory
jurisdictions: 50 States, the District of Columbia, and 3 U.S.
territories. This translates into at least 54 separate regulatory
structures to navigate. Each departure from uniformity and consistency
means higher compliance and system costs for USAA. And, as a member-
owned association, our policyholders absorb every penny in costs we
incur responding to each State's different process.
It is also clear that the current system cannot accommodate modern
methods of conducting business locally, regionally, nationally, or
internationally. Today, USAA members depend heavily on the Internet,
telephones, fax machines, and other electronic means to stay in touch
with their families and to conduct personal business. USAA is a pioneer
in leveraging information technology to provide the best possible
customer service at the lowest cost. But the patchwork of shifting and
burdensome State laws means our members are unable to manage their
insurance products online at our website to the degree they can
administer their other USAA financial products. It is sometimes a
Herculean effort just to ensure that our members are speaking and
working with only those insurance member service representatives
holding licenses in a specific State--a situation we do not face when
servicing brokerage, banking, or mutual fund accounts for a member.
The NAIC's efforts, while well-intentioned, can only go so far to
produce uniformity and consistency of regulation. The NAIC can draft
and adopt models, but it cannot force State legislatures to enact them.
Similarly, individual State insurance regulators can push for
regulatory modernization in their own respective jurisdictions, but
they cannot compel other State insurance regulators to push for similar
change.
The history of post-McCarran-Ferguson Act State insurance
regulation demonstrates that structural change is not a normal
occurrence, but an aberration. The Gramm-Leach-Bliley Act of 1999
(GLBA) provides a great example of the States' resistance to structural
change, even where Congress provides a significant push. While GLBA
established Federal privacy standards for insurance companies with
implementation left to the States, and the NAIC unanimously adopted a
privacy model regulation, States like California, New Mexico, and
Vermont have departed from that NAIC model, forcing insurers to comply
with varying privacy standards and enforcement mechanisms. Indeed,
while Congress recently reaffirmed Federal preemption of State
restrictions on information sharing among affiliated financial
institutions, California has continued to defend Senate Bill 1, which
flies in the face of Federal law by imposing affiliate-sharing
restrictions. This is not only burdensome to insurance companies, but
is also confusing to consumers who receive multiple privacy notices.
In addition, GLBA's registered agent and broker provisions were
supposed to provide reciprocity on producer licensing in at least 29
jurisdictions, with the NAIC certifying that it had met the conditions
of those provisions. Despite certification, key States are still not in
compliance. Even those that have been certified by the NAIC still allow
variances--extra requirements like fingerprint and background checks--
before a nonresident license is granted. For companies like USAA that
only write personal lines insurance and distribute insurance products
directly, this means that GLBA's best efforts have not only been for
naught, but have resulted in additional burdens.
Many States have failed to be effective regulatory stewards of
insurance. The McCarran-Ferguson Act is not a Federal abdication of
regulatory oversight responsibility, it is a delegation. Congress can--
and should--act to remedy the lack of uniformity and consistency of
insurance regulation that is so evident at the State level.
While nonuniformity is an inherent aspect of State insurance
regulation, government price and product controls are not. No other
competitive industry in the United States is forced to submit their
products and the prices charged for those products to a government
official for review and approval. This is anathema to the free market
environment that forms the backbone of the U.S. economy, including
every other
competitive industry deemed vital to American citizens, such as food,
housing, transportation, and energy. Price and product controls are
historical artifacts that have lost their utility and have turned a
competitive marketplace into one where insurance prices and products
are political pawns. Insurers should not be forced to ``beg the
government'' in order to use their existing products, bring new
products to market, or establish prices for those products. Likewise,
consumer empowerment in the marketplace should not be replaced by
needless regulatory control.
Perpetuation of government price and product controls in insurance
has led to a number of problems. First, an entrenched State focus on
government price and product controls discourages product innovation
and competition, ultimately denying consumers choice. The current
regulatory system concentrates on the wrong things. While artificially
or arbitrarily repressing prices may be politically popular, it is
ultimately economically unwise. Such price controls mask real problems
and over a period of time can lead to a crisis, forcing sizable
subsidized residual markets and market withdrawals that exacerbate
these problems. Government price controls do not work to the benefit of
anyone--especially consumers. In States where rigid government price
controls are prevalent, insurance premiums are higher, rates are more
politicized, consumer choices are restricted, residual markets are
larger, and the number of competing insurers is lower. These elements
conspire to drive capital from insurance markets in these States, and
place a burden on those insurers that remain.
Similar problems arise from suppression of insurance products.
Where regulators do not allow a variety of product options and
artificially limit the ability of insurers and consumers to structure
their insurance needs, insurers are left with a stark choice between
insuring or not insuring a consumer, and consumers may therefore be
left without coverage. In contrast, allowing insurers and consumers
maximum flexibility in the marketplace provides the best opportunity to
limit availability problems.
USAA is not immune from the problems attendant to government price
and product controls. In an increasing number of our regulatory
jurisdictions, USAA is actually prevented from charging rates
commensurate with the risks we insure. We have to submit policy and
product forms to regulators for lengthy review before using them in the
marketplace. In many States, regulatory rate and form approval delays
are chronic and increasing. USAA's federally regulated financial
services companies have no similar regulatory obstacles to getting
rates and products to market quickly. The emphasis on such controls in
insurance slows products from entering the market and inhibits product
creativity.
Second, while the property-casualty insurance industry stands out
as one of the most heavily regulated sectors of the U.S. economy, it is
not just a question of regulation. It is the fact of misguided
regulation. If the insurance industry cannot keep pace and cannot
provide consumers with real choices, the economy suffers. Insurance
provides much-needed security for businesses and individuals to
innovate,
invest, and take on risk. Yet the ability to innovate, invest, and take
on risk is substantially impeded because insurers labor under the
weight of a ``government-first, market-second'' regulatory system. This
system rewards inefficient market behavior, subsidizes high risks and
masks underlying problems that lead to rising insurance costs. The
bottom line is that consumers ultimately will pay more for less
adequate risk protection than would be the case under a more dynamic,
market-oriented regulatory system.
Third, because regulatory attention at the State level is misguided
and resources misdirected to ``front-end'' price and product
regulation, core functions like financial solvency have taken a
backseat. This is both unfortunate and dangerous, as it provides little
confidence to insurance consumers that their insurance companies will
be around and able to pay claims when they arise. This is a vitally
important role for insurance regulators, as financially sound insurers
lead to a healthy and vibrant market. But there have been some recent
lapses at the State level on that front. It is time to take a hard look
at these lapses, and to ask hard questions about whether the State
regulatory system has elevated outdated and unnecessary elements of
regulation to the detriment of industry financial condition.
Whether the problems are inherent in 50-State oversight or are part
of the post-McCarran-Ferguson approach to insurance regulation, the
current system is undeniably broken and all stakeholders are suffering
as a result. As price and product
obstacles increase, insurers find it more difficult to compete and make
a reasonable profit in the marketplace. This leads to more competitors
withdrawing from the market, taking capital and jobs from that market
and leaving fewer choices for consumers. It is no surprise that
property-casualty insurance consistently has the lowest return on
equity of all the financial services industries. The net result is a
parochial regulatory environment that encourages inefficiency and
repels investors.
The inability to serve customers because of a troubled regulatory
system is of acute concern to USAA, as we have a commitment to provide
insurance to members wherever they are located. Our mission does not
vary with a member's zip code. Unlike other insurers that have the
ability to defensively withdraw from markets due to a difficult
regulatory environment, USAA's commitment to its members does not make
this possible. The current ``heavy-handed'' regulatory system in many
States does not protect consumers, it actually disenfranchises them.
Because of the emphasis on price and product controls in these
jurisdictions, USAA is forced to devote enormous resources responding
to these ``pre-market'' obstacles rather than developing innovative new
products for our members. The system, in fact, discourages innovation
because the timeline for approving new products offered nationally can
be longer than the shelf-life of the innovation.
The rest of the USAA financial services family does not face these
regulatory obstacles. This is confusing and frustrating for our
members, who often need to use technology to access our products and
services. For example, whenever our members are transferred to another
location, they can provide their change of address at our website for
all USAA financial services. But, for our property-casualty insurance
products, the member's change of address is the beginning, not the end.
This is archaic. We should not have a mid-20th century system to handle
21st century needs.
While the focus of this hearing is on the State insurance
regulatory environment, USAA and other like-minded companies at AIA
have given a lot of thought to solutions to the current problems we are
experiencing. After much deliberation, USAA believes that a market-
based optional Federal charter would be the best route to true
regulatory reform. The optional Federal charter eliminates the arcane
government price and product controls that have been so corrosive to
the State regulatory system, empowering consumers through marketplace
competition. The optional Federal charter also provides for uniform
national oversight of federally licensed insurers.
Equally important, the optional Federal charter is just that--a
choice. Insurance companies that are comfortable with the current State
regulatory system are not forced into the new system, while insurers
like USAA that prize uniformity and market freedom may elect to be
subject to Federal oversight. Similarly, consumers who are comfortable
doing business with State-regulated insurers are free to continue to do
so. This is not a new regulatory paradigm, but one that is based on the
chartering system for U.S. banks.
Our preferred solution also does not place the Federal Government
in unfamiliar regulatory territory. There are numerous examples of
Federal involvement in property-casualty insurance. One that
immediately jumps to mind is terrorism risk
insurance, where the Terrorism Risk Insurance Act of 2002 (TRIA)
provides a Federal-private ``shared loss'' program for terrorism risk
that is administered by the U.S. Treasury. While the TRIA program
expires in 2005, insurers, policyholders, regulators, and legislators
are currently calling for a 2-year extension in order to gather all
necessary data about the risk, and for stakeholders to jointly develop
and implement a long-term, public-private solution for managing
terrorism exposure.
Finally, I would be remiss if I did not applaud the House Financial
Services Committee for its unyielding efforts to address the problems
I've outlined for the Committee today. Over the past few years, the
House has conducted 15 hearings on State insurance regulation in a
relentless drive to uncover the ills that plague the State regulatory
system. While enactment of the optional Federal charter is our aim, we
support the House process, as well as the market-driven direction of
the legislative draft that has been widely circulated. In particular,
the draft takes an historic ``free market'' approach to insurance
rates, recognizing the negative legacy of State government price
controls. We look forward to continuing to work constructively with
both the House and the Senate to ensure that the flaws of State
insurance regulation are exposed, and Federal legislative solutions
found.
Mr. Chairman, thank you for the opportunity to testify and I look
forward to answering any questions.
----------
PREPARED STATEMENT OF J. ROBERT HUNTER
Director of Insurance, Consumer Federation of America
September 22, 2004
Mr. Chairman and Members of the Committee, thank you for your
invitation to testify today. America's insurance consumers, including
small businesses, are vitally interested in how insurance will be
regulated in the future. Therefore, your hearing is most timely. We
especially appreciate the fact that the Committee is beginning its
review with an overall examination of insurance regulation--why it
exists, what are its successes and failures--rather than solely
reviewing proposed legislation, such as the Oxley-Baker proposal or the
optional Federal charter approach. \1\ In order to identify whether
Federal legislation is necessary and what should be its focus, it
obviously makes a great deal of sense for the Committee to first
conduct a thorough assessment of the current situation. If the
``problem'' is not properly diagnosed, the ``solutions'' that Congress
enacts will be flawed.
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\1\ CFA strongly opposes both of these proposals as undermining
needed consumer protections.
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Why is Regulation of Insurance Necessary?
The rationale behind insurance regulation is to promote beneficial
competition and prevent destructive or harmful competition in various
areas.
Insolvency: One of the reasons for regulation is to prevent
competition that routinely causes insurers to go out of business,
leaving consumers unable to collect on claims. Insolvency regulation
has historically been a primary focus of insurance regulation. After
several insolvencies in the 1980's, State regulators and the National
Association of Insurance Commissioners (NAIC) enacted risk-based
capital standards and implemented an accreditation program to help
identify and prevent future insolvencies. As far fewer insolvencies
occurred in the 1990's, State regulators appear to be doing a better
job.
Unfair and Deceptive Policies and Practices: Insurance policies,
unlike most other consumer products or services, are contracts that
promise to make certain payments under certain conditions at some point
in the future. (Please see the fact sheet on why insurance is different
from many other products for regulatory purposes that follows the
attached September 9, 2004 letter.) * Consumers can easily research the
price, quality, and features of a television, but they have very
limited ability to do so on insurance policies. Because of the
complicated nature of insurance policies, consumers rely on the
representations of the seller/agent to a far greater extent than for
other products. Regulation exists to prevent competition that fosters
the sale of unfair and deceptive policies, sales and claims practices.
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* Held in Committee files.
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Unfortunately, States have not fared as well in this area. Rather
than acting to uncover abuses and instigate enforcement actions, States
have often reacted after lawsuits or news stories brought bad practices
to light. For example, the common perception among regulators that
``fly-by-night'' insurance companies were primarily responsible for
deceptive and misleading practices was shattered in the late 1980's and
early 1990's by widespread allegations of such practices by household
names such as MetLife, John Hancock, and Prudential. For instance,
MetLife sold plain whole life policies to nurses as ``retirement
plans,'' and Prudential unilaterally replaced many customers' whole
life policies with policies that did not offer as much coverage. Though
it is true that State regulators eventually took action through
coordinated settlements, the allegations were first raised in private
litigation; many consumers were defrauded before regulators acted.
One of the problems insurance departments face is a lack of
resources for market conduct regulation. CFA's surveys indicate it
would take 5 to 7 years alone for States to complete market conduct
exams of just domestic insurance companies and over 50 years for all
companies. States making up 75 percent of the country's population have
inadequate resources. It is not surprising that many harmful practices
fall through the cracks.
Insurance Availability: Some insurance is mandated by law or
required to complete financial transactions, such as mortgage loans. In
a normal competitive market, participants compete by attempting to sell
to all consumers seeking the product. However, in the insurance market,
participants compete by attempting to ``select'' only the most
profitable consumers. This selection competition leads to availability
problems and redlining.\2\ Regulation exists to limit destructive
selection competition that harms consumers and society.
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\2\ The industry's reliance on selection competition can have
negative impacts on consumers. Insurance is a risk spreading mechanism.
Insurance aggregates consumers' premiums into a common fund from which
claims are paid. Insurance is a contractual social arrangement, subject
to regulation by the States.
The common fund in which wealth is shifted from those without
losses (claims) to those with losses (claims) is the reason that the
contribution of insurance companies to the Gross National Product of
the United States is measured as premiums less losses for the property/
casualty lines of insurance. The U.S. Government recognizes that the
losses are paid from a common fund and thus are a shift in dollars from
consumers without claims to those with claims, not a ``product'' of the
insurance companies.
Competition among insurers should be focused where it has positive
effects, for example, creating efficiencies, lowering overhead. But
rather than competing on the basis of the expense and profit components
of rates, the industry has relied more on selection competition, which
merely pushes claims from insurer to insurer or back on the person or
the State. States have failed to control against the worst ravages of
selection competition (for example redlining).
Some of the vices of selection competition that need to be
addressed include zip code or other territorial selection; the
potential for genetic profile selection; income (or more precisely
credit report) selection; and selection based on employment. Targeted
marketing based solely on information such as income, habits, and
preferences leaves out consumers in need of insurance, perhaps
unfairly.
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Lawsuits brought by fair housing groups and the Department of
Housing and Urban Development (HUD) have revealed that insurance
availability problems and unfair discrimination exist and demonstrate a
lack of oversight and attention by many of the States. NAIC had ample
opportunity after its own studies indicated that these problems existed
to move to protect consumers. It retreated, however, when the insurers
threatened to cut off funding for its insurance information database, a
primary source of NAIC income.
One obvious solution to discrimination and availability problems is
to require insurers to disclose information about policies written by
zip code, and about specific underwriting guidelines that are used to
determine eligibility and rates. Such disclosure would promote
competition and benefit consumers; but State regulators, for the most
part, have refused to require such disclosure in the face of adamant
opposition from the industry. Regulators apparently agree with insurers
that such information is a ``trade secret'' despite the absence of
legal support for such a position. In addition, though insurance
companies compete with banks that must meet data disclosure and lending
requirements in underserved communities under the Community
Reinvestment Act (CRA), insurers refuse to acknowledge a similar
responsibility to communities.
Reverse Competition: In certain lines of insurance, insurers market
their policies to a third party, such as creditors or auto dealers,
who, in turn, sell the insurance to consumers on behalf of the insurer
for commission and other compensation. This compensation is often not
disclosed to the consumer. Absent regulation, reverse competition leads
to higher--not lower--prices for consumers because insurers ``compete''
to offer greater compensation to third party sellers, driving up the
price to consumers.
The credit insurance market offers a perfect example of reverse
competition. Every few years, consumer groups issue reports about the
millions of dollars that consumers are overcharged for credit
insurance. Despite the overwhelming evidence that insurers do not meet
targeted loss ratios in most States, many regulators have not acted to
protect consumers by lowering rates.
The markets for low value life insurance and industrial life
insurance are characterized by overpriced and inappropriately sold
policies and a lack of competition. This demonstrates the need for
standards that ensure substantial policy value and clear disclosure.
Insurers rely on consumers' lack of sophistication to sell these
overpriced policies. With some exceptions, States have not enacted
standards that ensure value or provide timely, accurate disclosure.
Consumers continue to pay far too much for very little coverage.
Information for Consumers: True competition can only exist when
purchasers are fully aware of the costs and benefits of the products
and services they purchase. Because of the nature of insurance policies
and pricing, consumers have had relatively little information about the
quality and comparative cost of insurance policies. Regulation is
needed to ensure that consumers have access to information that is
necessary to make informed insurance purchase decisions and to compare
prices.
While information and outreach efforts of States have improved,
States and the NAIC have a long way to go. Some States have succeeded
in getting good information out to consumers, but all too often the
marketplace and insurance regulators have failed to ensure adequate
disclosure. Their failure affects the pocketbooks of consumers, who
cannot compare adequately on the basis of price.
In many cases, insurers have stymied proposals for effective
disclosure. For decades, consumer advocates pressed for more meaningful
disclosure of life insurance policies, including rate of return
disclosure, which would give consumers a simple way to determine the
value of a cash-value policy. Today, even insurance experts cannot
determine which policy is better without running the underlying
information through a computer. Regulators resisted this kind of
disclosure until the insurance scandals of the 1990's involving
widespread misleading and abusive practices by insurers and agents
prompted States and the NAIC to develop model laws to address these
problems. Regulators voiced strong concerns and promised tough action
to correct these abuses. While early drafts held promise and included
some meaningful cost-comparison requirements, the insurance industry
successfully lobbied against the most important provisions of these
proposals that would have made comparison-shopping possible for normal
consumers. The model disclosure law that NAIC eventually adopted is
inadequate for consumers trying to understand the structure and actual
costs of policies.
California adopted a rate of return disclosure rule a few years ago
for life insurance (similar to an APR in loan contracts) that would
have spurred competition and helped consumers comparison-shop. Before
consumers had a chance to become familiar with the disclosures,
however, the life insurance lobby persuaded the California legislature
to scuttle it.
Are the Reasons for Insurance Regulation Still Valid?
The reasons for effective regulation of insurance are as relevant,
or in some instances even more relevant, today than 5 or 10 years ago:
Advances in technology now provide insurers access to
extraordinarily detailed data about individual customers and allow
them to pursue selection competition to an extent unimaginable 10
years ago.
Insurance is being used by more Americans not just to protect
against future risk, but as a tool to finance an increasing share
of their future income, for example, through annuities.
Increased competition from other financial sectors (such as
banking) for the same customers could serve as an incentive for
misleading and deceptive practices and market segmentation, leaving
some consumers without access to the best policies and rates. If an
insurer cannot compete on price with a more efficient competitor,
one way to keep prices low is by offering weaker policy benefits
(that is, ``competition'' in the fine print).
States and lenders still require the purchase of auto and home
insurance. Combining insurer and lender functions under one roof,
as allowed by the Gramm-Leach-Bliley Act, could increase incentives
to sell insurance as an add-on to a loan (perhaps under tie-in
pressure)--or to inappropriately fund insurance policies through
high-cost loans.
As consumers are faced with these changes, it is more important
than ever that insurance laws are updated and the consumer protection
bar is raised, not lowered.
Given that Regulation is Important for Consumers, Who Should Regulate--
the States or the Federal Government?
Consumers do not care who regulates insurance; we only care that
the regulatory system be excellent. Consumer advocates have been (and
are) critical of the current State-based system, but we are not willing
to accept a Federal system that guts consumer protections in the States
and establishes one uniform but weak set of regulatory standards.
I am one of very few people who have served both as a State
regulator (Texas Insurance Commissioner) and as a Federal regulator
(Federal Insurance Administrator when the Federal Insurance
Administration was in HUD and had responsibility for the co-regulation
of homeowners' insurance in the FAIR Plans, as well as flood and crime
insurance duties.) I know that either a Federal or the State system can
succeed or fail in protecting consumers. What is critical is not the
locus of regulation, but the quality of the standards and the
effectiveness of enforcement of those standards.
Both a State and a Federal system have potential advantages and
disadvantages. Here are some of them:
Despite many weaknesses that exist in insurance regulation at the
State level, a number of States do have high-quality consumer
protections. Moreover, the States also have extensive experience
regulating insurer safety and soundness and an established system to
address and respond to consumer complaints. The burden is on those who
for opportunistic reasons now want to shift away from 150 years of
State insurance regulation to show that they are not asking Federal
regulators and American consumers to accept a dangerous ``pig in a
poke'' that will harm consumers.
CFA agrees that better coordination and more consistent standards
for licensing and examinations are desirable and necessary--as long as
the standards are of the highest--and not the lowest--quality. We also
agree that efficient regulation is important, because consumers pay for
inefficiencies. CFA participated in NAIC meetings over many months
helping to find ways to eliminate inefficient regulatory
practices and delays, even helping to put together a 30-day total
product approval package. Our concern is not with cutting fat, but with
removing regulatory muscle when consumers are vulnerable.
Why Have Insurers Suddenly Embraced Federal Regulation?
The recent conversion of insurers to the concept of Federal
regulation is based solely on the notion that such regulation would be
weaker. Insurers have, on occasion, sought Federal regulation when the
States increased regulatory control and the Federal regulatory attitude
was more laissez-faire. Thus, in the 1800's, the industry argued in
favor of a Federal role before the Supreme Court in Paul v. Virginia,
but the court ruled that the States controlled because insurance was
intrastate commerce.
Later, in the 1943 SEUA case, the Court reversed itself, declaring
that insurance was interstate commerce and that Federal antitrust and
other laws applied to insurance. By this time, Franklin Roosevelt was
in office and the Federal Government was a tougher regulator than were
the States. The industry sought, and obtained, the McCarran-Ferguson
Act. This law delegated exclusive authority for insurance regulation to
the States, with no routine Congressional review. The Act also granted
insurers a virtually unheard of exemption from antitrust laws, which
allowed insurance companies to collude in setting rates and to pursue
other anticompetitive practices without fear of Federal prosecution.
From 1943 until recently, the insurance industry has violently
opposed any Federal role in insurance regulation. In 1980, insurers
successfully lobbied to stop the Federal Trade Commission from
investigating deceptive acts and practices of any kind in the insurance
industry. They also convinced the White House that year to eliminate
the Federal Insurance Administration's work on insurance matters other
than flood insurance. Since that time, the industry has successfully
scuttled any attempt to require insurers to comply with Federal
antitrust laws and has even tried to avoid complying with Federal civil
rights laws.
Notice that the insurance industry is very pragmatic in their
selection of a preferred regulator. They always favor the least
regulation. It is not surprising that, today, the industry would again
seek a Federal role at a time they perceive little regulatory interest
at the Federal level. But, rather than going for full Federal control,
they have learned that there are ebbs and flows in regulatory oversight
at the Federal and State levels, so they seek the ability to switch
back and forth at will.
Further, the insurance industry has used the possibility of an
increased Federal role to pressure NAIC and the States into gutting
consumer protections over the last 3 or 4 years. Insurers have
repeatedly warned States that the only way to preserve their control
over insurance regulation is to weaken consumer protections.\3\ They
have been assisted in this effort by a series of House hearings, which
rather than focusing on the need for improved consumer protection have
served as a platform for a few Representatives to issue ominous
statements calling on the States to further deregulate insurance
oversight, ``or else.'' Most recently, some House Members have floated
a ``road map'' for insurance deregulation (known as the ``SMART''
bill), a plan that would greatly harm America's insurance consumers.
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\3\ The clearest attempt to inappropriately pressure the NAIC
occurred at their spring 2001 meeting in Nashville. There, speaking on
behalf of the entire industry, Paul Mattera of Liberty Mutual Insurance
Company told the NAIC that they were losing insurance companies every
day to political support for the Federal option and that their huge
effort in 2000 to deregulate and speed product approval was too little,
too late. He called for an immediate step-up of deregulation and
measurable ``victories'' of deregulation to stem the tide. In a July 9,
2001 Wall Street Journal article by Chris Oster, Mattera admitted his
intent was to get a ``headline or two to get people refocused.'' His
remarks were so offensive that I went up to several top commissioners
immediately afterwards and said that Materra's speech was the most
embarrassing thing I had witnessed in 40 years of attending NAIC
meetings. I was particularly embarrassed since no commissioner
challenged Mattera and many had almost begged him to grant them more
time to deliver whatever the industry wanted.
Jane Bryant Quinn, in her speech to the NAIC on October 3, 2000,
said: ``Now the industry is pressing State regulators to be even more
hands-off with the threat that otherwise they'll go to the feds.'' So
other observers of the NAIC see this pressure as potentially damaging
to consumers.
Larry Forrester, President of the National Association of Mutual
Insurance Companies (NAMIC), wrote an article in the National
Underwriter of June 4, 2000. In it he said, `` . . . how long will
Congress and our own industry watch and wait while our competitors
continue to operate in a more uniform and less burdensome regulatory
environment? Momentum for Federal regulation appears to be building in
Washington and State officials should be as aware of it as any of the
rest of us who have lobbyists in the Nation's capital . . . NAIC's
ideas for speed-to-market, complete with deadlines for action, are
especially important. Congress and the industry will be watching
closely . . . The long knives for State regulation are already out . .
.''
In a press release entitled ``Alliance Advocates Simplification of
Personal Lines Regulation at NCOIL Meeting; Sees it as Key to Fighting
Federal Control'' dated March 2, 2001, John Lobert, Senior VP of the
Alliance of American Insurers, said, ``Absent prompt and rapid progress
(in deregulation) . . . others in the financial services industry--
including insurers--will aggressively pursue Federal regulation of our
business . . .''
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This strategy of ``whipsawing'' State regulators to lower standards
benefits all elements of the insurance industry, even those that do not
support any Federal regulatory approach. Even if Congress does nothing,
the threat of Federal intervention is enough to scare State regulators
into acceding to insurer demands.
Unfortunately for consumers, the strategy has already paid off,
before the first insurance bill is ever marked up in Congress. In the
last few years, the NAIC has moved suddenly to cut consumer protections
adopted over a period of decades. The NAIC has also failed to act in
the face of a number of serious problems facing consumers in the
insurance market.
NAIC Failures To Act
1. Failure to do anything about abuses in the small face life
market. Instead, NAIC adopted an incomprehensible disclosure on
premiums exceeding benefits, but did nothing on overcharges, multiple
policies, or unfair sales practices.
2. Failure to do anything meaningful about unsuitable sales in any
line of insurance. Suitability requirements still do not exist for life
insurance sales even in the wake of the remarkable market conduct
scandals of the late 1980's and early 1990's. A senior annuities
protection model was finally adopted (after years of debate) that is so
limited as to do nothing to protect consumers.
3. Failure to call for collection and public disclosure of market
performance data after years of requests for regulators to enhance
market data, as NAIC weakened consumer protections. How does one test
whether a market is workably competitive without data on market shares
by zip code and other tests?
4. Failure to do anything as an organization on the use of credit
scoring for insurance purposes. In the absence of NAIC action, industry
misinformation about credit scoring has dominated State legislative
debates. NAIC's failure to analyze the issue and perform any studies on
consumer impact, especially on lower-income consumers and minorities,
has been a remarkable dereliction of duty.
5. Failure to address problems with risk selection. There has not
even been a discussion of insurers' explosive use of underwriting and
rating factors targeted at socio-economic characteristics: Credit
scoring, check writing, prior bodily injury coverage amounts purchased
by the applicant, prior insurer, prior nonstandard insurer, not-at-
fault claims, not to mention use of genetic information, where Congress
has had to recently act to fill the regulatory void.
6. Failure to do anything on single premium credit insurance
abuses.
7. Failure to take recent steps on redlining or insurance
availability or affordability. Many States no longer even look at these
issues, 30 years after the Federal Government issued studies
documenting the abusive practices of insurers in this regard. Yet,
ongoing lawsuits continue to reveal that redlining practices harm the
most vulnerable consumers.
NAIC Rollbacks Of Consumer Protections
1. The NAIC pushed through small business property/casualty
deregulation, without doing anything to reflect consumer concerns
(indeed, even refusing to tell consumer groups why they rejected their
specific proposals) or to upgrade ``back-end'' market conduct quality,
despite promises to do so. As a result, many States adopted the
approach and have rolled back their regulatory protections for small
businesses. Nebraska and New Hampshire joined the list of States that
have deregulated just this year.
2. States are rolling back consumer protections in auto insurance
as well. New Jersey, Texas, Louisiana, and New Hampshire have done so
in the last 2 years.
3. Last year, the NAIC just terminated free access for consumers to
the annual statements of insurance companies at a time when the need
for enhanced disclosure is needed if price regulation is to be reduced.
Can Competition Alone Guarantee a Fair, Competitive Insurance Market?
Consumers, who over the last 30 years have been the victims of
vanishing premiums, churning, race-based pricing, creaming, and
consumer credit insurance policies that pay pennies in claims per
dollar in premium, are not clamoring for such policies to be brought to
market with even less regulatory oversight than in the past. The fact
that ``speed-to-market'' has been identified as a vital issue in
modernizing insurance regulation demonstrates that some policymakers
have bought into insurers' claims that less regulation benefits
consumers. We disagree. We think smarter, more efficient regulation
benefits both consumers and insurers and leads to more beneficial
competition. Mindless deregulation, on the other hand, will harm
consumers.
The need for better regulation that benefits both consumers and
insurers is being exploited by some in the insurance industry to
eliminate the most effective aspects of State insurance regulation such
as rate regulation, in favor of a model based on the premise that
competition alone will protect consumers.\4\ We question the entire
foundation behind the assumption that virtually no front-end regulation
of insurance rates and terms coupled with more back-end (market
conduct) regulation is better for consumers. The track record of market
conduct regulation has been extremely poor. As noted above, insurance
regulators rarely are the first to identify major problems in the
marketplace.
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\4\ If America moves to a ``competitive'' model, certain steps must
first be taken to ensure ``true competition'' and prevent consumer
harm. First, insurance lines must be assessed to determine whether a
competitive model, for example, the alleviation of rate regulation, is
even appropriate. This assessment must have as its focus how the market
works for consumers. For example, States cannot do away with rate
regulation of consumer credit insurance and other types of insurance
subject to reverse competition. The need for relative cost information
and the complexity of the line/policy are factors that must be
considered.
If certain lines are identified as appropriate for a
``competitive'' system, before such a system can be implemented, the
following must be in place:
Policies must be transparent: Disclosure, policy form, and
other laws must create transparent policies. Consumers must be able to
comprehend the policy's value, coverage, actual costs, including
commissions and fees. If consumers cannot adequately compare actual
costs and value, and if consumers are not given the best rate for which
they qualify, there can be no true competition.
Policies should be standardized to promote comparison-
shopping.
Antitrust laws must apply.
Anti-rebate, antigroup, and other anticompetitive State
laws must be repealed.
Strong market conduct and enforcement rules must be in
place with adequate penalties to serve as an incentive to compete
fairly and honestly.
Consumers must be able to hold companies legally
accountable through strong private remedies for losses suffered as a
result of company wrongdoing.
Consumers must have knowledge of and control over flow and
access of data about their insurance history through strong privacy
rules.
There must be an independent consumer advocate to review
and assess the market, assure the public that the market is workably
competitive, and determine if policies are transparent.
Safeguards to protect against competition based solely on risk
selection must also be in place to prevent redlining and other
problems, particularly with policies that are subject to either a
public or private mandate. If a competitive system is implemented, the
market must be tested on a regular basis to make sure that the system
is working and to identify any market dislocations. Standby rate
regulation should be available in the event the ``competitive model''
becomes dysfunctional.
If the industry will not agree to disclosing actual costs,
including all fees and commissions, ensuring transparency of policies,
strong market conduct rules and enforcement then it is not advocating
true competition, only deregulation.
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Given this track record, market conduct standards and examinations
by regulators must be dramatically improved to enable regulators to
become the first to identify and fix problems in the marketplace and to
address market conduct problems on a national basis. From an efficiency
and consumer protection perspective, it makes no sense to lessen
efforts to prevent the introduction of unfair and inappropriate
policies in the marketplace. It takes far less effort to prevent an
inappropriate insurance policy or market practice from being introduced
than to examine the practice, stop a company from doing it and provide
proper restitution to consumers after the fact.
The unique nature of insurance policies and insurance companies
requires more extensive front-end regulation than other consumer
commodities. And while insurance markets can be structured to promote
beneficial price competition, deregulation does not lead to, let alone
guarantee, such beneficial price competition.
Front-end regulation should be designed to prevent market conduct
problems from occurring instead of inviting those problems to occur. It
should also promote beneficial competition, such as price competition
and loss mitigation efforts, and deter destructive competition, such as
selection competition, and unfair sales and claims settlement
practices. Simply stated, strong, smart, efficient, and consistent
front-end regulation is critical for meaningful consumer protection and
absolutely necessary to any meaningful modernization of insurance
regulation.
Is Regulation Incompatible With Competition?
The insurance industry promotes a myth: Regulation and competition
are incompatible. This is demonstrably untrue. Regulation and
competition both seek the same goal: The lowest possible price
consistent with a reasonable return for the
seller. There is no reason that these systems cannot coexist and even
compliment each other.
The proof that competition and regulation can work together to
benefit consumers and the industry is the manner in which California
regulates auto insurance under Proposition 103. Indeed, that was the
theory of the drafters (including me) of Proposition 103. Before
Proposition 103, Californians had experienced significant price
increases under a system of ``open competition'' of the sort the
insurers now seek at the Federal level. (No regulation of price is
permitted but rate collusion by rating bureaus is allowed, while
consumers receive very little help in getting information.) Proposition
103 sought to maximize competition by eliminating the State antitrust
exemption, laws that forbade agents to compete, laws that prohibited
buying groups from forming, and so on. It also imposed the best system
of prior approval of insurance rates and forms in the Nation, with very
clear rules on how rates would be judged.
As our in-depth study of regulation by the States revealed,\5\
California's regulatory transformation--to rely on both maximum
regulation and competition--has produced remarkable results for auto
insurance consumers and for the insurance companies doing business
there. The study reported that insurers realized very nice profits,
above the national average, while consumers saw the average price for
auto insurance drop from $747.97 in 1989, the year Proposition 103 was
implemented, to $717.98 in 1998. Meanwhile, the average premium rose
nationally from $551.95 in 1989 to $704.32 in 1998. California's rank
dropped from the third costliest State to the 20th.
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\5\ ``Why Not the Best? The Most Effective Auto Insurance
Regulation in the Nation,'' June 6, 2000; www.consumerfed.org.
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I can update this information through 2001.\6\ As of 2001, the
average annual premium in California was $688.89 (23rd in the Nation)
versus $717.70 for the Nation. So, from the time California went from
reliance simply on competition as insurers envisioned it to full
competition and regulation, the average auto rate fell by 7.9 percent
while the national average rose by 30.0 percent. A powerhouse result!
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\6\ State Average Expenditures & Premiums for Personal Automobile
Insurance in 2001, NAIC, July 2003.
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How Can Uniformity be Achieved Without Loss of Consumer Protections?
CFA would endorse a more uniform national or multi-State approach
if certain rigorous conditions were met. The attached fact sheet,
Consumer Principles and Standards for Insurance Regulation, provides
detailed standards that regulators should meet to properly protect
consumers, whether at the State, multi-State, or national level. It
should be noted that none of the proposals offered by insurers or on
behalf of insurers (such as the Oxley-Baker ``SMART'' proposal) come
close to meeting these standards.*
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* Held in Committee files.
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One obvious vehicle for multi-State enforcement of insurance
standards is the NAIC. We have favored empowering the NAIC to implement
such a multi-State approach only if the NAIC's decisionmaking
procedures are overhauled to make it a more transparent, accountable
body with meaningful regulatory powers. As stated above, recent NAIC
failures demonstrate that it is not an impartial regulatory body that
can be counted on to adequately consider consumer needs.
Because of its historical domination by the insurance industry,
consumer organizations are extremely skeptical about its ability to
confer national treatment in a fair and democratic way. It is essential
that any Federal legislation to empower the NAIC include standards to
prevent undue industry influence and ensure the NAIC can operate as an
effective regulatory entity, including:
Democratic processes/accountability to the public, which must
include: Notice and comment rulemaking; on the record voting;
accurate minutes; rules against ex-parte communication; public
meeting/disclosure/sunshine rules.
A decisionmaking process subject to an excellent
Administrative Procedures Act.
Strong conflict of interest and revolving door statutes
similar to those of the
Federal Government to prevent undue insurance industry influence.
If decisionmaking members of the NAIC have connections, past or
present, to certain companies, the process will not be perceived as
fair.
Independent funding. The NAIC cannot serve as a regulatory
entity if it relies on the industry for its funding. The bill
should establish a system of State funding to the NAIC at a set
percentage of premium so that all States and insured entities
equally fund the NAIC.
National Independent Advocate. To offset industry domination,
an independent, national, public insurance counsel/ombudsman with
necessary funding is needed. Consumers must be adequately
represented in the process for the process to be accountable and
credible.
Regulation By Domiciliary States Will Lead to Unacceptably Weak
Standards
We oppose allowing a domiciliary State to essentially act as a
national regulator by allowing domiciled companies to comply only with
that State's standards. This approach has several potential problems,
including:
It promotes forum shopping. Companies would move from State-
to-State to secure regulation from the State that has the least
capacity to regulate, provoking a ``race to the bottom.''
The State of domicile is often under the greatest political
and economic pressure not to act to end harmful business practices
by a powerful in-State company.
The resources of States to properly regulate insurance vary
widely.
It is antithetical to States' rights to apply laws from other
States to any business operating within their borders. If such a
move is made, however, it is imperative that consumers have a
national, independent advocate.
It promotes a lack of consistency in regulation because
companies could change domiciliary State status.
Residents of one State cannot be adequately represented by the
legislature/executive of another. If a resident's State consumer
protections did not apply, the resident would be subject to laws of
a State in which they have no representation. How can a consumer
living in Colorado influence decisions made in Connecticut?
Rather than focusing on protecting consumers, this system
would change the focus to protecting itself and its regulatory
turf, as has happened in the bank regulatory system. State and
Federal banking regulators have competed to lower their consumer
protections to lure banks to their system.
We would be particularly concerned with proposals to give
exclusive control of market conduct exams to a domiciliary State.
Unscheduled exams by a State are very important for that State's
ability to protect its consumers from abuse. States must retain the
ability to act quickly based on complaints or other information.
``One-Stop'' Policy Approval Must Meet High Standards
Allowing insurers to get approval for their products from a single,
unaccountable, non-State regulatory entity would also lead to extremely
weak protections unless several conditions are met:
An entity, such as the NAIC's Coordinated Advertising, Rate
and Form Review Authority (CARFRA), that is not subject to
authorizing legislation, due process standards, public
accountability, prohibitions on ex-parte communications, and
similar standards should not have the authority to determine which
lines would be subject to one-stop approval process or develop
national standards. It also must have funding through the States,
not directly from insurers. Independent funding ensures that the
regulatory entity is not subject to unfair and detrimental industry
influence.
Any standards that apply must be high and improve the ability
of consumers to understand policies and compare on the basis of
price. Consumers do not want ``speed-to-market'' for bad policies.
Any entity that serves as national standard setter, reviewer
and/or approver needs Federal authorizing legislation. An
``interstate compact'' or ``memorandum of understanding'' is
unworkable and unaccountable.
Giving the regulated insurer the option to choose which entity
regulates it is an invitation to a race to the bottom for
regulatory standards.
Standardization of forms by line has the potential to assist
consumers if done in such a way to enhance understanding of terms,
benefits, limitations, and actual costs of policies.
Public/consumer input is essential if the entity makes
decisions that ultimately affect information provided to and rates
charged consumers.
We support the concept of an electronic central filing
repository, but the public must have access to it.
To retain oversight of policies and rates affecting their
residents, States must have the ability to reject decisions of the
entity.
Any national system must include a national, externally funded
consumer-public advocate/counsel to represent consumers in standard
setting, development of forms, rate approval, etc.
Current Federal Proposals
Three major proposals have surfaced, two of which do not meet the
basic standards of consumer protection cited above. Several trade
associations have drafted legislation that would create an ``optional
Federal charter'' for insurance regulation, patterned on the Nation's
bifurcated Federal/State bank chartering structure. In response,
Senator Ernest Hollings last year introduced S. 1373, which would
establish Federal minimum standards for insurance regulation and repeal
insurers' antitrust exemption under the McCarran Ferguson Act. Senator
Hollings' goal was to prevent competition between State and Federal
regulators to lower standards. Most recently, Representatives Michael
Oxley and Richard Baker have circulated a discussion draft entitled the
``State Modernization and Regulatory Transparency (SMART) Act.'' We
will comment separately on each.
Optional Federal Insurance Charter
The bills that have been drafted by trade associations like the
American Bankers Association and the American Council of Life Insurers
would create a Federal regulator that would have little, if any,
authority to regulate price or product, regardless of how
noncompetitive the market for a particular line of insurance might be.
Insurers would be able to choose whether to be regulated by this
Federal body or by State regulators. These bills represent the wish
list of insurer interests, and include minimal, if any, regulation,
coupled with little improvement in consumer information or protection
systems.
Consumer organizations strongly oppose an optional Federal charter,
where the regulated, at its sole discretion, gets to pick its
regulator. This is a prescription for regulatory arbitrage that can
only undermine needed consumer protections. Indeed, the drafters of
such proposals have openly stated that this is their goal with the
optional charter approach. If elements of the insurance industry truly
want to obtain ``speed-to-market'' and other advantages through a
Federal regulator, let them propose a Federal approach that does not
allow insurers to run back to the States when regulation gets tougher.
We could all debate the merits of that approach.
CFA and the entire consumer community stand ready to fight optional
charters with all the strength we can muster.
The Insurance Consumer Protection Act of 2003, S. 1373
Only one bill currently before Congress considers the consumer
perspective in its design, adopting many of the consumer protection
standards cited in this testimony. That is S. 1373 by Senator Hollings.
The bill would adopt a unitary Federal regulatory system under which
all interstate insurers would be regulated. Intrastate insurers would
continue to be regulated by the States.
The bill's regulatory structure requires Federal prior approval of
prices to protect consumers, including some of the approval procedures
(such as hearing requirements when prices change significantly) being
used so effectively in California. It requires annual market conduct
exams. It creates an office of consumer protection. It enhances
competition by removing the antitrust protection insurers hide behind
in ratemaking. It improves consumer information and creates a system of
consumer feedback.
If Federal regulation is to be considered, S. 1373 should be the
baseline for any debate on the subject before this Committee.
SMART Act
Rather than increase insurance consumer protections for individuals
and small businesses while spurring States to increase the uniformity
of insurance regulation, this sweeping proposal would override
important State consumer protection laws, sanction anticompetitive
practices by insurance companies, and incite State regulators into a
competition to further weaken insurance oversight. It is quite simply
one of the most grievously flawed and one-sided pieces of legislation
that we have ever seen with absolutely no protections offered for
consumers. The consumers who will be harmed by it are our Nation's most
vulnerable: The oldest, the poorest, and the sickest.
For example, the discussion draft would preempt State regulation of
insurance rates. This would leave millions of consumers vulnerable to
price gouging, as well as abusive and discriminatory insurance
classification practices. It would also encourage a return to insurance
redlining, as deregulation of prices would include the lifting of State
controls on territorial line drawing. States would also be helpless to
stop the misuse of risk classification information, such as credit
scores, territorial data, and the details of consumers' prior insurance
history, for pricing purposes. The draft bill goes so far as to
deregulate cartel-like organizations such as the Insurance Services
Office and the National Council on Compensation Insurance, while
leaving the Federal antitrust exemption fully intact.
What the draft does not do is as revealing as what it does require.
It does not create a Federal office to represent consumer interests,
although the draft creates two positions to represent insurer
interests. It takes no steps to spur increased competition in the
insurance industry, such as providing assistance or information to the
millions of consumers who find it extremely difficult to comparison
shop for this complex and expensive product, or eliminating the
antitrust exemption that insurers currently enjoy under the McCarran-
Ferguson Act. Insurers are not required to meet community reinvestment
requirements, as banks are, to guarantee that insurance is available in
underserved communities. Nothing is done to prevent insurers from using
inappropriate information, such as credit scores or a person's income,
to develop insurance rates.
CFA supports the goals outlined in several sections of this draft.
As stated above, we are not opposed to increasing uniformity in
insurance regulation. Unfortunately, however, in almost every
circumstance in which the draft attempts to ensure uniformity, it
chooses the weakest consumer protection approach possible. (For more
details on CFA's concerns with this draft, please see the attached
letter to House Financial Services leaders dated September 9, 2004.) *
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* Held in Committee files.
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Federal Insurance Reform that Insurers Won't Discuss: Amending the
McCarran Act
to Provide Federal Oversight and, Perhaps, Minimum Standards for
Efficient and
Effective Regulation
Insurers want competition to set rates, they say. How about a
simple repeal of the antitrust exemption in the McCarran Act to test
their desire to compete under the same rules as normal American
businesses do?
Another amendment to the McCarran Act we would suggest is to do
what should have been done at the beginning of the delegation of
authority to the States: Have the FTC and other Federal agencies
perform scheduled oversight of the States' regulatory performance and
propose minimum standards for effective and efficient
consumer protection. The Hollings bill or relevant provisions of
Proposition 103 in California might be the basis for such minimum
standards.
Conclusion
CFA looks forward to working with the Committee to strengthen
consumer protection for insurance consumers, Mr. Chairman. I will be
happy to respond to questions at the appropriate time.
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PREPARED STATEMENT OF ALAN F. LIEBOWITZ
President, OMNIA (Bermuda) LTD.
on behalf of the
American Bankers Insurance Association
September 22, 2004
Mr. Chairman and Members of the Committee, my name is Alan
Liebowitz, and I am President of OMNIA (Bermuda) Ltd., an insurance
company affiliated with the Old Mutual Financial Network. Old Mutual is
a global diversified financial services network that extends from
Europe to Asia, Africa, and North America. In the United States, the
Old Mutual Financial Network provides retirement savings and financial
protection products in all 50 States through Fidelity & Guaranty Life,
Americom Life & Annuity, and Fidelity & Guaranty Life of New York. Our
life insurance companies have combined assets of over $12 billion and
serve nearly 650,000 policyholders. Prior to joining OMNIA, I was the
General Counsel for Citibank's insurance initiative and president of
certain of its domestic insurance companies. During my 15 years at
Citibank, I was actively involved in the efforts to permit Citibank's
Delaware subsidiary bank to underwrite insurance.
I am here today on behalf of the American Bankers Insurance
Association (ABIA). ABIA is a subsidiary of the American Bankers
Association. ABIA's members are banking institutions that are engaged
in the business of insurance and insurance companies and administrators
that provide insurance products or services to banks.
Thank you for the opportunity to participate in this hearing on the
condition and regulation of the insurance industry. We have concluded
that the current insurance regulatory system is badly in need of reform
and note that the organizations at this table agree with that
fundamental premise. Virtually all industry participants and even
insurance regulators have spent years detailing the failings of the
State system and are now beginning to define appropriate solutions to
the problem.
In general, the main criticisms of the State system include its
lack of uniformity in licensing standards, its inability to bring
insurance products to market within a reasonable time-frame, and the
need for greater uniformity in oversight of market conduct.
In response to these criticisms, House Financial Services Committee
Chairman Mike Oxley and Capital Markets Subcommittee Chairman Richard
Baker developed a draft ``Roadmap'' for modernizing the State system of
regulation. Recently, this ``Roadmap'' has been translated into an
actual legislative proposal. The Oxley-Baker plan is comprehensive in
scope and is the product of a long review process involving careful and
thoughtful deliberation. We are pleased that the House has elected to
begin legislating solutions to these problems and we look forward to
working with the Chairmen as the legislative process moves forward.
Similarly, the States have made some progress with their plan for
achieving uniformity. The National Association of Insurance
Commissioners (NAIC) has focused its energies on the adoption of an
Interstate Compact for life insurance products and the nationwide
adoption of its Model Laws. ABIA is supportive of the NAIC's work, as
it represents a good faith effort toward achieving uniformity of
regulation.
ABIA is not alone in trying to encourage the States and the
Congress in their efforts to bring modernization to insurance
regulation. Others share a similar goal and all of us want these
efforts to succeed. However, while there are several approaches to
modernizing insurance regulation, we have concluded that the best
approach is the creation of a Federal chartering and regulatory system
that serves as an alternative to the current State insurance regulatory
system. Our approach requires the establishment of an ``Optional
Federal Charter'', which addresses the shortcomings of the existing
State insurance regulatory system, yet preserves the State system for
those who prefer it.
In the balance of my statement, I will explain the involvement of
banks in the business of insurance; more fully describe the problems
with the current system of State insurance regulation; explain our
optional Federal chartering and regulation alternative; and, last, show
how that alternative would protect and benefit consumers.
ABIA's Members Are Actively Engaged in the Business of Insurance
Banking institutions have long been involved in the business of
insurance, principally as agents. The level and scope of that
involvement has expanded significantly in recent years. ABIA estimates
that in 2002, the banking industry produced almost $70 billion in
insurance premiums. This is a 26 percent increase over the 2001
estimate of $55 billion in premiums. ABIA also estimates that there are
over 2,000 banks involved in the distribution of insurance. This
includes some of the Nation's largest agent networks. In fact, we
estimate that banking institutions employ over 50,000 licensed
insurance agents.
Two laws passed by the Congress have contributed to the growth in
bank insurance activities. First, the Riegle-Neal Interstate Banking
and Branching Act of 1994 allowed banking organizations to establish
nationwide offices through which they can offer insurance products and
annuities. These multi-State offices not only have expanded bank
insurance sales, but also have given our industry a unique exposure to
the variations in State insurance laws and regulations. Second, the
Gramm-Leach-Bliley Act authorized affiliations between banks and
insurance companies. These affiliations have more closely aligned the
banking industry with the insurance industry, and have given ABIA an
even deeper appreciation of the current State of insurance regulation.
Problems With the Current Insurance Regulatory System
While the States have a commendable record of protecting consumers
from insurance insolvencies, they also have a record of inconsistent
and inefficient regulation that results in unnecessary costs and lost
opportunities for consumers. In past testimony before the Congress,
former NAIC President Ernst Csiszar described eight areas of insurance
regulation in need of reform.\1\ I will highlight the three areas of
most importance to bank-insurance operations: Producer licensing, rate
regulation, and product approval.
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\1\ Testimony of Ernst Csiszar, Director of Insurance, South
Carolina Department of Insurance, before the Subcommittee on Capital
Markets, Insurance, and Government Sponsored Enterprises of the
Financial Services Committee, U.S. House of Representatives, Wednesday
March 31, 2004.
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Producer Licensing
ABIA's members are particularly familiar with the patchwork of
disparate laws applicable to the licensing of insurance agents. For
example, different States impose different qualification and testing
standards and different continuing education requirements. Licenses
recognized in one State are not necessarily recognized in another
State. Agents associated with banks are sometimes subject to sales
limitations not applicable to agents not associated with banks. For
organizations that operate agent networks in multiple States, these
differences impose compliance costs and burdens that are both
significant and ultimately borne by consumers.
Continued disharmony among States' producer licensing laws persists
despite a considerable Congressional effort to eradicate it. In 1999,
as part of the Gramm-Leach-Bliley (GLB) Act, Congress adopted two
limited requirements designed to promote uniformity and reduce
discrimination in the rules applicable to producer
licensing and insurance sales. The first appears in Section 104 of the
GLB Act. This Section includes a preemption standard designed to
prevent the States from discriminating against depository institutions
engaged in the sale of insurance. Following the enactment of Section
104, ABIA identified insurance sales laws in 33 States that by varying
degrees conflict with and are preempted by the standard. We made this
list available to State insurance authorities and the NAIC, urging them
to repeal or otherwise not enforce the offending laws. Our appeal to
the States continues to be largely ignored.
As a result, several national banks requested preemption opinions
from the Office of the Comptroller of the Currency (OCC). Where OCC
opinions have been issued (that is, on State insurance sales laws in
Massachusetts and West Virginia that are uniquely applicable to
depository institutions), they have been the subjects of lawsuits in
Federal courts. Those courts that have rendered judgment to date have
ruled against the States. Even these judicial actions, however, have
been ignored and have failed to cause other States to modify their
laws.
The GLB Act also included provisions designed to encourage the
States to reform their producer licensing laws and regulations. These
so-called ``NARAB provisions'' required the establishment of an
organization to develop uniform licensing rules and regulations but
only if a majority of the States did not adopt either uniform or
reciprocal licensing laws and regulations within 3 years of the date of
enactment of the GLB Act. To facilitate compliance with the GLB Act,
the NAIC developed a reciprocal licensing Model Act, which has
currently been adopted by only about 40 States. Because the States
could avoid NARAB--and the uniformity mandate it represented--if only a
majority of States enacted the Model, that action by a majority of
States has allowed some States, including some of the largest States
like California, to avoid the issue of licensing reform entirely.
And, the more important goal of achieving licensing uniformity has
been put off indefinitely. The GLB Act allowed the goal of uniform
agent licensing laws to remain unrealized so long as a majority of
States passed reciprocal licensing laws.
Unfortunately, reciprocity is not uniformity. Instead, it is the
recognition and acceptance of differences between States. Five years
after passage of the GLB Act, significant differences in State
licensing laws remain.
Rate Regulation
ABIA's members are also familiar with the anticonsumer effects of
price controls. Congress repealed the last vestiges of Federal price
controls on banking products over 20 years ago after it realized that
such artificial constraints do more harm than good. Today, however, the
insurance industry continues to be subject to extensive price
regulation--to the disadvantage of consumers. In most States, an
insurance product can only be sold after the State insurance regulator
approves the price of an insurance product. Some States regulate the
price of an insurance policy; some States regulate the loss ratio a
given product line must maintain.
Price controls are only appropriate, arguably, when associated with
a utility or a monopoly. In such situations, a single company could set
and hold prices at unreasonable levels. The insurance industry,
however, is a competitive industry. There are thousands of insurers
operating in the United States, and there are no significant barriers
to entry for new companies. In such a competitive market, competition
between firms will protect consumers from unfair pricing schemes much
more efficiently than the Government.
The consumer benefits associated with competitive rates are more
than just speculative. Several States already have moved away from rate
regulation, and, in those States, there is evidence that rates have
fallen on certain products. A study by Scott Harrington for the AEI-
Brookings Joint Center for Regulatory Studies entitled ``Insurance
Deregulation and the Public Interest'' found that auto insurance is
less costly and more available in 14 States that do not require prior
approval of rates than in 27 other States that do require prior
approval.
Product Approval
Similar to price controls, most States' insurance departments will
not approve an insurance policy for sale unless subject to prior review
by the insurance regulator. ABIA's members have found that the
impediments created by most States' prior
approval requirements have had the undesirable effect of depriving
consumers of innovative insurance products and retarded the ability of
insurers to develop these products in a timely fashion.
Under the current State system of insurance regulation, it can take
months, and sometimes years, for a company to receive permission from
State insurance regulators to introduce a new product in every State.
Such delays are an inevitable
result of a system in which every State has an opportunity to review
and approve insurance products and where the standards of review are
different in every State. If the insurance industry cannot gain some
relief from the States' prior approval regime, life insurers will
continue to lose market share to other noninsurance investment products
and property and casualty insurers will reduce or eliminate their
efforts to develop innovative products that offer more comprehensive
benefits at lower costs.
ABIA Supports Optional Federal Insurance Chartering
ABIA believes that the answer to the problems inherent in the
current State insurance regulatory system is the creation of an
optional Federal insurance chartering system for insurers and insurance
agencies.
Seven years ago, ABIA developed its own ``blueprint'' for insurance
regulatory reform patterned after the dual banking system. That
blueprint called for the optional chartering of insurers and insurance
agencies by either the Federal Government or the States. Our goal was
not to replace or duplicate State insurance regulation, but to create
an alternative to State insurance regulation. Optional chartering has
worked well in the banking industry, and we saw no reason to believe it
could not work well in the insurance industry.
When we first developed our blueprint, Congress was actively
debating the Gramm-Leach-Bliley Act. Therefore, we put our blueprint on
the back burner until action on that bill was complete. After the
Gramm-Leach-Bliley Act was finalized, we made optional Federal
chartering a priority. We converted our blueprint into a specific
legislative proposal and unveiled it at a conference organized by the
American Enterprise Institute in the fall of 2000.
Our optional Federal chartering proposal was a natural outgrowth of
the banking industry's experience with the dual banking system. That
system, which permits banking institutions to voluntarily choose
between a Federal or State charter, has been in place for over 140
years, and is widely perceived to be a great success.
Initially, our proposal received a mixed reception. State insurance
regulators, some insurance trade groups, and representatives of
consumer groups expressed various concerns and reservations. Other
insurance trade groups offered quiet encouragement.
We soon joined forces with two other insurance trade groups, the
American Council of Life Insurers and the American Insurance
Association, each of which had developed its own proposal, to develop a
common optional Federal chartering proposal. The first step in that
cooperative effort was the development of a set of principles around
which a legislative proposal could be structured. The second step was
the drafting of a consensus bill. The end product incorporates the best
of State insurance regulation into a single Federal/State optional
chartering framework similar in structure to the dual banking system.
The Consensus Optional Federal Charter Proposal
The following are some of the key features of that consensus bill:
Office of National Insurance/National Insurance Commissioner--
The bill calls for the establishment of a new independent bureau
within the Treasury Department, the Office of National Insurance.
The National Insurance Commissioner, who would be empowered to
charter, regulate, and supervise national insurance companies and
national insurance agencies, would head this office. The
Commissioner would be a Presidential appointee, subject to Senate
confirmation, and subject to a 5-year term. The bill requires the
establishment of a consumer protection division and a fraud
division within the Office. Start up funding for the Office would
be provided by a loan from the Treasury, which must be repaid over
30 years. On-going funding would be provided by assessments imposed
upon federally chartered insurers and agencies.
National Insurers--One of the central powers of the
Commissioner would be the chartering of national insurance
companies. Such companies could be organized in stock, mutual, or
fraternal form. As a general rule, national insurance companies
would be subject to the exclusive regulation of the Office and the
Commissioner. federally chartered insurers would be required to
obtain a license from the Commissioner to underwrite specific types
(or lines) of insurance. A federally chartered insurer could not be
licensed to underwrite both life insurance and property and
casualty insurance. However, the bill permits an insurance holding
company to own both life and property and casualty insurers. The
Commissioner would not issue a license for the underwriting of
health insurance until 3 years after the date of enactment of the
bill. Existing State-licensed insurers could exchange a State
license for a national charter and national license.
Solvency Regulations--The Commissioner would be required to
regulate the solvency of national insurers. For the first 5 years
after the enactment of the bill, Federal solvency regulations would
be based upon existing NAIC models, including the NAIC model
accounting standards and the NAIC model risk-based capital
standards.
Product Regulation--As a general rule, a national insurer
would not be subject to rate or form regulation. The Commissioner
would be directed to develop policy standards for life insurance
companies, and such companies would be required to file their forms
with the Commissioner. However, these forms would not be subject to
review or approval prior to their use by the company. Similarly,
property and casualty companies would be required to file,
annually, a list of standard policy forms, but, again, these forms
would not be subject to prior review or approval. The Commissioner
would review rates for long-term care insurance and disability
insurance.
Market Conduct--The Commissioner would be directed to issue
regulations governing the market conduct of national insurers. Such
regulations would address marketing and claims practices.
Corporate Organization--The bill provides for insurance
holding companies, which could own both State licensed and
federally chartered insurers. The bill also provides for changes in
corporate control, demutualizations, mergers and acquisitions.
These provisions are patterned after model State laws.
National Insurance Agencies--The bill provides for the
chartering of national insurance agencies and issuance of Federal
producers' licenses. (Every national insurance agency would be
required to hold a Federal producers' license.) federally licensed
producers could sell policies for any federally chartered insurer
or any State insurer. States could not regulate sales of policies
issued by federally chartered insurers. However, States could
require a Federal producer to obtain a limited license to sell
policies issued by a State insurer. The limited license would
subject the producer to State market conduct standards.
State Law--As a general rule, national insurers, national
insurance agencies and federally licensed producers are not subject
to State insurance regulations. However, federally chartered
property and casualty companies would be subject to State
reparations statutes, which define the scope of property and
casualty policies. Also, national insurance agencies that sell
policies for State licensed insurers may be required to obtain
limited State licenses. National insurers also would be subject to
State tax laws, including premium tax requirements.
Insolvencies--The bill includes receivership provisions
patterned after a model Interstate Insurance Receivership Compact
proposal developed in 1998. Under those provisions, Federal courts,
not State courts, would handle the receiverships of national
insurers. The bill requires national insurers to be members of the
State guarantee associations in those States where they do
business. However, if a State's guaranty statute does not provide
policyholders certain minimum standards of protection, a Federal
guarantee association would step in and guaranty the policies
issued by insurers operating in that State. States are given 4
years to meet these minimum standards.
In sum, the bill provides insurers and agencies a chartering and
supervisory alternative to State insurance regulation. It does so in a
manner that safeguards the
interests of policyholders and the public-at-large. It also does so in
a manner that preserves the integrity of State regulations. State
authority over State-licensed insurers and agencies is untouched. State
authority to tax all insurers and agencies is recognized. State
guaranty systems are left in place.
Consumer Protections and Optional Federal Chartering
ABIA's member companies are driven by the needs and demands of
consumers, so we recognized early on that any insurance modernization
proposal must be responsive to those needs and demands. ABIA believes
the consensus optional Federal charter proposal benefits consumers in
several respects: It assures consumers access to sound insurance
products in a fair manner; it is responsive to the changing needs of
consumers; and, it creates a dynamic tension between State and Federal
regulators that is in the best interests of consumers.
Federal Solvency and Market Conduct Standards Ensure That Consumers
Have
Access to Sound Insurance Products in a Fair Manner
Optional Federal regulation of insurers and producers fully and
fairly protects the rights and interests of the consumers of insurance
through Federal solvency standards. These standards include risk-based
capital requirements (which will ensure that national insurers are
adequately capitalized); investment standards (which require a national
insurer to invest assets prudently); and, dividend restrictions (which
prevent insolvent national insurers from paying dividends). Such
standards give consumers confidence that a federally chartered insurer
is able to pay claims on its policies.
The consensus proposal backs Federal solvency standards with
regular examinations and enforcement actions. These examination and
supervisory powers signal to consumers that federally chartered
insurers are safe and sound. Examination and enforcement standards
include the authority to require federally chartered insurers to file
regular reports on their operations and financial condition; the
authority to regularly examine federally chartered insurers, and to the
extent appropriate, their affiliates; and the authority to initiate an
enforcement action against federally chartered insurers that fail to
comply with applicable standards. Enforcement penalties are patterned
after those available to Federal banking regulators, which include the
power to remove officers and directors and to impose civil money
penalties of up to $1 million a day.
Optional Federal chartering also protects consumers through Federal
market conduct standards. Such standards protect consumers by
preventing unfair methods of competition and unfair and deceptive acts
and practices in the advertising, sale, issuance, distribution, and
administration of insurance policies.
Critics of optional Federal chartering often claim that a Federal
insurance regulator would not be able to adequately police sales and
claims practices by national insurers or producers. Some of these
critics even cite the hundreds of thousands of consumer complaints
filed annually with State insurance regulators in support of this
claim. The Federal regulation of the banking industry shows that
Federal agencies can effectively enforce consumer protection standards.
Today, thousands of banks are offering a variety of products to
consumers through hundreds of thousands of branches, ATM's, loan
production offices, and other outlets throughout the United States.
These banks are subject to Federal consumer protection statutes such as
the Truth in Lending Act, the Truth in Savings Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, and many others. The
Federal banking agencies, which are responsible for enforcing
compliance with these various consumer protection laws, have been able
to fully and effectively enforce compliance with the laws. They have
done so through a combination of regular examinations and the threat of
enforcement actions. Federal market conduct standards for insurers
backed by examinations and the threat of enforcement should work
equally well for the consumers of insurance.
In fact, the combination of Federal market conduct standards backed
by regular examinations and the potential for enforcement actions
should provide insurance consumers better protection than currently
exists in many States. The number of consumer complaints filed annually
with State insurance commissioners is not a sign of successful State
market conduct regulation. Those complaints indicate that something is
wrong with State market conduct regulation--otherwise consumers would
not need to file so many complaints. The fact is that many States do
not conduct market conduct examinations, and this allows insurers and
producers who choose to ignore the laws to engage in practices that are
harmful to consumers. Federal market conduct standards, regular
examinations, and the threat of enforcement actions would effectively
deter such harmful practices.
Access to Uniform Products Benefits Consumers
Uniform policies and sales practices reduce consumer confusion,
especially for those consumers that move from State-to-State for
professional or personal reasons. Under an optional Federal chartering
system, the same life insurance policy could be offered in every State.
Optional Federal chartering also would permit a company to use the same
policy form, same disclosure statements, and same administrative
procedures throughout the United States.
Uniform regulation also facilitates delivery of insurance products
over the Internet. As we all know, the Internet can reach consumers,
regardless of where they are located. To date, however, the use of the
Internet to deliver insurance products has been complicated by
variations in State insurance sales laws. A single Federal sales
practice standard would not be subject to such complications. This
would expand consumer access to insurance products through the
Internet.
The Dynamic Tension Created by Optional Federal Chartering Benefits
Consumers
The model for optional Federal chartering is the dual banking
system. Since the dual banking system has been in place for over 140
years, the best way to judge how optional Federal chartering for
insurers and producers would affect consumers of insurance is to take a
closer look at the dual banking system.
It is interesting to note that the authors of the dual banking
system were President Lincoln and his Secretary of the Treasury, Salmon
Chase. After he became President, Lincoln worked with Secretary Chase
to secure enactment of the National Bank Act, which provided for the
chartering and regulation of national banks.
While there is evidence President Lincoln intended national banks
to replace the then existing system of State banks; that has not been
the case. Today, approximately two-thirds of all banks are State
chartered, and those banks control approximately 40 percent of all
banking assets. We are confident the same dynamics prevalent in the
banking industry will emerge in the insurance industry. Accordingly,
contrary to the concerns of State insurance regulators, in our opinion,
optional Federal regulation will not replace State regulation.
In sum, we see no reason to believe that the dynamic tension
inherent in a dual regulatory system would not produce a strong
supervisory environment for insurance firms and lead to the development
of new products and services for insurance customers, just as it has
done for the banking industry and banking customers.
Conclusion
In conclusion, we urge the Committee to carefully consider the
weaknesses of the current State system of insurance regulation and the
merits of ABIA's optional Federal insurance chartering proposal. I
again thank you for the opportunity to appear here today and if we can
be of any further assistance as you consider this issue, I hope the
Committee will call upon us.
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PREPARED STATEMENT OF THOMAS B. AHART
President, Ahart, Frinzi & Smith Insurance Agency
on Behalf of the
Independent Insurance Agents and Brokers of America
September 22, 2004
Good morning Chairman Shelby, Ranking Member Sarbanes, and Members
of the Committee. My name is Tom Ahart, and I am pleased to be here
today on behalf of the Independent Insurance Agents and Brokers of
America (IIABA) and to provide our association's perspective on the
role that Congress can play in enhancing and improving State insurance
regulation. I am President of Ahart, Frinzi & Smith Insurance Agency,
an independent agency based in Phillipsburg, New Jersey, and I served
as President of IIABA from September 2001 to September 2002.
IIABA is the Nation's oldest and largest trade association of
independent insurance agents and brokers, and we represent a network of
more than 300,000 agents, brokers, and employees nationwide. IIABA
represents small, medium, and large businesses that offer consumers a
choice of policies from a variety of insurance companies. Independent
agents and brokers offer a variety of insurance products--property,
casualty, health, employee benefit plans, and retirement products.
Introduction
At the outset, Chairman Shelby, I must note that IIABA applauds the
Committee's interest in this issue as we have many challenges facing
the State-based system of insurance regulation. It is our hope that
this hearing will be the first step in what promises to be a
comprehensive and ongoing process, and we hope we will have the
opportunity to present our views at each and every stage of your
deliberations on these crucial questions.
IIABA believes it is essential that all financial institutions be
subject to efficient regulatory oversight and that they be able to
bring new and more innovative products and services to market quickly
to respond to rapidly evolving consumer demands. It is clear that there
are inefficiencies existing today, and there is little doubt that the
current State-based regulatory system should be reformed and
modernized. At the same time however, the current system is exceedingly
proficient at ensuring that insurance consumers--both individuals and
businesses--receive the insurance coverage they need and that any
claims they may experience are paid. These and other aspects of the
State system are working well. The ``optional'' Federal charter concept
proposed by some would displace these well-running components of State
regulation and, in essence, ``throw the baby out with the bathwater.''
As we have for over 100 years, IIABA supports State regulation of
insurance--for all participants and for all activities in the
marketplace, and we oppose any form of Federal regulation--optional or
otherwise. Yet despite this historic and longstanding support for State
regulation, we are not confident that the State system will be able to
resolve its problems on its own. That is why we feel that there is a
vital legislative role for Congress to play in helping to reform the
State regulatory system; however, such an effort need not replace or
duplicate at the Federal level what is already in place at the State
level. IIABA supports targeted, Federal legislation along the lines of
the NARAB provisions of the Gramm-Leach-Bliley Act \1\ (GLBA) to
improve the State-based system.
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\1\ Previously known as the ``Financial Services Modernization Act
of 1999.''
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To explain the rationale under-girding this approach, I will first
offer an overview of both the positive and negative elements of the
current insurance regulatory system. I will then outline our opposition
to an optional Federal charter. I will then describe the NARAB
provisions of GLBA that we feel can serve as a template for further
reform. Finally, I will provide a more complete explanation of IIABA's
support for the NARAB approach of targeted reforms already proven
successful by this Committee.
The Current State of Insurance Regulation
From the beginning of the insurance business in this country, it is
the States that have carried out the essential task of regulating the
insurance marketplace to protect consumers. The current State insurance
regulatory framework has its roots in the 19th century with New
Hampshire appointing the first insurance commissioner in 1851, and
insurance regulators' responsibilities have grown in scope and
complexity as the industry has evolved. When a Supreme Court decision
raised questions about the role of the authority of the States,
Congress quickly adopted the McCarran-Ferguson Act \2\ (McCarran-
Ferguson) in 1945. That Act, which was reaffirmed by Congress 5 years
ago, declared that States should regulate the business of insurance and
that the continued regulation of the insurance industry by the States
was in the public's best interest.
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\2\ McCarran-Ferguson Act, ch. 20, 59 Stat. 33 (1945) (codified as
amended at 15 U.S.C. 1011-1015 (1994)).
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GLBA expressly states that McCarran-Ferguson remains the law of the
United States and further states that no person shall engage in the
business of insurance in a State as principal or agent unless such
person is licensed as required by the appropriate insurance regulator
of such State. Title III also unequivocally provides that ``[t]he
insurance activities of any person (including a national bank
exercising its powers to act as agent . . .) shall be functionally
regulated by the States,'' subject only to certain exceptions which are
intended to prevent a State from thereby frustrating the new
affiliation policy adopted in GLBA. These provisions collectively
ensured that State insurance regulators retained regulatory authority
over all insurance activities, including those conducted by financial
institutions and their insurance affiliates. These mandates were
intended in large part to draw the appropriate boundaries among the
financial regulators, boundaries that unfortunately continue to be
challenged.
Most observers agree that State regulation has worked effectively
to protect consumers, largely because State officials are positioned to
be responsive to the needs of the local marketplace and local
consumers. Unlike most other financial products, the purchaser of an
insurance policy will not be able to fully determine the value of the
product purchased until after a claim is presented--when it is too late
to decide that a different insurer or a different product might make a
better choice. As a result, insurance is a product with which consumers
have many issues and questions and if a problem arises they want to
resolve it with a local call. During 2001, State insurance regulators
handled approximately 3.6 million consumer inquiries and complaints.
Today, State insurance departments employ approximately 13,000
individuals who draw on over a century-and-a-half of regulatory
experience to protect insurance consumers.
Unlike banking and securities, insurance policies are inextricably
bound to the separate legal systems of each State, and the policies
themselves are contracts written and interpreted under the laws of each
State. When property, casualty, and life claims arise, their legitimacy
and amounts must be determined according to individual State legal
codes. Consequently, the constitutions and statue books of every State
are thick with language laying out the rights and responsibilities of
insurers, agents, policyholders, and claimants. State courts have more
than 100 years of experience interpreting and applying these State laws
and judgments. The diversity of underlying State reparations laws,
varying consumer needs from one region to another, and differing public
expectations about the proper role of insurance regulation require
local officials ``on the beat.''
Protecting policyholders against excessive insurer insolvency risk
is one of the primary goals of insurance regulation. If insurers do not
remain solvent, they cannot meet their obligations to pay claims. State
insurance regulation gets high marks for the financial regulation of
insurance underwriters. State regulators protect policyholders'
interests by requiring insurers to meet certain financial standards and
to act prudently in managing their affairs. The States, through the
National Association of Insurance Commissioners (NAIC), have developed
an effective accreditation system for financial regulation that is
built on the concept of domiciliary deference (the State where the
insurer is domiciled takes the lead role). When insolvencies do occur,
a State safety net is employed: The State guaranty fund system. The
system has paid out over $11 billion to cover claims asserted against
insolvent insurers since they were first created in the mid-1970's.
States also supervise insurance sales and marketing practices and
policy terms and conditions to ensure that consumers are treated fairly
when they purchase products and file claims.
Despite its many benefits, State insurance regulation it not
without its share of problems. The shortcomings of State regulation of
insurance fall into two primary categories--it simply takes too long to
get a new insurance product to market, and there is unnecessary
duplicative regulatory oversight in the licensing and post-licensure
auditing process.
In many ways, the ``speed-to-market'' issue is the most pressing
and the most vexing from both a consumer and an agent/broker
perspective because we all want
access to new and innovative products that respond to identified needs.
Today, insurance rates and policy forms are subject to some form of
regulatory review in nearly every State, and the manner in which rates
and forms are approved and otherwise regulated can differ dramatically
from State-to-State and from one insurance line to the next. Such
requirements are significant because they not only affect the products
and prices that can be implemented, but also the timing of product and
rate changes in today's competitive and dynamic marketplace. The
current system, which may involve seeking approval for a new product or
service in up to 55 different jurisdictions, is too often inefficient,
paper intensive, time-consuming, and inconsistent with the advance of
technology and regulatory reforms made in other industries. In order to
maximize consumer choice in terms of the range of products available to
them, changes and improvements are needed.
Similarly, insurers are required to be licensed in every State in
which they offer insurance products, and the regulators in those States
have an independent right to determine whether an insurer should be
licensed, to audit its market-conduct practices, to review mergers and
acquisitions, and to outline how the insurer should be governed. It is
difficult to discern how the great cost of this duplicative regulatory
oversight is justified.
Federal Chartering
There is growing consensus among observers, including State and
Federal legislators, regulators, and the insurance marketplace--that
insurance regulation needs to be updated and modernized. There is
disagreement, however, about the most effective and appropriate way in
which to obtain needed reforms. Some support pursuing reforms in the
traditional manner, which is to seek legislative and regulatory
improvements on an ad hoc basis in the various State capitals. A second
approach, pursued by several international and large domestic
companies, calls for the unprecedented establishment of full-blown
Federal regulation of the insurance industry. This call for an optional
Federal charter concerns me deeply.
Although the proposed optional Federal charter regulation might
correct certain deficiencies, the cost is incredibly high. The new
regulator would add to the overall regulatory infrastructure--
especially for agents and brokers selling on behalf of both State and
federally regulated insurers--and undermine sound aspects of the
current State regulatory regime. Agents could be required to obtain an
additional license through a bureaucratic Federal agency. As an
independent insurance agent, I write for multiple companies, and surely
some companies would choose a Federal option while others would
continue to be regulated at the State level, which could force me to
get dually licensed.
The best characteristics of the current State system from the
consumer perspective would be lost if some insurers were able to escape
State regulation completely in favor of wholesale Federal regulation.
As insurance agents and brokers, we serve on the front lines and deal
with our customers on a face-to-face basis. Currently, when my
customers are having difficulties with claims or policies, it is very
easy for me to contact my local company representative or a local
official within the State insurance department to remedy any problems.
If insurance regulation is shifted to the Federal Government, I would
not be as effective in protecting my consumers, as I have serious
reservations that some Federal bureaucrat on a 1-800 number will be as
responsive to a consumer's needs as a local regulator. The Federal
regulatory model proposes to charge a distant and likely highly
politicized Federal regulator with implementation and enforcement. Such
a distant Federal regulator may be completely unable to respond to
insurance consumer claims concerns. As a consumer, personal or
business, there would be confusion as to who regulates their policy,
the Federal Government or the State insurance commissioner. I could
have a single client with several policies with one company that is
regulated at the Federal level, while at the same time having several
other policies which are regulated at the State level.
Finally, as I will discuss below, the ``consensus'' optional
Federal charter proposal would require the State guaranty funds to be
responsible for insurance companies whose solvency regulation is solely
in the hands of a Federal regulator.
National Association of Registered Agents and Brokers (NARAB)
One of the most significant accomplishments of GLBA for the
insurance marketplace was the NARAB Subtitle, which launched a producer
licensing reform effort that continues today. Prior to the enactment of
GLBA, each State managed its agent/broker licensing process in a
distinct and independent manner, and there was virtually no consistency
or reciprocity among the States. For agents and brokers, who
increasingly operate in multiple jurisdictions, the financial and
paperwork burdens associated with multi-State licensing compliance
became overwhelming; and consumers suffered as duplicative and
redundant regulatory requirements made it difficult for producers to be
responsive to their needs. However, insurance producer licensing has
improved dramatically over the last 5 years, and these changes are a
direct result of Congress' decision to address these issues.
NARAB put the ball in the States' court by threatening the creation
of a new national, NASD-style licensing entity--known as the National
Association of
Registered Agents and Brokers--if the States did not satisfy the
licensing reform objectives articulated by Congress. The creation of
NARAB was only averted when a majority of the States and territories
(interpreted to be 29 jurisdictions) achieved a specified level of
licensing reciprocity within a 3-year period.
To their credit, the NAIC and most States took swift and
unprecedented action in response to this ``act-or-else'' licensing
provision. Nearly every State enacted new legislation that established
licensing reciprocity among the States and instituted interstate
uniformity in certain critical areas. According to the NAIC, at least
48 States have passed licensing reform legislation since the enactment
of GLBA, and over 40 jurisdictions have been formally certified as
meeting the NARAB mandates. There is no dispute that the NARAB
provisions had their intended effect and initiated the move toward
agent licensing modernization at the State level. Although more
improvement is undoubtedly needed, the States have made significant
progress in the 5 years since the passage of GLBA.
The success of the NARAB licensing provisions is a perfect example
of what the Federal Government and the States can accomplish in
partnership and how Congress can assist the States to achieve much
needed marketplace reforms. The NAIC and State policymakers had been
trying to move toward reciprocal and uniform licensing for over a
century, but little progress was made until Congress set a specific
deadline and attached specific goals and repercussions. In fact,
Congress set the bar at only a majority of the States and now all but a
few have met the NARAB reciprocity standard. This success would not
have occurred without targeted Federal legislation, or what some are
now calling ``Federal tools.''
Some may argue that the bar was not set high enough--because
uniformity was not required and several States have not adopted the
reciprocity standards--but there is no arguing with the provision's
effectiveness so far. There is certainly much more to do to get to full
agent licensing reciprocity and the ultimate goal of licensing
uniformity, but NARAB has set State insurance regulators on the right
path, and Congress can now easily move the bar higher in follow-up
legislation.
IIABA's Support for the NARAB Approach of Targeted Reforms
IIABA supports State regulation of insurance but feels that the
system needs to be modernized to bring it into the 21st century.
Despite our continued support for the State system, we question whether
the States will be able to resolve their problems on their own. For the
most part, State reforms must be made by statute, and State lawmakers
inevitably face practical and political hurdles and collective action
challenges in their pursuit of improvements on a national basis.
Therefore, IIABA believes that Congressional legislative action is
necessary to help reform the State regulatory system. We propose that
two overarching principles should guide any such efforts in this
regard. First, Congress should attempt to fix only those components of
the State system that are broken. Second, no actions should be taken
that in any way jeopardize the protection of the insurance consumer,
which is the fundamental objective of insurance regulation and of
paramount importance to the IIABA as our members represent consumers in
the insurance marketplace.
IIABA believes the best alternative for addressing the current
deficiencies in the State-based regulatory system is a pragmatic,
middle-ground approach that utilizes Federal legislative tools to
foster a more uniform system and to streamline the regulatory oversight
process at the State level. By using targeted and limited Federal
legislation to overcome the structural impediments to reform at the
State level, we can improve rather than replace the current State-based
system and in the process promote a more efficient and effective
regulatory framework. Rather than employ a one-size-fits-all regulatory
approach, a variety of legislative tools could be employed on an issue-
by-issue basis to take into account the realities of today's
increasingly global marketplace. There are only a handful of regulatory
areas where
uniformity and consistency are imperative, and Congress has the ability
to address each of these core issues on a national basis in a single
legislative act.
Congress's work in this area need not jeopardize or undermine the
knowledge, skills, and experience that State regulators have developed
over decades. While IIABA believes such a proposal must modernize those
areas where existing requirements or procedures are outdated, it is
important to ensure that this is done without displacing the components
of the current system that work well. In this way, we can assure that
insurance regulation will continue to be grounded on the proven
expertise of State regulators at the local level.
Some optional Federal charter proponents argue that using targeted
Federal legislation to improve State regulation is more intrusive on
the State system than the optional Federal charter model. We strongly
disagree. They would have you believe that the optional Federal charter
proposals create a parallel universe of Federal-chartered insurers but
leave in place the State-chartered system. This is not the case. In
fact, to take one example, the so-called industry ``consensus'' Federal
charter proposal would force the State guaranty funds to accept and
backstop Federal chartered insurers--there is nothing ``optional''
about that. This would be an unprecedented intrusion on State solvency
regulation. In the end, the State system would be responsible for
insolvent insurers but could not regulate them to keep them from going
insolvent.
This proposal turns the dual-banking model, which proponents
profess to admire, on its head. It is as if the FDIC was turned into 50
State-managed individual deposit insurance corporations, and then these
State funds were forced by Congress to insure both national banks and
State-chartered banks, but without the States having any supervisory
authority over the national banks. The States are clearly left holding
the bag under this proposal, which could lead to dysfunction in the
insurance marketplace to the detriment of both consumers and companies.
In contrast, a NARAB approach is more deferential of States' rights
and is designed to give the leverage to make State and NAIC-developed
standards uniform across the Nation. In each substantive area that
Congress may choose to address in targeted legislation, a Federal
``tool'' could provide incentives for the States and the NAIC to
develop standards and for the State legislatures or departments to
adopt such models. The States could collectively develop the standards
that are to become uniform. For example, the consensus choice of the
majority of States in each area could become the uniform, required
standards in all States. Preemption is only used as a last-resort in
most cases. This preserves and builds upon the expertise of State
regulation and leaves in place the substantial regulatory force which
now protects consumer interests and insurer solvency at the State
level. It is the least intrusive option, which unlike ``optional''
Federal chartering, does not threaten to remove a substantial portion
of the insurance industry from State supervision and risk the creation
of an unlevel playing field.
Unlike the creation of an entirely new regulatory structure, the
enactment of targeted Federal legislation to address certain, clearly
identified problems with State regulation is not a radical concept. The
Senate Banking Committee and the House Financial Services Committee
have already proven that this approach can work with the NARAB
provisions of GLBA that we have already discussed. The IIABA believes
the NARAB model can serve as a template for further reform of State
insurance regulation. The leadership of the House Financial Services
Committee has recently decided to take the NARAB approach of ``targeted
reform'' after conducting a 3 year, in-depth review of insurance
regulation. We would recommend such an approach to the Senate Banking
Committee as well, and look forward to working with the Committee as
you continue your review of State insurance regulation and consider
possible solutions to modernize the system.
Conclusion
IIABA has long been a supporter of reform of the insurance
marketplace, working closely with the Senate and House in support of
Gramm-Leach-Bliley, the Terrorism Risk Insurance Act of 2002 (TRIA),
and more recently supporting an extension of TRIA and the developing
consensus for State-based insurance modernization. While GLBA
reaffirmed State functional regulation of insurance, some large
insurers are now advocating for an ``optional'' Federal charter. State
regulators and legislators, many consumer groups, independent insurance
agents and brokers, some life insurance companies, and most property-
casualty companies are strongly opposed to an optional Federal charter.
In fact, the Property Casualty Insurers Association of America and the
National Association of Mutual Insurance Companies which represent
property-casualty insurers of all sizes oppose an optional Federal
charter. The State system has proven that it best protects consumers
and can be modernized to work effectively and efficiently for the
entire insurance marketplace with the right pressure from Congress.
Targeted, Federal legislation to improve the State-based system
presents Members with a middle-ground solution that is achievable--
something we can all work on together. This pragmatic approach would
build on the success of the NARAB provisions in GLBA. Because of the
Senate Banking Committee's work on NARAB, the vast majority of States
have now implemented reciprocal agent licensing. This same approach can
be used to get all States moving toward not only reciprocal but also
uniform agent licensing, as well as improving other areas of insurance
regulation such as State market conduct oversight, company licensing,
and product review. We encourage the Senate Banking Committee to take
up the mantle of State-based insurance reform and lead this effort. It
is a proven a success with NARAB, and is the only solution that can
bring the marketplace together to achieve reform.
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PREPARED STATEMENT OF ALBERT R. COUNSELMAN, CPCU
Past Chairman, The Council of Insurance Agents + Brokers and
President & CEO, Riggs, Counselman, Michaels & Downes, Inc.
September 22, 2004
Good morning, Chairman Shelby, Ranking Member Sarbanes and Members
of the Senate Banking Committee. My name is Albert Counselman. I am
President and CEO of Riggs, Counselman, Michaels and Downes in
Baltimore, MD and past Chairman of The Council of Insurance Agents +
Brokers (The Council). Thank you for giving me the opportunity to
testify before the Committee today.
The Council represents the Nation's largest, most productive, and
most profitable commercial property and casualty insurance agencies and
brokerage firms. Council members specialize in a wide range of
insurance products and risk management services for business, industry,
government, and the public. Operating both nationally and
internationally, Council members conduct business in more than 3,000
locations, employ more than 120,000 people, and annually place more
than 80 percent--well over $90 billion--of all U.S. insurance products
and services protecting business, industry, government, and the public
at-large, and they administer billions of dollars in employee benefits.
Since 1913, The Council has worked in the best interests of its
members, securing innovative solutions, and creating new market
opportunities at home and abroad.
Riggs, Counselman, Michaels and Downes (RCM&D) is the largest
independent agency/brokerage firm in Maryland, with more than 250
employees. We are headquartered in Baltimore, with offices in
Washington and Richmond. Based on information reported by Business
Insurance in their annual survey of firms, RCM&D is the 75th largest
insurance/risk management agency in the United States. Our clients
range from large, multi-State employers in the Fortune 1000, to large
and small hospitals, to mid-size and small businesses and individuals.
We provide risk management, including risk control and claim management
programs, commercial and personal insurance, self-insurance and
employee benefit programs. We represent most of the largest and most
well-known insurers operating in the United States and many located
overseas. We have been in business since 1885 and continue to be
privately owned by individuals active in the operation of the business.
Through our ownership and membership in organizations such as Assurex
Global and Worldwide Brokerage Network, we service clients locally as
well as throughout the United States and the globe.
Introduction
RCM&D and the members of the Council of Insurance Agents + Brokers
commend you for holding this hearing on the condition and regulation of
the insurance industry. Insurance regulatory reform, which is critical
for the long-term health of the industry, is long overdue.
Modernization of the insurance regulatory structure is an important
element in maintaining a strong, vibrant insurance sector. We are very
happy to see interest on both sides of Capitol Hill in addressing this
issue.
A discussion of the condition of the insurance industry is not
complete without addressing the risks posed by terrorism and the
importance of the Terrorism Risk Insurance Act (TRIA). The need for
Federal action in the area of terrorism coverage is a clear example of
the limits of State regulation. Although the State regulators worked
diligently in the days and months after the September 11, 2001
terrorist attacks to help to bring stability to the insurance
marketplace, it was abundantly clear that they did not have the
capacity to act quickly to implement a uniform approach in every State
to address the emergency. With the leadership of Senators Bennett and
Dodd, and thanks to the hard work of the Members of this Committee and
others, TRIA was adopted to provide the backstop necessary to stabilize
the insurance markets, and enable construction and real estate projects
to go forward and critical, but vulnerable, infrastructure to be
insured.
Now, as we look forward to the third and final year of TRIA's
current life, the evidence is mounting that TRIA is effective and that
purchase of terrorism coverage is increasing. It has also become
evident, however, that the private marketplace will not be prepared to
take on the full risk posed by potentially catastrophic terrorism
losses by the time the law expires on December 31, 2005. Thus, it is
imperative that TRIA be extended. The Council thanks Senators Bennett
and Dodd for the leadership they have shown by introducing legislation
that would accomplish just that. We urge this Committee to ensure that
this important piece of legislation becomes law before you adjourn for
the term.
I plan to address two main issues in my testimony today:
(i) The Terrorism Risk Insurance Act: Extension of TRIA is critical
for consumers/policyholders and for the insurance industry; and
(ii) Insurance regulatory reform: Notwithstanding some improvement
in the last few years, there remain significant problems in the State
insurance regulatory system; because the States cannot solve these
problems on their own, Congressional action will be necessary.
The Terrorism Risk Insurance Act: Extension of TRIA is Critical for
Consumers/Policyholders and for the Insurance Industry
TRIA has had a huge impact on the availability of insurance and the
capacity of insurers to take on risk. The law has successfully brought
stability to the private market for terrorism risk insurance, enabling
all sectors of the economy to operate on a ``business as usual''
footing. Without the backstop, the economy could suffer significant
damage as businesses pull back because the lack of insurance coverage
makes them financially vulnerable. Under TRIA, insurers have the
ability to offer terror coverage, thus allowing commercial activity to
go forward without threatening the solvency of the parties involved.
TRIA's effect is felt in all corners of the country. Since its
enactment, the availability of terrorism coverage has grown and premium
prices have dropped. Statistics show that nearly one-half of all
insureds now are purchasing terror coverage.
Earlier this year, Marsh, Inc., a member of The Council and one of
the top insurance brokers in the United States and internationally,
issued a report on the terrorism insurance marketplace based on data
collected from its Global Broking centers across the country. The
findings indicate that among 15 industries examined, the largest
percentage of insureds buying terrorism insurance were in the energy
industry. Media, food and beverage, habitational/hospitality,
healthcare, and real estate were the other industries with the highest
take-up rates. We believe one of the most significant aspects of these
findings is that these industries operate across the country--they are
not limited to one or two cities or geographic areas--and their
products and services are used by all Americans. That is certainly true
of the energy industry, which is a critical element of the national
infrastructure. TRIA ensures that these industry sectors--which are
terrorism targets because of their importance to the country, public
safety, and the economy--are able to secure the insurance coverage they
need to operate.
Let me give you two specific examples of the importance of TRIA to
my firm and our clients:
One of our clients was building a downtown Baltimore apartment
project--located near the Inner Harbor--and the lender required
terrorism coverage for the builders risk and for the permanent
property coverage. Because of the availability of TRIA, there were
several insurers writing in that market. We were able to negotiate
with various builders risk insurers, allowing us to provide
multiple quotations promptly to the project owner. This gave the
owner several competitive choices, rather than forcing the company
to ``take whatever they could get'' in a noncompetitive market--if
they could get any coverage at all.
Another client is a large financial services firm
headquartered in a major city. Because of the existence of the TRIA
backstop, a leading financial services insurance provider can offer
multiple coverages to this insured, such as property, business
income, workers' compensation, and other lines. Without TRIA,
however, the insurer would not be able to offer multiple-line
coverages. For example, because our client has almost 1,000
employees in a downtown multistory office tower, the insurer likely
would not be able to offer the firm workers' compensation coverage.
This would force the insured to seek coverage from an insurer that
has the capacity to provide such coverage. If there were no
insurers with available capacity, the insured may be forced to take
significantly higher self-insured retention levels or go into a
``State-managed workers' compensation pool.'' Insurers
participating in these assigned-risk pools are ``forced'' to accept
the workers' compensation risk.
When TRIA was enacted, the intent of Congress was to create a
short-term Federal backstop to allow insurance markets to gradually
assume, and learn to price, terrorism risk--a risk that had previously
been insured at no additional cost over the standard policy premium. As
TRIA enters the third and last year of its original life-span, it is
clear that the capacity of the private market to provide terrorism risk
coverage will require more time to fully develop.
A comprehensive and accurate terrorism risk model is necessary for
a private terrorism insurance and reinsurance market to take root;
development of such a model, however, remains elusive. Risk modeling is
a complex and difficult process. Terrorism risk modeling is all the
more difficult because of the unique nature of the terrorist threat,
the element of human intent, and the limited historical precedents
available to provide data for predicting future events.
Terrorism risk models cannot simply follow models for natural
catastrophes, which do not involve human intent. To be effective,
terrorism risk models need to be based upon:
where attacks may occur;
the nature and/or method of attack;
the probability of a particular type of attack occurring at a
specific location; and
estimated damages that may be inflicted at the location.
In addition to the difficulty in modeling catastrophic terrorism
risks, there are several other factors that make such risks
uninsurable:
the insurance sector does not have the capacity to handle
truly catastrophic terrorism losses, so another huge terrorism
event could financially ruin the commercial property and casualty
industry;
terrorism is an interdependent risk from which no one business
or system can protect itself from failure on the part of others;
information necessary to evaluate terrorism risk is often
sensitive intelligence data held by the Government;
despite the modest amounts of reinsurance available for
terrorism coverage, reinsurers will not be able to provide
sufficient capacity to the market for terrorism insurance upon
TRIA's expiration; and
alternative financing mechanisms--such as alternative risk
pools or catastrophe bonds--currently cannot generate sufficient
capacity to deal with catastrophic terrorism risk.
Extension of TRIA must be made a priority. A recent study by
Analysis Group, Inc., an economic research firm, says that TRIA helps
strengthen the economy's performance by ensuring that commercial
business and properties have terrorism risk coverage in place. The
report indicates that failure to reauthorize TRIA could result in a $53
billion hit to the U.S. economy even without another terrorist attack.
Without the backstop, insurers will reduce capacity for terrorism
coverage and impose exclusions on current coverages. The study found
that overall GNP would be reduced 0.4 percent without TRIA, total
household income net worth would fall by $512 billion, and roughly
326,000 fewer jobs would be created.
The House is scheduled to consider extension of TRIA on September
29, one week from today. We urge you to make every effort to adopt
legislation such as S. 2764 extending the program before you adjourn
this fall.
Insurance Regulatory Reform: Notwithstanding Some Improvement in
the Last Few Years, There Remain Significant Problems in the State
Insurance Regulatory System; Because the States Cannot Solve These
Problems on Their Own, Congressional Action will be Necessary
Although the State insurance regulators, through the National
Association of Insurance Commissioners (NAIC), have attempted to
institute regulatory reforms without Federal involvement, the reality
is that today's marketplace demands far more dramatic action than the
States alone are able to provide. The pace of financial services
convergence and globalization are far outstripping the pace of reform
efforts by State regulators and legislatures. Competition and
efficiency in the insurance industry lags behind other financial
services sectors due to the regulatory inefficiencies and
inconsistencies in the State insurance regulatory system,
inefficiencies and inconsistencies that must be addressed if the
insurance sector is going to be able to keep up with the pace of change
in the rapidly evolving global marketplace and thereby expand the
insurance marketplace for the benefit of insurers, producers, and
consumers.
The Council regards itself as a pioneer within our industry with
respect to regulatory modernization, though reform is a frustratingly
long process. We formed our first internal committee to address the
problems of interstate insurance producer licensing more than 60 years
ago. Our efforts were finally rewarded with the enactment of the NARAB
provisions of the Gramm-Leach-Bliley Act a few years ago--a first step
on the road to insurance regulatory modernization.
While it is abundantly clear to Council members that the current
system of State-by-State regulation is not working, we wanted to see a
full, economic analysis of the alternatives for reform. To that end,
The Council's Foundation for Agency Management Excellence (FAME)
commissioned an independent study of the economic costs and benefits of
the various proposals. Our study, entitled ``Costs & Benefits of Future
Regulatory Options for the U.S. Insurance Industry,'' provides an in-
depth examination of the pros and cons of the regulatory options
available for oversight of the business of insurance. A copy of the
study is attached to my testimony.* I hope it will serve as a useful
tool as you consider insurance regulatory reforms.
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* Held in Committee files.
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Continuing Problems under the Current Regulatory System
Although the States have made some strides in recent years in
simplification and streamlining regulatory requirements, almost all the
concrete progress has been in the producer licensing area--thanks to
the enactment of the NARAB provisions included in the Gramm-Leach-
Bliley Act (GLBA). NARAB-compliance notwithstanding, there remain
several problem areas in the interstate licensing process that impose
unnecessary costs on our members in terms of time and money. In
addition, insurance companies face problems doing business on a multi-
State basis, and recent efforts by the States to streamline rate and
policy form approval processes have not proven to be very successful.
The operation of and access to alternative markets--such as surplus
lines and risk retention groups--is also hampered by unnecessarily
cumbersome and duplicative regulatory requirements. These continuing
problems with the State-by-State insurance regulatory process has lead
us to the following conclusion: Regulatory relief is needed, and it is
needed now.
Producer Licensure: Welcome Improvements, but Incomplete Reform
The NARAB provisions included in GLBA required that at least 29
States enact either uniform agent and broker licensure laws or
reciprocal laws permitting an agent or broker licensed in one State to
be licensed in all other reciprocal States simply by demonstrating
proof of licensure and submitting the requisite licensing fee.
After enactment of GLBA, the NAIC pledged not only to reach
reciprocity, but also, ultimately, to establish uniformity in producer
licensing. The regulators amended the NAIC Producer Licensing Model Act
(PLMA) to meet the NARAB reciprocity provisions, and their goal is to
get the PLMA enacted in all licensing jurisdictions. As of today, 47
States have enacted some licensing reform and the NAIC has now
officially certified that a majority of States have met the NARAB
reciprocity requirements, thereby averting creation of NARAB. This is a
good effort, but the problems are in the details; there is still much
work to be done to reach true reciprocity and uniformity in all
licensing jurisdictions.
Although most of the States have enacted the entire PLMA, 4 States
have enacted only the reciprocity portions of the model. Of the States
that have enacted the entire PLMA, there are several that have deviated
significantly from the model's original language. One State has enacted
licensing reform that in no way resembles the PLMA. And two of the
largest States in terms of insurance premiums written, Florida and
California, have not enacted legislation designed to meet the NARAB
reciprocity threshold at all.
The inefficiencies and inconsistencies that remain in producer
licensing affect every insurer, every producer, and every insurance
consumer. As for my own firm, we hold 161 resident licenses in Maryland
and Virginia, and 332 nonresident licenses across the country, up from
175 nonresident licenses in 1999. We not only had to secure initial
licenses, but we face also annual renewals for those nearly 500
licenses in 50+ jurisdictions, in addition to satisfying all the
underlying requirements and post-licensure oversight. Progress in
streamlining the producer licensing process has undeniably been made
since GLBA's NARAB provisions were enacted in 1999, but these numbers--
and, more critically, the regulatory and administrative burdens they
represent--vividly demonstrate that the job is not yet finished. Most
States retain a variety of individual requirements for licensing, and
they all differ with respect to fees, fingerprinting, and
certifications, among other requirements.
In addition to the lack of full reciprocity in licensing procedures
for nonresidents, the standards by which the States measure compliance
with licensing requirements differ from State-to-State, as well. These
include substantive requirements--prelicensing education, continuing
education, and criminal background checks, for example--as well as
administrative procedures such as agent appointment procedures and
license tenure and renewal dates. While these may seem like small
issues, they can easily turn into large problem for someone like me,
who is licensed in all 51 jurisdictions: I must constantly renew
licenses throughout the year, based upon the individual requirements in
each State. In addition to the day-to-day difficulties the current set-
up imposes, this inconsistent application of law among the States
inhibits efforts to reach full reciprocity. Some States may be
disinclined to license as a nonresident a producer whose home State has
``inferior'' licensing standards, even a State with similar or
identical statutory language. In fact, several States that have failed
to adopt compliant licensure reciprocity regimes claim that their
refusal is based on this absence of uniform standards--thus implying
that the standards of other States do not measure up.
A third major area in need of streamlining is the processing of
license applications. Although a uniform electronic producer licensing
application is now available for use in many States--arguably, the
biggest improvement in years--several States, including Florida and
South Carolina, do not use the common form, and in States that use the
form there is no common response mechanism. Each State follows up on an
application individually, which can be cumbersome and confusing. Our
attempts to renew licenses in the District of Columbia last year offer
an egregious example of this failure of forms and processing. Although
renewal applications were submitted in April 2003, approval of the
final renewal was not received until February of this year, after many
attempts to follow-up.
Thus it is clear that, despite the revolutionary NARAB
achievements, comprehensive reciprocity, and uniformity in producer
licensing laws remains elusive--and I am not sure that the NAIC and the
States are capable of fully satisfying those goals. Indeed, until
recently, the State of Florida completely barred nonresidents from
being licensed to sell surplus lines products to Florida residents or
resident businesses. The State required nonresident agents and brokers
who sold a policy of an admitted company to a Florida resident or
resident business to pay a resident agent a mandated ``countersignature
fee'' in order to complete that transaction. These practices have been
terminated only because The Council filed a lawsuit and was granted
summary judgment on its claims that these statutory requirements
violated the constitutional rights of its members. Similarly, the U.S.
Court for the District of Nevada ruled from the bench in The Council's
favor on its challenge to analogous countersignature requirements in
Nevada; the formal judgment has not yet been issued. West Virginia,
facing a similar lawsuit initiated by The Council, repealed its
countersignature requirements. The Council's suit challenging South
Dakota's countersignature law is still pending.
Speed-To-Market
The State-by-State system of insurance regulation gives rise to
problems outside the area of producer licensing that require immediate
Congressional attention, as well. Although these problems appear to
affect insurance companies more than
insurance producers, the unnecessary restraints imposed by the State-
by-State regulatory system on insurers harm producers as much as
companies because they negatively affect the availability and
affordability of insurance, and, thus, our ability to place coverage
for our clients.
My agency--like most Council members--sells and services primarily
commercial property/casualty insurance. This sector of the insurance
industry is facing severe challenges today due to a number of factors,
including: The losses incurred as a result of the September 11
terrorist attacks; increased liability expenses for asbestos, toxic
mold, D&O liability, and medical malpractice; and years of declining
investment returns and consistently negative underwriting results. Some
companies have begun to exit insurance markets as they realize that
they can no longer write these coverages on a break-even basis, let
alone at a profit. The end result is increased prices and declining
product availability to consumers. This situation is exacerbated by the
current State-by-State system of insurance regulation.
The FAME study mentioned earlier in my testimony notes that the
current U.S. system of regulation can be characterized as a
prescriptive system that generally imposes a comprehensive set of prior
constraints and conditions on all aspects of the business operations of
regulated entities. Examples of these requirements include prior
approval or filing of rates and policy forms. Although the prescriptive
approach is designed to anticipate problems and prevent them before
they happen, in practice, this approach hinders the ability of the
insurance industry to deal with changing marketplace needs and
conditions in a flexible and timely manner. This approach also
encourages more regulation than may be necessary in some areas, while
diverting precious resources from other areas that may need more
regulatory attention.
It is also important to note that insurers wishing to do business
on a national basis must deal with 51 sets of these prescriptive
requirements. This tends to lead to duplicative requirements among the
jurisdictions, and excessive and inefficient regulation in these areas.
Perhaps the best (or worst, depending upon your perspective) example of
this are the policy form and rate preapproval requirements still in use
in many States. Over a dozen States have completely deregulated the
commercial insurance marketplace for rates and forms, meaning that
there are no substantive regulatory approval requirements in these
areas at all. Other States,
however, continue to maintain preapproval requirements, significantly
impeding the ability of insurers to get products to market. Indeed,
some studies have shown that it can take as much as 2 years for a new
product to be approved for sale on a nationwide basis. Banking and
securities firms, in contrast, can get a new product into the national
marketplace in 30 days or less. The lag time for the introduction of
new insurance products is unacceptable. It is increasingly putting the
insurance industry at a competitive disadvantage as well as undermining
the ability of insurance consumers to access products that they want
and need.
Let me give you an example that all Council members are familiar
with: A few years ago, PAR, an errors and omissions captive insurer
sponsored by The Council, sought to revise its coverage form. In most
States, PAR was broadening coverage, although in a few cases, more
limited coverage was sought. PAR had to refile the coverage form in 35
States where PAR writes coverage for 65 insureds. After 2 years and
$175,000, all 35 States approved the filing. Two years and $5,000 per
filing for a straightforward form revision for 65 sophisticated
policyholders is unacceptable and is symptomatic of the problems caused
by outdated rate and form controls.
We support complete deregulation of rates and forms for commercial
lines of insurance. There is simply no need for such Government
paternalism. Commercial insureds are capable of watching out for their
own interests, and a robust free market has proved to be the best price
control available.
Access To Alternative Markets
In the last 2 years, high rates for property and casualty insurance
have been a serious problem for many mid-sized and larger commercial
firms. Hard markets such as these cause availability to decrease and
the cost of coverage to increase. During these periods, insureds--
particularly sophisticated commercial insureds--are increasingly drawn
to the appeal of alternatives to the traditional, regulated
marketplace to expand their coverage options and hold down costs. There
are two excellent mechanisms in place that offer such alternative
markets: Surplus lines insurance and risk retention groups. Although
surplus lines insurance and insurance purchased through risk retention
groups technically are less regulated than insurance in the admitted
market, there are, nonetheless, State regulatory requirements--and
Federal laws--that apply to these alternative market mechanisms. As
described more fully below, updating these regulations and laws and
encouraging use of alternative insurance markets would help to increase
options and decrease costs for insurance consumers.
Surplus Lines. For commercial property and casualty insurance,
business is done increasingly through the surplus lines marketplace. A
surplus lines product is an insurance product sold by an insurance
company that is not admitted to do business in the State in which the
risk insured under the policy is located. Surplus lines products tend
to be more efficient because the issuing companies are less regulated
and because the policies are manuscripted and therefore need not comply
with State form and rate requirements. In essence, the insured goes to
wherever the insurance company is located to purchase the coverage. The
insurer may be in another State, or it may be in Great Britain,
Bermuda, or elsewhere. Potential insureds can procure this insurance
directly, but they generally do so through their insurance brokers.
Although the purchase of surplus lines insurance is perfectly legal
in all States, the regulatory structure governing such coverage is a
morass. When surplus lines activity is limited to a single State,
regulatory issues are minimal. When activity encompasses multiple
States, however, full regulatory compliance is difficult, if not
impossible. And I should note that multi-State surplus lines policies
are the norm rather than the exception because surplus lines coverage
is uniquely able to address the needs of insureds seeking coverage in
more than one State. Thus, the difficulty of complying with the
inconsistent, sometimes conflicting requirements of multiple State laws
is a real problem. Simply keeping track of all the requirements can be
a Herculean task. For example: Maryland and the District of Columbia
require a monthly ``declaration'' of surplus lines business placed, but
only require payment of premium taxes on a semi-annual basis; Virginia,
in contrast, requires that a declaration be filed and taxes be paid
quarterly; New Jersey has 36 pages of instructions for surplus lines
filings, including a page discussing how to number the filings and a
warning not to file a page out of sequence because that would cause a
rejection of the filing and could result in a late filing.
The problems with State surplus lines laws fall into four general
categories:
Taxes: States have inconsistent and sometimes conflicting
approaches regarding the allocation of premium taxes, which can
lead to double taxation and confusion when a surplus lines policy
involves multi-State risk.
Single situs approach--100 percent of the premium tax is
paid to the insured's State of domicile or headquarters State.
(This approach is imposed by some States regardless of what
percentage of the premium is associated with risks insured in the
State.)
Multi-State approach--Premium tax is paid to multiple States
utilizing some method of allocation and apportionment based upon
the location of the risk(s).
No clear requirement--More than a dozen States that impose
surplus lines premium taxes do not have statutory or regulatory
provisions indicating the State's tax allocation method, leaving it
up to the insured and the insured's broker to determine how to
comply with the State law. In such States, determination of tax
allocations is often based on informal guidance from State
insurance department staff.
Declinations: Some, but not all, States require that an
attempt be made to place coverage with an admitted insurer before
turning to the surplus lines market. Some States specifically
require that one or more licensed insurers decline coverage of a
risk before the risk can be placed in the surplus lines market.
State declination requirements are inconsistent and conflicting,
however, and the methods of proving declinations vary
tremendously--from specific requirements of signed affidavits to
vague demonstrations of ``diligent efforts.''
Status of Insurers:
Most States require that a surplus lines insurer be deemed
``eligible'' by meeting certain financial criteria or having been
designated as ``eligible'' on a State-maintained list. These lists
vary from State-to-State, making it potentially difficult to locate
a surplus lines insurer that is ``eligible'' in all States in which
placement of a multi-State policy is sought. Although the NAIC
maintains a list of eligible alien (non-U.S.) surplus lines
insurers, this does not seem to have any bearing on the uniformity
of the eligible lists in the individual States.
In addition to eligibility, another problem with respect to
the status of insurers occurs when multi-State surplus lines
coverage is placed with an insurer that is an admitted (not surplus
lines) insurer licensed in one of the States in which part of the
risk is located. This is problematic because surplus lines
insurance cannot be placed with a licensed insurer. In these
situations, more than one policy will have to be used, or the
insured will have to use a different surplus lines carrier.
Filings: All States require surplus lines filings to be made
with the State insurance department. The type and timing of such
filings vary from State-to-State, but may include filings of
surplus lines insurer annual statements, filings regarding diligent
searches/declinations, and filings detailing surplus lines
transactions. Depending on the States in question, filings can be
required annually, quarterly, monthly, or a combination thereof. In
addition, some States treat ``incidental exposures''--generally
relatively small surplus lines coverages--differently from more
substantial coverages. States have differing definitions of what
constitutes incidental exposures and who has to make required
filings for such an exposure: Some States require the broker to
make the filings; others the insured; and some require no filings
at all for incidental exposures.
Risk Retention Groups. Enacted in 1981, the Product Liability Risk
Retention Act was developed by Congress in direct response to the
insurance ``hard market'' of the late 1970's. The current version of
the law--the Liability Risk Retention Act of 1986--was enacted in
response to the ``hard market'' of the mid-1980's and expanded the
coverage of the Act to all commercial liability coverages. Risk
Retention Groups (RRG's) created under the Act are risk-bearing
entities that must be chartered and licensed as an insurance company in
only one State and then are permitted to operate in all States. They
are owned by their insureds and the insureds are required to have
similar or related liability exposures; RRG's may only write commercial
liability coverages and only for their member-insureds.
The rationale underlying the single-State regulation of RRG's is
that they consist only of ``similar or related'' businesses which are
able to manage and monitor their own risks. The NAIC has recognized
that the purpose of Risk Retention Groups is to ``increase the
availability of commercial liability insurance.''
Solutions--Congressional Leadership and Action is Critical if Insurance
Regulatory Reform is to Become a Reality
The FAME study notes that all the regulatory modernization efforts
attempted by the NAIC in the past several years have been the direct
result of major external threats--either the threat of Federal
intervention, or the wholesale dislocation of regulated markets. The
study concludes that there is no guarantee the State-based system will
adopt further meaningful reforms without continued external threats to
the States' jurisdiction, and it offers the progress on producer
licensing reform as a prime example. The Council wholeheartedly agrees
with this conclusion. Too much protectionism and parochialism
interferes with the marketplace, and the incentive for reform in
individual States simply does not exist without a Federal threat. Thus,
Congressional involvement in insurance regulatory reform is entirely in
order and, in fact, overdue.
The Council believes it is critical to the long-term viability of
the U.S. insurance industry that Congress pass legislation to address
the deficiencies of the State insurance regulatory system. Broad
reforms to the insurance regulatory system are necessary to allow the
industry to operate more efficiently, to enable the insurance
industry to compete in the larger financial services industry and
internationally, and to provide consumers with a strong, competitive
insurance market that brings them the best product at the lowest cost.
As we all know, there are, essentially, two approaches to insurance
regulatory reform currently under consideration--the ``roadmap'' that
addresses reform issue-by-issue and the optional Federal charter. These
approaches, although different, are not necessarily mutually
exclusive--partial reform now does not rule out further reform in the
future.
The ``roadmap'' approach being developed by House Financial
Services Committee Chairman Mike Oxley (R-OH) and Capital Markets,
Insurance and Government Sponsored Enterprises Subcommittee Chairman
Richard Baker (R-LA), lays the groundwork for aggressive reforms that
will provide desperately needed modernization in insurance regulation.
It builds upon State-based efforts and provides both carrots and sticks
to force States to effectively respond to the critical need for reform.
The proposal would go a long way toward resolving many of the most
deep-seated insurance regulation problems, particularly with respect to
the producer issues that are of specific concern to Council members.
The Oxley-Baker proposal would build on the NARAB template, expanding
reciprocity requirements to all 50 States, and requiring uniform
licensing standards--including criminal background checks--in every
State, resulting in the first truly seamless, national insurance
producer licensing system.
The Oxley-Baker proposal is a comprehensive plan that, in addition
to producer licensing, addresses the spectrum of insurance regulatory
issues. It would resolve the surplus lines market access issues by
updating and streamlining the current dysfunctional semi-regulatory
process; it addresses speed to market problems caused by unnecessarily
cumbersome rate and form regulation; and it attacks a number of other
insurance regulatory issues that are dealt with in patchwork fashion by
the States, including market conduct, company licensing, and life
insurance matters.
The roadmap proposal could prove to be a huge step on the road to
insurance regulatory reform. Having said that, however, we believe the
ultimate solution--at least for the property and casualty industry--is
enactment of legislation creating an optional Federal insurance
charter. An optional Federal charter would give insurers and producers
the choice between a single Federal regulator and multiple State
regulators. It would not dismantle the State system, rather it would
complement the State system with the addition of a Federal partner. It
is likely that many insurers and producers--particularly those who
operate in a single State or perhaps a small number of States--would
choose to remain State-licensed. Large, national and international
companies, on the other hand, would very likely opt for a Federal
charter, thereby relieving themselves of the burden of compliance with
51 different regulatory regimes.
I am encouraged to hear that Senators Sununu (R-NH) and Carper (D-
DE) are developing optional Federal charter legislation. The Council
has been a strong advocate for such legislation for a number of years,
and we look forward to working with all of you to develop the proposal
from concept into reality. Realistically, we understand that it could
take several years for optional Federal charter legislation to be
enacted. It is a major undertaking with a great number of issues to be
resolved. Political reality dictates that it will not be an easy
process, nor will it be quick. Let me be clear that The Council is in
this for the long haul. We will work with you until our common goal is
reached. Between now and then, however, insurance regulation is in
desperate need of reform. In order to better serve our policyholders
and clients, we need practical solutions to real marketplace problems.
We believe the Oxley-Baker proposal provides those practical solutions
and, by streamlining and updating critical insurance regulatory
processes, will set the stage for creation of an optional Federal
charter.
In closing, as I noted above, improvements in the State insurance
regulatory system have come about largely because of outside pressure,
notably, from the Congress. Despite its ambitious reform agenda, the
NAIC is not in a position to force dissenting States to adhere to any
standards it sets. Thus, it is clear that Congressional leadership will
be necessary to truly reform the insurance regulatory regime in the
United States. On behalf of The Council, I thank you for your genuine
interest in fixing this important piece of our financial
infrastructure. I also thank Chairman Shelby and Senator Sarbanes for
their leadership in this area. Your attention to this critical issue is
heartening. We stand ready to assist you in any way that we can to
advance this important effort.
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PREPARED STATEMENT OF BRIAN K. ATCHINSON
Executive Director, Insurance Marketplace Standards Association
September 22, 2004
Introduction
Good morning, Chairman Shelby and Members of the Committee. Thank
you for the opportunity to speak to you today on the Examination and
Oversight of the Condition and Regulation of the Insurance Industry.
I am Brian Atchinson, Executive Director of the Insurance
Marketplace Standards Association (IMSA). IMSA is an independent,
nonprofit organization created in 1996 to strengthen consumer trust and
confidence in the marketplace for individually sold life insurance,
annuities and long-term care insurance products. We encourage you to
visit our website (www.IMSAethics.org) to learn more about IMSA.
IMSA members comprise more than 160 of the Nation's top insurance
companies representing nearly 60 percent of the life, annuities, and
long-term care insurance policies written in the United States. The
IMSA Board of Directors is comprised of chief executive officers from
IMSA-qualified companies as well as experts and professionals from
outside the insurance industry. To attain IMSA qualification, a life
insurance company must demonstrate its commitment to high ethical
standards through a rigorous independent assessment process to
determine the company's compliance with IMSA's Principles and Code of
Ethical Market Conduct.
As a former regulator and company person, my views on the
regulation of insurance are based upon a number of different vantage
points. From 1992-1997, I served as Superintendent of the Maine Bureau
of Insurance. From 1994-1997, I represented U.S. regulators in the
International Association of Insurance Supervisors and in 1996, I
served as President of the National Association of Insurance
Commissioners (NAIC). Prior to joining IMSA, I served as an executive
officer in the life insurance industry.
Ethical Standards in a Competitive Financial Services Marketplace
Life insurers face increasingly intense market competition from
other providers of financial service products both domestically and
internationally. In this challenging environment, it is important that
financial service providers follow high ethical standards to best
protect and serve consumers and to make sure the marketplace remains
strong.
In the United States, IMSA develops ethical standards for the life
insurance industry. To our knowledge, there is no similar organization
in this country for financial services sectors dedicated to promoting
ethical standards and practices.
In an era when the practices of some financial services companies
have come under media and public scrutiny, IMSA continues to provide
clear ethical leadership. Our Principles of Ethical Market Conduct, to
which all IMSA-qualified companies must adhere, include requirements
for the marketing, advertising, sales and customer service of
annuities, long-term care and life insurance. (See attached
Principles.) * IMSA's Principles also contain a ``needs-based'' selling
standard. We believe that all consumers--including our military service
men and women--should receive clear and honest information before they
purchase any type of insurance product.
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* Held in Committee files.
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IMSA's standards have received favorable recognition
internationally as well. A recent Financial Times article regarding the
``Restoring Trust'' report on the UK's financial services industry
cited IMSA as a successful example of a principles-based, industry-led
approach to raising ethical standards. As competition in the financial
services sector grows, ethical standards for all financial services
providers, not just life insurers, could improve marketplace practices.
The Changing Role of Market Conduct Regulation
Insurance regulation is intended to ensure a healthy, competitive
marketplace, to protect consumers, and create and to maintain public
trust and confidence in the insurance industry.
An integral component of insurance regulation is the appropriate
oversight of the ways insurance companies distribute their products in
the marketplace, namely, market conduct regulation.
The history of market conduct regulation goes back to the early
1970's when the NAIC developed its first handbook for market conduct
examinations and did its first market conduct investigation. We've come
a long way--by 2002, departments reported a total of 1,333 market
conduct exams and 465 combined financial/market conduct exams.
Yet as the Government Accountability Office noted in a report
issued last year, there has been little consistency or uniformity in
the way individual States perform market conduct oversight. For
example, each company writing business nationally must comply with
dozens of widely divergent State and Federal standards regarding the
replacement of policies. There are no logical reasons for so many
different and inconsistent standards or to impose those extra and
superfluous costs on companies and consumers.
The State-based system of market conduct regulation has been in
need of improvement and updating for some time. Until a consistent,
nationwide system of market regulation can be established, insurers
will continue to be subject to simultaneous or overlapping market
conduct examinations from different States applying different laws and
regulations--while consumers in some States receive little market
conduct protection, as documented in the GAO study. This lack of
uniformity places significant costs and human resource burdens upon
insurance companies that translate into higher costs that are
ultimately passed on to consumers in the form of higher prices for
their products.
Making Market Conduct Regulation More Efficient
The challenge for the future is to create a uniform system of
market conduct oversight that creates greater efficiencies for
insurance companies while maintaining appropriate consumer protections.
There has been some progress toward a more efficient system of
market regulation and IMSA has been an active participant in these
efforts. We commend the NAIC for its willingness to explore ways that
regulators and best practices organizations can work collaboratively to
improve market conduct regulation and advance the interests of
consumers.
IMSA has worked closely with the NAIC in a variety of areas,
including its recently completed a 2-year study of best practices
organizations such as IMSA. We commend State insurance regulators for
pursuing a new market analysis approach to regulation that will
hopefully reduce inefficiencies and better allocate resources to
provide more comprehensive consumer protections. While this represents
a step forward, the framework to implement this type of analysis
remains under development.
In addition, IMSA was involved in development of the NAIC/NCOIL
Model Law on market surveillance that promotes market analysis and
greater use of insurer self-evaluative activities such as those
required under IMSA standards to introduce a more uniform and efficient
regulatory scheme.
IMSA has responded to requests to provide information to the House
Committee on Financial Services for its draft of the State
Modernization and Regulatory Transparency Act (SMART Act), which
encourages State regulators to collaborate with best practices
organizations such as IMSA. By introducing a uniform set of national
standards for market conduct regulation and collaborating with best
practices organizations, all consumers can be assured that every
insurer will be subject to some degree of oversight.
Establishing a uniform system of market analysis in cooperation
with best practices organizations would allow regulators to focus on
whether an insurer has a sound market conduct and compliance
infrastructure in place to better protect consumer interests. Today's
market conduct examinations tend to focus on technical
instances of noncompliance rather than exploring whether a company has
a comprehensive system of policies and procedures in place to address
market conduct compliance issues. Uniform national market analysis also
would establish a more efficient and effective regulatory process that
would eliminate unnecessary duplicative costs and the administrative
burdens of the current system that are ultimately passed on to
consumers.
Response to Market Conduct Challenges
IMSA's mission is primarily to strengthen trust and confidence in
the life insurance industry through commitment to high ethical market
conduct standards. IMSA qualification also provides a consistent
uniform template of market conduct compliance policies and procedures
at all IMSA member companies. To become IMSA-qualified, an insurer
voluntarily undergoes an internal assessment of their existing policies
and procedures to determine whether they comply with IMSA standards.
Then an independent assessor reviews those policies and procedures to
determine that a comprehensive system of compliance exists throughout
the company.
Insurers that qualify for IMSA devote considerable resources to
maintaining IMSA's standards. These companies also are well-positioned
to respond quickly and effectively to State market conduct inquiries
and to comply swiftly with new Federal or State requirements.
In the last 2 years, IMSA has gained greater acceptance by
regulators, rating agencies, and others. A growing number of State
insurance departments use a company's IMSA qualification as a tool when
planning and conducting market analysis activities. We applaud these
efforts and would like to see more State insurance departments using
IMSA information to create greater efficiencies in the market
conduct regulatory process. During a period of time in which State
insurance department budgets are often under pressure, we encourage
regulators to pursue all appropriate means to leverage limited
regulatory resources.
IMSA continually strives to meet the needs of consumers, companies,
and the marketplace as a whole by helping its member companies develop
and refine an infrastructure of policies and procedures designed not
just to detect but to also resolve questionable marketing, sales, and
distribution practices before they become more widespread.
Consumers should be able to expect honesty, fairness, and integrity
in their insurance transactions. Neither regulators nor companies alone
can ensure the marketplace is always operating in a fair and
appropriate manner at all times. Organizations like IMSA, working
collaboratively with regulators, can offer invaluable support for a
healthy competitive marketplace and to enhance market conduct
regulation.
Conclusion
The financial services marketplace is becoming increasingly
competitive for life insurance companies. To be able to bring products
to market and conduct their operations in an efficient manner, the life
insurance industry, as represented by IMSA member companies, believes
market conduct regulation should be more uniform and efficient. IMSA-
qualified companies stand as the benchmark for excellence in the life
insurance industry and can serve as a valuable resource to help
regulators implement true market regulation reform.
IMSA will continue to work with you and State and Federal officials
to improve market conduct regulation for the benefit of consumers,
regulators, insurers, and insurance professionals alike. I would like
to thank the Members of this Committee for examining this crucial topic
and for the opportunity to share my perspectives on this important
issue.
RESPONSE TO A WRITTEN QUESTION OF SENATOR CRAPO
FROM ARTHUR F. RYAN
Q.1. Some have suggested to this Committee that the privacy
notice required by the Gramm-Leach-Bliley Act is overly
confusing and largely ignored by consumers. Would you please
briefly describe your experience with the privacy notice
requirement and what, if any, recommendations you have for us?
A.1. Our experience with the privacy notice required under the
Gramm-Leach-Bliley Act (GLBA) suggests that this is not an area
of particular concern for Prudential's customers. Further
details of our experience are described below. If, however,
Congress determines that modifications are called for, we would
strongly encourage the Committee to consider a Federal
preemption of State law as modifications are discussed.
Prudential sends customers an initial and annual GLBA
privacy notice, as required by Federal and State law. The
notice describes how we handle customer information, including
the sharing of certain information with affiliates and a joint
marketing partner (we do not, however, share information with
other third parties for marketing-related purposes).
Prudential's privacy notice also describes how we protect
personal information about our customers--and offers customers'
choices to consider, including how to ``opt out'' of sharing
their information with our affiliates and joint marketing
partner. In fact, two opt out methods are available (a tear-off
coupon that customers can complete and mail back to us, or a
toll-free telephone number they can call to opt out).
We sent more than eight million GLBA privacy notices to our
customers in the first 9 months of 2004. Of that number,
129,665 individuals returned coupons or called the toll-free
number to opt out of information sharing. More than half of
those responses had comments or questions in addition to the
opt out request. The overwhelming majority of responses were
related to products customers have with us (for example,
requests for address changes and inquiries about product
status).
A very small segment of the responses received were related
the notice itself. Some of the most common were, ``Why am I
getting this every year?'' and ``Am I still opted out?'' To
date, approximately 150 customers have expressed opinions about
the notice wording or content (comments including that the
notice was ``difficult to read,'' in ``legalese'' or that it
was ``long winded''). Since these comments represent fewer than
20 notices for every million notices mailed, and this rate is
consistent with our experience in previous years, we feel that
it is fair to conclude that our customers are not ``overly
confused'' by our GLBA privacy notice. While this data would
suggest to us that Congress need not take action regarding the
language of GLBA notices, if Congress determines that
modifications are called for, we would strongly encourage the
Committee to consider a Federal preemption of State law.
The insurance industry is unique in its regulatory
structure, in that we are regulated extensively in all the
States in which we do business. Thus, when Congress assigned
GLBA enforcement to the ``functional regulators,'' in the case
of insurance, authority resided with each State's insurance
regulator. Most States responded by promulgating rules based on
the NAIC Privacy of Consumer Financial and Health Information
Model Regulation, which has been generally consistent with the
Federal banking and securities rules, or by enacting State law
with GLBA-like provisions. Consequently, financial institutions
have been able to send customers a single notice, regardless of
product or jurisdiction.
We are concerned that without preemption of State law,
States will adopt varying standards, which will ultimately
result in insurance products and services being subject to
multiple notice requirements. This concern is particularly
acute regarding variable life
insurance and variable annuity products that are regulated for
GLBA purposes by both State law and SEC Regulation S-P. It is
only with diligent effort and extraordinary luck that we have
been able to avoid such a result thus far, and there is no
assurance that we could successfully modify the notice
requirements of 50 States to conform to changes in Federal
requirements. In fact, since some States adopted the GLBA
notice requirements legislatively, and some of those
legislatures meet only once every 2 years, it is likely that
notice requirements could actually conflict if Congress were to
modify the notice requirements without preemption.
Allowing two separate sets of notice requirements to be in
place--one Federal and one State--seems almost certain to cause
exactly the kind of consumer confusion that is the basis for
Congress' current concern about the notice language. Therefore,
if Congress decides to modify the GLBA notice requirements, we
strongly recommend that it preempt State law on that subject as
part of the modification.
RESPONSE TO A WRITTEN QUESTION OF SENATOR CRAPO
FROM WILLIAM H. MCCARTNEY
Q.1. Some have suggested to this Committee that the privacy
notice required by the Gramm-Leach-Bliley Act is overly
confusing and largely ignored by consumers. Would you please
describe you experience with the privacy notice requirements
and what, if any, recommendations you have for us?
Q.1. Are notices overly confusing? Privacy notices are
confusing to many consumers. The specific reasons for this are
discussed below, but we believe the legal requirements and the
complexity of the issue drive this confusion.
Are notices largely ignored by consumers? We find that
consumers are not as interested in the privacy practices of a
financial institution as they are in the price of the product
and reputation of the company. While we have a small minority
of customers who are very vocal about privacy issues and
contact us to share their thoughts, the overwhelming majority
seem to have made up their minds to trust a financial
institution based on brand, reputation, and past experience
before acquiring a product. Consumers tend to make their opt
out choice based on their overall trust of the company or their
general position on privacy issues rather than on the content
of privacy notices. Once consumers have made the decision to
place their trust in a company, the privacy notice becomes
almost immaterial to many of them. Many of our customers
reported feeling flooded with notices, indicating that they are
getting more far more detailed information on this topic than
they want, and are receiving more notices than they believe
they need.
USAA experience. USAA has a very low opt out rate. Many of
our customers have indicated that they have filed opt outs with
other companies with which they do business, but not with USAA,
because they trust us and assume we will use their information
appropriately. According to Forrester Research, USAA received
the highest score among all financial services companies as an
advocate for its customers.
Recommendations. We have several recommendations for
improving privacy notices.
State and Federal privacy laws should be consistent.
Consistency should apply across all types of financial
institutions. In several States we have to send multiple
notices in order to meet the standards under Federal and
State laws. This results in confusion to consumers when
they receive multiple privacy notices from the same family
of companies with different information and different
choices. We believe the only way to remedy this is to amend
GLBA to preempt State regulation of financial institution
information sharing practices and notice requirements.
Reduce the information that is required to be in a GLB
privacy notice. Privacy notices are required to include
information about practices that are not affected by an opt
out. This is confusing to consumers and misleads them with
regard to the scope of the opt out. It results in too much
information for consumers to wade through to get to
essential information about their opt out, as well as the
consequences of exercising an opt out.
Part of the reason that notices are too long is
because the Federal regulations added requirements that
were not in GLBA.
Reduce the frequency of notices. One reason that
consumers ignore privacy notices is that they receive so
many notices. One
solution would be to reduce the frequency of notices. After
providing a consumer with the initial notice, no further
notice should be required for 5 years, provided the initial
notice is still accurate as to that customer. This would be
consistent with the timing under FACTA.
Constitute an advisory group with representatives from
the financial services industry, the regulatory community,
leading privacy experts, and consumers to recommend new,
simpler standards. Some work in this area has already been
done through the FTC workshop, the Treasury Department
study on information sharing practices and informal working
groups.
Thank you for the opportunity to comment on this important
issue. USAA is dedicated to protecting the privacy of our
members and to making it as efficient as possible for them to
do business with us. Privacy notices should be simple and
privacy laws should not make it more difficult for consumers to
transact business with companies they have already decided to
trust as their provider of financial services.
STATEMENT OF THE AMERICAN LAND TITLE ASSOCIATION
September 29, 2004
On behalf of the membership of the American Land Title Association
(ALTA),* we commend you for undertaking ``Examination and Oversight of
the Condition and Regulation of the Insurance Industry'' We ask that
you include this letter in the hearing record on that issue.
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* The American Land Title Association membership is composed of
2,400 title insurance companies, their agents, independent abstracters,
and attorneys who search, examine, and insure land titles to protect
owners and mortgage lenders against losses from defects in titles. Many
of these companies also provide additional real estate information
services, such as tax search, flood certification, tax filing, and
credit reporting services. These firms and individuals employ nearly
100,000 individuals and operate in every county in the country.
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Congressional review of the State insurance regulatory system is an
important accomplishment. We applaud the time and effort that has gone
into analysis of the strengths and weaknesses of the current State
product approval, rate setting, and consumer protection programs. The
attempt by the Senate Banking Committee to undertake a review of the
areas where uniformity would increase the efficiency of the Nation's
insurance system while maintaining consumers' access to products and
the consumer protections inherent in the current State regulatory
system is admirable. We also note that the Senate heard from many
insurance entities that an optional Federal charter for insurance
companies would have many benefits.
At this point, based on what we know of the concepts of optional
Federal charter and proposals discussed by Chairman Mike Oxley and
Subcommittee Chairman Richard Baker in the House Financial Services
Committee, we prefer the approach discussed in the House of
Representatives. We wanted to alert you that as you move forward and
draft legislation, you should keep in mind the wide variety of business
models in the title insurance industry. In fact, we are writing to
officially express our concerns and hope that we are excluded from
legislation that establishes a national licensing system for agents and
brokers. In fact, it may be easier and preferable to exclude title
insurance from most provisions of this legislation as was done when the
National Association of Registered Agents and Brokers (NARAB) was
created as part of Gramm-Leach-Bliley. We look forward to reviewing any
legislative proposals for their potential effect on our industry. And,
we stand ready to assist you as you move forward in this process.
ALTA represents title insurance and settlement service providers.
Of all the lines of insurance, none are as inextricably linked to State
and local conditions as the title insurance industry. The focus of
title insurance is the protection of the interests of owners,
investors, lenders, and others in real estate. The underwriting of
title insurance involves a review and assessment of State and local
records affecting titles to real estate. Title insurance policies are
issued in connection with inherently local transactions--real estate
settlements and mortgage loan closings. Reflecting the diversity of
State and local laws as well as the variety of local practices
regarding real estate, the processes by which title insurance is issued
will frequently vary from State-to-State, and even from region-to-
region within a State.
Because title insurance underwriting is so State specific, and
because specific legislative language allowing us to determine the
effect on the industry is not yet available for review, ALTA and its
members strongly believe that regulation of the title insurance
industry should continue to be the province of the various States.
Uniform licensing of insurance companies may be unnecessary given the
small number of companies that underwrite the title insurance product.
Nearly 50 percent of the industry volume is written in four States,
where title insurance companies are highly regulated and have stringent
consumer protections. Solvency issues are best addressed at the State
level. In fact, title insurance companies are so well-regulated at the
State level that only one State--Texas--has a State guaranty fund.
Uniform licensing of title agents would be counterproductive. There
are various types of agents through which title insurance is provided
in different States and regions of the country, a variety of State real
property laws, and a need for each such agent to be intimately familiar
with its own unique State real property statutes. Any Federal
regulation of agents should set standards as high as current State law
requirements. In many areas of the country, title insurance is provided
through attorneys, who perform the title and legal and advocacy work
associated with commercial and residential real estate settlements.
Attorneys are licensed and disciplined through their State bar
associations and could be expected to object vehemently object to
National licensing supervision. It would make little sense to require
federally licensed title insurance agents doing business in Ohio to
learn South Carolina real property law, and an enormous undertaking for
a Federal agency to establish Federal regulations that would reflect
variations in the real property law of the 50 States. In fact, title
insurance was excluded from coverage under the NARAB authorized in the
Financial Services Modernization Act because of these issues.
With respect to consumer claims, ALTA believes that problems that
arise with insureds are best handled at the State level. Title claims
relate to the specific real property involved. It is unlikely that
Federal agencies would be in a better position to remedy these specific
problems than local courts. Further, some title problems are solved
through such methods as remedying foreclosures that reflect State
specific law. Again, this is an area where State regulators have great
expertise. We look forward to working with the Committee and the
Subcommittee on these and other issues as the legislative process
proceeds.