[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

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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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.
                               ----------
                       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.
---------------------------------------------------------------------------
    * Held in Committee files.
---------------------------------------------------------------------------
    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.
                               ----------
                      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.
                               ----------
               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.
---------------------------------------------------------------------------
    * 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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \5\ ``Why Not the Best? The Most Effective Auto Insurance 
Regulation in the Nation,'' June 6, 2000; www.consumerfed.org.
---------------------------------------------------------------------------
    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!
---------------------------------------------------------------------------
    \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.*
---------------------------------------------------------------------------
    * 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.) *
---------------------------------------------------------------------------
    * 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.
                               ----------
                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.
                               ----------
                 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.
---------------------------------------------------------------------------
    \1\ Previously known as the ``Financial Services Modernization Act 
of 1999.''
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \2\ McCarran-Ferguson Act, ch. 20, 59 Stat. 33 (1945) (codified as 
amended at 15 U.S.C.  1011-1015 (1994)).
---------------------------------------------------------------------------
    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.
                               ----------
            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.
---------------------------------------------------------------------------
    * 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.
                               ----------
                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.
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