[Senate Hearing 108-983]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-983

 
                      FEDERAL INVOLVEMENT IN THE 
                  REGULATION OF THE INSURANCE INDUSTRY

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 22, 2003

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation


                                 ______

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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South 
CONRAD BURNS, Montana                    Carolina, Ranking
TRENT LOTT, Mississippi              DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas          JOHN D. ROCKEFELLER IV, West 
OLYMPIA J. SNOWE, Maine                  Virginia
SAM BROWNBACK, Kansas                JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon              JOHN B. BREAUX, Louisiana
PETER G. FITZGERALD, Illinois        BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  RON WYDEN, Oregon
GEORGE ALLEN, Virginia               BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
                                     MARIA CANTWELL, Washington
                                     FRANK R. LAUTENBERG, New Jersey
      Jeanne Bumpus, Republican Staff Director and General Counsel
             Robert W. Chamberlin, Republican Chief Counsel
      Kevin D. Kayes, Democratic Staff Director and Chief Counsel
                Gregg Elias, Democratic General Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on October 22, 2003.................................     1
Statement of Senator Hollings....................................     2
    Prepared statement...........................................     3
Statement of Senator Lautenberg..................................     7
Statement of Senator McCain......................................     1
Statement of Senator Sununu......................................    56

                               Witnesses

Ahart, Thomas, President, Ahart, Frinzi & Smith Insurance Agency, 
  on behalf of and past President, Independent Insurance Agents & 
  Brokers of America.............................................    37
    Prepared statement...........................................    39
Berrington, Craig A., Senior Vice President and General Counsel, 
  American Insurance Association (AIA)...........................    46
    Prepared statement...........................................    49
Csiszar, Ernst, Vice President, National Association of Insurance 
  Commissioners..................................................     8
    Prepared statement...........................................    11
Heller, Douglas, Foundation for Taxpayer and Consumer Rights.....    56
    Prepared statement...........................................    59
Hunter, J. Robert, Director of Insurance, Consumer Federation of 
  America........................................................    22
    Prepared statement...........................................    25
Rahn, Stephen E., Vice President, Associate General Counsel and 
  Director, State Relations, Lincoln National Life Insurance 
  Company, on behalf of the American Council of Life Insurers....    81
    Prepared statement of American Council of Life Insurers given 
      by Stephen E. Rahn, Vice President, Associate General 
      Counsel and Director, State Relations, Lincoln National 
      Life Insurance Company.....................................    82

                                Appendix

Atchinson, Brian K., Executive Director, Insurance Marketplace 
  Standards Association, prepared statement......................   119
Independent Insurance Agents & Brokers of Arizona (IIABA), 
  prepared statement.............................................   128
National Association of Mutual Insurance Companies (NAMIC), 
  prepared statement.............................................   121
Response to written questions submitted by Hon. Olympia J. Snowe 
  to:
    Thomas Ahart.................................................   142
    Craig A. Barrington..........................................   136
    Douglas Heller...............................................   139
    J. Robert Hunter.............................................   139


    FEDERAL INVOLVEMENT IN THE REGULATION OF THE INSURANCE INDUSTRY

                              ----------                              


                      WEDNESDAY, OCTOBER 22, 2003

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:30 a.m. in room 
SR-253, Russell Senate Office Building, Hon. John McCain, 
Chairman of the Committee, presiding.

            OPENING STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    The Chairman. Good morning. The purpose of today's hearing 
is to explore the effectiveness of the current state-based 
system of insurance regulation. In addition to examining the 
existing system of regulation, we will hear testimony about 
options for improving the current regulatory system, including 
initiatives to enhance state-level regulation and proposals to 
more actively involve the Federal Government in the regulation 
of the insurance business.
    While the hearing topic may be straightforward, the 
question of how insurance should be regulated is complex and 
has long been debated. Over the decades, government officials, 
consumer groups, and industry participants have questioned 
whether the states should be the primary regulators of the 
insurance industry. Indeed, since the passage in 1945 of the 
McCarran-Ferguson Actflong- which granted the states the 
exclusive power to regulate the business of insurance, the 
Federal Government has taken an increasingly active role in the 
regulation of the insurance industry.
    Still, two major segments of the insurance industry remain 
almost exclusively within the jurisdiction of the states, 
namely property and casualty insurance and life insurance. 
Today's hearing will focus on the regulation of those two lines 
of insurance. As we continue to consider and debate the merits 
of whether the states or the Federal Government or some 
combination of the two should regulate the insurance industry, 
I would remind everyone that insurance is a unique business 
structured to protect both individuals and businesses from the 
risk of financial loss. Because insurance is a business, we 
need to make sure that the insurance companies are not overly 
burdened by unnecessary regulations.
    Just as importantly, because insurance is so crucial to the 
day-to-day lives of Americans, we must also ensure that the 
interests of insurance consumers are protected, regardless of 
whether the states or the Federal Government regulate 
insurance.
    In sum, our overarching purpose should be to strike a 
balance to ensure that consumers are well-protected and that 
insurance companies are not saddled with unnecessary regulation 
which can hinder their viability and jeopardize the very 
consumers we're seeking to protect.
    I thank the witnesses for appearing before the Committee 
today, and I look forward to hearing their testimony. I'd like 
to turn to Senator Hollings, the Ranking Member of the 
Committee, who has had a longstanding and ongoing abiding 
interest in this issue.

             STATEMENT OF HON. ERNEST F. HOLLINGS, 
                U.S. SENATOR FROM SOUTH CAROLINA

    Senator Hollings. Thank you very much, Mr. Chairman, for 
your leadership and willingness to call this hearing, because 
my position comes over years and years of long experience.
    Over 40 years ago as a Governor, I found in our insurance 
department that the bonds filed in order to qualify to do 
business in the great State of South Carolina were all just 
thrown down on the closet floor. The coupons have never been 
clipped, and literally 65 million was unaccounted for until we 
found it in the closet. We cleaned up the insurance department, 
and we have now, seated at the table, Mr. Ernest Csiszar, who 
is considered one of the outstanding state commissioners. So my 
complaint is not the state of South Carolina at the moment, but 
just generally speaking with respect to the states.
    Beginning at the beginning, under Article I, Section 8, 
insurance is interstate commerce. There isn't any question 
about it, except those, of course, that are conducting business 
solely within the state. Otherwise, it's interstate commerce, 
found so by the U.S. Supreme Court, and accepted by McCarran-
Ferguson, which, in the general sense, has not worked. Why 
hasn't it worked? Time and time again, seated up there over the 
past several years, they've come to us for product liability 
risk retention, they've come to us for flood and crop 
insurance, they've come to us for guarantee system with 
insurers, and, more recently, of course, for terrorism risk 
insurance. And every time they come, particularly with our 
experience in this Committee on product liability, the claim 
was that they couldn't even have a Little League baseball game 
because of the liability insurance of product liability, and 
everybody was going out of business, and they had to cancel the 
American Legion Series and everything else of that kind. We 
found out, rather, their losses were not on account of enormous 
product liability suits, but, on the contrary, their bad real 
estate investments. That was categorically, everybody agrees 
with that, and you don't hear any more about product liability 
before this Committee. They have moved on with that particular 
political move to so-called tort reform, malpractice, and now 
the asbestos case and class actions.
    What happens is that you find out from the GAO report that 
they really leave a lot to be desired in the Administration, 
generally speaking, not necessarily, like I say, in my own 
state, but they've got all kind of practices. When the market 
is up, they run out and sell, sell, sell. They don't care about 
the premium, because they want the money to invest in the 
market, because they make way more money on the market than 
they do on the premium. And then all of a sudden the market 
goes down, and then they say, ``Ooh, malpractice, class 
actions, tort reform,'' and come running here. And, bottom 
line, I can't find out what is the truth, because I don't 
regulate it. Can you imagine having to come in on these 
emergency bases time and time and time again, where the 
Committee cannot find out what the truth is because we're not 
incident to their particular records and everything else, 
because we don't have Federal authority?
    Well, we've got a good example, and a good example is out 
in California, where back in 1988 they passed Proposition 103 
and all the companies that went back--turned back the premium--
my particular bill doesn't call for any cancellation or 
reduction in the premiums, but they in Proposition 103 put it 
back some 20 percent. And they go in now and they have hearings 
and everything else before the rate increases. The insurance 
industry is thriving and growing and prospering in the state of 
California. And it is our hope that we can get in the 
interstate commerce, stop all of this gaming the system and 
then running to Washington saying, ``Well, we want to 
deregulate, deregulate, deregulate,'' until they get into 
trouble with their tontine kind of practices, like Prudential 
did down in Florida. They sell a policy, gaming it on the stock 
market system and everything else of that kind. And then coming 
up to us, and then we can't find out what the truth is and 
everything else, and then desperately we give them money.
    Let's get on and quit playing games and get into a Federal 
system, not any either/or where you game it again and where I 
can fix this particular insurance commissioner in state X--they 
can smile because they know exactly what I'm talking about. 
I've been in the game 50 years. And we used to get a necktie in 
the legislature in South Carolina, and then we'd all vote for 
the Commissioner.
    [Laughter.]
    Senator Hollings. Thank you, Mr. Chairman.
    [The prepared statement of Senator Hollings follows:]

            Prepared Statement of Hon. Ernest F. Hollings, 
                    U.S. Senator from South Carolina

    For 150 years, insurance has been regulated by the states, and 
generally speaking, the industry has provided products that have 
enabled businesses and people to accept risks they otherwise would not. 
But there are trends developing that strike me as necessary to revisit 
the way the industry is regulated.
    First, the insurance industry itself comes to Congress asking for 
bailouts and backstops with increasing regularity. Then, the industry 
turns around and asks for further deregulation, and even the ability to 
pick their regulator, when there are significant problems in the market 
that calls for more vigorous oversight. Of course, the insurance 
industry wants the regulator they get to pick to have a light hand so 
they can compete with banks in a climate that emphasizes short-term 
profits over long-term stability.
    The GAO just weeks ago released a report analyzing the of market 
conduct regulation by the States. Market conduct regulation oversees 
how insurers treat consumers. The report said: ``States generally have 
the systems and tools in place to regulate financial solvency. But 
market regulation is hindered by limited resources, a lack of emphasis 
on important regulatory tools, and the framework of the system itself, 
which requires individual states to oversee companies that operate in 
many states or nationwide. As a result, market regulation is currently 
based on overlapping and often inconsistent state policies and 
activities. While it provides some oversight, it may also place an 
undue burden on some insurance companies and, at times, may fail to 
adequately protect consumers.''
    Due to the limits of this fragmented, state-by-state regulation, no 
one stopped the poor investments made by insurance companies during the 
late 1990s that have helped drive up premium increases during the past 
three years.
    The average policyholder may not know that insurance companies do 
not just profit on the difference between premiums collected and claims 
paid. Large portions of insurance company income is derived from 
investing premiums into stocks and bonds until they need the money for 
a large payout. An insurance company will often make more profit from 
investing the premiums of homeowner policies than on the margin between 
homeowner premiums and claims. By 2001, large insurance companies had 
more than half of their portfolios invested in corporate stocks and 
bonds.
    This leaves insurance companies vulnerable to the stock and bond 
markets as never before. According to the Foundation for Taxpayer and 
Consumer Rights, just 10 companies lost $274 million on investments in 
Enron, WorldCom, Adelphia, Global Crossing and Tyco. State Farm Mutual 
Auto increased its level of corporate investment by 32 percent since 
1994, but lost $60 million on WorldCom and $13 million Enron. Allstate 
lost $23 million in the first half of 2002 as the company shed its Tyco 
shares. USAA had 57 percent of its portfolio in the stock market, and 
lost $63 million in international energy and telecom investments.
    It is no coincidence that we have seen insurance premiums rise as 
the stock and bond markets have lost value during the past couple 
years. When a customer receives a larger bill for homeowners insurance, 
it is not because the rate of homeowners claims has dramatically 
increased; it is because the insurance company is looking to recover 
the lost revenue from poor investment decisions. These companies reap 
the gains when investment returns are good, but then stick 
policyholders with the bill when investments go bad.
    Some insurance executives and representatives of tort ``reform'' 
interest groups have even admitted to this trend. Victor Schwarz, 
General Counsel of the American Tort Reform Association, was quoted in 
the April 20, 2003, Honolulu Star-Bulletin as saying, ``Insurance was 
cheaper in the 1990s because insurance companies knew that they could 
take a doctor's premium and invest it, and $50,000 would be worth 
$200,000 five years later when the claim came in. An insurance company 
today can't do that.''
    And Donald Zuk, CEO of Scpie Holdings, Inc., a leading malpractice 
insurer in California, told The Wall Street Journal in 2002 that recent 
premium rate increases by insurance companies were ``self-inflicted'' 
due to poor business management practices--not a spike in malpractice 
claims.
    We need real Federal regulation, not ``federal option charter'' 
regulation, to correct these problems in the insurance industry. I have 
introduced S. 1373, the Insurance Consumer Protection Act of 2003 to do 
just that.
    This bill will establish the Federal Insurance Commission, an 
independent commission established within the Department of Commerce. 
It will be comprised of five commissioners serving seven year terms, 
regulating property and casualty lines as well as life insurance. 
Workers compensation and state residual workers compensation pools will 
be excluded.
    Under S. 1373, the McCarran-Ferguson antitrust exemption will be 
repealed. The Federal Insurance Commission will be the only regulator 
for interstate insurers. Insurers that only do business in the state in 
which they are domiciled (intrastate insurers) will be regulated by the 
states.
    The Commission will be responsible for:

   Licensing and Standards for the Insurance Industry

   Regulation of Rates and Policies

   Annual Examinations and Solvency Review

   Investigation of Market Conduct

   Establishment of Accounting Standards

    The Commission will be able to investigate the organization, 
business, conduct, practices and management of any person, partnership, 
or corporation in the insurance industry. The Commission will also 
create a central depository for insurance data for the purpose of 
studying the insurance industry.
    In addition, under S. 1373 an independent office will be created 
within the Commission to receive complaints and reports about improper 
insurance industry practices from the public, and to represent 
consumers before the Commission. Consumers will have a right to 
challenge rate applications before the Commission.
    The Commission will have the ability to issue cease and desist 
orders for practices that would place policyholders at risk, and to 
levy civil fines for violations of Commission regulations. Actions that 
require enforcement actions outside the scope of the Commission's 
mandate will be referred to the proper agency. Criminal prosecutions 
will be handed to the Department of Justice.
    Finally, a national guaranty corporation will be created to provide 
payment of life, property and casualty, and health claims when the 
insurer is unable to pay. The corporation will also be responsible for 
liquidating insolvent insurers.
    Real Federal regulation as outlined in S. 1373 would protect 
consumers by giving them a voice in the setting of premium rates. 
Experiences with California's Proposition 103 legislation, which shares 
many of the same concepts as my bill, prove that involving the consumer 
in rate-setting will reduce insurance rates for consumers. Proposition 
103 has saved California consumers billions of dollars via the prior 
approval regulatory structure it created. In the past two months alone, 
$62 million has been saved by doctors and homeowners due to rate 
challenges brought by consumers. This is a model that has worked in one 
of our largest and most populated states, and it should be a guidepost 
on how insurance regulation can provide consumer protection and 
stability.
    Good actors in the insurance industry also would benefit from 
Federal regulation. Now, national insurance companies must navigate 50 
different state laws regarding insurance, and must also navigate 50 
different insurance commissions. Having one set of rules to govern the 
entire industry would create great efficiencies and competitive 
opportunities for these companies. By standardizing market conduct 
regulation standards, states could rely on examination results of other 
states, thus reducing the number of duplicative, expensive examinations 
companies now undergo.
    There is no doubt real Federal regulation of insurance--not 
``federal option charter,'' which would allow each company to choose 
their regulator--would benefit the industry, the consumer, and the 
stability of our overall economy.
    I consider the bill a starting point to spark discussions about how 
we can transform our fragmented oversight of the insurance industry 
into a streamlined, comprehensive review process that will better 
protect consumers and the free marketplace.

                               Attachment




    The Chairman. As I mentioned in my opening statement, 
Senator Hollings has a longstanding and abiding interest in 
this issue.
    [Laughter.]
    The Chairman. Senator Lautenberg?

            STATEMENT OF HON. FRANK R. LAUTENBERG, 
                  U.S. SENATOR FROM NEW JERSEY

    Senator Lautenberg. Thanks, Mr. Chairman, and we hope that 
we can keep Senator Hollings' standings on the issues after 
his--after he decides to become a golf pro or whatever else he 
intends.
    [Laughter.]
    Senator Lautenberg. But we're sure going to miss Senator 
Hollings, and we look with interest at his proposal here, 
although we're not quite prepared to say yes to that today.
    And traditionally, insurance regulation has been left to 
the states, and I can tell you that the cost of insurance, 
especially auto insurance, is a huge issue for my constituents 
in New Jersey and others in the Northeast. The citizens of New 
Jersey, New York, and Massachusetts pay the highest premiums in 
the Nation for private passenger auto insurance. In 2001, the 
average premium nationwide was $718, but in New Jersey the 
average was $1,028, a substantial difference. According to a 
survey published by the National Association of Insurance 
Commissioners, New York drivers came in second, paying $1,015, 
and Washington, D.C., the drivers came in third, paying over a 
thousand dollars; they're $1,012. Massachusetts, it was the 
fourth, and they pay $936 for their automobile insurance, 
compared to, again, New Jersey, at $1,028. Seven of the top 
states, top ten states, with the highest auto insurance rates 
are located in the Northeast. Clearly, this is a problem. The 
question is whether the Federal Government ought to get 
involved. In New Jersey, our Governor has made auto insurance 
reform a priority. He's tackled the issue head on, signed the 
New Jersey Automobile Insurance Competition and Choice Act into 
law this past summer.
    Now, the new law doesn't automatically cut premiums. 
Instead, it's intended to bring more insurers to the state by 
scaling back the regulations that some blame for forcing 
companies out of New Jersey. Competition presumably will drive 
premiums down. The new law tackles consumer issues, such as 
fraud, and allows drivers with good records to pay less than 
motorists with lots of tickets. But the bulk of the measure 
targets insurers.
    The new law phases out the requirements that companies 
write policies for all drivers. It also streamlines the process 
for rate increases and scales back the rules requiring insurers 
to return excess funds to policyholders if the company averages 
more than 6 percent profit over 3 years.
    As a direct result of auto insurance reform in New Jersey, 
the tide of insurers leaving the state seems to be turning. 
While more than 25 carriers have left New Jersey over the last 
decade, a major carrier, Mercury General Insurance, has become 
the first new insurer to enter this New Jersey market in 7 
years. State Farm Insurance, which had previously announced 
that it intended to stop serving New Jersey consumers, has 
announced now that it plans to stay for four more years and has 
cut its rates by 4.1 percent, and that puts $70, on average, 
back into the pockets of the policyholders.
    The bottom line is that New Jersey appears to be headed in 
the right direction in dealing with its auto insurance woes. 
And I look forward to hearing from our friends, the witnesses, 
about what role, if any, the Federal Government should play in 
regulating property, casualty, and life insurers who write $700 
billion in net premiums each year.
    So, Mr. Chairman, once again, I thank you. The subject's an 
important one. I think this is kind of a first that this has 
been looked at.
    The Chairman. Thank you, Senator Lautenberg.
    The first from our panel of witnesses this morning is Mr. 
Ernst Csiszar, who's the Director of South Carolina's 
Department of Insurance, and Vice Chairman of the Executive 
Committee of the National Association of Insurance 
Commissioners; Mr. Tom Ahart, former President of Independent 
Insurance Agencies and Brokers of America; Mr. Craig 
Berrington, the Senior Vice President and General Counsel of 
American Insurance Association; Mr. Stephen E. Rahn, Vice 
President, Associate General Counsel, and Director of State 
Relations, Lincoln National Life Insurance Company; Mr. J. 
Robert Hunter, Director of Insurance in the Consumer Federation 
of America; and Mr. Douglas Heller, Senior Consumer Advocate, 
the Foundation for Taxpayer and Consumer Rights.
    Welcome, Mr. Csiszar, we'll begin with you.

     STATEMENT OF ERNST CSISZAR, VICE PRESIDENT, NATIONAL 
             ASSOCIATION OF INSURANCE COMMISSIONERS

    Mr. Csiszar. Thank you, Mr. Chairman, Senators, Senator 
Hollings, Senator Lautenberg, Senator Nelson.
    The Chairman. You'll have to pull that microphone a little 
closer, if you don't mind.
    Mr. Csiszar. I'm delighted to be here, and let me begin by 
stating to Senator Hollings, that I think my Governor would 
embrace me with open arms if I could find $65 million for his 
budget in a closet somewhere in South Carolina, because we're--
right now, we're hurting under budget shortfalls.
    But let me begin by----
    Senator Hollings. He won't find it sleeping together.
    [Laughter.]
    Senator Hollings. The Governor says in order to economize 
and balance the budget, that he wants state officials that go 
around on various missions to start sleeping----
    Mr. Csiszar. That's correct.
    Senator Hollings.--together.
    [Laughter.]
    Mr. Csiszar. The ``buddy system,'' we call it.
    [Laughter.]
    Senator Hollings. You've got the wrong job.
    [Laughter.]
    The Chairman. You're the wrong type, Senator.
    Mr. Csiszar. Notice I have one of my associates back here 
with me, and she's female.
    The Chairman. I don't know how much further we ought to 
push these----
    [Laughter.]
    Mr. Csiszar. Let's stick to insurance regulations.
    The Chairman.--budget-cutting measures.
    Mr. Csiszar. Let me begin by essentially recounting the 
fundamental purpose of insurance regulation. This purpose--this 
has been its purpose for the last 125 years. It has been a 
state-based system, but albeit all along the purpose has been 
consumer protection.
    And the primary ways in which we pursue that objective at 
the state level is through two different means. One, because 
insurance is the type of product where your money comes first 
and the benefits, if any, sometimes come much later, so one way 
in which we regulate the industry is by way of solvency. We do 
financial analyses and reporting and disclosure and 
transparency. There is a separate accounting system, in fact, a 
more conservative accounting system than U.S. GAAP. It's known 
as statutory accounting. And we monitor the solvency of 
companies, largely to make sure that when the time comes for 
that benefit to be paid, that the companies are still around.
    The second way in which we regulate insurance companies is 
through a market conduct process, and this is primarily driven 
by abusive practices, for instances, practices like redlining, 
for instance, other types of--for instance, the Prudential 
practice that you mentioned, Senator Hollings, a few years ago. 
We regulate that process through market conduct, market conduct 
exams, and a variety of laws on the books of states that deal 
with trade practices, unfair trade practices, discriminatory 
trade practices, and so on.
    Under that umbrella of solvency regulation and market 
conduct regulation, the entities that we regulate are in the 
thousands, tens of thousands. They include the primary 
carriers, both on the life side, as well as the property and 
casualty side. These are the companies that sell directly to 
you, to the public. Certainly there is also a component of 
health insurance in there, but as I understand it today we're 
confining ourselves to property and casualty and life.
    So there are thousands of companies on the primary side, 
there are not in the thousands, but in the dozens, of 
reinsurers that come under the umbrella of regulation, largely 
through what we call a credit-for-reinsurance system, so it's 
an indirect kind of regulation, by and large driven by the fact 
that you have sophisticated customer transactions. This like 
the wholesale market versus the retail market, in a way.
    And, last, of course, we regulate the distribution system, 
be that through independent agents, be that through captive 
agents, be that through agents who are on staff of insurance 
companies. So we regulate the distribution system through a 
licensing process. And, of course, the companies themselves 
have to go through a licensing process.
    The way it's worked in the past, particularly as you look 
at them, let me start with the solvency issue.
    By and large, the process takes place by way of financial 
exams, but also through rate regulation and form regulation and 
certain lines of business. And it varies sometimes from state 
to state, albeit--but certain lines of business have to go 
through rate reapprovals, certain lines of business go through 
product reapprovals, on the property and casualty side.
    To differentiate that from the life side, on the life side 
there has never been rate regulation at the state level. There 
has always been--the regulatory process has always been 
confined to product regulation, to form regulation, if you 
will.
    So there is some differentiation there between the 
approaches, but, by and large, the system, when you look at it 
historically, when you look at it from the standpoint of 
solvency regulation, for instance, of--yes, there have been 
hiccups here and there--we had some hiccups back in the 1980s, 
when Chairman Dingle, you might recall, had a lot to say about 
what was happening in the industry--but, by and large, the 
state system has worked.
    And now, of course, we're faced with the fact that there 
are a number of drivers in the market that, in essence, dictate 
that regulators go back and take a new look at how we regulate. 
And when I say ``the drivers,'' I mean, things like 
convergence, for instance. Certainly, what Gramm-Leach-Bliley, 
the legislation that was passed several years ago, has made 
clear is that there is, in fact, a convergence of products in 
the financial sector--banking, securities, insurance--and that 
in many ways what we're speaking of is really one financial 
sector, no longer this artificial division between banking, 
securities, and insurance. With that convergence, of course, 
new competitors, in fact, the insurance industry finds itself 
with new competitors, with a need for new products, with a new 
need for innovation, with a new need for pricing flexibilities, 
for instance, so this is one of the drivers. Technology is 
another one, communications and information technology, for 
instance. And then, of course, we hear the overused word of 
globalization, but it is a reality, because if there ever was a 
global industry, it's the reinsurance industry. Most of our 
reinsurers, with one or two exceptions, are now entirely 
offshore. All the large ones are offshore--German companies, 
French companies, Bermuda companies, and so on. So there is a 
globalization factor that needs to be considered.
    And as a result of that, at the NAIC level, and also at the 
state level, we've, for instance, in South Carolina, undertaken 
many a reform, in essence, to provide a more market-driven kind 
of system. And to answer Senator Lautenberg, in that respect, 
South Carolina, for instance, we've gone through a file-and-use 
system with rate bans, and under that system, we have managed, 
in essence, to attract over 200 new companies into the state, 
and we have done away with what used to be a state reinsurance 
facility that had 43 percent of the market and incurred between 
$180 million and $200 million a year in deficits, by and large 
because rate suppression was taking place within that mechanism 
of the state reinsurance facility.
    So both at the state level, as well as at the NAIC level, 
we've undertaken a reform effort. In the aftermath, 
particularly in the aftermath, as I said, of Gramm-Leach-
Bliley. At the NAIC, these reforms have included an entire 
review, which is in--work in progress, of our market conduct 
function to make it more coordinated. We understand that's a 
considerable cost to the industry, and we do want to make the 
process more efficient. It is disjointed at this point. It 
needs more coordination. Speed-to-market initiatives, licensing 
under the NARAB provisions, for instance, of Gramm-Leach-
Bliley, we've made much more efficient, so that there's 
reciprocity. Streamlining mergers and acquisitions. And, of 
course, throughout this process we work very closely with 
NCOIL, the Conference of Insurance Legislators, as well as with 
NCSL, the state legislature.
    Our fear of a Federal, some type of Federal intervention in 
the process very simply is that we end up with two systems, and 
that may well be good for companies, insofar as choice is 
concerned, but we think it's bad for consumers. We really think 
that consumers that face a choice of two different levels of 
consumer protections, that isn't the ideal world for consumers. 
So we're very much in favor of maintaining and reforming the 
state-based system, fully realizing that change in many ways, 
indeed, is necessary.
    Second, we don't think that the Federal Government really 
has done all that great a job----
    The Chairman. Mr. Csiszar, you're going to have to 
abbreviate, please.
    Ms. Csiszar. I will make it short, thank you--that the 
Federal Government has done all that great a job in other 
respects, and we really think that state regulation has proven 
itself over the years. And I'll leave it at that to questions, 
Mr. Chairman.
    [The prepared statement of Mr. Csiszar follows:]

     Prepared Statement of Ernst Csiszar, Vice President, National 
                 Association of Insurance Commissioners

Introduction
    Good morning, my name is Ernst Csiszar. I am the Director of 
Insurance for the State of South Carolina, and this year I am serving 
as Vice President 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 Commerce, Science and 
Transportation with an overview and update of our efforts to modernize 
state insurance supervision to meet the true demands of the 21st 
Century.
    Today, I would like to make three basic points--

   First, effective consumer protection that focuses on local 
        needs is the hallmark of state insurance regulation because we 
        understand local and regional markets and the needs of 
        consumers in those markets.

   Second, with the NAIC's adoption in September 2003 of ``A 
        Reinforced Commitment: Insurance Regulatory Action Plan'', 
        state regulators are on time and on target to accomplish 
        changes needed to modernize the system of insurance regulation 
        in the United States. Our goal is to achieve a more uniform 
        state regulatory system because it makes sense for both 
        consumers and insurers. However, in areas where different 
        standards among states are required because they address 
        regional needs, we are harmonizing state regulatory procedures 
        to ease compliance by insurers and agents doing business in 
        those markets.

   Third, we believe any Federal legislation dealing with 
        insurance regulation carries the risk of creating an 
        unnecessary bureaucracy and the risk of undermining state 
        consumer protections due to unintended or unnecessary 
        preemption of state laws and regulations.

Why Are Insurance Companies and Agents Regulated?
    As the Senate Commerce Committee evaluates state insurance 
regulation, members of the NAIC hope you will start by asking the 
fundamental question: ``Why are insurance companies and agents 
regulated in the United States?'' Government regulation of insurance 
companies and agents began in the states well over a century ago for 
one overriding reason--to protect consumers. Our most important 
consumer protection is to assure that insurers remain solvent so they 
can meet their obligations to pay claims, as recently evidenced in the 
aftermath of September 11th and Hurricane Isabel. Beyond that, states 
supervise insurance sales and marketing practices, as well as policy 
terms and conditions, to ensure that consumers are treated fairly when 
they purchase insurance products and file claims.
    It is fair to ask how the system of regulation can be made most 
compatible with the demands of commercial competition without 
sacrificing the needs of consumers. As the Director of the South 
Carolina Department of Insurance, I believe that competition, within 
the proper regulatory framework, can be used as an effective component 
of insurance regulation. Consumers benefit directly from competitive 
insurance markets.

Protecting Consumers is the First Priority of State Insurance 
        Regulation
    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. Insurance is a 
commercial product based upon subjective business decisions. As 
regulators of insurance, state governments are responsible for making 
sure the expectations of American consumers are met regarding financial 
safety and fair treatment by insurance providers. The states maintain a 
system of financial guaranty funds that cover personal losses of 
consumers in the event of an insurer insolvency. The entire state 
insurance system is authorized, funded, and operated at no cost to the 
Federal government.

States Have a Strong Record of Successful Consumer Protection
    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. As government officials responsible 
for operating the state system, we understand that any government 
regulation, including insurance regulation, may be considered 
inconvenient and occasionally frustrating to those persons who wish to 
do business on their own terms.
    However, the NAIC and its members do not believe the consumers we 
serve each day think we are inefficient or burdensome. During 2001, we 
handled approximately 3.6 million consumer inquiries and complaints 
regarding the content of their policies and their treatment by 
insurance companies and agents. Many of those calls led to a successful 
resolution of the problem at little or no cost to the consumer. This 
does not include the numerous industry complaints that were 
successfully resolved by regulators.
    The September 11, 2001 terrorist attacks on America were a horrible 
and tragic event that exposed serious weaknesses in certain government 
operations in this country. Yet the state insurance regulatory system 
was proven to be sound, even when hit with a sudden $40 billion 
catastrophe that ultimately will be the most expensive in history. If 
our existing system operates smoothly under the most horrific and 
unexpected conditions, we question why anyone would want to supplant 
it.
    State regulators know from years of firsthand experience that when 
consumers need help with insurance sales or claims problems, they 
naturally look to their state agency to get assistance. We are 
accessible through a local call or visit, and every state has trained 
staff and programs to assist consumers promptly.
State Regulatory Modernization: On Time and On Target
    While recognizing the inherent strength of the state system when it 
comes to protecting consumers, we also agree that there is a need to 
improve the efficiency of the system. In March 2000, the Nation's 
insurance commissioners committed to modernizing the state system by 
endorsing an action plan entitled ``Statement of Intent--The Future of 
Insurance Regulation.'' Working in their individual states and 
collectively through the NAIC, we have made tremendous progress in 
achieving an efficient, market-oriented regulatory system for the 
business of insurance as shown below--

Producer Licensing and Reciprocity

   Adopted the Producer Licensing Model Act (PLMA) that 49 
        states have enacted.

   By year-end 2002, 36 states had implemented State Licensing 
        Reciprocity, thus exceeding the Federal mandate. To date, 39 
        states now implement SLR.

   Via the NAIC's affiliate, the National Insurance Producer 
        Registry (NIPR), we've created the Producer Database, which 
        holds information relating to over 3 million insurance agents 
        and brokers. 50 states, D.C. and Puerto Rico now use the 
        Producer Database to share information; 1,200 insurers also 
        utilize it.

   15 states now use the NIPR Gateway, a system that links 
        state regulators electronically with insurance companies to 
        facilitate the exchange of producer information. Allows for the 
        exchange of non-resident license applications, appointment 
        renewals and termination information.

   Have created a streamlined company licensing system via 
        uniform laws and electronic processing, called the Uniform 
        Certificate of Authority Application (UCAA). 51 jurisdictions 
        now accept the UCAA licensing application.

Speed to Market

   Created the System for Electronic Rate and Form Filing 
        (SERFF) in 2001.

   As of August 31, 2003, more than 48,000 filings were 
        submitted via SERFF to the states, an 88 percent increase over 
        all filings in 2002. The target for 2003 is 75,000 filings.

   Total number of insurance companies licensed to use SERFF 
        now exceeds 885, including major players such as Prudential, 
        Liberty Mutual, Manulife, The Hartford and Zurich America.

   To date, 50 states accept property/casualty filings via 
        SERFF, 48 states accept life insurance filings via SERFF, and 
        41 states accept health insurance filings via SERFF.

   Goal of all states accepting rate and form filings via 
        SERFF, for all lines of insurance and all filing types, by 
        December 31, 2003.

   Average turnaround time for filings made via SERFF is only 
        17 days.

Market Conduct and Consumer Protection

   Drafted the Uniform Examination Outline

   42 states currently certify compliance with two or more of 
        the following exam areas: scheduling, pre-exam planning, 
        procedures, and reports.

   Created the Consumer Information Source (CIS) link on the 
        NAIC website, allowing consumers to file complaints 
        electronically, research complaint history of insurance 
        companies and to search and download information on selected 
        insurance companies.

    We have now taken the next step of developing specific program 
targets and establishing a common schedule for implementing them. At 
the NAIC's Fall National Meeting in September 2003, we adopted ``A 
Reinforced Commitment: Insurance Regulatory Action Plan'' (See 
Attachment A). This landmark document--the result of lengthy 
discussions and difficult negotiations--puts the states on a track to 
reach all key modernization goals at scheduled dates ranging from 
December 31, 2003 to December 31, 2008.
    Let me point out that these specific regulatory program targets 
were developed with extensive input from industry and consumer 
representatives who are active in the NAIC's open committee process. To 
our knowledge, every legitimate complaint regarding inefficiency and 
redundancy in the state system has been effectively addressed by our 
new regulatory action plan that will phase-in the necessary 
improvements over the next five years. 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 which state regulators have adopted voluntarily.

Specific Action Goals in the NAIC Plan
    Although a complete description of our detailed program is 
contained in Attachment A, the following is a summary of NAIC's 
declared principles and goals reflecting our commitment to continue 
modernizing insurance regulation:

        I. 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.''

        II. 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.''

        III. 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.''

        IV. 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.''

        V. 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.''

        VI. 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.''

        VII. Change In Insurance Company Control

                ``Streamline the process for approval of mergers and 
                other changes of control.''

    NAIC members understand that these goals present difficult 
challenges; however, with the active participation of governors and 
state legislators, as well as industry and consumer advocates, we are 
confident that NAIC member states will achieve these goals in the near 
term.

Achieving State Uniformity for Life Insurance Products
    Life insurance product approval by regulators is an area that 
deserves special comment. Where appropriate, the NAIC and the states 
are working to achieve full regulatory uniformity to benefit both 
consumers and insurance providers. Marketing life insurance is an area 
where we agree with industry that uniformity is needed to enable life 
insurers to market products nationally. In fact, aside from producer 
licensing, this is one of the few areas that has generated a true 
national consensus for reform among all segments of industry, 
consumers, and regulators.
    To accomplish uniform supervision of life insurance products within 
the state system, the NAIC--in consultation with state legislators--
developed an interstate compact model that we are working to get 
adopted by the states. The goal of the compact is to establish a single 
point of filing where life insurers would file their products for 
approval and thereafter, assuming the product satisfies appropriate 
product standards created jointly by the compacting states, be able to 
sell those products in multiple states without the need for making 
separate filings in each state.
    The key points that make a compact attractive are: (1) the states 
will continue to regulate product approvals for annuities and life 
insurance products through the compact (as opposed to Federal 
preemption); (2) each state in the compact helps govern the activities 
of the compact; (3) we do not anticipate that states will lose revenues 
generated through product filings; and (4) states will be able to 
withdraw from the compact through legislative action.

Market Regulation--More Difficult to Harmonize than Financial 
        Regulation
    Another regulatory area that deserves special comment is market 
regulation. The GAO issued a report on this subject in September 2003 
entitled ``Insurance Regulation: Common Standards and Improved 
Coordination Needed to Strengthen Market Regulation'' (GAO-03-433). 
While the NAIC cooperated with GAO and agrees with much of the GAO's 
analysis, we believe a deeper understanding of how market regulation 
works is necessary to appreciate the difficulties any regulatory agency 
faces in attempting to harmonize market conduct processes.
    On the financial regulation side, the NAIC and the states have 
developed an effective accreditation system that is built on the 
concept of domiciliary deference (i.e., the state where the insurer is 
domiciled takes the lead role). This makes eminent sense because 
financial records do not change state to state; if one state has 
reviewed financial records and determined a company to be in good 
standing, it would truly be redundant for another state to review those 
same records. The market side is not as straightforward. The market 
behaviors of insurers can be quite different from one state to another, 
both because the laws may be different and because insurer compliance 
with the laws may vary by state. In short, market regulation is 
definitely not an area where ``one size fits all'' across the country.
    Efforts to improve market regulation must start by recognizing that 
it is multi-faceted, and that the best way to make market regulation 
both more effective and more efficient is to focus on bringing more 
coordination to the various facets of regulation. The NAIC has 
identified seven major market regulatory components that are common to 
all state insurance departments:

   Consumer complaint handling

   Producer licensing

   Rate and form review

   Market analysis

   Market conduct examinations

   Investigations

   Enforcement

    In addition, state insurance departments typically include various 
other ancillary activities, such as consumer education and outreach, 
oversight of residual markets, and antifraud programs.
    A formal market analysis program is being integrated into the 
market surveillance programs as a part of our modernization efforts. 
Effective use of market analysis techniques, such as enhanced data 
sharing and interpretation, can also help achieve coordinated state 
regulatory action with substantially less redundancy and cost. While 
market conduct examinations may require more collaboration and 
consistency, they will continue to be necessary components of market 
surveillance.
    The NAIC has been looking carefully at the extent to which one 
state can rely on the findings of another state when it comes to making 
regulatory decisions about examinations, investigations, and 
enforcement actions. We are looking at collaborative models for relying 
on the domestic state (or some combination of states) for baseline 
monitoring of companies, and we have several specific collaborative 
projects underway. But, ultimately, we cannot escape the fact that 
regulatory violations can affect consumers in different states quite 
differently. Because regulators are government officials who must 
enforce the laws of their state, they cannot delegate that 
responsibility to someone who may not understand or appreciate the 
nature of a particular violation and its impact on local consumers. Any 
modernized market surveillance program developed must contain 
sufficient flexibility to permit states to enforce their laws and 
protect their citizens.
    We believe much progress can be made to achieve the goals of 
efficiency sought by industry representatives in our market 
surveillance processes. However, we do not overlook the fact that 
insurance must be regulated to protect local consumers. Regulatory 
efficiency for its own sake should not undermine the credibility and 
effectiveness of the state regulators charged with enforcing consumer 
protection laws.

Federal Legislation 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 state laws and regulations that protect insurance consumers. 
For example, 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 preempt state laws unnecessarily, 
there have already been disagreements and inconsistent interpretations 
about the extent to which federally-chartered banks may conduct 
insurance-related activities without complying with state laws.
    We fully expect that creating a Federal charter for insurers, along 
with its Federal regulatory structure, will cause far greater problems 
for states and insurance regulation in general than those resulting 
from the GLBA provisions dealing with banks. For instance, federally-
chartered insurers would certainly 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. The result will be years of 
market and regulatory confusion that will benefit the legal community 
rather than insurance providers and consumers.

The Impact of Federal Chartering on State Regulation Will Not Be 
        Optional
    A Federal charter and its regulatory system would result in two 
separate insurance systems operating in each state. The first would be 
the current system of supervision by state insurance departments under 
state law that will continue responding directly to state voters and 
taxpayers.
    The second system would be a new Federal regulator with zero 
experience in the local state laws that control the content of 
insurance policies, claims procedures, contracts, and legal rights of 
citizens in tort litigation. This new Federal regulator would 
undoubtedly have the power to preempt state laws that disagree with the 
laws governing policyholders and claimants of federally-chartered 
insurers. At the very least, this situation will lead to confusion. At 
worst, it will lead to two levels of consumer protection 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 the complaints of consumers. 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 that go hand-in-hand with a 
government charter to underwrite and sell insurance.
    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 give-and-take and 
mutual respect, knowing that no single state can force its own way over 
the objections of other states. Keeping in mind that the original 
purpose of regulation is to protect consumers, we believe such 
participatory democracy and state decision-making based upon the 
realities of local markets is a major strength of our system for 
regulating insurers and agents.
    A Federal insurance regulator would not be just another member of 
NAIC, it would instead be a super-agency with power to intervene and 
overrule every state and territory under United States jurisdiction. 
The local needs and wants of citizens protected under state laws would 
be subjugated to the national agenda of insurers and Federal 
regulators.

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 that commercial insurance markets have changed, and that 
modernization of state insurance standards and procedures is needed to 
ease regulatory compliance for insurers and agents.
    We ask Congress and insurance industry participants to work with us 
to implement the specific improvements set forth in NAIC's A Reinforced 
Commitment: Insurance Regulatory Modernization Action Plan through the 
state legislative system. That is the only practical way to achieve 
necessary changes quickly in a manner that preserves state consumer 
protections expected by the public. The NAIC and its members will 
continue to work with Congress and within state government to improve 
the national efficiency of state insurance regulation while preserving 
its longstanding dedication to protecting American consumers.

                              Attachment A

             President Commissioner Mike Pickens (Arkansas)

         Vice President Director Ernst Csiszar (South Carolina)

          Secretary-Treasurer Administrator Joel Ario (Oregon)

       Immediate Past President Commissioner Terri Vaughan (Iowa)

                       A Reinforced Commitment: 
             Insurance Regulatory Modernization Action Plan

    In March 2000, the National Association of Insurance Commissioners 
put forth our Statement of Intent--The Future of Insurance Regulation. 
Working in our individual states and collectively through the NAIC, we 
have made tremendous progress. We are proud of what has been 
accomplished, but believe more dramatic advances in unifying state 
regulatory processes are needed to further improve insurance 
marketplace efficiencies and to protect the needs of insurance 
consumers in the 21st Century.
    The National Association of Insurance Commissioners is renewing our 
commitment to modernizing the state-based system of insurance 
regulation. As committed in our original Statement of Intent, our 
primary goal is to protect insurance consumers, which we must do 
proactively and aggressively. We also recognize that consumers and the 
marketplace are best served by efficient, market-oriented regulation of 
the business of insurance.
    The insurance industry must operate on a financially sound basis in 
order to manage risk and to provide financial protection to families 
and businesses. Our Nation's economy depends on the insurance 
industry's ability to effectively manage risk. A solid regulatory 
framework provides for efficient, safe, fair and stable insurance 
markets.
    Like other sectors of the financial services marketplace, the 
insurance industry and its products are changing in response to the 
wants and needs of consumers. Increasingly the insurance industry is 
viewed in a global context. Advances in technology facilitate the 
opportunity to offer new insurance products thus providing consumers 
with greater choice and enabling them to become better informed as to 
those choices.
    States have met the challenge of regulating a national and 
international business on a fifty state basis using a number of 
innovative mechanisms. The NAIC Financial Regulation and Accreditation 
Standards Program has served the insurance industry and consumers well 
for the past fourteen years. The program has ensured coherent financial 
solvency oversight and has proven to be a highly effective approach 
within the state-based system. As licensing states substantially defer 
to the insurer's home state for nearly all aspects of financial and 
solvency regulation, the state solvency system promotes intelligent and 
efficient use of finite regulatory resources. By focusing on those 
insurers that pose solvency risks, this system has strengthened 
protection of policyholders and benefited both the insurance industry 
and policyholders by minimizing regulatory costs. While NAIC members 
continue to seek greater effectiveness and improvements to the 
financial standards of the program, it can serve as a template for 
market based regulatory reforms.
    Using this state-based solvency system as a model, the members of 
the NAIC will design and implement similar uniform standards for 
producer licensing, market conduct oversight, and rate and form 
regulation. In addition, the NAIC will expand the existing financial 
regulation framework to institute true uniformity and reciprocity in 
company licensing requirements, and further enhance financial condition 
examinations, and changes of an insurer's control during mergers and 
acquisitions.

PRINCIPLES AND GOALS
    The following is a declaration of NAIC principles and goals 
reflecting our commitment to continuing to modernize insurance 
regulation:

        I. 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.''

        II. 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.''

        III. 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.''

        IV. 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.''

        V. 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.''

        VI. 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.''

        VII. Change In Insurance Company Control

                ``Streamline the process for approval of mergers and 
                other changes of control.''

    NAIC members understand that these goals present difficult 
challenges; however, with the active participation of state governors 
and state legislators, industry and consumer advocates, and state 
insurance department regulators, we are confident NAIC member states 
will achieve these goals in the near term.
                                 * * *

                              ACTION PLAN

I. 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.

    The NAIC members will keep consumer protection as their highest 
priority by:

  (1)  Providing NAIC access to consumer representatives and having an 
        active organized strategy for obtaining the highly valued input 
        of consumer representatives in the proceedings of all NAIC 
        committees, task forces, and working groups;

  (2)  Developing disclosure and consumer education materials, 
        including written and visual consumer alerts, to help ensure 
        consumers are adequately informed about the insurance market 
        place, are able to distinguish between authorized an 
        unauthorized insurance products marketed to them, and are 
        knowledgeable about state laws governing those products;

  (3)  Providing an enhanced Consumer Information Source (CIS) as a 
        vehicle to ensure consumers are provided access to the critical 
        information they need to make informed insurance decisions;

  (4)  Reviewing and assessing the adequacy of consumer remedies, 
        including state arbitration laws and regulations, so that the 
        appropriate forums are available for adjudication of disputes 
        regarding interpretation of insurance policies or denials of 
        claims; and

  (5)  Developing and reviewing consumer protection model laws and 
        regulations to address consumer protection concerns.

II. 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.

    The NAIC has established market analysis, market conduct, and 
interstate collaboration as the three pillars on which the states' 
enhanced market regulatory system will rest. The NAIC recognizes that 
the marketplace is generally the best regulator of insurance-related 
activity. However, there are instances where the market place does not 
properly respond to actions that are contrary to the best interests of 
its participants. A strong and reasonable market regulation program 
will discover these situations, thereby allowing regulators to respond 
and act appropriately to change company behavior.

Market Analysis
    While all states conduct market analysis in some form, it is 
imperative that each state have a formal and rigorous market analysis 
program that provides consistent and routine reports on general market 
problems and companies that may be operating outside general industry 
norms. To meet this goal:

  (1)  Each state will produce a standardized market regulatory profile 
        for each ``nationally significant'' domestic company. The 
        creation of these profiles will depend upon the collection of 
        data by each state and each state's full participation in the 
        NAIC's market information systems and new NAIC market analysis 
        standards; and

  (2)  Each state will adopt uniform market analysis standards and 
        procedures and integrate market analysis with other key market 
        regulatory functions.

Market Conduct
    States will also implement uniform market conduct examination 
procedures that leverage the use of automated examination techniques 
and uniform data calls; and

  (1)  States will implement uniform training and certification 
        standards for all market regulatory personnel, especially 
        market analysts and market conduct examiners; and

  (2)  The NAIC's Market Analysis Working Group will provide the 
        expertise and guidance to ensure the viability of uniform 
        market regulatory oversight while preserving local control over 
        matters that directly affect consumers within each state.

Interstate Collaboration
    The implementation of uniform standards and enhanced training and 
qualifications for market regulatory staff will create a regulatory 
system in which states have the confidence to rely on each other's 
regulatory efforts. This reliance will create a market regulatory 
system of greater domestic deference, thus allowing individual states 
to concentrate their market regulatory efforts on issues that are 
unique to their individual market place conditions.

  (1)  Each state will monitor its ``nationally significant'' domestic 
        companies on an on-going basis, including market analysis and 
        appropriate follow up to address any identified problems;

  (2)  Market conduct examinations of ``nationally significant'' 
        companies performed by a non-domestic state will be eliminated 
        unless there is a specific reason that requires a targeted 
        market conduct examination; and

  (3)  The Market Analysis Working Group will assist states to identify 
        market activities that have a national impact and provide 
        guidance to ensure that appropriate regulatory action is being 
        taken against insurance companies and producers and that 
        general market issues are being adequately addressed. This peer 
        review process will become a fundamental and essential part of 
        the NAIC's market regulatory system.

III. ``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.

    Insurance regulators have embarked on an ambitious `Speed-to-Market 
Initiative' which covers the following four main areas:

  (1)  Integration of multi-state regulatory procedures with individual 
        state regulatory requirements;

  (2)  Encouraging states to adopt regulatory environments that place 
        greater reliance on competition for commercial lines insurance 
        products;

  (3)  Full availability of a proactively evolving System for 
        Electronic Rate and Form Filing (known as `SERFF') that 
        includes integration with operational efficiencies (best 
        practices) developed for the achievement of speed-to-market 
        goals; and

  (4)  Development and implementation of an interstate compact to 
        develop uniform national product standards and provide a 
        central point of filing.

Integration of Multi-state Regulatory Procedures
    It is the goal that all state insurance departments will be using 
the following regulatory tools by December 31, 2008:

  (1)  Review standards checklists for insurance companies to verify 
        the filing requirements of a state before making a rate or 
        policy form filing;

  (2)  Product requirements locator tool, which is already in use, will 
        be available to assist insurers to locate the necessary 
        requirements of the various states to use when developing their 
        insurance products or programs for one or multiple-state 
        markets;

  (3)  Uniform product coding matrices, already developed, will allow 
        uniform product coding so that insurers across the country can 
        code their policy filings using a set of universal codes 
        without regard for where the filing is made; and

  (4)  Uniform transmittal documents to facilitate the submission of 
        insurance products for regulatory review. The uniform 
        transmittal document contains information that is necessary to 
        track the filing through the review process and other necessary 
        information. The goal is that all states adopt it for use on 
        all filings and databases related to filings by December 31, 
        2003.

Adoption of Regulatory Frameworks that Place Greater Reliance on 
        Competition
    States will continue to ensure that the rates charged for products 
are actuarially sound and are not excessive, inadequate or unfairly 
discriminatory. To the extent feasible, for most markets, states 
recognize that competition can be an effective element of regulation. 
While recognizing that state regulation is best for insurance 
consumers, it also recognizes that state regulation must evolve as 
insurance markets change.

Full availability of a proactively evolving System for Electronic Rate 
        and Form 
        Filing (SERFF)
    SERFF is a one-stop, single point of electronic filing system for 
insurance products. It is the goal of state insurance departments to be 
able to receive product filings through SERFF for all major lines and 
product types by December 2003. We will integrate all operational 
efficiencies and tools with the SERFF application in a manner 
consistent with our Speed-to-Market Initiatives and the recommendations 
of the NAIC's automation committee.

Implementation of an Interstate Compact
    Many products sold by life insurers have evolved to become 
investment-like products. Consequently, insurers increasingly face 
direct competition from products offered by depository institutions and 
securities firms. Because these competitors are able to sell their 
products nationally, often without any prior regulatory review, they 
are able to bring new products to market more quickly and without the 
expense of meeting different state requirements. Since policyholders 
may hold life insurance policies for many years, the increasing 
mobility in society means that states have many consumers who have 
purchased policies in other states. This reality raises questions about 
the logic of having different regulatory standards among the states.
    The Interstate Insurance Product Regulation Compact will establish 
a mechanism for developing uniform national product standards for life 
insurance, annuities, disability income insurance, and long-term care 
insurance products. It will also create a single point to file products 
for regulatory review and approval. In the event of approval, an 
insurer would then be able to sell its products in multiple states 
without separate filings in each state. This will help form the basis 
for greater regulatory efficiencies while allowing state insurance 
regulators to continue providing a high degree of consumer protection 
for the insurance buying public.
    State insurance regulators will work with state law and 
policymakers with the intent of having the Compact operational in at 
least 30 states or states representing 60 percent of the premium volume 
for life insurance, annuities, disability income insurance and long-
term care insurance products entered into the Compact by year-end 2008.

IV. Producer Licensing Requirements
        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.

    The states have satisfied GLBA's licensing reciprocity mandates and 
continue to view licensing reciprocity as an interim step. Our goal is 
uniformity.
    Building upon the regulatory framework established by the NAIC in 
December of 2002, the NAIC's members will continue the implementation 
of a uniform, electronic licensing system for individuals and business 
entities that sell, solicit or negotiate insurance. While preserving 
necessary consumer protections, the members of the NAIC will achieve 
this goal by focusing on the following five initiatives:

  (1)  Development of a single uniform application;

  (2)  Implementation of a process whereby applicants and producers are 
        required to satisfy only their home state pre-licensing 
        education and continuing education (CE) requirements;

  (3)  Consolidation of all limited lines licenses into either the core 
        limited lines or the major lines;

  (4)  Full implementation of an electronic filing/appointment system; 
        and

  (5)  Implementation of an electronic fingerprint system. In 
        accomplishing these goals, the NAIC recognizes the important 
        and timely role that state and Federal legislatures must play 
        in enacting necessary legislation.

National Insurance Producer Registry (NIPR)
    Through the efforts of NIPR, major steps have been taken to 
streamline the process of licensing non-residents and appointing 
producers, including the implementation of programs that allow 
electronic appointments and terminations. Other NIPR developments 
helping to facilitate the producer licensing and appointment process 
include:

  (1)  Use of a National Producer Number, which is designed to 
        eliminate sole dependence on using social security numbers as a 
        unique identifier;

  (2)  Acceptance of electronic appointments and terminations or 
        registrations from insurers; and

  (3)  Use of Electronic Funds Transfer for payment of fees. The goal 
        is to have full state implementation of the services provided 
        by NIPR by December of 2006.

V. 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.

    Except under certain limited circumstances, insurance companies 
must obtain a license from each state in which they plan to conduct 
business. In considering licensure, state regulators typically assess 
the fitness and competency of owners, boards of directors, and 
executive management, in addition to the business plan, capitalization, 
lines of business, market conduct, etc. The filing requirements for 
licensure vary from state to state, and companies wishing to be 
licensed in a number of states have to determine and comply with each 
state's requirements. In the past three years, the NAIC has developed, 
and all states have agreed to participate in, a Uniform Certificate of 
Authority Application process that provides significant standardization 
to the filing requirements that non-domestic states use in considering 
the licensure of an insurance company.
    In its commitment to upgrade and improve the state-based system of 
insurance regulation in the area of company licensing, the NAIC will:

  (1)  Maximize the use of technology and pre-population of data needed 
        for the review of application filings;

  (2)  Develop a Company Licensing Model Act to establish standardized 
        filing requirements for a license application and to establish 
        uniform licensing standards; and

  (3)  Develop baseline licensing review procedures that ensure a fair 
        and consistent approach to admitting insurers to the 
        marketplace and that provide for appropriate reliance on the 
        work performed by the domestic state in licensing and 
        subsequently monitoring an insurer's business activity.

    As company licensing is adjunct to a solvency assessment, the 
members of the NAIC will consider expanding the Financial Regulation 
and Accreditation Standards Program to incorporate the licensing and 
review requirements as appropriate. This action will assure appropriate 
uniformity in company licensing and facilitate reciprocity among the 
states. As much of this work is well underway, the NAIC will implement 
the technology and uniform review initiatives, and draft the model act 
by December 2004.

VI. 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.

        Deference to ``Lead States''

        Relying on the concept of ``lead state'' and recognizing 
        insurance companies by group, when appropriate, the NAIC will 
        implement procedures for the relevant domestic states of 
        affiliated insurers to plan, conduct and report on each 
        insurer's financial condition.

        Financial Examinations

        In regard to financial examinations, many insurers are members 
        of a group or holding company system that has multiple insurers 
        and that may have multiple states of domicile. These affiliated 
        insurers often share common management along with claims, 
        policy and accounting systems, and participate in the same 
        reinsurance arrangements. Requirements for coordination of 
        financial examinations will be set forth in the NAIC Financial 
        Condition Examiners Handbook. To allow time for the states to 
        adjust examination schedules and resources, such coordination 
        will be phased in over the next 5 years, with the goal of full 
        adherence to the Handbook's guidance for examinations conducted 
        as of December 2008.

        Insolvency Model Act

        The NAIC will promote uniformity by reviewing the Insolvency 
        Model Act, maximizing use of technology, and developing 
        procedures for state coordination of imminent insolvencies and 
        guaranty fund coverage. The Financial Regulation Standards and 
        Accreditation Committee will consider the requirements no later 
        than January 1, 2008.

VII. Changes of Insurance Company's Control

        Streamline the process for approval of mergers and other 
        changes of control.

        Coordination Using ``Lead States''

        Regulatory consideration of the acquisition of control or 
        merger of a domestic insurer is an important process for 
        guarding the solvency of insurers and protecting current and 
        future policyholders. At the same time, NAIC members realize 
        that these transactions are time sensitive and the process can 
        be daunting when approvals must be obtained in multiple states. 
        As a result, states will enhance their coordination and 
        communication on acquisitions or mergers of insurers domiciled 
        in multiple states by designing a system through which these 
        multi-state reviews are coordinated by one or more ``lead'' 
        states.

        Form A Database

        Insurers are required to file for approval on documents 
        referred to as Form A filings when mergers or acquisitions are 
        being considered. The NAIC has created a database to track 
        these filings so that this information is available to all 
        state regulators. Usage will be monitored to ensure that all 
        states use the application to improve coordination of Form A 
        reviews and to alert state regulators to problem filings. The 
        Form A Review Guide and Form A Review Checklist, which contain 
        procedures to be utilized when reviewing a Form A Filing, will 
        be enhanced and incorporated into the existing NAIC Financial 
        Analysis Handbook as a supplement. NAIC members will work on 
        amending the Accreditation Program to include the Form A 
        requirements to further promote stronger solvency standards and 
        state coordination, as well as an efficient process for our 
        insurers. The Form A requirements will be targeted for 
        incorporation into the Accreditation Program no later than 
        January 1, 2007.

Integrate Policy Form Approval and Producer Licensing into the Merger 
        and Acquisition Process
    The NAIC members will develop procedures for the seamless transfer 
of policy form approvals and producer appointments to take place 
contemporaneously with the approval of mergers or acquisitions where 
appropriate. We will begin developing and testing these procedures 
through pilot programs in 2003 and fully incorporate them system wide 
by 2006.
                                 * * *

    The Chairman. Thank you very much.
    I think we'll move to Mr. Hunter.

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

    Mr. Hunter. Thank you, Mr. Chairman. Is this on?
    The Chairman. Yes, sir.
    Mr. Hunter. Insurance regulation is at a crossroads, so 
this is a very appropriate hearing, and it's good to see former 
insurance commissioner, who stepped down to become a Senator, 
Bill Nelson, up there with you all.
    [Laughter.]
    Mr. Hunter. Elements of the insurance industry want to be 
regulated by the Federal Government, or at least have the 
option, and other strong elements of the industry don't want 
Federal regulation at all. But while they disagree on whether 
there should be a Federal role, they do not disagree about 
using the threat of a Federal role to leverage the states to 
press them to hold off or reduce consumer protections, using 
threats like this. A Liberty Mutual executive told the NAIC 
that they were losing insurance companies every day to 
political support for the Federal option, and that their huge 
effort to deregulate and speed product approval was too little 
and too late. He called for an immediate step up of 
deregulation and measurable victories to stem the tide toward a 
Federal role. I could give you hundreds of examples of that 
kind of language from insurance executives.
    They have a powerful ally in Chairman Oxley, who's held a 
series of ten hearings at least in which he constantly 
pressurizes the states with statements such as, ``Congress is 
going to come up with their own solution if they don't move. 
State legislators and insurance commissioners must enact 
deregulation reform.''
    Even some insurance commissioners have piled on. Just last 
week, Mr. Csiszar spoke to industry executives saying, ``You 
have to force us at the NAIC, hold a club over our heads, knock 
us over the head, use every tool in your bag.''
    But, meanwhile, the NAIC is failing, and the states, in 
many ways. The NAIC has failed to do anything about unsuitable 
sales of insurance in any line of insurance. They've failed to 
do anything as an organization on the use of credit scoring, an 
issue that is just rife, and people are just very upset. They 
haven't fixed the market-conduct mess the GAO has recently 
commented upon.
    Meanwhile, they're rolling back consumer protections. 
They've passed a deregulation for small businesses at the NAIC, 
and states have adopted that, many states, and other states 
have been rolling back even personal auto insurance and 
homeowner protections for consumers.
    There are good reasons that insurance is subject to 
regulation. We've heard some already. The most obvious one, the 
consumer pays today, gets the product, maybe, years later. 
There's a solvency threat, there's dishonesty, there are lots 
of reasons why you have to regulate.
    Product regulation is very important for consumers. An 
insurance contract is a very complex legal document, and 
consumers cannot be expected to pick out good and bad ones. 
They need someone to check and make sure that they meet state 
laws and are reasonable.
    Price regulation is a very complex issue. Insurance is not 
a product like a can of peas. Once a consumer is sure that 
policies being compared are the same, which is a problem of a 
serious magnitude, the level of service offered by insurers 
must be determined, then there's the solvency of the insurance 
company, finally there's the price. Some insurers have many 
tiers. I just heard yesterday that there's one insurance 
company that's filed in Florida for 125 tiers of rates for 
similar insureds. Only when a consumer actually applies will 
underwriting be done, and maybe the price offered is quite 
different than they were quoted when they actually get the 
policy. And, indeed, underwriting may even result with the 
consumer being turned away after all that. So when you shop for 
a can of peas, you see the unit price, all the options are 
before you on the shelf. When you get to the checkout counter, 
nobody asks where you live and turns you away. You can taste 
the quality as soon as you get home. You don't care if the pea 
company goes broke, you don't care much about their service. In 
short, insurance and peas are different, and that's why you 
need regulation.
    The insurance industry promotes a myth that regulation and 
competition are incompatible. Regulation and competition seek 
the same goal, the lowest possible price consistent with a 
reasonable return for the seller. I assume Mr. Heller will talk 
about California. California relies on both regulation and 
competition. They maximize both, and the results have been 
tremendous. And auto insurance in California was the third 
leading state in price, highest price, when competition was 
replaced by Prop 103, and now they're 24th and their rates are 
below average in the country. It's been amazing success.
    The prime issue with consumers is not who regulates 
insurance. Consumers could care less. It's whether insurance 
regulation is efficient and effective. Attached to my statement 
is a list of principles by which consumers will measure any 
proposal for regulatory reform.
    As to the Federal bills, the only bill before Congress 
considering any of our principles is S. 1373 by Senator 
Hollings, and we appreciate it very much, Senator. We support 
the bill's prior approval mechanism, annual market conduct 
exams, the creation of Office of Consumer Protection, and the 
enhanced competition and enhanced consumer information, and the 
repeal of the antitrust exemption.
    CFA and the entire consumer community stands ready to fight 
optional Federal charters with all the strength we can muster. 
We cannot abide a race to the bottom, which this idea is 
premised upon, having two systems where the industry gets to 
choose who regulates will drive regulation down to the bottom.
    CFA would like to see a simple repeal of the McCarron-
Ferguson antitrust exemption to see if insurers really are 
willing to compete under the same rules as American businesses.
    I'd urge the Committee to continue your study of insurance 
regulation. The proper focus of Congress is not to encourage 
mindless deregulation by the states--and I'm glad to hear your 
statements; you don't--but to encourage greater competition and 
economic efficiencies while strengthening, not lowering, 
consumer protection standards.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Hunter follows:]

  Prepared Statement of J. Robert Hunter \1\, Director of Insurance, 
                     Consumer Federation of America
---------------------------------------------------------------------------
    \1\ Mr. Hunter served as Federal Insurance Administrator under 
Presidents Ford and Carter and as Texas Insurance Commissioner.
---------------------------------------------------------------------------
State of Insurance Regulation
    Insurance regulation is at a crossroads. Most states are rolling 
back insurance consumer protections and weakening their oversight of 
the industry, while pressure from some insurers is growing for 
increased Federal regulation. Some powerful elements of the insurance 
industry want to be allowed to choose either Federal or state oversight 
(e.g., ACLI, AIA, banks selling insurance). Under such an ``optional 
Federal charter'' plan, if the Federal government actually effectively 
regulated, these companies would be allowed to retreat to state 
regulation. Other elements of the industry favor no Federal role at 
all, except bailouts such as the Terrorism Risk Insurance Act (e.g., 
NAII, AAI, NAMIC).
    While insurance companies disagree on the need for Federal 
regulation, they are unanimous in their desire to use the possibility 
of Federal oversight as leverage to press the states to reduce extant 
consumer protections or hold off needed new protections. Insurers know 
that state regulators will want to move fast to reduce the regulatory 
burden (that is, the consumer protections they require) in order to 
hold onto some extra insurers in the regulatory turf wars that are 
coming. There is even talk of interstate compacts to limit regulation 
to one state or to otherwise ``harmonize'' regulation, although the 
states with higher standards--the sopranos, tenors and altos--will be 
asked to ``harmonize'' by learning to sing bass.
    Few ask consumers what they think. I am therefore most grateful to 
you, Chairman McCain, Ranking Member Hollings and members of the 
Committee, for this opportunity to explain how insurance regulation can 
be improved to help consumers.

Background
    Insurance is regulated by the states under a remarkable delegation 
of authority in the McCarran-Ferguson Act. There is no insurance 
oversight by the Federal government, nor are there standards for 
effective regulation, but there is an exemption from the antitrust law, 
which very few other American industries outside of major league 
baseball enjoy. Thus, for example, insurers routinely use rating 
organizations to jointly project inflation costs into the future.
    Insurers have, on occasion, sought Federal regulation when the 
states increased regulatory control and the Federal government 
regulatory attitude was more lazes-faire. Thus, in the 1800s, 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 1943 in the 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 Act.
    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 that 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.
    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.
    Further, the insurance industry has used the possibility of an 
increased Federal role to pressure states into gutting consumer 
protections over the last three or four years. Insurers have repeatedly 
warned states that the only way to preserve their control over 
insurance regulation is to weaken consumer protections. They have been 
assisted in this effort by a series of House hearings, which have not 
focused on legislation or the need for improved consumer protection, 
but have served as a platform for a few politicians to issue ominous 
statements urging the states to further deregulate insurance oversight, 
``or else.'' (See statements by industry representatives and Members of 
Congress below.)

Can Insurance Be Deregulated?
    There are good reasons that insurance has, historically, been 
subject to regulation. The most obvious one is that a consumer pays 
money today for a promise that may not be deliverable for years. That 
promise must be secured from many threats, including insolvency and 
dishonesty.
    No one seems to dispute the need for oversight of insurer solvency 
and bad management behavior. Insolvency regulation has been upgraded, 
thanks in large part to the interest in the issue of Warren Magnusen 
and John Dingell (which is how insurers first became aware of the value 
of Congressional pressure on state regulators.)
    As front-end regulatory controls such as price regulation have been 
eliminated for personal lines and small businesses by the states 
individually and for small businesses by the actions of the National 
Association of Insurance Commissioners (NAIC), consumers have been 
promised that back-end market conduct oversight would be improved. 
These promises have proven to be empty. For example when small business 
pricing was deregulated by the NAIC and many states adopted this 
approach, nothing was done to correct the hopelessly incompetent market 
conduct system that exists in most states. (The GAO has recently 
documented the failures of the state market conduct system in great 
detail.)
    The big question is: can price and product regulation be 
eliminated? The insurance companies say ``sure,'' but never discuss the 
potential adverse impact on consumers.
    Product regulation is very important for consumers. An insurance 
contract is a complex legal document. Consumers cannot be asked to pick 
out good or avoid bad deals by reading these documents. It won't 
happen. If insurers are free to write any contract that they want, some 
sharp dealers will come in with illusory policies that look good but 
take away the apparent coverage in the fine print. There will develop 
competition to write poor products that unwary consumers will buy.
    Consumers are in no rush to have bad products appear in the market, 
even though insurers insist that ``speed-to-market'' is somehow a 
critical issue. It makes no sense to remove front-end control of these 
products and wait for market conduct exams or, as is more usual, 
lawsuits, to clean up the mess.\2\
---------------------------------------------------------------------------
    \2\ There are several reasons why it is dangerous for consumers if 
regulators focus exclusively on ``speed to market.''
    First, consumers, who have been victimized by such abuses as life 
insurance policies that promised rates of return they could not give, 
consumer credit insurance policies that pay pennies in claims per 
dollar in premium, and race-based pricing are in no hurry for such 
policies. Second, in some trials of product deregulation in health 
insurance, policies with low prices often were found to have fine print 
that eliminated most coverage. Third, standards to ensure fair pricing, 
adequate disclosure and a more honest marketplace are urgently needed 
and should be a part of any process for faster product approval, 
particularly in the era of globalization and Internet sales. Fourth, 
CARFRA, a voluntary organization set up by the NAIC to offer ``one-
stop'' approval over several states, is dangerous for consumers. CARFRA 
lacks direct accountability to the relevant public: consumers in 
affected states. There is no assurance that their standards for product 
approval will benefit consumers. For example, if a panel made up of 
Montana members approves a rate or policy for use in California, then 
it will be difficult for California consumers to object. CARFRA must be 
an independent, legally authorized entity with democratic processes, 
such as on-the-record voting, notice and comment rulemaking, conflict-
of-interest standards, prohibitions on ex-parte communications, etc. 
CARFRA cannot rely on the industry it regulates to provide its funding. 
Moreover, the same issues consumers find dangerous in CARFRA exist in 
the interstate compact concept.
---------------------------------------------------------------------------
    However, consumer groups do want efficient regulation. I, and 
others from the consumer community, worked very hard at the NAIC to 
eliminate inefficient regulatory practices and delays, even helping put 
together a 30-day total product approval package. Our concern is not 
with fat cutting, it is with removing regulatory muscle when consumers 
are vulnerable.
    Price regulation is a complex issue. It does not suffice to say 
that ``competition is good and regulation is bad'' as insurers often 
do.
    First of all, insurance is not a normal product like a can of peas 
or even an auto. One cannot ``kick the tires'' of the complex legal 
document that is the insurance policy until a claim arises, perhaps 
years after the purchase.
    Second, the level of service offered by insurers is usually unknown 
at the time a policy is purchased. Some states have complaint ratio 
data that help consumers make purchase decisions, and the NAIC has made 
a national database available that should help, but service is not an 
easy factor to assess.
    Then there is the solidity of the insurance company. You can get 
information from A.M. Best and other rating agencies, but this is also 
complex information to obtain and decipher.
    Finally, there is the price of the policy itself. Some insurers 
have many tiers of prices (we have seen mare than 25 for some 
companies) for similar looking insureds. Online assistance may help 
consumers understand some of these distinctions but only when they 
actually apply is full underwriting conducted. At that point, the 
consumer might be quoted a much different rate than he or she expected. 
Frequently, consumers receive a higher rate, even after accepting a 
quote from an agent.
    And, after all that, underwriting may result in the consumer being 
turned away.
    When you shop for a can of peas, you see the unit price, all the 
options are before you on the same shelf, when you get to the checkout 
counter no one asks where you live and then denies you the right to 
make a purchase, you can taste the quality as soon as you get home, and 
you don't care if the pea company goes broke or gives much service. In 
short, peas are simply not insurance.
    Price regulation considerations vary by line of insurance. Large 
commercial insureds have insurance experts, called ``risk managers,'' 
on staff. They need less help from government. Individuals and small 
businesses may need help. They are not well informed consumers and 
often go into the insurance purchase decision with an odd combination 
of fear and boredom. They frequently go to an insurer or agent and say 
the something akin to ``take me, I'm yours,'' a shopping strategy that 
does nothing to discipline the market price.\3\
---------------------------------------------------------------------------
    \3\ Another problem with insurance is the inertia of consumers. 
That is, the reluctance to change carriers for even fairly large price 
breaks. Consumers fear that new insurers would be more apt to drop them 
after a claim than their old insurer. This inertia is a drag on the 
competitive force of consumer decisions.
---------------------------------------------------------------------------
    The degree of insurance regulation that is needed varies by line-
of-business, something insurers often don't admit. Consider three life 
insurance products as an example of this fact. Term life, cash value 
life and credit life. We believe that the regulatory response to these 
three products must be different.
    Term life insurance is easy for consumers to understand. If you die 
in the term, whatever that time frame is, your beneficiaries receive 
the face amount of the policy. Consumers understand this very well so 
coverage is not an issue. Dead is dead, so service is not much of an 
issue compared to, say, auto claims. Solvency may also be somewhat less 
of an issue, depending upon the length of the term. The decision 
centers on price. Excellent online price services exist (CFA's favorite 
is www.term4sale.com).
    Because of the simplicity of the decision-making process, term 
insurance prices are very competitive and have fallen, year-by-year, 
for decades. Price regulation is not needed in this line of life 
insurance.
    Cash value insurance is a complex product. It is, essentially, a 
term policy with a bank account hidden inside the product. The problem 
is that the industry has resisted calls for tools to help consumers 
more easily understand what is going on inside the policy or to create 
suitability requirements for its agents. It is very difficult to know 
exactly what part of the first year premium (if any--often, it is none) 
goes into the bank account. CFA's actuary, who handles our service for 
life insurance, tells me that even he frequently can't tell a good 
product without running the policy details through our computerized 
service to see how it works. Consumers are confused. Competition is 
weak. Prices have not declined in the way term prices have.
    For this product, prices should be subject to more control than 
exists today unless the industry truly agrees to stop the obfuscation 
and promote rules that let the consumer see what each policy is truly 
like.
    Credit life insurance is a product sold along with a loan, such as 
a car loan. The car dealer may offer the coverage that would pay off a 
loan if an insured dies, so that this person's family would own the car 
outright. The problem is that consumers do not go to car dealers to buy 
insurance. They have not even thought about it until the dealer starts 
the sales pitch. If the consumer decides to buy the coverage, the 
consumer does not then go out and shop for an insurance company. The 
dealer has already done that for the consumer.
    Guess what the criteria the dealer uses in making the choice of 
credit life insurer? The amount of the commission is, of course, the 
decisive factor. (Some car dealers make more money selling insurance 
than cars.) Prudential Insurance Company once said in a hearing in 
Virginia, that they did not sell much credit life insurance because 
``we are not competitive, our price is too low.''
    This purchase-of-insurance-by-the-commissioned-agent-not-the-
consumer/buyer has a name: ``Reverse Competition.'' In this line of 
insurance, competition drives the price up, not down.
    Credit life insurance must have price regulation. States have 
recognized this by limiting the price that can be charged, with widely 
varying maxima. New York and Maine consumers pay one-fifth of the rate 
of Louisiana consumers, although Louisianans obviously do not die five 
times faster than Mainers. Even though the credit life insurers, car 
dealers and other powerful lobbyists have succeeded in keeping the 
price outrageously high in most states, at least there are caps in 
every state, as there must continue to be.

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 in a 
market 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 Prop. 103, Californians had experienced significant price 
increases under a system of ``open competition'' of the sort the 
insurers seek. (No regulation of price is permitted but rate collusion 
by rating bureaus is allowed, while consumers receive very little help 
in getting information, etc.) Prop. 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,\4\ 
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.
---------------------------------------------------------------------------
    \4\ ``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.\5\ As of 2001, the 
average annual premium in California was $688.89 (Rank 23) vs. $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!
---------------------------------------------------------------------------
    \5\ State Average Expenditures & Premiums for Personal Automobile 
Insurance in 2001, NAIC, July 2003.
---------------------------------------------------------------------------
State Regulatory/Legislative Failures
    Compare the outstanding improvement in consumer protection in 
California with the collapse of regulatory resolve at the national, 
NAIC level. Here is a small sample of NAIC failures and consumer 
protection rollbacks:
Failures To Act

  1.  Failed to do anything about abuses in the small face life market. 
        Instead, they 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 1980s and early 1990s. 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 they weakened consumer protections. How 
        do you test if a market is workably competitive without data on 
        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 limits, prior insurer, prior non-standard 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.  Nothing has been done on redlining or insurance availability or 
        affordability. The vast majority of 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.

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 us why they rejected 
        our specific proposals) or to upgrade ``back-end'' market 
        conduct quality, despite promises to do so.

  2.  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.

  3.  States are rolling back consumer protections in auto insurance as 
        well. Just this year, New Jersey, Texas, Louisiana, and New 
        Hampshire did so.

  4.  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.

NCOIL: At the Insurance Industry's Beck and Call
    As bad as the NAIC and some state regulators have been, the 
National Conference of Insurance Legislators is worse. NCOIL is 
directed by a significant number of legislators who work for the 
insurance industry.\6\ On several issues that are currently being 
debated in Congress and the states, NCOIL has offered recommendations 
that would negatively affect many insurance consumers, recommendations 
that often mirror insurance industry proposals.
---------------------------------------------------------------------------
    \6\ ``Many State Legislators Involved with National Insurance 
Organization Have Close Ties to Insurance Industry,'' CFA, 07/09/03 (at 
www.consumerfed.org).
---------------------------------------------------------------------------
    For example, on May 6, 2003 Illinois State Senator and insurance 
agent Terry Parke offered Congressional testimony on NCOIL's proposals 
to improve oversight of ``market conduct'' abuses by insurance 
companies. Parke's written testimony did not comment on the state 
regulatory failures that led to well-known market conduct abuses that 
cost consumers millions of dollars, such as the infamous life insurance 
market conduct abuses by the Nation's largest insurers such as 
Prudential and Met Life. Instead, Parke offered recommendations that 
would allow insurance companies to ``self certify'' that they are 
complying with market conduct requirements and would largely restrict 
oversight of insurance companies to the state where the company is 
headquartered.
    In the wake of the Enron and WorldCom scandals, we are astonished 
that NCOIL would propose allowing insurance companies to essentially 
regulate themselves. Even worse, NCOIL proposes to put the state that 
is most subject to political pressure--the state where an insurance 
company is based--in charge of market conduct regulation for that 
company.
    NCOIL has also offered model legislation on the use of credit 
scoring for insurance purposes, which has been adopted by several 
states. The legislation would allow insurers to continue to use credit 
scores to grant insurance policies and establish rates, even though 
serious concerns have been raised about the logic of using credit 
history to predict consumer accident propensity (why would getting laid 
off in a recession make a person a bad driver?), the inaccuracy of 
these scores, and the disproportionate impact that this practice has on 
low income and minority consumers. NCOIL's model bill would only ban 
the use of credit scoring if it is the sole factor used in the 
underwriting or pricing of insurance, which means that the bill offers 
no protection, as credit scoring is never the sole factor used for 
these purposes.
    The NCOIL credit-scoring bill was developed at the behest of the 
industry, which realized that real reform might emerge as consumers 
across the Nation expressed outrage over higher prices due to 
consideration of irrelevant credit histories. The NCOIL vote on this 
was telling. Members from five states (MI, NY, VT, ND and LA) accounted 
for 60 percent of the vote. Members from North Dakota represented 8 
percent of the vote (its population is 0.2 percent of the national 
population). At least seven of the 25 members on the NCOIL committee 
that proposed this legislation are employed by the insurance industry. 
The vote does not appear to be representative of much other than 
insurer wishes.
    While not every proposal NCOIL offers is anti-consumer, many are. 
Other examples of recent anti-consumer moves by NCOIL include:

   After years of effort, consumer groups persuaded the NAIC to 
        adopt a credit personal property insurance model bill with a 60 
        percent loss ratio standard, which is necessary because credit 
        insurance is added to a sale of some other products with huge, 
        often hidden commissions being paid to the seller. Because the 
        seller selects the insurer, not the customer, credit insurance 
        suffers from ``reverse competition,'' driving prices up. Thus a 
        loss ratio limit is vital to control cost. A short time after 
        NAIC acted to control the loss ratio, the industry went to 
        NCOIL, which had never worked on the issue, and got them to 
        issue a resolution opposing the loss ratio standard. If NCOIL 
        prevails, consumers who purchase this form of credit insurance 
        will pay millions of unnecessary dollars.

   Consumers requested that NCOIL adopt a consumer 
        participation program, like that sponsored by NAIC, in which a 
        few consumer representatives can come to the meetings to 
        present consumer positions. NCOIL would cover participants' 
        expenses, with consumer groups supplying the time of their 
        advocates. Not only did NCOIL reject this mechanism for 
        allowing consumer input, they also voted down the more modest 
        measure of waiving registration fees for consumers, effectively 
        shutting out all consumer input from their meetings.

   NCOIL adopted a property/casualty insurance regulatory model 
        bill that is intended to cut consumer protections by reducing 
        regulatory authority. The model goes so far as to say that the 
        model should not be adopted if a state has gone even further in 
        removing consumer protections than the bill proposes, i.e., the 
        model is only recommended for use when it lowers protection but 
        is not recommended for use if it raises protections. The model 
        does not require the insurer to even file rate increases with 
        an insurance commissioner until 30 days after it begins to 
        charge consumers more. The commissioner, under the model, could 
        not disapprove even an excessive rate if the market was 
        ``competitive'' under a set of standards that would make a 
        finding of non-competitiveness nearly impossible.

   NCOIL's Insurance Compliance Self Evaluation Privilege Model 
        Act would give insurers a privilege of secrecy for anything 
        they claim as ``self-audit'', effectively allowing the industry 
        to shield itself from responsibility for its market conduct 
        actions.

What has Caused the States to Move So Suddenly to Cut Consumer 
        Protections Adopted Over a Period of Decades?
    In a word, ``pressure,'' from insurers and from a couple of Members 
of Congress.

Industry Statements
    What follows are examples of industry attempts to use the Federal 
government interest in insurance to pressure the NAIC into action:

  1.  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 of 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.

  2.  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.

  3.  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 \7\ 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 . . .''
---------------------------------------------------------------------------
    \7\ Of course, Mr. Forrester knows that this is a life insurer 
problem, which is not the case for his members, who are property/
casualty insurance companies.

  4.  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 . . .''

Congressional Statements
    The leading Member of Congress involved in putting pressure on the 
states to further deregulate is House Financial Services Committee 
Chairman Michael Oxley. Below are some recent statements Chairman Oxley 
has made on the matter.
    ``Make no mistake about it, true reform is necessary. It is my hope 
that our State legislators and insurance commissioners can enact such 
reform. If not, Congress will return to this issue with our own 
solution.'' (Emphasis added) Opening statement at 6/2/01 Hearing, 
``Insurance Product Approval: The Need for Modernization.''
    ``. . . why are Massachusetts and New Jersey afraid to adopt the 
models used successfully in Illinois and now South Carolina . . .'' 
Opening statement at 8/1/01 Hearing, ``Over Regulation of Automobile 
Insurance: A Lack of Consumer Choice.''
    ``. . . price fixing and heavy anti-consumer regulations . . . have 
led to a balkanized system that can be inefficient, denies consumers 
choice, and is destroying the industry's competitive ability to raise 
capital. Today . . . we turn from assessing the current inefficiencies 
to a review of the various proposals for reform. Consensus will be 
difficult, but America deserves our every effort . . .'' Opening 
statement at 6/4/02 Hearing, ``Insurance Regulation and Competition for 
the 21st Century'' (Day 1).
    ``. . . our American insurance marketplace is entering into a 
crisis . . . Some states fix prices below the levels to attract 
adequate capital . . . And each state imposes its own regulatory 
regime, creating long delays for consumers, and making it impossible 
for insurers to provide products uniformly nationwide . . . It is my 
primary hope that our State legislators and insurance commissioners can 
enact meaningful reform. The States have had some success . . . I would 
note however that this success is far from complete and has only 
occurred in the face of Congressional legislative pressure, pressure 
that will continue to grow if the pace of reform does not improve. 
(Emphasis added) Opening statement at 6/11/02 Hearing, ``Insurance 
Regulation and Competition for the 21st Century'' (Day 2).
    ``As many of you know, my interest in reform is not new. Several 
years ago I asked the NAIC to focus on this glaring problem and they 
responded in March, 2000 with a Statement of Intent . . . Since that 
time, the NAIC has experienced some successes and some failures. In the 
face of Congressional legislative pressure, the NAIC has made progress 
in agent licensing reform . . . Unfortunately, the NAIC has met with 
less success in efforts to modernize the product approval process . . . 
Unfortunately, it is becoming increasingly apparent that the NAIC may 
be facing an insurmountable task . . . this Committee will not sit idly 
by. I am committed to working on this issue for the long haul, looking 
at all the different facets of the industry. We will keep building . . 
. we will not let up . . .'' Opening statement at 6/18/02 Hearing, 
``Insurance Regulation and Competition for the 21st Century'' (Day 3).
    ``. . . a problem that has reached crisis proportions in some 
States: the increasing difficulty consumers face in finding available 
insurance for their homes and cars . . . (a) crisis being caused in 
part by the archaic system of insurance price controls imposed by some 
states . . . wrong-headed regulation . . .'' Opening statement at 4/10/
03 Hearing, ``The Effectiveness of State Regulation: Why Some Consumers 
Can't Get Insurance.''
    ``I believe that we're reaching agreement on the fundamental nature 
of the problem and are nearing agreement on a framework to fix it . . . 
We will be discussing a number of short-term legislative proposals to 
fix the state system later this year, and hope that the states can act 
quickly . . . before Congress needs to step in and provide additional 
impetus. (Emphasis added) Opening statement at 5/6/03 Hearing 
``Increasing the Effectiveness of State Consumer Protections.''
Consumers Don't Care Who Regulates--It's The Quality Stupid!
    The prime issue with consumers is not who regulates insurance; it 
is whether insurance regulation is effective and efficient.
    As a former state regulator, I have always supported state 
regulation of insurance, but now that I see the ease in which states 
panic and are willing to trade consumer protections to protect their 
turf, I am reevaluating my life-long support. CFA intends, over the 
next few months, to meet with consumer, business, labor and other 
interests to determine whether CFA should end its support of state 
regulation.
    We have already determined one thing: optional Federal charter 
legislation is harmful to consumers. The writers of these bills have 
readily admitted to me, to their credit, that their intent is to set up 
a ``race to the bottom'' where, in a search for regulatory market 
share, regulators will compete with each other to attract insurers by 
lowering consumer protections. Consumers can not allow this race to get 
started anymore than insurers would agree to a system where consumers 
could vote to decide which regulator would oversee the insurance 
industry (creating a race in the other direction).
    When the NAIC began its process to head off Federal oversight, 
consumer groups came together to write a white paper to list the 
consumer protections we sought. That paper, ``Consumer Principles and 
Standards for Insurance Regulation,'' is attached to this statement. It 
presents the principles by which consumers will measure any proposal 
for insurance regulatory reform, be it state or federally based.

Federal Options
    At the moment, Federal regulatory options include the Hollings 
Bill, the optional Federal charter idea espoused by part of the 
insurance industry, a simple bill that would repeal the antitrust 
exemption combined with oversight of the delegation of insurance 
regulation to the states and, perhaps, minimum standards for regulatory 
effectiveness and efficiency.

Hollings Bill
    Only one bill before Congress considers the consumer perspective in 
its design, adopting many of the proposals made in our white paper. 
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 process language 
(such as hearing requirements when prices change significantly) so 
effectively used in Prop. 103. 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.
    S. 1373 is a good bill and should be the baseline for any debate on 
the subject before this committee.

Optional Federal Charter
    The bills that have been proposed would create a Federal regulator 
that would have little, if any, authority to regulate price or product, 
regardless of how non-competitive the market for a particular line of 
insurance might be. 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.
    As stated above, the bills put forth by the industry are an amazing 
attempt to play off the Federal government against the states. For 
consumers, these bills are poison and cannot be fixed. If these 
elements of the 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 can 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.
Amend 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? We will then see just how much they want competition.
    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 the provisions of Prop. 103 might be 
the basis for such minimum standards.

Conclusion
    Insurers talk a good competition game, but they do not walk it. 
Rarely will those calling for deregulation seek to give up the 
antitrust exemption or increase the provision of consumer information 
or do the other things needed to make competition effective. Insurers 
seek to set up systems designed to make dual regulators fight with each 
other for market share by weakening consumer protections; never 
proposing strong regulatory floors to avoid such a result. Most 
insurers do not seem to want effective and efficient regulation. Rather 
they appear to want no regulation.
    Insurers seek to continue to use Congress to pressure the states 
into giving up necessary consumer protections out of fear of loss of 
regulatory turf. To date, the pressure on the states from the Hill has 
come primarily from a few Members of Congress not in this body. I 
strongly urge you to resist engaging in such activity because it is a 
detriment the needs of your constituents.
    I urge the Committee to continue your study of insurance 
regulation. The proper focus of Congress is not to encourage mindless 
deregulation by the states, but to encourage greater competition and 
economic efficiencies while strengthening, not lowering consumer 
protection standards.
    Thank you for the opportunity to appear here today. I will be happy 
to answer your questions at the appropriate time.
       Consumer Principles and Standards for Insurance Regulation
1.  Consumers should have access to timely and meaningful information 
        of the costs, terms, risks and benefits of insurance policies.

   Meaningful disclosure prior to sale tailored for particular 
        policies and written at the education level of average consumer 
        sufficient to educate and enable consumers to assess particular 
        policy and its value should be required for all insurance; 
        should be standardized by line to facilitate comparison 
        shopping; should include comparative prices, terms, conditions, 
        limitations, exclusions, loss ratio expected, commissions/fees 
        and information on seller (service and solvency); should 
        address non-English speaking or ESL populations.

   Insurance departments should identify, based on inquiries 
        and market conduct exams, populations that may need directed 
        education efforts, e.g., seniors, low-income, low education.

   Disclosure should be made appropriate for medium in which 
        product is sold, e.g., in person, by telephone, on-line.

   Loss ratios should be disclosed in such a way that consumers 
        can compare them for similar policies in the market, e.g., a 
        scale based on insurer filings developed by insurance 
        regulators or independent third party.

   Non-term life insurance policies, e.g., those that build 
        cash values, should include rate of return disclosure. This 
        would provide consumers with a tool, analogous to the APR 
        required in loan contracts, with which they could compare 
        competing cash value policies. It would also help them in 
        deciding whether to buy cash value policies.

   Free look period with meaningful state guidelines to assess 
        appropriateness of policy and value based on standards the 
        state creates from data for similar policies.

   Comparative data on insurers' complaint records, length of 
        time to settle claims by size of claim, solvency information, 
        and coverage ratings (e.g., policies should be ranked based on 
        actuarial value so a consumer knows if comparing apples to 
        apples) should be available to the public.

   Significant changes at renewal must be clearly presented as 
        warnings to consumers, e.g., changes in deductibles for wind 
        loss.

   Information on claims policy and filing process should be 
        readily available to all consumers and included in policy 
        information.

   Sellers should determine and consumers should be informed of 
        whether insurance coverage replaces or supplements already 
        existing coverage to protect against over-insuring, e.g., life 
        and credit.

   Consumer Bill of Rights, tailored for each line, should 
        accompany every policy.

   Consumer feedback to the insurance department should be 
        sought after every transaction (e.g., after policy sale, 
        renewal, termination, claim denial). Insurer should give 
        consumer notice of feedback procedure at end of transaction, 
        e.g., form on-line or toll-free telephone number.

2.  Insurance policies should be designed to promote competition, 
        facilitate comparison-shopping and provide meaningful and 
        needed protection against loss.

   Disclosure requirements above apply here as well and should 
        be included in design of policy and in the policy form approval 
        process.

   Policies must be transparent and standardized so that true 
        price competition can prevail. Components of the insurance 
        policy must be clear to the consumer, e.g., the actual current 
        and future cost, including commissions and penalties.

   Suitability or appropriateness rules should be in place and 
        strictly enforced, particularly for investment/cash value 
        policies. Companies must have clear standards for determining 
        suitability and compliance mechanism. For example, sellers of 
        variable life insurers are required to find that the sales that 
        their representatives make are suitable for the buyers. Such a 
        requirement should apply to all life insurance policies, 
        particularly when replacement of a policy is at issue.

   ``Junk'' policies, including those that do not meet a 
        minimum loss ratio, should be identified and prohibited. Low-
        value policies should be clearly identified and subject to a 
        set of strictly enforced standards that ensure minimum value 
        for consumers.

   Where policies are subject to reverse competition, special 
        protections are needed against tie-ins, overpricing, e.g., 
        action to limit credit insurance rates.

3.  All consumers should have access to adequate coverage and not be 
        subject to unfair discrimination.

   AWhere coverage is mandated by the state or required as part 
        of another transaction/purchase by the private market, e.g., 
        mortgage, regulatory intervention is appropriate to assure 
        reasonable affordability and guarantee availability.

   Market reforms in the area of health insurance should 
        include guaranteed issue and community rating and where needed, 
        subsidies to assure health care is affordable for all.

   Information sufficient to allow public determination of 
        unfair discrimination must be available. Zip code data, rating 
        classifications and underwriting guidelines, for example, 
        should be reported to regulatory authority for review and made 
        public.

   Regulatory entities should conduct ongoing, aggressive 
        market conduct reviews to assess whether unfair discrimination 
        is present and to punish and remedy it if found, e.g., 
        redlining reviews (analysis of market shares by census tracts 
        or zip codes, analysis of questionable rating criteria such as 
        credit rating), reviews of pricing methods, reviews of all 
        forms of underwriting instructions, including oral instructions 
        to producers.

   Insurance companies should be required to invest in 
        communities and market and sell policies to prevent or remedy 
        availability problems in communities.

   Clear anti-discrimination standards must be enforced so that 
        underwriting and pricing are not unfairly discriminatory. 
        Prohibited criteria should include race, national origin, 
        gender, marital status, sexual preference, income, language, 
        religion, credit history, domestic violence, and, as feasible, 
        age and disabilities. Underwriting and rating classes should be 
        demonstrably related to risk and backed by a public, credible 
        statistical analysis that proves the risk-related result.

4.  All consumers should reap the benefits of technological changes in 
        the marketplace that decrease prices and promote efficiency and 
        convenience.

   Rules should be in place to protect against redlining and 
        other forms of unfair discrimination via certain technologies, 
        e.g., if companies only offer better rates, etc. online.

   Regulators should take steps to certify that online sellers 
        of insurance are genuine, licensed entities and tailor consumer 
        protection, UTPA, etc. to the technology to ensure consumers 
        are protected to the same degree regardless of how and where 
        they purchase policies.

   Regulators should develop rules/principles for e-commerce 
        (or use those developed for other financial firms if 
        appropriate and applicable)

   In order to keep pace with changes and determine whether any 
        specific regulatory action is needed, regulators should assess 
        whether and to what extent technological changes are decreasing 
        costs and what, if any, harm or benefits accrue to consumers.

   A regulatory entity, on its own or through delegation to 
        independent third party, should become the portal through which 
        consumers go to find acceptable sites on the web. The standards 
        for linking to acceptable insurer sites via the entity and the 
        records of the insurers should be public; the sites should be 
        verified/reviewed frequently and the data from the reviews also 
        made public.

5.  Consumers should have control over whether their personal 
        information is shared with affiliates or third parties.

   Personal financial information should not be disclosed for 
        other than the purpose for which it is given unless the 
        consumer provides prior written or other form of verifiable 
        consent.

   Consumers should have access to the information held by the 
        insurance company to make sure it is timely, accurate and 
        complete. They should be periodically notified how they can 
        obtain such information and how to correct errors.

   Consumers should not be denied policies or services because 
        they refuse to share information (unless information needed to 
        complete transaction).

   Consumers should have meaningful and timely notice of the 
        company's privacy policy and their rights and how the company 
        plans to use, collect and or disclose information about the 
        consumer.

   Insurance companies should have clear set of standards for 
        maintaining security of information and have methods to ensure 
        compliance.

   Health information is particularly sensitive and, in 
        addition to a strong opt-in, requires particularly tight 
        control and use only by persons who need to see the information 
        for the purpose for which the consumer has agreed to sharing of 
        the data.

   Protections should not be denied to beneficiaries and 
        claimants because a policy is purchased by a commercial entity 
        rather than by an individual (e.g., a worker should get privacy 
        protection under workers' compensation).

6.  Consumers should have access to a meaningful redress mechanism when 
        they suffer losses from fraud, deceptive practices or other 
        violations; wrongdoers should be held accountable directly to 
        consumers.

   Aggrieved consumers must have the ability to hold insurers 
        directly accountable for losses suffered due to their actions. 
        UTPAs should provide private cause of action.

   Alternative Dispute Resolution clauses should be permitted 
        and enforceable in consumer insurance contracts only if the ADR 
        process is: 1) contractually mandated with non-binding results, 
        2) at the option of the insured/beneficiary with binding 
        results, or 3) at the option of the insured/beneficiary with 
        non-binding results.

   Bad faith causes of action must be available to consumers.

   When regulators engage in settlements on behalf of 
        consumers, there should be an external, consumer advisory 
        committee or other mechanism to assess fairness of settlement 
        and any redress mechanism developed should be independent, fair 
        and neutral decision-maker.

   Private attorney general provisions should be included in 
        insurance laws.

   There should be an independent agency that has as its 
        mission to investigate and enforce deceptive and fraudulent 
        practices by insurers, e.g., the reauthorization of FTC.

7.  Consumers should enjoy a regulatory structure that is accountable 
        to the public, promotes competition, remedies market failures 
        and abusive practices, preserves the financial soundness of the 
        industry and protects policyholders' funds, and is responsive 
        to the needs of consumers.

   Insurance regulators must have clear mission statement that 
        includes as a primary goal the protection of consumers:

   The mission statement must declare basic fundamentals by 
        line of insurance (such as whether the state relies on rate 
        regulation or competition for pricing). Whichever approach is 
        used, the statement must explain how it is accomplished. For 
        instance, if competition is used, the state must post the 
        review of competition (e.g., market shares, concentration by 
        zone, etc.) to show that the market for the line is workably 
        competitive, apply anti-trust laws, allow groups to form for 
        the sole purpose of buying insurance, allow rebates so agents 
        will compete, assure that price information is available from 
        an independent source, etc. If regulation is used, the process 
        must be described, including access to proposed rates and other 
        proposals for the public, intervention opportunities, etc.

   Consumer bills of rights should be crafted for each line of 
        insurance and consumers should have easily accessible 
        information about their rights.

   Insurance departments should support strong patient bill of 
        rights.

   Focus on online monitoring and certification to protect 
        against fraudulent companies.

   A department or division within regulatory body should be 
        established for education and outreach to consumers, including 
        providing:

   Interactive websites to collect from and disseminate 
        information to consumers, including information about 
        complaints, complaint ratios and consumer rights with regard to 
        policies and claims.

   Access to information sources should be user friendly.

   Counseling services to assist consumers, e.g., with health 
        insurance purchases, claims, etc. where needed should be 
        established.

   Consumers should have access to a national, publicly 
        available database on complaints against companies/sellers, 
        i.e., the NAIC database.

   To promote efficiency, centralized electronic filing and use 
        of centralized filing data for information on rates for 
        organizations making rate information available to consumers, 
        e.g., help develop the information brokering business.

   Regulatory system should be subject to sunshine laws that 
        require all regulatory actions to take place in public unless 
        clearly warranted and specified criteria apply. Any insurer 
        claim of trade secret status of data supplied to regulatory 
        entity must be subject to judicial review with burden of proof 
        on insurer.

   Strong conflict of interest, code of ethics and anti-
        revolving door statutes are essential to protect the public.

   Election of insurance commissioners must be accompanied by a 
        prohibition against industry financial support in such 
        elections.

   Adequate and enforceable standards for training and 
        education of sellers should be in place.

   The regulatory role should in no way, directly or 
        indirectly, be delegated to the industry or its organizations.

   The guaranty fund system should be prefunded, national fund 
        that protects policyholders against loss due to insolvency. It 
        is recognized that a phase-in program is essential to implement 
        this recommendation.

   Solvency regulation/investment rules should promote a safe 
        and sound insurance system and protect policyholder funds, 
        e.g., rapid response to insolvency to protect against loss of 
        assets/value.

   Laws and regulations should be up to date with and 
        applicable to e-commerce.

   Antitrust laws should apply to the industry.

   A priority for insurance regulators should be to coordinate 
        with other financial regulators to ensure consumer protection 
        laws are in place and adequately enforced regardless of 
        corporate structure or ownership of insurance entity. Insurance 
        regulators should err on side of providing consumer protection 
        even if regulatory jurisdiction is at issue. This should be 
        stated mission/goal of recent changes brought about by GLB law.

   Obtain information/complaints about insurance sellers from 
        other agencies and include in databases.

   A national system of ``Consumer Alerts'' should be 
        established by the regulators, e.g., companies directed to 
        inform consumers of significant trends of abuse such as race-
        based rates or life insurance churning.

   Market conduct exams should have standards that ensure 
        compliance with consumer protection laws and be responsive to 
        consumer complaints; exam standards should include agent 
        licensing, training and sales/replacement activity; companies 
        should be held responsible for training agents and monitoring 
        agents with ultimate review/authority with regulator. Market 
        conduct standards should be part of an accreditation process.

   The regulatory structure must ensure accountability to the 
        public it serves. For example, if consumers in state X have 
        been harmed by an entity that is regulated by state Y, 
        consumers would not be able to hold their regulators/
        legislators accountable to their needs and interests. To help 
        ensure accountability, a national consumer advocate office with 
        the ability to represent consumers before each insurance 
        department is needed when national approaches to insurance 
        regulation or ``one-stop'' approval processes are implemented.

   Insurance regulator should have standards in place to ensure 
        mergers and acquisitions by insurance companies of other 
        insurers or financial firms, or changes in status of insurance 
        companies (e.g., demutualization, non-profit to for-profit), 
        meet the needs of consumers and communities.

   Penalties for violations must be updated to ensure they 
        serve as incentives against violating consumer protections and 
        should be indexed to inflation.

8.  Consumers should be adequately represented in the regulatory 
        process.

   Consumers should have representation before regulatory 
        entities that is independent, external to regulatory structure 
        and should be empowered to represent consumers before any 
        administrative or legislative bodies. To the extent that there 
        is national treatment of companies or ``one-stop'' (OS) 
        approval, there must be a national consumer advocate's office 
        created to represent the consumers of all states before the 
        national treatment state, the OS state or any other approving 
        entity.

   Insurance departments should support public counsel or other 
        external, independent consumer representation mechanisms before 
        legislative, regulatory and NAIC bodies.

   Regulatory entities should have well-established structure 
        for ongoing dialogue with and meaningful input from consumers 
        in the state, e.g., consumer advisory committee. This is 
        particularly true to ensure needs of certain populations in 
        state and needs of changing technology are met.

    The Chairman. Mr. Ahart?

          STATEMENT OF THOMAS AHART, PRESIDENT, AHART,

         FRINZI & SMITH INSURANCE AGENCY, ON BEHALF OF

 AND PAST PRESIDENT, INDEPENDENT INSURANCE AGENTS & BROKERS OF 
                            AMERICA

    Mr. Ahart. Yes, good morning, Chairman McCain and Ranking 
Member Hollings and Senate Committee Members.
    I'm Tom Ahart, and I'm an insurance agent, own an agency in 
Phillipsburg, New Jersey, and I'm a past President of the 
Independent Insurance Agents & Brokers of America. I appreciate 
the opportunity for us to testify and to be involved in the 
process of revamping insurance regulation.
    Over the last 10 years, as an insurance agent, we've really 
seen a change with technology and with global modernization, 
which has changed our industry. Many of our business accounts 
that we now write don't just do business in New Jersey, they do 
business across the country and internationally, and it's very 
important to have products that can meet those needs and be 
able to be licensed in different states to handle their needs 
as they change.
    Since Gramm-Leach-Bliley was passed, there have been a few 
insurance companies, both domestic and international, that have 
called for Federal regulation of insurance to change from the 
current state-based system because they've seen a need to help 
certain problems, like speed-to-market issues and licensing 
issues, which they felt weren't being addressed by the state 
system.
    As agents, we recognize those problems. We believe that 
there are major problems right now in speed-to-market issues 
and in license uniformity. It's very difficult as agents and as 
insurance companies that we represent to provide some of the 
new products and get them passed. For instance, e-commerce 
products that are coming up daily are difficult to get passed 
at times in different states when we need them. It's very 
difficult, even though with the licensing modernization laws 
that have been passed and the work with the NAIC, it's still 
difficult in some states to get licensed on a timely basis, 
and, therefore, it's tough to provide the protection that we 
need for our insurance consumers.
    So we recognize those issues, and I think in most of the 
testimony you'll hear, you'll hear that there are problems with 
speed to market and with licensing issues, and we agree with 
that.
    However, recognizing those problems, we don't believe that 
the answer is Federal regulation. We believe that it's an 
unproven system, and we also believe that it's total overkill. 
There are many things that the state regulatory system has done 
well over the 150 years that it's been in existence. It's 
involved with regulation of coverage parameters, it involves 
regulation of sales practices, claims practices, claims dispute 
situations, and those things have been handled very, very well 
at the state level. So to change that because there are certain 
issues that aren't working well just doesn't make sense.
    So the Independent Insurance Agents & Brokers of America 
have been working on a draft with a lot of insurance leaders. 
We've met with NAIC and talked with them and gotten their 
input, as well as insurance companies and other agents' 
organizations, and we've really come up with what we think is a 
pragmatic middle-of-the-road approach, in that instead of going 
to Federal regulation, we believe we should use legislative 
tools, basically Federal legislation, just to handle those 
issues that are a problem at the time. For instance, on speed-
to-market issues there could be Federal legislation that's 
passed that actually preempts state rights and allows file-and-
use laws. So on forms, we would recommend that file-and-use be 
handled so that forms would be filed 30 days prior, and there 
would be 30 days to approve those forms. If there's nothing 
heard at the end of 30 days, it would be deemed to be approved, 
and that would hurt--that would help the speed-to-market issue 
in forms.
    In rates, we believe that it should be pretty much market 
competition, and in those areas of the market that are 
competitive, we believe that we should allow it to be a 
competitive situation and not be regulated as far as the rates 
go. We believe, in those markets that are not competitive, that 
the states should still regulate those areas to make sure that 
the coverages are still available.
    As far as licensing goes, we believe in more uniformity and 
reciprocity, and we think that, again, that can be handled on a 
Federal legislation basis by, again, preempting state rights so 
that uniformity and reciprocity is mandated, and then the 
states would be the ones that would regulate it once the law 
has been passed.
    And, in essence, a company and an insurance agent would be 
licensed in their state, and then once they've met those 
licencing requirements, they'd be able to get nonresident 
licenses by, again, simply meeting their own standards in their 
own states and filing once.
    So we believe that there is a lot of opportunity to handle 
the issues as they come up by using Federal tools; however, it 
just doesn't make sense to us in any way to overkill and to go 
to situations on Federal regulations which are unproven and 
which would actually hurt areas of consumer protection that are 
currently being done by state regulation.
    In addition, it would create a huge Federal bureaucracy, in 
our mind. In those areas where you'd have Federal and state 
regulation, it would create a dual bureaucracy, you know, for 
agents. We represent many companies, small and large, and we 
would end up having to be licensed both at the state level and 
the Federal level as companies chose which regulation they 
wanted to follow.
    So, in conclusion, we believe strongly in continuing state 
regulation, but using legislative tools, basically Federal 
legislation, to handle just those issues that seem to be a 
problem.
    Thank you very much.
    [The prepared statement of Mr. Ahart follows:]

 Prepared Statement of Thomas Ahart, President, Ahart, Frinzi & Smith 
   Insurance Agency, on behalf of and past President of Independent 
                 Insurance Agents & Brokers of America

    Good afternoon Chairman McCain, Ranking Member Hollings, and 
members of the Committee. My name is Tom Ahart, and I am pleased to 
have the opportunity to give you the views of the Independent Insurance 
Agents & Brokers of America (IIABA) on the current state of insurance 
regulation and IIABA's views on the role Congress can play to reform 
and improve the current system. I am President of the Ahart, Frinzi & 
Smith Insurance Agency in Phillipsburg, New Jersey. I am also a past 
President of the IIABA.
    IIABA is the Nation's oldest and largest national trade association 
of independent insurance agents and brokers, and we represent a network 
of more than 300,000 agents, brokers and agency employees nationwide. 
IIABA members are small, medium and large businesses that offer 
customers a choice of policies from a variety of insurance companies. 
Independent agents and brokers offer all lines of insurance--property, 
casualty, life, health, employee benefit plans and retirement products.

Introduction
    At the outset, Chairman McCain, 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 expectation 
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.
    In the last few years, the perceived need for reform has increased. 
The enactment of financial services modernization legislation and the 
emergence of an increasingly more consolidated, more global financial 
services industry have sparked new interest in the concept of an 
``optional'' Federal insurance charter and, more generally, in Federal 
regulation of the business of insurance. Proponents of such proposals 
argue that Federal insurance regulation would promote greater 
uniformity, reduce costs and cause less frustration than the current 
multi-state system.
    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 deficiencies and inefficiencies that exist today, and there is no 
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 insuring that insurance consumers--both 
individuals and businesses--receive the insurance coverage they need 
and that any claims they may experience are paid. These aspects of the 
state system are working well, and I have little doubt that this 
Committee will hear any testimony to the contrary. The optional Federal 
regulation proposals, however, would displace these well-running 
components of state regulation as well and, in essence, thereby ``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. Yet despite this historic and longstanding support, we are 
not confident that the state system will be able to resolve its 
problems on its own. In fact, we feel there is a vital role for 
Congress to play in helping to reform the state regulatory system, and 
such an effort need not replace or duplicate at the Federal level what 
is already in place at the state level. 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.
    Under the proposal that IIABA has been developing in conjunction 
with a broad-based group of insurers and insurance producers, these 
overarching principles would be satisfied through an approach under 
which--

  (1)  Every insurer, agent and broker would be subject to only a 
        single--albeit a state--regulator for licensing determinations, 
        solvency regulation, financial audits, corporate transaction 
        reviews and corporate governance requirements;

  (2)  The procedures under which states review proposed insurance 
        policy forms would be limited to 30 days, and the requirements 
        that apply to rate approvals essentially would be eliminated 
        for any insurance coverage sold in a ``competitive'' 
        marketplace; and

  (3)  Although no substantive consumer protection requirements would 
        be eliminated or displaced, incentives for states to create 
        compacts to streamline the market conduct examination process 
        would be provided and limitations would be placed on the 
        ability of state regulators to conduct ``fishing expedition''-
        type examinations.

    To explain the rationale under girding this approach, I will first 
offer an overview of both the positive and the negative elements of the 
current insurance regulatory system. I will then provide a more 
complete explanation of IIABA's proposal to address the negative while 
retaining the positive elements of the current system.

1. The Current State of Insurance Regulation

    As the United States Supreme Court has so aptly put it, ``[p]erhaps 
no modern commercial enterprise directly affects so many persons in all 
walks of life as does the insurance business. Insurance touches the 
home, the family, and the occupation or the business of almost every 
person in the United States.'' \1\ ``It is practically a necessity to 
business activity and enterprise.'' \2\ Insurance serves a broad public 
interest far beyond its role in business affairs and its protection of 
a large part of the country's wealth. It is the essential means by 
which the ``disaster to an individual is shared by many, the disaster 
to a community shared by other communities; great catastrophes are 
thereby lessened, and, it may be, repaired.'' \3\ Thus, it is ``the 
conception of the lawmaking bodies of the country without exception 
that the business of insurance so far affects the public welfare as to 
invoke and require governmental regulation.'' \4\ Since the inception 
of the business of insurance in the United States, it is the states 
that have carried out that essential regulatory task. Today, state 
insurance departments employ over 11,000 individuals and address 
hundreds of thousands of consumer complaints and inquiries annually, 
and they draw on over a century-and-a-half of regulatory experience 
they endeavor to protect the insurance consumers of this country.
---------------------------------------------------------------------------
    \1\ United States v. South-Eastern Underwriters Ass'n, 322 U.S. 
533, 540 (1944).
    \2\ German Alliance Ins. Co. v. Lewis, 233 U.S. 389, 415 (1914).
    \3\ Id. at 413.
    \4\ Id. at 412.
---------------------------------------------------------------------------
    These core regulatory tasks of state insurance regulators can 
essentially be divided into the following eight categories:

  (1)  Regulation of the coverage parameters of insurance contracts;

  (2)  Sales practices regulation;

  (3)  Claims practices regulation;

  (4)  Claims dispute mediation/resolution;

  (5)  Claims payment guarantees--state guaranty funds regulation and 
        solvency regulation;

  (6)  Claims payment guarantees--qualification standards and financial 
        audits;

  (7)  Insurer licensing, merger review and corporate governance 
        regulation; and

  (8)  Insurance agent/broker licensing and qualifications to do 
        business regulation.

    As a general matter and as explained in more detail below, the 
regulatory performance of the state system on the first five of the 
eight categories--all of which directly involve regulation of the 
interaction between the consumer and the insurer--is superlative. It is 
only with respect to determining and monitoring insurers, agents, and 
brokers' qualifications to do business and financial health that the 
state system has developed the inefficiencies that are now the focal 
point of the cries for reform.

a. The Positive--Protecting Consumers and Ensuring Claims Are Paid

    The goal of all insurance is to protect the purchaser (or their 
heirs) from calamity. At its most basic level, this means that the 
consumer purchases an insurance contract and, in exchange for the 
premium paid for that contract, the consumer receives a promise from 
the insurance company that they will be compensated for any losses they 
experience that are covered under that contract. From the consumer 
perspective, it is imperative that the insurance contract be adequate 
for their needs and that the insurer actually pay any claims that are 
made under that contract. In both of these respects, the historical 
performance of state insurance regulators is impeccable--they ensure 
that necessary coverage minimums are included in insurance contracts 
and, perhaps even more importantly, they make sure legitimate claims 
are paid.
    Regulators play two very distinct roles in ensuring that claims are 
paid. First, they are responsible for guaranteeing that funds are 
available to pay any and all claims that arise. Despite their best 
efforts to oversee and audit insurers' financial solvency, insurance 
companies--like national banks and savings and loans--sometimes fail. 
The state system of insurer guaranty funds--which are like Federal 
Deposit Insurance Corporation (FDIC) insurance but for insurance 
companies instead of banking institutions--works. It has paid out over 
$11 billion to cover claims asserted against insolvent insurers since 
they were first created in the mid-1970s, and none of that money has 
been at taxpayer expense.
    Second, state regulators play a vital role in mediating disputes 
that arise on a daily basis between consumers who have submitted claims 
and insurers who contend that the claims either are illegitimate or are 
not covered by the insurance policy. The respective bargaining 
positions between tens of millions of insureds--such as individuals and 
small businesses--and their insurers is tremendously skewed. Insurance 
consumers therefore regularly rely on the intervention of state 
regulators on their behalf when claims disputes arise. Large segments 
of every insurance department in the country are dedicated to assisting 
with the resolution of such disputes, and all available evidence 
suggests that insurance consumers are very satisfied with those local 
efforts.

b. The Negative--Product Regulation and Duplicative Oversight

    As you will hear from the testimony give today, it becomes evident 
that all of the perceived 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. The reality of today's marketplace is 
that banking institutions and securities firms are able to develop and 
market new and more innovative products and services quickly, while 
insurance companies are hampered by lengthy and complicated filing and 
approval requirements in 50 states. As a result, insurance companies--
and, derivatively, agents and brokers selling their products and 
services--are at a competitive disadvantage compared to their 
counterparts in other financial services industries.
    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. While most 
insurance codes provide that policy rates shall not be inadequate, 
excessive or unfairly discriminatory, and that policy forms must comply 
with state laws, promote fairness, and be in the public interest, there 
are a multitude of ways in which States currently regulate rates and 
forms. These systems include prior-approval, flex-rating, file-and-use, 
use-and-file, competitive-rating and self-certification. These 
requirements are important 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, arbitrary and 
inconsistent with the advance of technology and regulatory reforms made 
in other industries. As you have heard previously, it often takes two 
years or more to obtain regulatory approval to bring new insurance 
products to market on a national basis. Cumbersome inefficiencies 
create opportunity costs, and the regulatory regime in many states is 
likely responsible for driving many consumers into alternative markets 
mechanisms. As a result, the costs of insurance regulation are 
exceeding what is necessary to protect the public, particularly in the 
area of commercial insurance. In order to keep insurers competitive 
with other financial services entities and 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 financial solvency and market-conduct practices, 
to review mergers and acquisitions, and to dictate how the insurer 
should be governed. With the exception of market-conduct examinations, 
it is difficult to discern how the great cost of this duplicative 
regulatory oversight is justified, especially in light of the fact that 
the underlying solvency requirements are essentially identical from 
state to state. Market conduct examinations present a somewhat more 
thorny issue because, although the majority of sales and claims 
practices requirements and prohibitions are similar across the country, 
there are local variations. It is, of course, difficult for a regulator 
to determine compliance with another jurisdiction's requirements. At 
the same time, it seems wholly unnecessary for each regulator to 
examine every insurer on every aspect of their compliance practices 
given that there is such an extensive overlap in requirements.

2. Solutions

    Although heroic efforts have been made to date, state regulators 
and legislators face the near impossible challenge of addressing and 
remedying the identified deficiencies unilaterally. For the most part, 
these reforms must be made by statute, and state lawmakers face 
practical and political hurdles and collective action challenges in 
their pursuit of such improvements on a national basis. Despite the 
actions of the States on producer licensing reform over the last two 
legislative sessions, real-world realities suggest that it is 
extraordinarily difficult, if not impossible, to pass identical bills 
through the 50 state legislatures
    Although the proposed optional Federal regulation proposals might 
correct certain deficiencies, the cost is incredibly high. The new 
regulator would serve to 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. 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. Federal models propose to charge a 
distant and likely highly politicized Federal regulator with the 
implementation and enforcement of a single set of rules that would 
apply equally across all States and all insurance markets. Such a 
distant Federal regulator may be completely unable to respond to 
insurance consumer claims concerns and its mere creation could spark 
fears that this will prove to be the case. Nor can a single regulatory 
system harmonize 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. The 
potential responsiveness of a Federal regulator to both industry and 
consumer needs in several critical areas could therefore jeopardize the 
fundamental purpose of insurance regulation and must be considered 
questionable at best.
    This year, Sen. Fritz Hollings (D-S.C.) has introduced the 
Insurance Consumer Protection Act (S. 1373). This legislation takes a 
very dramatic approach by proposing to repeal the McCarran-Ferguson 
Act. In addition, S. 1373 would create a ``Federal Insurance 
Commission,'' an independent panel within the Department of Commerce. 
The commission would be the sole regulator of all interstate insurers 
offering property and casualty insurance as well as life insurance. As 
with any proposal that would shift regulation from the states to the 
Federal Government, IIABA strongly opposes this legislation.
    There are several key components to S. 1373 that IIABA strongly 
objects to. Under this legislation, a newly formed commission would 
have full authority over both rates and policies, while at the same 
time allowing consumers to have a right to challenge rate applications 
before the Commission. The commission would also be responsible for 
licensing and standards for the insurance industry, annual examinations 
and solvency reviews, investigation of market conduct, and the 
establishment of accounting standards. The bill would also allow the 
Commission to investigate the organization, business, conduct, 
practices and management of ``any person, partnership or corporation in 
the insurance industry.'' It would appear that insurance agents and 
brokers would fall under this definition. IIABA believes that by 
creating this commission, S.1373, would only take everything that is 
wrong with the current state system and shift it to the Federal level, 
where there is even less accountability. We are specifically troubled 
that this legislation would regulate agents from all states and for all 
lines of business who do business across a state line in what will 
inevitably be a new massive Washington bureaucracy. While IIABA does 
have problems with the current multi-state licensing system, we think 
that adding another layer of regulation on top of this is a big 
problem.
    We believe that the states are better positioned to accommodate 
diversity and to respond to change. However, weaknesses exist in state 
regulation today. Unnecessary distinctions among the States and 
inconsistencies within the States thwart competition, reduce 
predictability and add unnecessary expenses to the cost of doing 
business. Similarly, outdated rules and practices do not serve the 
goals of regulation in today's financial services marketplace. 
Nevertheless and as noted previously, there is much that is good about 
the current state-based system that would be jettisoned through the 
creation of a Federal regulator, including an enforcement 
infrastructure upon which consumers throughout the Nation heavily rely 
to protect their interests. Federal charters and the establishment of a 
full-blown, unprecedented, untested and likely politicized regulatory 
structure at the Federal level are not the answer.
    What is needed is a third way--a system that builds on, rather than 
dismantles, the States' inherent strengths to meet the challenges of a 
rapidly changing insurance environment. It must include mechanisms to 
promote the establishment of more uniform and consistent regulations 
and regulatory procedures, but must be poised to respond faster and 
more fully to the reality of electronic distribution and to emerging 
industry trends such as globalization and consolidation. It must 
modernize areas in which existing requirements or procedures are 
outdated, while continuing to impose effective regulatory oversight and 
necessary consumer protections. The result, for all stakeholders, 
should be a more efficient, modernized and workable system of insurance 
regulation.
    For the last year, IIABA has been spearheading a cooperative 
attempt to develop just such a proposal. We have been working with 
other trade associations and directly with an array of national and 
regional insurers in an effort to identify precisely what must be fixed 
and how that might be done without displacing the components of the 
current system that work so well and without creating additional layers 
of government bureaucracy. Through this process, four specific areas 
for reform and the constraints on the mechanisms for that reform have 
been identified, and we have begun assembling a draft proposal for 
accomplishing these reforms. In my remaining testimony, I will outline 
the four components of this draft proposal.

a. Rate and Form Filing and Review/``Speed to Market'' Reform

    As previously discussed, the product regulation requirements in 
most States require insurers to file new rates and forms with the 
insurance commissioner and obtain formal regulatory approval before 
introducing them in the marketplace. Accordingly, an insurer that 
wishes to introduce a new product on a national basis may be forced to 
seek approval in up to 55 different jurisdictions. The process can be 
inefficient, paper intensive, time-consuming, arbitrary and 
inconsistent with the advance of technology and the regulatory reforms 
made in other industries. These cumbersome inefficiencies create 
unnecessary costs and delays, reduce industry responsiveness and drive 
many consumers into alternative market mechanisms. The regulatory 
regime in many States exceeds, in terms of scope and cost, what is 
necessary to protect the public.
    In evaluating potential solutions to these problems, it is 
essential to recognize that uniformity is very difficult to achieve for 
property and casualty lines product regulation. Due to geography and 
other factors, some States must take into account issues that other 
States need not address. In addition, States may subject rates and 
forms to different levels of regulatory scrutiny, and personal lines 
and commercial lines products might also be treated differently.
    Consumer protection concerns also limit the range of potential 
options to some extent. The concern is that the quicker and easier it 
is to have a new product or rate approved, the less protection 
consumers will receive. The solution thus must strike a balance between 
timely and quality reviews and appropriate consumer protections. In 
addition, ``race to the bottom'' and ``turf'' concerns have to be taken 
into account. Particularly under a scheme that employs a single point 
of review, States that use more stringent rate and form processes will 
be hesitant to accept the introduction of products or policies approved 
under more lenient guidelines. We believe it is possible, however, to 
strike an appropriate balance between realizing meaningful speed-to-
market reform and protecting consumer interests.
    Based on these objectives and considerations, the IIABA proposal is 
designed to do three things: (1) make the system more market-oriented; 
(2) make the system faster; and (3) create greater accountability. On 
the form approval side of the equation, this would be accomplished by 
preempting any state law that requires more than allowing all proposed 
forms (both commercial and personal lines) to be used no later than 30 
days after they have been filed with the insurance commissioner unless 
the rate or form is disapproved within that time period. Under such a 
system, an insurer must at most file a proposed form with the insurance 
department 30 days in advance of the proposed effective date, and the 
form must be used at that time unless affirmatively disapproved by the 
regulator. If a department affirmatively approves the filing at any 
time within the 30-day period, the insurer may use the form 
immediately. Under the proposal, regulators would be entitled to a 
single 15-day extension of this disapproval period if an approval 
application is incomplete, and more permissive state filing/approval 
requirements would not be affected.
    Under this approach, the current requirement that filings be done 
in every state in which the product will be offered would not be 
disrupted and current state form requirements would not be preempted 
(except as discussed below). In both the personal and commercial lines 
context, any disapproval must be articulated in writing and be based 
substantively on a properly promulgated statute, regulation or final 
court order. Many regulators have historically disapproved policy forms 
based on unpublished and unsubstantiated ``desk drawer rules,'' but 
such actions would be impermissible under our approach. As noted 
previsously, more permissive form filing and approval requirements 
would not be displaced by the Federal rules.
    Under our draft proposal, rate approval is treated much differently 
than form approval because the competitive market generally is the most 
efficient and effective regulator for rates. At the same time, in 
markets that are not sufficiently competitive, regulators need to 
retain the ability to monitor rates and to intervene to disapprove 
rates when necessary. Accordingly, under the draft proposal, any 
regulatory review requirement for rates in competitive markets that 
requires more than the filing of the rates with the insurance 
department would be preempted. States, however, will remain empowered 
to approve or disapprove rates in ``non-competitive'' markets if an 
affirmative finding has been made determining that the market is ``non-
competitive.'' That determination would be subject to Federal court 
scrutiny under the proposal.

b. Producer Licensing

    Insurance agents and brokers must be licensed in every state in 
which they conduct business, and many producers face considerable 
hurdles in complying with inconsistent, duplicative and unnecessary 
licensing requirements when they operate on a multi-state basis. 
Although state licensing reforms adopted over the last two years offer 
great promise, additional improvements and refinements are necessary. 
The core proposal that we are developing to address this problem is to 
mandate licensing reciprocity in all states and thus achieve meaningful 
licensing reform that is national in scope. This could be accomplished 
by prohibiting a state in which an agent or broker is seeking to be 
licensed on a non-resident basis from imposing any licensure 
requirement on that person other than submission of proof of licensure 
in their home state and the requisite fee. Under a reciprocal licensing 
system that is national in scope, any individual agent or broker would 
only be confronted by a single set of licensing requirements.
    The largest potential impediment to such a proposal is the concern 
by some that it could create incentives for certain States to establish 
lenient requirements with the hope that producers might flock there for 
resident licenses. Such a ``race to the bottom'' would be detrimental 
to the goal of fair, responsible regulation. To address the concern, 
the draft proposal would empower the NAIC to establish minimum 
standards for licensure. Only agents or brokers licensed as a resident 
in states that satisfy these minimum standards would be able to benefit 
from the preemption of state licensing authority over non-resident 
agents. If an agent or broker resides in a state that does not adopt 
the minimum-licensing standards, the proposal would explicitly enable 
that producer to apply to a state in which they do business and that 
has adopted such minimum standards to be licensed as a resident. 
Through this mechanism, Congress also could dictate minimum licensing 
standards. Under the draft proposal, for example, the minimum licensing 
standards would be required to include the performance of a criminal 
background check, utilization of standardized licensing cycles and 
application forms and fees in the filing process, imposition of a 
standardized trust account requirement for use in any state that 
requires maintenance of such accounts, and the mandatory availability 
of agency-level licenses.

c. Company Licensing/Transaction Review/Corporate Governance/Insolvency 

        Standards/Financial Audits

    Like insurance agents and brokers, insurers currently must be 
licensed by every state in which they do business. They also must 
satisfy a variety of corporate organization, solvency and governance 
requirements and go through multiple reviews of proposed corporate 
transactions (i.e., change in control, mergers and acquisitions) and 
financial audits. Insurers need a single set of requirements; requisite 
compliance with the rules of multiple states creates delays and adds 
unnecessary costs without adding any tangible consumer benefit. 
Compliance with multiple audit procedures also is needlessly 
inefficient, costly and administratively cumbersome for insurers.
    As in the insurance producer context, in developing potential 
solutions, the possibility of a race to the bottom and regulatory turf 
concerns of state insurance departments must be considered. In 
particular, state insurance departments likely will be hesitant to 
accept licensing, solvency and auditing determinations made by other 
States where the insurer does a significant amount of business in their 
States.
    Regulation in this area also must contemplate the financial risks 
at stake if insurer solvency is not sufficiently regulated and 
companies become financially unsound. Concerns about possible strains 
on the guaranty system and the need for bailouts (such as in the 
savings-and loan-crisis) are never far from the surface when dealing 
with this area of regulation.
    To remove duplicative and inconsistent requirements and examination 
procedures while at the same time maintaining sufficient protection for 
policyholders and the public, the proposal for companies tracks the 
producer licensing proposal by preempting the ability of all States to 
impose any licensing/transaction, review/corporate or governance/
solvency standards or requirements on any non-resident company that is 
licensed by a state that is accredited by the NAIC. An insurer would be 
able to select as its ``home state'' either its state of domicile or 
its state of incorporation. States still would be free to require non-
resident companies to be licensed but only upon proof of home-state 
licensure and the submission of a fee. The draft will clarify that any 
company that satisfies such Federal ``passport'' requirements can offer 
products in a non-resident state even if the state does not try to 
license them through the federally approved process (if the state does 
license in a federally permissible way, an insurer would have to comply 
with the state requirements, however). Hence, although any state could 
impose more stringent requirements on its resident companies, the 
system would remain uniform from the perspective of each individual 
insurer because each insurer would need to comply with only one set of 
substantive requirements.
    To stem a potential ``race to the bottom,'' a company will be 
required to be licensed in an ``accredited'' state in order to use its 
license as a passport to do business in other states and have the 
preemption outlined above apply to its activities in those non-resident 
states. The legislation would empower the NAIC to continue to conduct 
the accreditation process, subject to two new requirements.
    First, additional accreditation requirements would have to be 
incorporated into the NAIC's accreditation requirements, including the 
new producer licensing minimum standards and any company minimum 
licensing, solvency or other standards that Congress chose to 
incorporate.
    Second, the NAIC's accreditation criteria and any determination 
that a state is (or is not) accredited would be subject to review and 
disapproval either by a Federal agency or by a Federal court. Such 
oversight would be limited to reviewing NAIC determinations regarding 
what standards must be satisfied to become accredited and applications 
of those standards to states that have applied for accreditation.
    To ensure that no company would be penalized (and thus unable to 
qualify for the ``passport'' rights) by virtue of the fact that it is 
domiciled in a non-accredited state, the legislation would permit an 
insurer to choose an alternative state of ``residence'' for licensing 
purposes if its state of domicile and its state of incorporation both 
are not accredited. Tentatively, the legislation will allow such an 
insurer to be licensed in the accredited state in which it does the 
most business based on premium volume. This should increase the 
pressure on all states to become accredited.
    The legislation also must account for the possibility that the NAIC 
will refuse to implement the program and/or that the States will decide 
to boycott the process. In either event, the legislation will 
incorporate the back-up provisions included in NARAB. Hence, either if 
the NAIC refuses to implement the accreditation procedures as required 
under the Act or if a majority of States do not become accredited 
within a specified number of years, an independent body would be 
established either to stand in the shoes of the NAIC in conducting the 
accreditation process or--if States refuse to comply--to act as a 
licensing clearinghouse so that insurers will qualify for the 
licensing/solvency/etc. single set of requirements envisioned under the 
overarching approach. The proposal utilizes a combination of the NARAB 
back-up provisions and the Risk Retention Act non-resident state 
regulatory provisions to create these fall-back sets of provisions. The 
tighter they are designed, the less likely it is that the NAIC and/or 
the States will refuse to comply with the intended NAIC accreditation 
procedures.

d. Market Conduct Examinations

    Insurers are subject to examinations from insurance departments in 
multiple States. Exam procedures are inefficient and requirements are 
duplicative as a result of lack of coordination between States. 
Multiple exams are costly and administratively cumbersome for insurers. 
There often does not appear to be a sound justification for the 
examination and there are no restrictions on most insurance 
department's exercise of their market conduct examination power.
    At the same time, however, it must be noted that market conduct 
directly involves consumer protection issues and, as a result, turf 
concerns and political concerns can be prevalent. Moreover, the focus 
of market conduct examinations is supposed to be on sales practices 
that occur where the customer is located rather than where the company 
resides, undermining the practicality of mandating a home-state 
regulation approach.
    To reduce the administrative costs of compliance by clarifying the 
circumstances under which a regulator of a non-resident insurer may 
conduct examinations, the frequency with which such examinations may be 
conducted, and the review procedures that will apply, the proposal 
would require that, in the non-resident state, examinations may be 
conducted only to review compliance with properly promulgated statutory 
and regulatory requirements, and that no insurer can be deemed to have 
``failed'' such an examination unless it is provided with an 
explanation in writing that sets forth the statutory and/or regulatory 
requirement that allegedly has been violated. The proposal includes a 
provision permitting any claim that a regulator is exceeding the scope 
of his or her authority to be brought in Federal court.
    In an effort to facilitate greater coordination of market conduct 
examinations where appropriate, the proposal includes a provision 
authorizing and encouraging the use of multi-state compacts to 
facilitate market conduct examinations.

Conclusion
    Although IIABA supports the preservation of state regulation of the 
business of insurance, we believe that reforms to the current system 
are necessary and essential. Specifically, 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 Federal legislative action 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 marketplace and to 
achieve the same level of overall reform as the imposition of a Federal 
regulator. The specific ideas outlined above are just a few of the many 
specific solutions that could be adopted under this type of approach. 
Instead of relying on the agenda of a displaced and possibly 
politicized Federal regulator, however, insurance regulation would 
continue to be grounded on a more solid foundation--the century-and-
one-half worth of skills and experience that the States have as 
regulators of the insurance industry. The advantage of this approach is 
that it offers the best of all worlds. It will promote the 
establishment of more uniform standards and streamlined procedures from 
state to state, protect consumers while enhancing marketplace 
responsiveness, and emphasize that the primary goals of insurance 
regulation can best be met by improving, not abandoning, the state-
based system that has been in place for over 150 years.

    The Chairman. Mr. Berrington?

         STATEMENT OF CRAIG A. BERRINGTON, SENIOR VICE

 PRESIDENT AND GENERAL COUNSEL, AMERICAN INSURANCE ASSOCIATION 
                             (AIA)

    Mr. Berrington. Thank you very much, Mr. Chairman.
    My name is Craig Berrington. I'm general counsel of the 
American Insurance Association. AIA represents insurers doing 
business in every state, writing all types of property and 
casualty insurance.
    Two years ago, the AIA board, which has insurers of various 
sizes, small to large, formally decided to support optional 
Federal chartering, while at the same time continuing to 
support efforts to reform state insurance regulation. Our 
members were there at the creation of the state system and have 
worked diligently to reform it. They have concluded, however, 
that while some states--that in some states, sufficient--I'm 
sorry--they have concluded, however, that while useful reforms 
have occurred in some states, sufficient nationwide reform 
through individual state actions is unlikely under the current 
state-centric approach. Therefore, nationwide reform from the 
Federal level is critical.
    I'd like to take a few minutes this morning to provide the 
Committee with some insurance background and to sketch out our 
optional Federal chartering and proposal from a property and 
casualty insurance perspective.
    We generally think about insurance as individual 
transactions, and there has been discussion about that this 
morning--homeowners, auto, business, workers' compensation, 
life--but the broader truth about insurance is that you cannot 
have a democratic free-market society without it. Democracy and 
free markets are all about taking risks, and insurance is all 
about making those risks manageable in our personal and in our 
entrepreneurial lives.
    Insurance is also a critical early warning system for 
society. However, as with other messengers throughout the ages, 
insurers often get blamed for the messages that they bring and 
the truths that those messages tell. But those truths are the 
beginning of coming to grips with a problem and then solving 
it.
    Like banking and securities, insurance is integral to the 
financial services lifeblood of the country, yet its regulated 
very differently. This results in a real dichotomy, a business 
that is so integral to the national interest is controlled so 
overwhelmingly by the most local of regulation.
    How insurance should be regulated and by what level of 
government is an old argument in the United States. We have new 
legislation addressing these issues, but this is not a new 
debate. It goes back at least to 1869, as was pointed out 
earlier, where the Supreme Court held that insurance was 
intrinsically local and Congress could not constitutionally 
regulate it. That, of course, was overturned in 1944 and 
followed by the McCarran Act in 1945.
    So insurers now operate in an environment with 51 different 
state regulatory systems, with 51 different regulatory 
philosophies, with all the obvious costs, complexities, and 
confusion that this causes. In these 51 states, there are 
approximately 350 different regulatory price-control schemes 
for property and casualty insurance, and over 200 different 
regulatory approaches to approving the introduction of new P&C 
products. This cannot be efficient.
    Playing out within the argument about where insurance 
should be regulated is the argument about how it should be 
regulated. As the state system developed, it began to rely 
upon, as its two primary regulatory tools, the imposition of 
government price controls and a presumption against product 
innovation. In choosing this course of regulatory behavior, 
most states wound up enshrining in their laws and regulations 
governmental command-and-control economic theories that have 
been discredited at home and around the world over the past 50 
years. They adopted a system that distorts regulatory goals by 
putting almost all the regulatory eggs in the price and 
product-control basket. By doing so, they created a system that 
discourages innovation and maximum competitive opportunities, 
that denies consumers maximum choice, and that often makes the 
pricing of insurance a political act.
    I should say that the benefits asserted for Prop 103 are 
benefits that I disagree with and we might want to discuss 
later.
    But what kind of change do we want? In short, we want 
insurers to have the option of obtaining a Federal charter. In 
the broadest conceptual sense, the bill would allow insurers to 
choose between state regulation and the Federal charter with a 
single Federal regulator. The bill would focus Federal 
regulation on financial integrity, market conduct, and consumer 
protection, not on government price controls and an ingrained 
hostility to the development of new products. The bill would 
normalize the antitrust legal environmental for federally 
chartered insurers at the same time as it normalizes their 
right to price their products in the marketplace. We are 
willing to give up the McCarran antitrust protection with 
regard to price if we can be free to price our products in the 
market, just like any other business. We think that's a fair 
tradeoff.
    The bill would allow the states to continue to set the 
mandatory standards of their insurance coverage laws, like, 
say, automobile insurance and workers' compensation rules. And 
federally-chartered insurers would have to follow those 
mandates when they did business in the state.
    The bill would generally preempt other state insurance laws 
for federally chartered insurers, but keep them subject to 
state contract and tort law, as well as the state premium tax 
regulation, state residual markets, and state guarantee funds.
    And, finally, it would let any insurer that thought that 
the state system worked better for it to stay in the states. We 
know, Mr. Chairman, that not everyone in the insurance industry 
favors our optional Federal chartering approach. Although 
support for it continues to grow, we know there are a wide 
variety of views in the industry. Many insurers, especially, 
I'm told, some smaller one, favor continuation of the current 
state system, and they should be allowed to continue in it if 
they would like to.
    We also understand, Mr. Chairman, that in the debate over 
change the burden is on us who favor change. But we, the 
advocates of change, are not the only ones who have a burden to 
meet. Those who advocate the status quo have the burden of 
moving beyond rhetoric to reform, and really showing us that 
reform can be done at the state level.
    We believe that the Federal legislation incorporating our 
reform principles is needed to move forward now and to continue 
to work on state reform where we can.
    I'd be happy to take any questions later in this session.
    Thank you very much.
    [The prepared statement of Mr. Berrington follows:]

 Prepared Statement of Craig A. Berrington, Senior Vice President and 
         General Counsel, American Insurance Association (AIA)

    Thank you, Mr. Chairman. My name is Craig A. Berrington, and I am 
Senior Vice President and General Counsel of the American Insurance 
Association (``AIA''). I appreciate the opportunity to testify here 
today on the important issue of insurance regulatory reform. Attached 
to my written statement is an article that appeared in the August 2003 
edition of Best's Review, which further details AIA's position in favor 
of an optional Federal charter.
    AIA is a national trade association representing more than 424 
property and casualty insurers that write insurance in every 
jurisdiction in the United States, with U.S. premiums exceeding $103 
billion in 2001. AIA member companies offer all types of property and 
casualty insurance including personal and commercial automobile 
insurance, commercial property and liability coverage, workers' 
compensation, homeowners' insurance, medical malpractice coverage, and 
product liability insurance.
    For AIA members, insurance regulatory reform is, and will continue 
to be, a key concern. The ability of insurers to bring products to 
market in a timely and cost-effective manner free from government price 
controls, along with uniform regulatory treatment regardless of where 
they are domiciled and where they do business, is critical. Real 
reforms are necessary if insurance is to remain a competitive, vibrant 
industry.
    The state insurance regulatory system for property and casualty 
insurance is premised on government price controls and on the 
imposition of barriers to bringing new products to market. This system 
is replicated 51 times, often in different and inconsistent ways. Even 
within each jurisdiction, there are often differing systems for 
different lines of business, making the process incredibly cumbersome, 
inefficient, and ultimately unresponsive to consumer needs. A limited 
survey of state requirements finds approximately 350 dictating how 
rates are to be filed and reviewed and approximately 200 relating to 
the filing and review of new products. We need a more efficient 
regulatory system than this.
    Recognizing that the long-term best interests of policyholders, 
insurers, and the overall economy are served by an efficient, effective 
regulatory system, AIA examined the ``value chain'' associated with the 
regulation of insurance companies and products and identified 
opportunities--based on both domestic and international regulatory 
models--to remove current regulatory impediments to competition, thus 
creating greater value for all stakeholders. From that discussion and 
analysis of the current regulatory system, several themes emerged.
    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 repressing prices may be politically popular, 
it is ultimately economically unwise as it masks problems and over a 
period of time can lead to a crisis, forcing sizable subsidized 
residual markets and market withdrawals that exacerbate the problem.
    Any system that requires companies to ``beg the government'' in 
order to use their product and to establish a price improperly places 
the government in the middle of marketplace decisions. In contrast, a 
system that relies on marketplace competition and that makes the 
consuming public the central player in the system is well-focused.
    Second, there is inconsistency among state statutory and legal 
requirements and the administration of state systems. The need to meet 
differing regulatory demands in each jurisdiction increases compliance 
costs, discourages innovation, and makes it difficult for insurers to 
service customers doing business in more than one state.
    The current regulatory system is a jumble of individual state 
requirements. State insurance codes provide hundreds of different rate 
and form regulatory requirements for the various lines of insurance. 
Uncodified practices of many state insurance departments, known as 
``desk drawer rules,'' impose additional, often needlessly onerous, 
procedural requirements. One problem that this causes in the 
marketplace is that companies wishing to launch a national product 
cannot do so until both the price and product have been separately 
approved in every state.
    Third, in many states, regulatory rate and form approval delays are 
chronic and increasing. Federally-regulated financial services 
industries 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.
    Our industry stands out as one of the most heavily regulated 
sectors of the U.S. economy. But, it is not just a question of 
regulation. It's 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.

Debate and Solutions: Optional Federal Charter Proposal and Other Ideas
    There are a variety of views within the industry about the most 
appropriate solutions to this regulatory dilemma. Almost all those 
involved in the debate recognize that, on the whole, the current state 
system is under great stress. There is, in addition, we believe, a 
growing consensus--although certainly not unanimity--that the state 
system is not just stressed, it is broken. The only question remaining 
is how best to solve the problem; there are a variety of ideas.
    For AIA and a number of others, the solution is a new regulatory 
paradigm that eliminates government obstacles to getting prices and 
products to market, and thereby providing consumers with choice. 
Members of AIA were there at the creation of the state system. They 
have much invested in this system, which they know well. They have been 
at the forefront of efforts to reform the system and they approve of 
substantive reform efforts of individual state insurance commissioners 
and of the National Association of Insurance Commissioners (``NAIC''). 
However, recognizing systemic barriers to efficiency and competition, 
AIA's Board of Directors decided more than 2 years ago that the kinds 
of reforms necessary to keep the industry vital and to maximize 
consumer benefits were unlikely to be achieved in a state regulatory 
environment. Thus, the AIA Board voted to support the enactment of 
optional Federal chartering legislation, which would allow insurers to 
obtain a Federal charter, but not to displace the state system for 
those who want it.
    One of the benefits of our optional Federal charter proposal is 
that it accommodates those who believe their business is best served by 
local regulation. Other benefits will follow, including consumer 
choice, healthy competition and the ability of regulators to focus a 
national system on meeting core financial tests and on protecting 
consumer interests.
    AIA is not alone in advocating an optional Federal charter 
solution. After our Board determined to advocate for this system, we 
were joined by the American Council of Life Insurers and the American 
Bankers Insurance Association. Further, non-AIA member insurers are 
looking increasingly at Federal solutions as well.

Support for the Optional Federal Charter Solution
    AIA believes that optional Federal chartering will benefit 
consumers and boost the competitiveness of the insurance industry. Our 
proposal is designed to provide options for consumers, to achieve 
systemic efficiency, and to normalize regulation of insurers. While 
some aspects of the insurance industry are local in nature, the 
business is increasingly national and international in its customer 
focus and regulatory needs. The insurance industry is extremely 
diverse. A state-based regulatory approach may be appropriate for 
companies that operate on a single-state or regional basis, but, for 
national and international companies--as well as their customers--the 
current fifty-one-jurisdiction regulatory system is costly and 
inflexible. Reforms such as optional Federal chartering would allow 
companies and customers to choose the regulatory approach that is most 
suitable for their size and scope of operations.

Principles for Optional Federal Chartering
    Keeping this context in mind, our proposal focuses on financial 
integrity, not government rate and form regulation. The proposal 
creates a Federal regulatory system in the Department of the Treasury 
to grant Federal charters to qualified insurers and reinsurers--and to 
their agents--for the purpose of regulating their conduct. The proposal 
is designed to regulate federally chartered insurers, not to create or 
regulate state reparations laws, like the mandatory requirements of 
state automobile or workers' compensation insurance laws. That 
authority over state reparations laws would remain within the state 
legislatures. The proposal otherwise preempts most state insurance 
regulatory laws for those insurers that obtain a Federal charter.
    The proposal substantially normalizes the Federal antitrust 
environment for federally chartered insurers, and allows any insurer, 
reinsurer, or insurance producer that wants to stay in the state 
regulatory system to do so without any obligation to the Federal system 
whatsoever. In sum, the optional Federal charter proposal fosters 
freedom of choice for insurers and their customers.
    More specifically, in terms of scope, the proposal would apply to 
all lines of property and casualty and life insurance. Insurers and 
holding companies would have essentially unrestricted options with 
regard to use of the Federal chartering system. For example, a holding 
company could decide to have all of its insurance affiliates federally 
chartered, just some, or none. For mergers and acquisitions, states 
would have a role only if one or more of the insurers were state-
licensed.
    The Federal regulatory system would be organized around a new 
Treasury Department agency. The commissioner of the new agency would 
serve a five-year term, and would be appointed by the President with 
the advice and consent of the Senate. The new Federal agency would be 
funded by the federally chartered insurers, not by the public. It would 
have no rate regulation authority, but would have access to policy 
forms, which federally chartered insurers would be required to make 
available for inspection. Chartered insurers would also be required to 
file an annual list of their standard policy forms with the Federal 
agency.
    The role of the new Federal office would be to make concrete and to 
enforce the statutory standards for obtaining and retaining a Federal 
charter through regulation. The office would also have full financial 
and market conduct regulatory and examination authority, including the 
authority to establish prohibitions on unfair trade and claims 
practices. An insurer could lose its Federal charter for any knowing 
significant violation, and could also be fined or required to pay 
restitution. Except for non-preempted areas such as mandatory state 
residual market participation, a state insurance regulator could not 
bring a regulatory action against a federally chartered insurer, but 
could file a complaint with the Federal agency. The proposal also 
includes a rehabilitation and liquidation process, incorporating the 
NAIC model, and authorizes insurers to establish self-regulatory 
organizations subject to Federal oversight.
    In terms of the interplay between Federal and state law, there are 
three critical areas--state law preemption, antitrust, and state tort 
and contract law--affected by the proposal. First, all state insurance 
laws and regulations would be preempted by the proposal unless 
specifically preserved. Examples of preempted areas of regulation 
include licenses; solvency and financial condition; mergers and 
acquisitions; rates and forms; marketing; underwriting; claims; so-
called ``take-all-comers'' laws; and policy non-renewal or cancellation 
limitations. Major areas of state regulation that are expressly not 
preempted by the proposal include mandatory residual markets; premium 
tax laws; state guaranty funds; general corporate governance laws; 
mandatory coverage provisions of state reparations laws; workers' 
compensation administrative mechanisms; and mandatory statistical or 
advisory organizations. Even for areas of state regulation that remain 
in effect, states cannot use those to discriminate against federally 
chartered insurers or their affiliates. The new Federal agency can 
block any state laws that it finds discriminatory. In addition, it can 
block any other state law that is inconsistent with the optional 
Federal chartering proposal.
    Second, with regard to the antitrust interplay, the proposal 
substantially normalizes the application of the antitrust laws to 
federally chartered insurers as the quid pro quo for a marketplace-
oriented regulatory system. As a result, there is generally no 
McCarran-Ferguson Act protection from the Federal antitrust laws, 
except for state-mandated activities. In practical terms, this means 
that collective ratemaking activities are subject to antitrust 
scrutiny, but that specific antitrust protection remains for policy 
forms development as the tradeoff for regulatory authority.
    Third, with respect to state tort and contract law, federally 
chartered insurers are still subject to state court tort and contract 
suits, as well as to state ``bad faith'' insurance regulation laws.

NAIC Role and Limitations in Regulatory Modernization
    AIA has been actively engaged in advancing the elimination of 
government rate and form controls on a state-by-state basis for a 
number of years. AIA applauds the spirit of NAIC efforts and we will 
continue to work with the NAIC to produce needed regulatory reform in 
the states. AIA, as well as some other trades and insurers, fully 
supports continued efforts to modernize and improve the state 
regulatory system. But, we urge Congress to move forward with the 
creation of an optional Federal charter because ultimately it is 
impossible for the NAIC to deliver uniformity or complete systemic 
reforms at the state level.
    Efforts at regulatory uniformity have consistently failed, because 
many states have refused to sign on to a united effort and there is no 
guarantee that any uniform standards would actually import the correct 
standard. What is left, at best, is a dysfunctional uniformity, such 
as:

   Privacy: In response to the Gramm-Leach-Bliley Act's 
        (``GLBA'') privacy standards, the NAIC unanimously adopted its 
        model ``Privacy of Consumer Financial and Health Information 
        Regulation'' in September 2000. While AIA supported the 
        adoption of that model, there has been little uniformity even 
        where states purportedly base privacy laws and regulations on 
        the model. States have enacted and promulgated privacy laws and 
        regulations that depart in numerous ways from both GLBA and the 
        NAIC model. This created a costly patchwork of privacy 
        obligations. Compounding the problem is a 20-year old NAIC 
        insurance privacy model that remains the law in sixteen states 
        and differs in scope and form from the more recent model.

   Producer Licensing: A year ago, the NAIC was supposed to 
        certify that it had met the conditions of GLBA's registered 
        agent and broker 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 non-resident 
        license is granted.

   Interstate Compact Attempts: The NAIC has created model 
        interstate compacts, though only for life insurance and not for 
        property and casualty insurance. Since then, one state adopted 
        a version different from the NAIC model, two large states 
        publicly opposed the model, and three other large states began 
        working on their own model.

    More than three years ago, the NAIC unveiled a ``new'' 
modernization effort designed to improve state insurance regulation, in 
its ``Statement of Intent.'' It declared that state insurance 
regulators must modernize insurance regulation to meet the realities of 
an increasingly dynamic, and internationally competitive, insurance 
marketplace. Even then, such pronouncements were not new--state 
insurance commissioners have been talking about uniform efforts since 
1871.
    Last month, the NAIC issued a renewed commitment to its 
``Regulatory Modernization Action Plan.'' This plan abandons previous 
efforts for substantive changes in the regulatory framework. For the 
most part, the NAIC plan focuses on incremental efficiencies that make 
no major systemic changes in today's outmoded regulatory framework. The 
plan does not even reinforce the NAIC's own ``Speed to Market'' 
recommendations that the NAIC adopted in 2000.
    Consumers would benefit from a free market, without today's 
antiquated product and price controls. But the NAIC's latest plan not 
only fails to eliminate this discredited system, it retreats from 
previous and stronger recommendations in this area. To stimulate 
healthy regulatory competition in insurance, we must turn to a market-
oriented environment. The NAIC has proven that it cannot force states 
to let such an environment flourish, so other, more effective avenues 
must be pursued.

Conclusion
    AIA advocates a market-based approach to insurance regulation that 
does not rely on government review of prices or products, but permits 
competitive forces to respond to consumer demand. The state of the 
current regulatory environment makes comprehensive insurance regulatory 
reform imperative.
    There have been decades of NAIC reports and commissioner promises 
of reform, none of which has ever produced the system-wide reform that 
is needed. The failure to enact systemic reform is not for lack of 
effort, but is a product of 51 different jurisdictions with 51 
different regulatory and political philosophies. Reform must occur at 
the Federal level, and we ask that you consider the optional Federal 
charter as the appropriate vehicle.
    I appreciate the Committee's attention and the opportunity to speak 
today on this important issue. Thank you.

                               Attachment










               STATEMENT OF HON. JOHN E. SUNUNU, 
                U.S. SENATOR FROM NEW HAMPSHIRE

    Senator Sununu [presiding]. Thank you, Mr. Berrington.
    Mr. Heller?

 STATEMENT OF DOUGLAS HELLER, THE FOUNDATION FOR TAXPAYER AND 
                        CONSUMER RIGHTS

    Mr. Heller. Thank you, Mr. Chairman and Senators.
    I'm Douglas Heller, with The Foundation for Taxpayer and 
Consumer Rights.
    As Senator Hollings started today and pointed out, that 
there is a strong regulatory regime in this Nation that 
protects consumers and equally ensures a stable insurance 
market. That system is California's Proposition 103, a voter 
initiative that was passed in 1988. And, indeed, most of its 
provisions are contained in Senator Hollings' admirable 
insurance consumer protection bill, and for that we are 
appreciative.
    In the main, Proposition 103 creates a prior-approval 
system of insurance. It requires insurance companies to justify 
their rates, it allows the insurance commissioner to approve or 
deny or amend and alter insurance rates as they come. It also 
provides the right of the public to inspect the books of 
insurance companies and to challenge those rates in case the 
insurance companies are asking too much or the Commissioner is 
looking for too little.
    In recent weeks--excuse me, in recent months--our 
organization has challenged two such rate increases proposed by 
medical malpractice insurance providers in California. And as a 
result of our challenges, we have saved doctors $35 million, 
protecting them from excessive price hikes. We also saved $26 
million for insurance policyholders for the fourth-largest 
homeowners company when we blocked a rate increase just last 
month using Proposition 103.
    Proposition 103 also ended the antitrust exemption for 
California carriers that we know exists throughout the rest of 
the Nation. And, as Senator Hollings indicated, Proposition 103 
did require rates to go back to adjust for historic gouging. 
And, as a result, there were $1.2 billion in rebates paid to 
California consumers.
    It's been a quantitative success. Auto liability rates are 
down 22 percent since Proposition 103 passed in California. 
They're up 30 percent nationwide.
    But also, and this is very important to note, the insurance 
industry in California has been more profitable than it has 
been in the Nation as a whole. Over the last 10 years, average 
profits in auto, homeowners, farm-owners insurance, medical 
malpractice insurance, has been higher in California than the 
national average.
    And, of course, it's been a qualitative success, because 
we've had a stable market, without the ups and down swings that 
we've seen throughout much of the country.
    But despite the success, we hear time and again the 
insurance wants to deregulate, or when they talk about Federal 
regulation or Federal options, it's just a way to get around 
the more stringent approaches around--in certain states, like 
California.
    But the reason they don't want regulation is not because it 
hasn't been a success, but because it tends to air their dirty 
laundry, things like the economic cycles that impact the 
insurance market. Insurance companies, as we know, make a lot 
of their money through their investment practices. And, as a 
result, they follow the economic cycles of the Nation. And when 
interest rates fall, their investment income declines. When the 
stock market falls and they lose money, they need to--they want 
to raise more money.
    And this, we've seen in a recent study we did of ten major 
insurance companies. The insurance industry is putting more and 
more of their money into higher-risk investments in the 
corporate sector in equity, stock investments, as well as 
corporate bonds. And, as a result, these ten companies that we 
studied lost a quarter of a billion dollars in investments in 
just those five corporate frauds that this Committee and other 
Senate Committees studied in recent years, Enron and WorldCom 
being the main protagonists of those losses.
    So when the insurance companies lose their money, they then 
have to come up with an excuse, and instead of taking 
responsibility for their investment mistakes, the industry 
points to consumers and say, ``Oh, the claims have gone up.'' 
Well, we went back, and we studied 15 years of medical 
malpractice claims loss history, and we see that the insurance 
company, when they project losses initially, are inflating that 
data. Thirty percent higher. When we look, after 10 years of 
accounting revisions by the insurance industry, when they said, 
``We had $10 billion in losses this year,'' 10 years later 
they've revised those numbers down to $7 billion. They inflate 
that data, those loss data, so they can push for rate increases 
so they can tighten up coverage of insurance, and, of course, 
so they can push for changes in tort laws.
    That's the third dirty secret of the insurance industry. 
These changes in tort laws actually don't fulfill the promises 
of rate decreases.
    I can go through, and perhaps, if you're interested later 
on, I could talk about some of the studies we've done to show 
that these tort law changes haven't worked. But I think the 
best way to explain it is to just read to you what the 
insurance industry has said when under the scrutiny of 
regulation. They have been asked about the impact. When we 
challenged the rate increase of SCPIE indemnity, the second 
largest medical malpractice provider in California, this is 
what their assistant vice president and actuary said to the 
regulator, ``While MICRA''--which is California's malpractice 
caps law--``was the legislature's attempt at remedying the 
malpractice crisis in California in 1975, it did not 
substantially reduce the relative risk of medical malpractice 
insurance in California.'' ``Caps do not work,'' is what the 
insurance company told the regulator, because they--because the 
company wanted to raise rates instead.
    And when, in 1987, the Florida regulators asked St. Paul 
and Aetna and other companies to explain what was happening in 
the wake of their tort law changes, St. Paul said that the 
conclusion of their study about their caps, ``will produce 
little or no savings to the tort system as it pertains to 
medical malpractice.''
    Senators, insurance reform is a crucial element of 
improving our economy, because, as Chairman McCain had said 
earlier, insurance is absolutely integral to the economic lives 
and well-being of American consumers and businesses. I doubt 
there's any disagreement on that. The question is, How do we do 
it? Do we do it with regulation, or do we concede to a market 
and to tort law changes and such that have, in the past, not 
produced a savings that we expect and that consumers need?
    I appreciate the time to participate in this hearing and 
will be happy to take any questions.
    [The prepared statement of Mr. Heller follows:]

   Prepared Statement of Douglas Heller, Foundation for Taxpayer and 
                            Consumer Rights

         ``Proposition 103: A Model for Insurance Regulation''

    Mr. Chairman and Members of the Committee:

    Thank you for inviting the Foundation for Taxpayer and Consumer 
Rights (FTCR) to present its views on insurance regulation and engage 
in this important discussion on the state of insurance regulation and 
proposals to improve it.
    FTCR is a nonpartisan, nonprofit organization that conducts 
research, education and advocacy activities on insurance matters and 
other consumer issues, including healthcare and energy. In particular, 
FTCR has done extensive work on issues related to auto, home and 
medical malpractice insurance and has long been an advocate of 
insurance industry regulation. FTCR's founder, Harvey Rosenfield, is 
the author of Proposition 103, the California insurance reform 
initiative that provides the state with the Nation's most stringent 
system of insurance regulation. I am FTCR's senior consumer advocate 
and insurance specialist.
    We would like to thank Chairman McCain for holding this oversight 
hearing and we appreciate the effort of Senator Hollings, who, in 
drafting S. 1373, has provided a model for discussing the strength and 
efficacy of insurance regulation. This proposal reflects many of the 
provisions of California's Proposition 103, which have provided a 
stable and affordable insurance market for the past 15 years in 
California, a stark contrast to the skyrocketing prices and industry 
turmoil that characterizes the property-casualty marketplace in many 
other states.
    While we believe that insurance regulation should remain the 
purview of state regulators, lawmakers and courts, we commend Senator 
Hollings for putting forward a compelling proposal to protect insurance 
consumers across the Nation. Senator Hollings proposal comes at a time 
when insurance companies are pushing to deregulate the insurance 
industry at the state level and by proposing an optional Federal 
charter system with rules that would allow insurers to choose their 
regulator in a manner that will undoubtedly reduce regulatory oversight 
of the insurance industry.
    It is our belief that the most effective way to protect consumers 
and ensure reasonable insurance rates is through the tools of a prior 
approval insurance regulation system. Our research has shown that 
insurance company regulation, when properly implemented, can save 
consumers billions of dollars and maintain profitability within the 
insurance industry, thereby providing customers with the most choice in 
the market. In other words, the regimen of insurance regulation creates 
the environment that is most conducive to marketplace competition while 
also affording consumers necessary protection against insurance company 
profiteering.
    In addressing the questions at hand, FTCR would like to present the 
following thesis:
    Insurance products are such an integral part of the economic life 
of Americans, that ensuring both the affordability and quality of the 
products is crucial to the financial security and well-being of 
American consumers and businesses. Effectively regulating the insurance 
marketplace is the best way to produce reasonable and stable rates for 
consumers and appropriate market conduct by carriers
    Our reports, analyses and experience have confirmed this thesis 
time after time over the 15 years since the enactment of Proposition 
103 in California. To illustrate the success of and need for a strong 
regulatory regime for insurance, we bring together a variety of data 
and analysis in this testimony to make the following points:





    I.                Proposition 103 has saved California consumers
                       billions of dollars through its prior approval
                       regulatory structure, including more than $62
                       million saved for doctors and homeowners in the
                       past two months alone as a result of FTCR's rate
                       challenges.

    II.               Insurance follows an economic cycle inversely
                       related to the Nation's financial markets.
                       Aggressive investing practices have created
                       volatility in insurance rates over the past five
                       years, culminating in the massive price spikes
                       and underwriting restrictions that appeared on
                       the heels of the collapse of Enron, Worldcom and
                       declining interest rates.

    III.              The antitrust exemptions provided to insurers are
                       anti-competitive and allow companies to set
                       prices collusively rather than compete on the
                       insurers' actual abilities to assess and carry
                       risks.

    IV.               Insurance companies project higher losses in order
                       to push for higher rates and imply a crisis, and
                       then quietly change their data in the years to
                       come.

    V.                Tort limitations imposed during previous crisess
                       have had no demonstrable effect on insurance
                       rates.


Proposition 103 Regulation Saves Consumers Billions of Dollars
    In 1988, California voters, facing skyrocketing insurance premiums 
and angry at the failure of tort reform to deliver its promised 
savings, went to the ballot box and passed Proposition 103, the 
Nation's most stringent reform of the insurance industry's rates and 
practices--applicable to all lines of property-casualty insurance, 
including auto, homeowners, commercial and medical-malpractice.
    Proposition 103:

   Mandated an immediate rollback of rates of at least 20 
        percent--rate relief to offset excessive rate increases by 
        establishing a baseline for measuring appropriate rates.

   Froze rates for one year. Ultimately, because of the delay 
        caused by insurance company legal challenges to Proposition 
        103, rates remained frozen for four years pursuant to decisions 
        by the state's insurance commissioner.

   Created a stringent disclosure and ``prior approval'' system 
        of insurance regulation, which requires insurance companies to 
        submit applications for rate changes to the California 
        Department of Insurance for review before they are approved. 
        Proposition 103 gives the California Insurance Commissioner the 
        authority to place limits on an insurance company's profits, 
        expenses and projections of future losses (a critical area of 
        abuse).

   Authorized consumers to challenge insurance companies' rates 
        and practices in court or before the Department of Insurance.

   Repealed anti-competitive laws in order to stimulate 
        competition and establish a free market for insurance. 
        Proposition 103 repealed the industry's exemption from state 
        antitrust laws, and prohibited anti-competitive insurance 
        industry ``rating organizations'' from sharing price and 
        marketing data among companies, and from projecting 
        ``advisory,'' or future, rates, generic expenses and profits. 
        It repealed the law that prohibited insurance agents/brokers 
        from cutting their own commissions in order to give premium 
        discounts to consumers. It permits banks and other financial 
        institutions to offer insurance policies. And it authorizes 
        individuals, clubs and other associations to unite to negotiate 
        lower cost group insurance policies.

   Promoted full democratic accountability to the public in the 
        implementation of the initiative by making the Insurance 
        Commissioner an elected position.

    A copy of the text of Proposition 103 are submitted as Appendix A.
    Insurers spent $80 million in their unsuccessful effort to defeat 
Proposition 103, including the cost of sponsoring three competing 
ballot measures that would have enacted ``tort reform.'' Having seen 
how ``tort reform'' laws passed at the behest of the insurance industry 
in 1975 and 1986 had had no effect on premiums, the voters rejected 
each of the industry's 1988 measures.
    Proposition 103 worked. Insurance companies refunded over $1.2 
billion to policyholders, including motorists, homeowners and doctors. 
In the closely studied area of auto insurance, California was the only 
state in the Nation in which auto insurance liability premiums actually 
dropped between 1989 and 2001, according to NAIC data. A 2001 study by 
the Consumer Federation of America concluded that the prior approval 
provision of Proposition 103 blocked over $23 billion in rate increases 
for auto insurance alone through 2000.
    Despite the clear success of Proposition 103, the insurance 
industry continues to resist regulatory oversight and, instead pushes 
for less accountability and less intervention. The industry typically 
criticizes insurance regulation as slowing down the process of 
adjusting rates and introducing products that companies want to provide 
to consumers. Insurers argue for ``speed to market'' rules that would 
set a national standard of scrutiny; not surprisingly, that standard is 
far weaker than the regulatory strictures of Proposition 103 and the 
prior approval method of insurance ratemaking.
    This professed goal of efficiency must be weighed next to the need 
to protect against high rates and low-quality products. Just as new 
drugs must be put through a battery of tests to ensure safety prior to 
being placed on the market, insurance products need to be fully vetted 
before they are sold to consumers. The prior approval structure of 
California's Proposition 103 gives the insurance commissioner and the 
public the ability to ensure that consumers have access to insurance 
products that provide high quality coverage and are not priced to gouge 
consumers.

A. Prior Approval and Consumer Participation Allow the Public to 
        Scrutinize 
        Insurers' Books, Hold Firms Accountable
    The chief tool necessary to effectively regulate insurance 
companies is the right of government to approve, deny or alter 
insurance rates before companies can change consumers' rates. Of 
course, the quality of the regulator determines, at least in part, the 
efficacy of the regulation. As a safety valve against an understaffed 
or unwilling regulator, Proposition 103 provides the public with the 
opportunity to analyze and challenge rates and industry practices in 
the courts as well as before the agency in order to offer a competitive 
perspective on rate changes proposed by insurers. This tool of 
participation also serves as a way to hold the insurance commissioner 
accountable to the regulatory structure, by allowing the public to 
challenge rate hikes or practices that the Commissioner might have 
otherwise approved.
    Proposition 103's prior approval system establishes a set of 
boundaries for insurance companies to use in setting rates for 
consumers. The formula includes limits on, or guidelines for 
administrative expenses, profits, the methods of projecting future 
losses and other aspects of developing a rate. Effective insurance 
regulation prohibits insurers from engaging in bookkeeping practices 
that inflate their claims losses and limits the amount insurers can set 
aside as surplus and reserves. It also forbids insurers from passing 
through to consumers the costs of the industry's lobbying, political 
contributions, institutional advertising, unsuccessful defense of 
discrimination cases, bad faith damage awards, and fines or penalties.
    A prior approval system places the burden on the insurance company 
to justify its rates in advance, rather than on the consumer or 
regulator to find inappropriate rates after the fact and only then 
begin the process of scrutiny. It is our belief that pre-emptive 
regulation is far more efficient and fair than the alternatives.
    A series of recent examples of the power of the prior approval 
system and the tangible benefit of consumer participation in California 
follow:

   On August 22, 2003, California Insurance Commissioner John 
        Garamendi ordered the state's second largest medical 
        malpractice insurer, SCPIE Indemnity, and its affiliate 
        American Healthcare Indemnity, to cut it's proposed rate hike 
        for physicians by 36 percent, in response to a rate challenge 
        brought by FTCR. As part of the challenge, FTCR actuaries and 
        insurance experts opened SCPIE's books to review the company's 
        financial data and actuarial projections. FTCR also interviewed 
        the firm's actuaries, economists and consultants in order to 
        demonstrate that the insurer's proposed 15.6 percent rate 
        increase was excessive.

    Instead of the company's proposed 15.6 percent increase that was 
        originally set to go into effect on January 1, 2003, the 
        Commissioner only allowed SCPIE and its affiliate to increase 
        premiums by 9.9 percent beginning on October 1, 2003. The net 
        impact is a $16 million savings for the insurer's 9,000 
        physicians in 2003 and an additional $7.2 million of savings in 
        2004 premiums. (SCPIE has applied for an additional 2004 
        increase that FTCR will likely challenge.)

    According to the decision issued by the commissioner, SCPIE tried 
        to justify its rate hike by claiming that it should not be 
        subject to a strict application of rate regulations and that it 
        did not have the burden of proving its rates were reasonable, 
        despite California's clear regulatory requirements. The 
        Commissioner rejected that argument and, to ensure regulatory 
        compliance by SCPIE and other insurers, officially designated 
        portions of his ruling as legal precedent.

   FTCR challenged a recent 9.9 percent increase proposal by 
        the state's largest medical malpractice provider, NORCAL 
        Mutual. The ensuing scrutiny by California Department of 
        Insurance regulators, led the company to slash its rate request 
        by 70 percent, resulting in a $11.6 million savings to NORCAL-
        insured doctors.

   Using the consumer participation tools of Proposition 103, 
        FTCR recently blocked a 10 percent rate hike for homeowner's 
        insurance policyholders with the Northern California Auto Club, 
        the state's fourth largest homeowner's insurance provider. This 
        resulted in a $26 million savings for the company's 330,000 
        policyholders.

   In 1998, FTCR challenged a rate decrease proposal by auto 
        insurer Allstate. The Commissioner allowed the company to 
        reduce rates, but FTCR's analysis indicated that rates should 
        have dropped further. In response to our challenge, Allstate 
        agreed to reduce its auto insurance premium by $43 million in 
        addition to the reductions associated with its initial rate 
        decrease proposal.

    To ensure that the public is able to effectively intervene and 
challenge inappropriate insurance rates and practices, Proposition 103 
requires insurers to reimburse consumers or consumer representatives 
when the group contributes to a decision rendered by the Insurance 
Commissioner with respect to rates. Pursuant to Proposition 103, 
consumer groups are also provided funding for participation in all 
aspects of insurance regulation. This has allowed groups acting on 
behalf of consumers a reasonable opportunity to enforce the rules set 
forth in Proposition 103.

B. Auto Insurance: Regulation Protects Consumers From a National Trend
    In the years since the implementation of Proposition 103, auto 
insurance rates in California have defied the national upward trend. 
The following tables summarize insurance industry data drawn from 
annual reports published by the National Association of Insurance 
Commissioners.\1\ We provide an analysis of data for the years 1989-
2001, encompassing the entire period following the implementation of 
Proposition 103 for which data is available.
---------------------------------------------------------------------------
    \1\ State Average Expenditures & Premiums for Personal Automobile 
Insurance 1993-2001, National Association of Insurance Commissioners
---------------------------------------------------------------------------
    The average auto liability premium dropped 22 percent in California 
between 1989 and 2001. Prior to Proposition 103, auto insurance 
premiums in California rose dramatically each year. Pre-election rate 
increases by insurance companies in anticipation of Proposition 103's 
passage, and post-election rate increases taken while Proposition 103 
was stayed pending California Supreme Court review, pushed the average 
liability premium in California to $519.39 by 1989.
    According to the latest NAIC data, California's average auto 
liability insurance premium for 2001 was $404.48--22 percent less than 
the 1989 figure. The average premium decrease in California becomes 
even more striking when adjusted for inflation.\2\ The average premium 
in 1989, in 2001 dollars, was $741.81. In comparison, the average 
California auto liability premium in 2001 was 45 percent lower.
---------------------------------------------------------------------------
    \2\ The Bureau of Labor Statistics Inflation Calculator can be 
accessed at http://data.bls.gov/cgi-bin/cpicalc.pl.

                               Comparison of Average Liability Premiums, 1989-2000
----------------------------------------------------------------------------------------------------------------
                Year                           California  Premium           California  Premium  (2001 dollars)
----------------------------------------------------------------------------------------------------------------
                         1989                               $519.39                               $741.81
                         1990                               $501.34                               $679.32
                         1991                               $522.95                               $679.99
                         1992                               $510.71                               $644.67
                         1993                               $512.52                               $628.15
                         1994                               $502.76                               $600.80
                         1995                               $514.53                               $597.92
                         1996                               $508.71                               $574.20
                         1997                               $492.31                               $543.23
                         1998                               $447.51                               $486.22
                         1999                               $405.85                               $431.43
                         2000                               $391.24                               $402.37
                         2001                               $404.48                               $404.48
----------------------------------------------------------------------------------------------------------------

    While auto premiums in California fell 22 percent, premiums 
throughout the rest of the Nation rose 30.2 percent. Another measure of 
the impact of Proposition 103 is a comparison with average liability 
premiums in other states. While liability premiums for the rest of the 
country grew 30.2 percent since 1989, California's dropped 22 percent. 
Tables 2 and 3 below compare California's average premium to the rest 
of the Nation's average.

                               Comparison of Average Liability Premiums, 1989-2000
                          Calculation is liability premiums/liability written car-years
----------------------------------------------------------------------------------------------------------------
                Year                               California                        Rest of  Nation \3\
----------------------------------------------------------------------------------------------------------------
                         1989                               $519.39                               $317.32
                         1990                               $501.34                               $338.55
                         1991                               $522.95                               $358.82
                         1992                               $510.71                               $381.69
                         1993                               $512.52                               $400.80
                         1994                               $502.76                               $411.40
                         1995                               $514.53                               $419.45
                         1996                               $508.71                               $431.45
                         1997                               $492.31                               $434.17
                         1998                               $447.51                               $423.39
                         1999                               $405.85                               $402.60
                         2000                               $391.24                               $398.44
                         2001                               $404.48                               $413.13
----------------------------------------------------------------------------------------------------------------


                      Comparison of Growth/Decline in Average Liability Premiums, 1989-2000
----------------------------------------------------------------------------------------------------------------
               Period                          California % Change                 Rest of Nation % Change
----------------------------------------------------------------------------------------------------------------
                         1989-90                                 -3.5%                                  6.7%
                         1990-91                                  4.3%                                  6.0%
                         1991-92                                 -2.3%                                  6.4%
                         1992-93                                  0.4%                                  5.0%
                         1993-94                                 -1.9%                                  2.6%
                         1994-95                                  2.3%                                  2.0%
                         1995-96                                 -1.1%                                  2.9%
                         1996-97                                 -3.2%                                  0.6%
                         1997-98                                 -9.1%                                 -2.5%
                         1998-99                                 -9.3%                                 -4.9%
                       1999-2000                                 -3.6%                                 -1.0%
                       2000-2001                                  3.3%                                  3.7%
----------------------------------------------------------------------------------------------------------------
                       1989-2001                                -22.1%                                 30.2%
----------------------------------------------------------------------------------------------------------------

    This sharp drop in California's average premium relative to that of 
other states brought California's rank down from the 2nd highest rates 
in the Nation in 1989 to 22nd in 2001.
---------------------------------------------------------------------------
    \3\ In this table and in subsequent tables, ``Rest of Nation'' data 
do not include California data.
---------------------------------------------------------------------------
     Comparison of Growth in Average Liability Premiums, 1989-2000 
                    Comparison of Premiums 1989-2001



    California's overall post-Proposition 103 premium decline defies 
national trend toward higher rates. In addition to lowering auto 
liability premiums, Proposition 103 has slowed premium growth for other 
types of automobile coverage at the same time that the rest of the 
Nation saw its premiums increase drastically. California's 
comprehensive premiums have fallen 10 percent while comprehensive 
premiums for the rest of the Nation have shot up by 40 percent. 
Collision premiums in California have gone up 20 percent, in contrast 
to the rest of the country's 40 percent.

 Comparison of Average Combined Collision and Comprehensive Premiums, 
                               1989-2001



    Combined liability, collision and comprehensive premiums are down 
9.2 percent for Californians, up 35 percent nationally since 
Proposition 103. In 1989 Californians paid $875.60 for liability, 
collision and comprehensive combined coverage on average. Nationwide 
consumers paid $606.40 for the combined coverage. However, with 
Proposition 103 in effect, California drivers' fortunes have changed, 
as combined average premium in California 2001 was $795.36, a 9.2 
percent decline while nationally, motorists paid $817.87, a 34.9 
percent increase

C. Insurance Regulation Has Allowed California To Be A More Profitable 
        Market For Insurance Companies Than The National Average, While 
        Keeping Rates Low
    Despite the insurance industry's automatic negative reaction to 
insurance regulation, California under the strict regulation of 
Proposition 103 has been a more profitable environment for insurers 
than the Nation as a whole. According to the most recent data available 
from the National Association of Insurance Commissioners, in the 
majority of lines of insurance returns are better in California than 
countrywide.\4\
---------------------------------------------------------------------------
    \4\ Profitability by Line by State In 2001, National Association of 
Insurance Commissioners, December 2002.
---------------------------------------------------------------------------
    Whether one compares return on net worth or profit on insurance 
transactions (both are measures of profitability used by NAIC), the 
findings consistently show that California is generally more profitable 
for insurers than the Nation as a whole.

  Table 7. Insurer Profitability in California vs. Countrywide Average
------------------------------------------------------------------------
           Return on Net Worth               10 Year Average 1992-2001
------------------------------------------------------------------------
            Line of insurance               California      Countrywide
------------------------------------------------------------------------
Private Passenger Auto (Total)                     13.7%            9.8%
------------------------------------------------------------------------
Homeowners Multiple Peril                           5.7%          (3.4%)
------------------------------------------------------------------------
Commercial Auto (Total)                            10.0%            7.2%
------------------------------------------------------------------------
Farmowners Multiple Peril                           7.3%            0.9%
------------------------------------------------------------------------
Medical Malpractice                                12.5%            9.6%
------------------------------------------------------------------------

    Notably, workers compensation has not been as profitable in 
California as that line has been nationally. Workers compensation 
insurance, however, was deregulated in California in 1993 and is in 
crisis currently.
    California has been a profitable marketplace for insurers 
specifically because of the regulatory regime. Regulation serves to 
restrain the companies from damaging themselves as well as hurting 
consumers. Insurance regulation is not meant to produce the lowest 
premiums, it is meant to produce the most appropriate premiums for the 
risk insured; insurance regulation guards against both excessive and 
inadequate, as well as unfairly discriminatory rates. As a result, 
regulated lines of insurance result in more stable rates for customers, 
even if they are not the lowest prices at certain points in time.
    The stable profitability associated with regulatory controls 
creates an environment in which insurers want to sell in the state. 
That is why there are so many insurers serving California customers. 
There are over 200 companies selling auto insurance in California, 150 
selling homeowners and almost 50 selling medical malpractice insurance.

II. The Insurance Cycle and the Impact of Enron, WorldCom and Low 
        Interest Rates
    Over the last three decades-plus, the Nation has experienced three 
major insurance crises, in the mid-1970s, the mid-1980s and the early 
2000s. Each of these crises swept the Nation with massive rate 
increases, insurers pulling or threatening to pull out of local markets 
and a legislative push for changes to tort laws. Each of these crises 
also occurred at the same time as a national downturn in the economy 
that dramatically reduced insurance company investment returns.

A. The Insurance Cycle
    The present insurance ``crisis''--apparent in homeowners, auto, 
commercial liability as well as medical and other malpractice lines--
constitutes the apogee of a financial cycle to which the insurance 
industry is constantly subject. As one consumer organization explains:

        Insurers make most of their profits from investment income. 
        During years of high interest rates and/or excellent insurer 
        profits, insurance companies engage in fierce competition for 
        premium dollars to invest for maximum return. Insurers severely 
        underprice their policies and insure very poor risks just to 
        get premium dollars to invest. This is known as the ``soft'' 
        insurance market. But when investment income decreases--because 
        interest rates drop or the stock market plummets or the 
        cumulative price cuts make profits become unbearably low--the 
        industry responds by sharply increasing premiums and reducing 
        coverage, creating a ``hard'' insurance market usually 
        degenerating into a ``liability insurance crisis.'' A hard 
        insurance market happened in the mid-1970s, precipitating rate 
        hikes and coverage cutbacks, particularly with medical 
        malpractice insurance and product liability insurance. A more 
        severe crisis took place in the mid-1980s, when most liability 
        insurance was impacted. Again, in 2002, the country is 
        experiencing a ``hard market,'' this time impacting property as 
        well as liability coverages with some lines of insurance seeing 
        rates going up 100 percent or more.\5\
---------------------------------------------------------------------------
    \5\ ``Medical Malpractice Insurance: Stable Losses/Unstable 
Rates,'' Americans for Insurance Reform, October 10, 2002.

    Fitch, a Wall Street rating firm, recently began a discussion of 
---------------------------------------------------------------------------
the current ``crisis'' by harkening back to the last one:

        We need to look back at the hard market of the mid-1980s. . . . 
        The last major hard market turn was in the mid-1980s, and was 
        inspired greatly by a sharp drop in interest rates. In years 
        prior to the mid-1980s, cashflow underwriting was prevalent in 
        which a significant amount of naive capital was attracted to 
        the property/casualty industry on the lure of making strong 
        investment returns on the premium ``float'' between the time 
        premiums were collected and claims were paid. Naturally, much 
        of the naive capacity was directed at long-tail casualty and 
        liability lines at both the primary and reinsurance levels in 
        order to maximize the float. In the early 1980s, nominal 
        interest rates were running in the mid-teens. When interest 
        rates dropped off and significant reserve deficiencies were 
        simultaneously detected, many insurers suffered large losses to 
        both earnings and capital. The result was a sharp turn in the 
        market, especially in long-tail lines, and the emergence of a 
        so-called ``liability insurance crisis.'' The liability 
        insurance crisis included a sharp drop in availability of 
        coverages, and huge price increases (in many cases several-
        fold).\6\
---------------------------------------------------------------------------
    \6\ Fitch Ratings, Inc., Insurance Special Report Review & Outlook: 
2001/2002: U.S. Property/Casualty Insurance, January 17, 2002, p. 19-
20.

    Indeed, by early 2002, insurers had already begun licking their 
chops as they looked forward to an infusion of profits from the latest 
``crisis.'' In its ``Groundhog Forecast 2002,'' the Insurance 
Information Institute projected a 14.7 percent increase in premiums, 
the industry's ``fastest pace since 1986''--the last crisis.\7\ The 
Auto Insurance Report proclaimed, ``The Stars Are Lining Up for Solid 
Profits in 2002-2003.'' \8\ ``How Much longer to P-C Nirvana?'' asked 
the National Underwriter, saying, ``Like kids on a long car trip headed 
for summer vacation, many insurance company employees and the agents 
that represent them have found themselves wondering just how much 
longer this trip to property-casualty nirvana can last.'' \9\ Said an 
industry executive: ``This manic behavior leads our customers to 
believe we don't know what we're doing, and I think they have a point. 
This is a generation of insurance professionals who need to learn how 
to be successful with something other than low premiums.'' \10\
---------------------------------------------------------------------------
    \7\ www.iii.org/media/industry/financials/groundhog2002/ visited 
11/21/02.
    \8\ Auto Insurance Report, May 13, 2002, p. 1.
    \9\ National Underwriter, July 22, 2001, p. 26.
    \10\ ``Liability Insurers Urged to Take Long View for Industry's 
Financial Health,'' Orlando Business Journal, November 26, 2002 at 
http://orlando.bizjournals.com/orlando/stories/2002/11/25/
daily25.html?t=printable.
---------------------------------------------------------------------------
B. Interest Rates and the Cycle
    The current push for higher insurance rates is driven in part by 
the historically low interest rates. There is an inverse relationship 
between interest rates and insurance rates and, as the graph below 
illustrates, when interest rates go down a crisis ensues and, 
inevitably, rates increase.
               When Interest Rates Fall, A Crisis Ensues



    Over the past three decades, there has been an insurance crisis and 
a concurrent spike in insurance premiums each time the Nation has 
experienced a major decline in interest rates. The notable exception to 
this is when interest rates dipped in 1992. Still reeling from 
California's adoption of Proposition 103 after the 1980s crisis, the 
insurance industry aborted another run-up in prices in 1992 and 1993 
despite the declining economy and interest rates. As one insurance 
executive explained, ``The last soft market was driven purely by the 
need for cash to invest. . . . We all know we can't do the dumb things 
we did last time. . . . We will not see a repeat of 1985-86.'' \11\ 
Arguing against a push to raise rates, a senior officer at the 
Insurance Services Office, an industry data provider, said: ``Remember 
the fallout from the last recovery: California's Proposition 103 and 
other price-suppression laws, threats to the industry on the antitrust 
front, and virulent consumer hostility.'' \12\
---------------------------------------------------------------------------
    \11\ Business Insurance, July 13, 1992, p. 55
    \12\ Insurance Week, Oct. 19, 1992, p.15
---------------------------------------------------------------------------
    Despite its apparent awakening after the passage of Proposition 
103, the insurance industry has fallen into its old ways in recent 
years, as the most recent insurance-cycle crisis and the ensuing rate 
increases have been particularly aggressive.
    In this crisis as with previous crises, insurers have made it 
difficult for consumers to obtain and maintain coverage. After the very 
liberal underwriting practices of the mid 1990s, in which obtaining 
coverage was not particularly difficult for consumers and businesses, 
the trend over the past two years has been to shut consumers out of the 
insurance market by implementing very restrictive underwriting 
guidelines.
    Increasingly, companies are punishing policyholders--especially in 
the homeowners insurance market--for having filed legitimate claims. In 
fact, during this crisis, insurers have begun to drop customers simply 
for inquiring with their insurer about a possible claim, even if they 
do not file a claim. Additionally, using the national claims database 
known as the Comprehensive Loss Underwriting Exchange (CLUE), insurers 
have been denying policies to consumers who have previous claims or 
even mere inquiries, regardless of the nature of the claim.

C. The Role of Enron, Worldcom and the Corporate Scandals of 2001-2002
    While internally acknowledging the insurance cycle and the role of 
investments, particularly in mandatory financial filings, the insurance 
industry has largely blamed factors such as higher medical bills, 
increased labor costs, litigation costs and jury awards when it 
presents its view of the insurance market to lawmaers and the public 
generally. The industry does not, unfortunately, blame Enron and 
WorldCom for rate hikes. More importantly, the companies do not blame 
themselves and the insurance executives who decided to risk a growing 
percentage of policyholder premiums on investments in Enron, WorldCom 
and other corporations. They should. And insurance commissioners should 
hold insurance companies accountable for the billions of policyholder 
premium dollars that have been squandered as a result of risky 
investment practices.
    Ten property and casualty insurance companies reviewed by FTCR lost 
a combined $274.1 million in 2001-2002 as a result of investments in 
the big five frauds--WorldCom, Enron, Adelphia, Global Crossing and 
Tyco.\13\ State Farm, for example, lost more than $74 million as a 
result of that company's investments in Enron and WorldCom alone.
---------------------------------------------------------------------------
    \13\ The companies reviewed include: Allstate Insurance Company, 
Auto Club of Northern California, Auto Club of Southern California, 
Farmers Insurance Exchange, Fireman's Fund, Liberty Mutual Insurance 
Company, Mercury Casualty Company, Nationwide Mutual Insurance Company, 
State Farm Mutual Auto, United Services Automobile Association.
---------------------------------------------------------------------------
1. Americans are more exposed to corporate corruption than they think

    With the excitement surrounding the stock market bubble of the 
1990s, insurance companies increasingly invested in private 
corporations. Typically, insurance industry executives assert that 
company portfolios are largely tied up in municipal and other 
government bonds, with only limited exposure to corporate America. 
However, by 2001, the particularly disgraced energy, high-tech and 
telecom sectors figured heavily in insurance companies' portfolios. As 
a result of this indulgence in higher risk investments, the spate of 
recent corporate scandals and the insurers' investment follies 
significantly impacted consumers, whose premium dollars have been 
placed in insurance company portfolios replete with stocks and 
corporate bonds.
    In a 2002 study, FTCR identified billions of premium dollars lost 
as a result of changes in property and casualty insurers' investment 
strategies.\14\
---------------------------------------------------------------------------
    \14\ All data are based on Annual Statements of insurers filed with 
the California Department of Insurance. Calculations of stock and bond 
holdings are based on the actual cost of the investments (see also 
footnote 8).
---------------------------------------------------------------------------
    Among FTCR's findings:

   State Farm Mutual Auto lost $60.7 million on WorldCom 
        investments in 2002 and $42.6 million associated with its 
        Tellabs holdings.

   Allstate lost $23.3 million when it shed several hundred 
        thousand shares of Tyco stock as the public became aware of 
        Tyco CEO Dennis Kozlowski's alleged criminal fraud in the first 
        half of 2002. The insurer also lost $11.7 million when it 
        discarded Qwest Communications stock, another firm investigated 
        by the SEC for its accounting practices.

   Fireman's Fund wrote off the entire cost of its Winstar 
        stocks and bonds--$85.4 million -after that wireless 
        communications company filed for bankruptcy in April 2001. 
        Additionally, the insurer took a $28.6 million hit on WorldCom.

The Enron factor:

   Enron, the company whose fraudulent accounting and 
        subsequent bankruptcy inaugurated the current era of corporate 
        scandals, was held by many of the insurers reviewed for this 
        analysis. In 2001, Enron losses cost State Farm Mutual Auto 
        $13.5 million, Farmers $9 million, Fireman's Fund $6.2 million, 
        Northern California Auto Club $4.4 million, United Services 
        Automobile Association $4.3 million and Allstate $3.6 million. 
        Fireman's Fund continued to hold $5 million dollars in Enron 
        bonds into 2002.
2. Insurers Change Investment Strategies in the late 1990s

    FTCR studied investment data for ten major insurers between 1998-
2001. The study also examined available 2002 data, and reviewed data 
going back to 1994 for four companies exhibiting the riskiest 
investment behavior.
    For this analysis, FTCR reviewed public filings to measure the 
percentage of an insurer's portfolio that is invested in stocks (both 
common and preferred) and corporate bonds.\15\ Real estate holdings, 
which are reported separately from stock and bond holdings, were not 
reviewed.
---------------------------------------------------------------------------
    \15\ This percentage was calculated using the actual cost of 
insurers' investments, also known as the purchase price. The purchase 
price of the insurance companies' stock and bond holdings in a given 
year remains constant, while other measures--such as book value--may 
fluctuate. Moreover, the actual cost of the investments is useful in 
that it shows how the companies in this study chose to allocate their 
investment dollars over the years. In other words, if a given company's 
level of investment in corporations grew over the period of the study, 
it was not due to rising values of previously purchased stocks and 
corporate bonds. The use of the actual cost value is also consistent 
with the losses on stock and bond sales and write-offs listed below, 
which are calculated based on the initial purchase price of the 
investments.
---------------------------------------------------------------------------
    Nine of the ten companies reviewed increased their level of 
investment in the corporate sector between 1998 and 2001. The 
companies' holdings in 1998 consisted on average of 48 percent stocks 
and corporate bonds combined, with the rest invested in government 
bonds. By 2001, the average percentage invested in corporate America 
was up to 57 percent--a 19 percent increase in the size of insurers' 
corporate investments relative to their overall portfolios. At the end 
of 2001, seven of the 10 companies for which FTCR obtained data had 
over 50 percent of their investments in stocks and corporate bonds.
    For four of the companies that had most heavily invested in the 
stock and corporate bond markets in 2001--USAA, Liberty Mutual, State 
Farm and Nationwide--FTCR analyzed portfolios for an extended period, 
1994-2001, and found that the companies had greatly increased 
investments in the corporate sector relative to their overall 
investments.

   In 2001 United Services Automobile Association had more than 
        four-fifths of its entire portfolio--82 percent--invested in 
        the corporate sector. This represents a 61 percent increase in 
        the companies' investments in corporations since 1994.

   Corporate investments accounted for 73 percent of Liberty 
        Mutual's portfolio in 2001, representing a 248 percent increase 
        over the insurer's 1994 corporate investments, which accounted 
        for 21 percent of its portfolio

   State Farm Mutual Auto's percentage was 58 percent in 2001, 
        a 32 percent increase over its level of corporate investing 
        before the company jumped into the nineties stock bubble.

   Nationwide Mutual's ratio of corporate investments to its 
        overall holdings jumped 37 percentage points over this period 
        to 65 percent--a 132 percent increase.

    The following graph shows the rise in the percentage of these 
companies' portfolios tied up in corporate sector investments.
  Corporate Investment as a percent of Investment Portfolio 1994-2001



3. Heavy in Stocks
    It is important to note that a large portion of corporate holdings 
is invested in stocks and not in the generally more stable corporate 
bonds.
    The stock investments of the ten companies reviewed averaged 37 
percent of their overall investments in 2001, eight percentage points 
more than 1998 levels. United Services Automobile Association invested 
more than half of its portfolio -57 percent--in stocks alone (up from 
40 percent in 1994). Nationwide Mutual was close behind with 46 percent 
(the company invested only 25 percent in stocks in 1994), and State 
Farm Mutual Auto's stock holdings represented 43 percent of its 
portfolio (compared to 27 percent in 1994). 42 percent of Liberty 
Mutual's holdings were in stocks in stocks in 2001, up from 10 percent 
in 1994.

4. Insurers' Major Losses
    Insurance portfolios are replete with corporate stock and bond 
picks that chronicle the recent bankruptcies, earnings restatements and 
fraud indictments. A glance at stock and bond transactions in 2001 for 
a handful of big insurance companies illustrates why investment income 
fell dramatically by remaining too heavily invested in the stock and 
corporate bond markets.
    The 2001 figures below represent the sum of the amounts lost by a 
given insurer on all transactions of a given company's stocks and bonds 
for the entire year, 2001.

   A Selection of Insurers' Major Stock and Bond Losses in 2001 \16\:
------------------------------------------------------------------------

------------------------------------------------------------------------
Allstate                             Fireman's Fund
------------------------------------------------------------------------
 Adelphia: $1.1 million       Broadcom: $31.2 million
 \17\
 AOL/Time Warner: $2.2        Cisco: $26.3million
 million
 Cisco: $6.9 million          Enron: $6.2 million
 Enron: $3.6 million          WorldCom/MCI: $28.6
                                      million
 Global Crossing:             Winstar: $85.4 million
 $5.9million
 Qwest: $11.7 million
 WorldCom/MCI: $2.4 million
------------------------------------------------------------------------
Farmers                              Nationwide
------------------------------------------------------------------------
 Enron: $9 million            Enron: $734,513
 Dynegy: $1.1 million         EMC Corp.: $4 million
                                      Compaq: $1.2 million
------------------------------------------------------------------------
State Farm                           USAA
------------------------------------------------------------------------
 Enron: $13.5 million         Enron: $4.3 million
 Level 3 Communications       JDS Uniphase (telecom
 Inc: $55 million                     supplier): $7.6 million
 Bank of America: $29.1       USAA emerging markets
 million                              fund: $63.6 million (fund heavily
 XO Communications Inc.:      invested in international energy
 $19.8 million                        and telecommunication stocks)
 Battle Mountain Gold: $9.9
 million
------------------------------------------------------------------------

    The data reviewed for the first two quarters of 2002 show equally 
precipitous declines in the portfolios of major insurers with 
particularly dramatic losses resulting from WorldCom and Tyco holdings.
---------------------------------------------------------------------------
    \16\ All of a given company's publicly traded units are grouped for 
the purposes of this report. For example, ``WorldCom'' includes MCI and 
WorldCom, ``AOL/Time Warner'' includes AOL and Time Warner, etc. 
``Williams'' includes Williams Cos. and Williams Communications Group, 
due to the Energy company having been the owner of the Communications 
subsidiary during a portion of the period covered by this report and 
the continuing close affiliation between the two companies.
    \17\ Figures for stock and bond losses are based on total net gain/
loss from all transactions of the given issuer's stocks and bonds, and/
or basis adjustments for bonds, for each insurer.
---------------------------------------------------------------------------
    The investment losses and other data detailed above are not meant 
to be exhaustive. They paint a picture, rather, of the sort of 
investment failures that have cut into insurance companies' 
profitability in recent years and led to a national run-up in insurance 
rates.
    In light of these findings, it is useful to review the preamble to 
the International Association of Insurance Supervisors' ``Supervisory 
Standard on Asset Management by Insurance Companies,'' which reads:

        In order to ensure that an insurer can meet its contractual 
        liabilities to policyholders, such assets must be managed in a 
        sound and prudent manner taking account of the profile of the 
        liabilities held by the company and, indeed, the complete risk-
        return profile.\18\
---------------------------------------------------------------------------
    \18\ ``Supervisory Standard on Asset Management by Insurance 
Companies,''International Association of Insurance Supervisors. 
Approved December 1999

    Instead of following these standards, we have found that insurance 
companies ignored their responsibility and jumped headlong into the 
stock market bubble--only to fall hard when it burst with the string of 
frauds and bankruptcies that decimated the Dow and NASDAQ.
    The mismanagement of policyholder premium, however, has been 
largely ignored as companies simply replenish the dissipated 
investments through rate hikes.\19\ As a result of insurers' increased 
exposure to corporate risk during this insurance cycle, the impact of 
corporate fraud on companies and, in turn, policyholders was far 
greater than should ever have been expected.
---------------------------------------------------------------------------
    \19\ Insurance companies maintain significant surplus, beyond what 
is reserved to pay losses, that could be tapped to cover claims if 
there is a shortfall due to failed investments of policyholder premium.
---------------------------------------------------------------------------
    Not surprisingly, with the recent rebounding of the stock market, 
it is becoming evident that insurers wish to start selling more 
policies in order to gain investment capital. Companies that earlier 
this year had committed to reducing exposure and refusing to sell 
insurance are once again entering the market and selling new policies. 
If the stock market continues this expansion, and especially if 
interest rates increase, a loosening of the insurance market--a 
stabilizing and possibly lowering of rates as well as a liberalizing of 
underwriting practices--is inevitable.
    It is not, however, good public policy to allow insurers to foist 
these economic cycles onto individual consumers and business consumers 
of insurance by allowing the rating and underwriting chaos that 
consumers have endured in recent years. Unregulated, or loosely 
regulated insurance companies will invest recklessly, knowing that the 
firms can simply pass through their investment mistakes and troubles.
    Under this system, individuals and businesses face unnecessary 
premium volatility as rates follow the investing cycles: when insurers' 
investment returns are high rates will drop and when investment returns 
drop, rates increase, and when the stock market, bond market and 
interest rates all collapse at once rates will skyrocket. Furthermore, 
without regulatory oversight to enforce more responsible practices, 
consumers bear much more of the burden of bad economic times than they 
gain in benefits during the good times.

III. The Insurance Industry Should Be Subject To Antitrust Laws
    In 1945 the McCarran-Ferguson Act exempted the insurance industry 
from Federal antitrust laws and in subsequent years the insurance 
industry won antitrust exemptions from virtually every state. As a 
result, insurer-controlled ``rating bureaus'' freely distribute 
proposed pricing data, including projected losses, expenses, profits, 
and overhead charges, to all insurers who wished to obtain the 
information, allowing tacit price collusion.
    As a result of this exemption, insurers are able to fix rates 
through the use of advisory rates established by an insurance industry 
owned organization, the Insurance Services Office (ISO). The ISO 
projects loss trends, allowing insurers to share data and projections 
for pricing rather than requiring companies to develop product pricing 
competitively. As a result of the anti-competitive environment, 
insurers know that they can price insurance too low when, for example, 
investment returns are high, because the companies know that the 
industry can act in concert to raise prices at a future date. Without 
the antitrust exemption, insurers would need to price more responsibly 
and based on their actuarial needs because they would not be assured of 
the higher future prices that collusion allows.
    Proposition 103 repealed the insurance industry's exemption from 
the antitrust laws in California and prohibited the operation of 
``rating'' and ``advisory'' organizations set up by the industry to 
circulate pricing and policy information to insurance companies.
    There is no reason to maintain this exemption from the Nation's 
antitrust laws elsewhere, as there is no reason to provide the industry 
with anti-competitive tools that allow it to act collusively against 
the interest of consumers. The antitrust exemption should be repealed.

IV. Insurance Companies' Loss Estimates Are Inflated
    The insurance industry bases rates on a series of actuarial 
analyses and calculations. A key data set in these calculations is the 
incurred losses that insurers report on an annual basis. Incurred 
losses represent the projected payments a company will make for claims 
filed in a given year. These projections are based on a combination of 
the assessed value of those claims that have been filed as well as 
those that have not yet been filed, but the insurer expects, known as 
``incurred but not reported'' losses. In short, the data reported 
annually as ``incurred losses'' are estimates of losses that are meant 
to be an insurer's best guess as to their liabilities for the year.
    The ``best guess'' data are used to assess a company's financial 
condition, to develop new rates and, often, the data are used as fodder 
for legislative efforts to push changes in tort law. FTCR has recently 
analyzed fifteen years of loss projections in the field of medical 
malpractice insurance and found that companies dramatically and 
consistently exaggerate incurred losses initially, only to adjust the 
losses downward in future years.
    According to the data (we have reviewed reported losses since the 
beginning of the last insurance crisis in 1986), malpractice insurance 
companies have historically inflated their loss projections and then 
revised their reported losses downward in subsequent years. The 
research shows that the ``incurred losses'' that medical malpractice 
insurance companies initially report for policies in effect in each of 
the years examined were, on average, 33 percent higher than the amount 
they actually paid out on those policies.
    We have also found that insurers' reported losses were 
significantly inflated during the ``insurance crisis'' of the late 
1980s. In 1989, for example, medical malpractice insurers' loss 
estimates were overstated by 40 percent. Based on this investigation, 
the ``incurred loss'' data reported by medical malpractice insurers do 
not represent, or even approximate, the actual losses a company will 
sustain as a result of claims against its policyholders.
    It is, therefore, our view that policymakers must not rely upon the 
insurance industry's current loss projections, because those figures 
are not based on hard or otherwise reliable data. In order to protect 
the public from the abuse of unreliable accounting practices, new 
regulatory and accounting reforms are needed. Additionally, regulators 
and law enforcement officials should seek to resolve the outstanding 
question as to whether insurance companies have simply failed to find 
accurate tools for projecting losses or are intentionally inflating 
their reported losses.

A. Incurred Losses vs. Actual Losses
    The distinction between ``incurred'' and actual losses, commonly 
known as ``paid losses,'' is central to understanding an insurance 
company's true financial condition and to evaluate the losses insurers 
report. It is a distinction insurers do not often make in public 
debate.
    Insurers calculate their rates for a given year based on their 
``incurred losses'' for that year. When insurers say they have an 
``incurred loss'' of a certain amount in a given year, however, they do 
not mean that they have actually paid out that amount in that year. 
Rather, they mean that they estimate that they will ultimately pay out 
that amount on claims they predict they will receive that are covered 
by policies in effect in that year. In other words ``incurred losses'' 
represent projected losses. Thus, if an insurer reports in 2003 that 
its ``incurred losses'' for 2002 were $100, the insurer has not paid 
out $100 for 2002 claims. Rather, the insurer estimates that it will 
ultimately pay out--over a period of several years--$100 for claims 
covered by policies in effect in 2002.
    An insurer's ``incurred losses'' are, therefore, by definition, a 
guess. Statistical and mathematical methodologies have been developed 
which, using standard actuarial techniques, can be applied to make that 
guess an educated one. However, absent a regulatory formula that both 
mandates the use of such techniques and reviews insurers' compliance, 
insurers have enormous discretion in determining incurred losses.
    Each year, the insurer receives more information about the 
``incurred losses'' it had guessed it would ultimately pay for claims 
covered by policies in effect in a previous year. As time goes on new 
claims are reported to the insurer, the insurer receives more details 
about existing claims, and the insurer ultimately pays a specific 
amount--or no amount--on each claim. As it receives this new 
information, the insurer adjusts the original guess it made. The more 
time that elapses, therefore, the less guesswork is involved and the 
more accurate an estimate for a previous year becomes.
    In medical malpractice, the average claim is paid approximately 5 
and 1/2 years after the claim arises; most claims are paid within 10 
years. An insurer's estimate of its true liability for claims it 
guesses it has incurred in a given year is therefore substantially 
accurate after 10 years.
    Projecting the number of claims an insurance company must pay out, 
and the amount of those claims, and setting rates based on these 
guesses, is inherent in the nature of the insurance business. In 
exchange for a premium an insurer receives from an insured in the 
present, the insurer agrees to pay claims against that insured in the 
future; there is no way for the insurer to know at the time it receives 
the premium exactly how much it will pay for claims against the 
insured, nor even whether there will be any claims against that insured 
at all.
    Insurers therefore may not fairly be criticized for estimating 
their future losses and changing those estimates every year--that is 
the nature of the business.\20\
---------------------------------------------------------------------------
    \20\ Indeed, insurance companies employ their own ``statutory 
accounting principles'' (SAP)--a departure from the ``generally 
accepted accounting principles'' applicable to all other industries in 
the United States--in recognition of their need to make loss 
projections. Under SAP accounting practices, insurers not only report 
incurred losses to regulators for purposes of justifying rate increases 
and decreases. They are also permitted to treat incurred losses as real 
losses for tax purposes. Although the IRS theoretically has the 
authority to impose penalties for grossly overstated loss reserves, as 
a practical matter it never imposes such penalties. See, e.g., K. 
Logue, Toward a Tax-Based Explanation of the Liability Insurance 
Crisis, 82 Va. L. Rev. 895, 917-18; R. Morais, Discounting the 
Downtrodden, Forbes, Feb. 25, 1985, at 82-83 (``It is virtually 
impossible on a case-by-case basis to prove reserve redundancy'') 
(quoting Larry Coleman, analyst for National Association of Insurance 
Commissioners).
---------------------------------------------------------------------------
    Insurers may fairly be criticized, however, when they 
mischaracterize these estimates of future losses as actual losses--
which they do frequently. For example, the most commonly used measure 
of success in the insurance industry is the loss ratio: the ratio of an 
insurer's incurred losses in a given year to its earned premiums in 
that year. While the earned premium number is a hard number and does 
not meaningfully change over time, the incurred loss number is a guess. 
Yet insurers discuss the loss ratio as if each number were a hard 
number. For example, if an insurer reports a loss ratio for 2002 of, 
say, 110, it typically characterizes itself as actually paying out 
$1.10 for each premium dollar it takes in in 2002. The implication is 
that the company is losing money. In fact, it has not paid out $1.10 in 
2002, but only guessed that when a final accounting of 2002 claims is 
completed years later, it will have paid out $1.10.
    For example, here is how the Florida coalition of insurance 
companies, hospitals and the medical lobby characterize the industry's 
financial status:

        In 2001, medical liability insurers nationally paid out $1.40 
        for every $1.00 they received in premiums.\21\
---------------------------------------------------------------------------
    \21\ Heal Florida's Health Care, fact sheet available at http://
www.healflhealthcare.org/heal_FLhealthcare/homepage.html.

    In fact, this dire portrayal is based on incurred losses, and is, 
by definition, only an estimate of what insurers will pay out in the 
future. Yet the statement expressly--and falsely--states that that 
amount was paid out.
    Similarly, the North Carolina Access to Quality Healthcare 
Coalition discussed North Carolina's medical malpractice incurred loss 
ratio of 113 for 2001 as follows:

        ``In 2001, according to NAIC data, North Carolina professional 
        liability insurers paid $1.13 in claims for every $1 in 
        premiums they received.'' (Emphasis in original). (Fact sheet, 
        N.C. Access to Quality Healthcare Coalition).

    Again, the numbers are referring to incurred losses, and insurers 
only estimated that they will pay out $1.13. Again, the insurance 
industry incorrectly states that that amount was paid out.
    The description of projections as actual payments is false, and it 
is a misrepresentation that has misled policymakers, the news media and 
the public.
    The difference between an insurer's initial estimate of its 
incurred losses for a given year's policies and the amount of its 
actual losses on that year's policies has important implications for 
the current medical malpractice insurance debate. This is because the 
rates an insurer charges for a given year are necessarily based on its 
incurred loss estimates for claims covered by that year's policies, not 
on its ultimate paid losses on that year's policies. Thus, if the 
amount an insurer ultimately pays out for claims covered by a given 
year's policies is less than the amount the insurer initially estimated 
it would pay out for claims covered by those policies, the insurer's 
rate (and the premiums paid by policyholders) for that year would have 
been too high. Similarly, if the amount the insurer ultimately pays out 
is more than the amount the insurer initially guessed it would pay out, 
the insurer's rate for that year would have been too low.
    It should be obvious that in a weakened economy such as today's, 
insurance companies stand to gain by reporting sudden and substantial 
increases in incurred losses. Such increases are used to justify sudden 
spikes in premiums, such as those in the current malpractice 
marketplace. They also provide tax breaks for insurers. And the 
increased estimates of incurred losses are the foundation of the 
industry's argument that only by enacting tort reform will premiums go 
down.
    Whether the insurer charged a rate that was too low or too high, 
and the amount by which that rate was too low or too high, cannot be 
known with confidence until 10 years after the insured pays the 
premium. Whether the rates doctors are being charged in 2003 for 
medical malpractice insurance are too low or too high, therefore, will 
not be known for certain until 2012.
    Unfortunately, there is no opportunity to go back ten years and 
lower rates that, in hindsight, proved to be too high.
    Nor is there any way to retroactively repeal the application of 
tort law restrictions put in place at the behest of the industry based 
on loss estimates that turned out to be far in excess of reality.

B. Data Show Companies Overestimated Losses
    After 10 years of claims information being reported to insurers and 
incurred losses being restated, the initial incurred loss estimated for 
each year from 1986 through 1992 by the medical malpractice insurance 
industry has proved to be at least 26 percent overstated. (Except where 
stated, these figures reflect an analysis of ``claims made coverage'' a 
common form of medical malpractice insurance.)

   During the key crisis years--1986 through 1990--incurred 
        losses were initially estimated to reach $10.7 billion. Ten 
        years later the reported losses for that period totaled $7.1 
        billion, meaning that original loss estimates during the crisis 
        were 34 percent higher than the actual losses reported ten 
        years later.

   The initial incurred loss estimate for 1988--the apogee of 
        the crisis--has proved to be 37 percent overstated.

   In total, for the 7 years 1986 through 1992, malpractice 
        insurers' initial incurred loss estimates were $16.8 billion; 
        they reported incurred losses of $11.6 billion for those years 
        10 years after the initial estimates, for a total overstatement 
        of $5.2 billion, or 31 percent.

   Initial incurred loss estimates for ``occurrence coverage'' 
        policies for the years 1986-92 totaled $12.9 billion, but the 
        reported incurred losses for these years was corrected to $8.3 
        billion ten years later, a total overstatement of $4.6 billion, 
        or 35 percent.

    The graph below illustrates the change in the combined (occurrence 
and claims-made policies) incurred losses, as reported by the Nation's 
medical malpractice. providers over the course of ten years. The graph 
shows that the losses insurers initially reported are far higher than 
the restated losses that are reported ten years later. Even after 
revising the original 1988 projections upward in 1989, that year's 
losses, along with every year's losses, eventually fell precipitously 
as the incurred loss estimates were refined over time.



    The data indicate that medical malpractice insurers overstated 
their anticipated losses for each of the years analyzed for this study. 
Additionally, it appears that the losses reported during the insurance 
crisis of the mid-to late-1980s were more inflated than those of the 
mid-1990s--although fewer years of restated loss data are available for 
the mid-1990s.
    According to the data (claims made and occurrence policies 
combined):

   In 1989, medical malpractice insurers announced losses for 
        that year of $4.4 billion; by 1998, that number had been 
        revised downward to $2.7 billion in losses.

   For the years 1986 through 1990, insurers' initial incurred 
        loss estimates were overstated by an average of 36 percent.

   During the following four years (1991-1994), initial 
        incurred loss estimates appear to have been overstated by 24 
        percent.\22\
---------------------------------------------------------------------------
    \22\ For 1991 and 1992, ten years of incurred loss estimates are 
available; for 1993, only nine years are available, and for 1993, only 
eight years are available.
---------------------------------------------------------------------------
C. Reported Losses and the Present Crisis
    The current crisis is roughly two years old; there is no data to 
assess the accuracy of the insurers ``incurred loss'' reports for 
recent years. In contrast to the previous years' data, because we have 
fewer than five years of restated incurred loss estimates for each year 
beginning with 1997, we cannot yet know what the ultimate payouts will 
be for claims incurred in those years with any reasonable degree of 
accuracy.
    We can, however, examine the recent incurred loss reports to 
determine whether the insurers have reported a sudden spike in incurred 
losses, following the pattern of the 1980s crisis.
    As revealed in the table below, there is a noteworthy and sudden 
increase in reported incurred losses between 2000 and 2001, the 
beginning of the current crisis. After four years during which total 
malpractice incurred losses hovered between $5.09 to $5.27 billion, the 
estimate for 2001 jumped 17 percent to nearly $6 billion.

   Initial Incurred Loss Estimate Past Five Years Medical Malpractice
             (Claims Made and Occurrence Policies Combined)
------------------------------------------------------------------------
     Year       Insurers' initial estimates of incurred losses for year
------------------------------------------------------------------------
1997                                                     $5,273,973,000
------------------------------------------------------------------------
1998                                                     $5,217,410,000
------------------------------------------------------------------------
1999                                                     $5,093,117,000
------------------------------------------------------------------------
2000                                                     $5,116,965,000
------------------------------------------------------------------------
2001                                                     $5,985,382,000
------------------------------------------------------------------------

    Loss inflation during the last insurance crisis--when insurers had 
multiple motives to show greater losses--was pronounced compared to the 
years which immediately followed. That said, for those non-crisis years 
in which at least five but less than 10 years of claims information is 
now available, insurers' initial incurred loss estimates also appear to 
be substantially overstated.
    As noted, insurance companies have a financial incentive to 
overstate losses during periods when their investments are performing 
poorly. By contrast, in periods of economic growth, such as the mid-
1990s, insurers seek to maximize their investment income during such 
periods by lowering prices in order to attract capital and to expand 
market share. They have nothing to gain by overstating losses at such 
times; indeed, inflating losses would reduce insurers' authority under 
state laws to write additional policies.
    In view of this data, it is to be expected that insurers' incurred 
loss estimates for 2001, 2002 and 2003--and thus their proposed rates 
for coming years--are inaccurate. We have clear evidence that the 
malpractice rates insurers charged during the last insurance crisis and 
the years following it were grossly excessive--by an average of between 
31 percent (for claims-made coverage) and 35 percent (for occurrence 
coverage). We should not be surprised to discover in the future that 
the incurred loss estimates medical malpractice insurers are reporting 
today, and the resultant rates that companies are charging, have been 
similarly inflated.
    These results should raise a red flag for insurance regulators and 
lawmakers. The information presented here suggests that the industry's 
accounting practices are in need of revision, including far greater 
scrutiny by insurance and financial regulators.

V. Limiting Liability and Restricting Consumer Rights Does Not Reduce 
        Rates But Does Reduce the Quality of the Insurance Product
    The insurance industry, in every state legislature and in Congress, 
proposes restricting the rights of policyholders or those injured by 
policyholders as the best way to restrain rates. Rather than regulate 
insurance companies' actuarial practices, administrative costs and 
profits, the insurance industry typically calls on government to 
regulate the ability of consumers to be compensated for an injury. The 
failure of these proposals is borne out in the data that clearly shows 
that there is no correlation between rates and legal liability.
    The fallacy of the efficacy of tort restrictions lies in the belief 
that insurers will automatically reduce rates if they are relieved of 
liability. In fact, without the requirements of regulation, insurers do 
not and will not reduce rates regardless of whether or not the law 
limits the rights of policyholders or other claimants.

A. Limits on Third Party Bad Faith Lawsuits Does Not Reduce Insurance 
        Rates
    A 1999 study by FTCR found that states that ban injured victims of 
auto accidents to sue the driver's insurance companies for low-balling 
or unfairly denying or delaying claims payments actually have faced 
greater rate increases than states that allow the suits, known as third 
party bad faith suits. The data directly contradict the insurance 
industry assertion that banning a third party bad faith cause of action 
will lower rates.
    The insurance industry has suggested that limiting the right to sue 
brings premiums down and that the converse is also true: allowing such 
suits raises premiums. Data from the National Association of Insurance 
Commissioners, however, shows no relationship between the right of 
third parties to sue and premium levels. According to the study, which 
reviewed premiums from 1989-1996, California was the only state with a 
ban on third party suits that saw a reduction in premiums and, other 
than Pennsylvania, consumers in all states with these tort restrictions 
saw rate increases of more than 25 percent, with most states above the 
national average of 35.8 percent for this time period. Of course, 
California was the only state with the regulatory structure of 
Proposition 103 in place to restrain rates.
    According to the data, a limitation on third party bad faith 
liability has not resulted in lower premiums as insurers promise. A 
copy of this study is available at http://www.consumerwatchdog.org/
insurance/rp/rp000156.pdf.

B. Medical Malpractice Caps Do Not Reduce Insurance Rates
    A March 2003 report by FTCR compared the impact on premiums of the 
tort restrictions of California's Medical injury Compensation Reform 
Act of 1975 (MICRA) with the regulatory strictures of Proposition 103. 
The study found that physicians' premiums increased by 450 percent over 
the first 13 years with the malpractice caps contained in MICRA and 
declined after the passage of Proposition 103. A copy of that study is 
available at http://www.consumerwatchdog.org/healthcare/rp/
rp003103.pdf.
    Despite the allegation that caps will lower rates, the reality is 
that even under California's MICRA law insurers have sought major 
increases in recent years. A major malpractice insurer, SCPIE, has 
increased rates by 23 percent since 1999 and the state's largest 
medical malpractice insurer, NORCAL Mutual, has increased rates by 26 
percent since 2001. Indeed, during the aforementioned Proposition 103 
rate challenge, SCPIE stated that California's strict malpractice caps 
law did not hold down insurance rates. In written testimony, SCPIE's 
actuary and Assistant Vice President James Robertson stated:

        ``While MICRA was the legislature's attempt at remedying the 
        medical malpractice crisis in California in 1975, it did not 
        substantially reduce the relative risk of medical malpractice 
        insurance in California.''

    This is not dissimilar to filings by Aetna and St. Paul Companies 
in the mid-1980s in which the companies refused to lower rates in 
Florida after that state imposed a liability cap. According to St. Paul 
Fire & Marine Insurance Company's 1987 filing with the Florida 
Department of Insurance:

        ``The conclusion of the study is that the noneconomic cap of 
        $450,000, joint and several liability on the noneconomic 
        damages, and mandatory structured settlements on losses above 
        $250,000 will produce little or no savings to the tort system 
        as it pertains to medical malpractice.''

    In short, liability caps reduce an insurers exposure without any 
mandatory impact on rates, while insurance regulation necessarily 
impacts rates as it is, by definition, a mechanism for controlling 
rates.

C. Regulating Rates Not Rights Makes the Difference
    Throughout the country, lawmakers have experimented with a host of 
liability-limiting tools ostensibly imposed to keep rates down. These 
restrictions, which include the approaches discussed above, as well as 
no-fault insurance and a variety of others such as periodic payments 
and elimination of the collateral source rule, fail to restrain rates 
because they do not address rates. The flaw in the promise of tort 
restrictions is that it depends upon insurers to reduce rates without 
requiring the companies to do so. It should be noted that a more 
important flaw in these programs is the injustice of barring a victim 
from access to their rights to compensation for their injuries.
    The insurance industry presses for tort restrictions with the 
promise that rates will go down, but the industry never agrees to 
mandatory rate decreases and regulatory oversight of the companies. The 
insurance industry has invested millions of dollars to promote the 
notion that lawsuits are the sole barrier to affordable insurance, yet 
after the industry successfully shields itself from lawsuits, there is 
no commensurate rate decrease.
    The lesson from decades of legislation restricting victims' and 
consumers' rights is that the insurance crises keep happening and rates 
continue to cycle higher and higher unless lawmakers address the real 
problem by regulating rates.

VI. Conclusion
    In this testimony we have presented the view that the preeminent 
public interest in protecting insurance consumers requires that 
insurance rates and practices are subject to a strong and thorough 
regulatory regime that promotes accountability.

   First and foremost, insurance companies should be subject to 
        strict prior approval system of rate regulation to ensure that 
        consumers neither pay excessive premiums nor shoulder the 
        unmitigated swings of the insurance cycle. Insurers should be 
        required to justify rates and products (demonstrating, for 
        example, the quality of the coverage to be offered) in advance 
        of placing insurance products in the marketplace. As part of 
        the regulatory process, insurers' books should be subject to an 
        additional layer of regulatory accountability by giving the 
        public an independent right to challenge rate hike proposals 
        and other regulatory actions.

   Insurance companies, which are currently exempt from 
        antitrust laws, are able to collude through the sharing of data 
        in a manner that leaves consumers without a competitive market 
        for insurance products. The industry should be stripped of this 
        unique exemption from the Nation's laws against anticompetitive 
        practices.

   Insurance companies use loss projection techniques that are 
        demonstrably inaccurate and possibly intended to inflate 
        companies' apparent losses. These projections, at least for the 
        medical malpractice line of insurance, are consistently higher 
        than the actual losses insurers pay out over time and should be 
        viewed skeptically by insurance regulators. Similarly the data 
        should not be accepted as grounds for changing tort laws.

   The insurance industry alternative to rate regulation, 
        dubbed ``tort reform'' by insurers, has not achieved its 
        promised goal of reducing insurance rates. Statutory changes 
        that have limited the legal rights of policyholders and 
        insurance claimants over the past thirty years have 
        consistently failed to produce savings specifically because 
        these laws never limit the rates insurers can charge.

    Although the insurance industry will argue for deregulation, much 
in the same way private energy companies argue for deregulation, the 
path of strict rate regulation and market conduct enforcement will 
provide the most security in the most fair and public manner for 
consumers and insurers. As with energy deregulation, in which many of 
the major firms either filed for bankruptcy or fell to penny-stock 
status in the wake of deregulation, a move to further undermine or 
overturn the insurance regulatory regime would be at the peril of 
consumers and the insurers.
    The model for reforming the insurance industry is California's 
voter-approved ballot initiative Proposition 103. The initiative has 
produced a stable and competitive insurance market for fifteen years in 
California, with above average profits for insurers and below average 
premiums for consumers.

                               Appendix A
                    Complete Text of Proposition 103

I. Complete Text Of Proposition 103 As Approved By The California 
        Electors, November 8, 1988
Insurance Rate Reduction and Reform Act
Section 1. Findings and Declaration.

    The People of California find and declare as follows:

    Enormous increases in the cost of insurance have made it both 
unaffordable and unavailable to millions of Californians.
    The existing laws inadequately protect consumers and allow 
insurance companies to charge excessive, unjustified and arbitrary 
rates.
    Therefore, the People of California declare that insurance reform 
is necessary. First, property-casualty insurance rates shall be 
immediately rolled back to what they were on November 8, 1987, and 
reduced no less than an additional 20 percent. Second, automobile 
insurance rates shall be determined primarily by a driver's safety 
record and mileage driven. Third, insurance rates shall be maintained 
at fair levels by requiring insurers to justify all future increases. 
Finally, the state Insurance Commissioner shall be elected. Insurance 
companies shall pay a fee to cover the costs of administering these new 
laws so that this reform will cost taxpayers nothing.
Section 2. Purpose.

    The purpose of this chapter is to protect consumers from arbitrary 
insurance rates and practices, to encourage a competitive insurance 
marketplace, to provide for an accountable Insurance Commissioner, and 
to ensure that insurance is fair, available, and affordable for all 
Californians.
Section 3. Reduction and Control of Insurance Rates.

    Article 10, commencing with Section 1861.01 is added to Chapter 9 
of Part 2 of Division 1 of the Insurance Code to read:

    Insurance Rate Rollback
    1861.01.(a) For any coverage for a policy for automobile and any 
other form of insurance subject to this chapter issued or renewed on or 
after November 8, 1988, every insurer shall reduce its charges to 
levels which are at least 20 percent less than the charges for the same 
coverage which were in effect on November 8, 1987.

    (b) Between November 8, 1988, and November 8, 1989, rates and 
premiums reduced pursuant to subdivision (a) may be only increased if 
the commissioner finds, after a hearing, that an insurer is 
substantially threatened with insolvency.

    (c) Commencing November 8, 1989, insurance rates subject to this 
chapter must be approved by the commissioner prior to their use.

    (d) For those who apply for an automobile insurance policy for the 
first time on or after November 8, 1988, the rate shall be 20 percent 
less than the rate which was in effect on November 8, 1987, for 
similarly situated risks.

    (e) Any separate affiliate of an insurer, established on or after 
November 8, 1987, shall be subject to the provisions of this section 
and shall reduce its charges to levels which are at least 20 percent 
less than the insurer's charges in effect on that date.

    Automobile Rates & Good Driver Discount Plan
    1861.02. (a) Rates and premiums for an automobile insurance policy, 
as described in subdivision (a) of Section 660, shall be determined by 
application of the following factors in decreasing order of importance:

  (1)  The insured's driving safety record.

  (2)  The number of miles he or she drives annually.

  (3)  The number of years of driving experience the insured has had.

  (4)  Such other factors as the commissioner may adopt by regulation 
        that have a substantial relationship to the risk of loss. The 
        regulations shall set forth the respective weight to be given 
        each factor in determining automobile rates and premiums. 
        Notwithstanding any other provision of law, the use of any 
        criterion without such approval shall constitute unfair 
        discrimination.

    (b)(1) Every person who (A) has been licensed to drive a motor 
vehicle for the previous three years and (B) has had, during that 
period, not more than one conviction for a moving violation which has 
not eventually been dismissed shall be qualified to purchase a Good 
Driver Discount policy from the insurer of his or her choice. An 
insurer shall not refuse to offer and sell a Good Driver Discount 
policy to any person who meets the standards of this subdivision. (2) 
The rate charged for a Good Driver Discount policy shall comply with 
subdivision (a) and shall be at least 20 percent below the rate the 
insured would otherwise have been charged for the same coverage. Rates 
for Good Driver Discount policies shall be approved pursuant to this 
article.

    (c) The absence of prior automobile insurance coverage, in and of 
itself, shall not be a criterion for determining eligibility for a Good 
Driver Discount policy, or generally for automobile rates, premiums, or 
insurability.

    (d) This section shall become operative on November 8, 1989. The 
commissioner shall adopt regulations implementing this section and 
insurers may submit applications pursuant to this article which comply 
with such regulations prior to that date, provided that no such 
application shall be approved prior to that date.

    Prohibition on Unfair Insurance Practices
    1861.03 (a) The business of insurance shall be subject to the laws 
of California applicable to any other business, including, but not 
limited to, the Unruh Civil Rights Act (Civil Code Sections 51 through 
53), and the antitrust and unfair business practices laws (Parts 2 and 
3, commencing with section 16600 of Division 7, of the Business and 
Professions Code).

    (b) Nothing in this section shall be construed to prohibit (1) any 
agreement to collect, compile and disseminate historical data on paid 
claims or reserves for reported claims, provided such data is 
contemporaneously transmitted to the commissioner, or (2) participation 
in any joint arrangement established by statute or the commissioner to 
assure availability of insurance.

    (c) Notwithstanding any other provision of law, a notice of 
cancellation or non-renewal of a policy for automobile insurance shall 
be effective only if it is based on one or more of the following 
reasons: (1) non-payment of premium; (2) fraud or material 
misrepresentation affecting the policy or insured; (3) a substantial 
increase in the hazard insured against.

    Full Disclosure of Insurance Information
    1861.04. (a) Upon request, and for a reasonable fee to cover costs, 
the commissioner shall provide consumers with a comparison of the rate 
in effect for each personal line of insurance for every insurer.

    Approval of Insurance Rates
    1861.05. (a) No rate shall be approved or remain in effect which is 
excessive, inadequate, unfairly discriminatory or otherwise in 
violation of this chapter. In considering whether a rate is excessive, 
inadequate or unfairly discriminatory, no consideration shall be given 
to the degree of competition and the commissioner shall consider 
whether the rate mathematically reflects the insurance company's 
investment income.

    (b) Every insurer which desires to change any rate shall file a 
complete rate application with the commissioner. A complete rate 
application shall include all data referred to in Sections 1857.7, 
1857.9, 1857.15, and 1864 and such other information as the 
commissioner may require. The applicant shall have the burden of 
proving that the requested rate change is justified and meets the 
requirements of this article.

    (c) The commissioner shall notify the public of any application by 
an insurer for a rate change. The application shall be deemed approved 
sixty days after public notice unless (1) a consumer or his or her 
representative requests a hearing within forty-five days of public 
notice and the commissioner grants the hearing, or determines not to 
grant the hearing and issues written findings in support of that 
decision, or (2) the commissioner on his or her own motion determines 
to hold a hearing, or (3) the proposed rate adjustment exceeds 7 
percent of the then applicable rate for personal lines or 15 percent 
for commercial lines, in which case the commissioner must hold a 
hearing upon a timely request.

    1861.06. Public notice required by this article shall be made 
through distribution to the news media and to any member of the public 
who requests placement on a mailing list for that purpose.

    1861.07. All information provided to the commissioner pursuant to 
this article shall be available for public inspection, and the 
provisions of Section 6254(d) of the Government Code and Section 1857.9 
of the Insurance Code shall not apply thereto.

    1861.08. Hearings shall be conducted pursuant to Sections 11500 
through 11528 of the Government Code, except that: (a) hearings shall 
be conducted by administrative law judges for purposes of Sections 
11512 and 11517, chosen under Section 11502 or appointed by the 
commissioner; (b) hearings are commenced by a filing of a Notice in 
lieu of Sections 11503 and 11504; (c) the commissioner shall adopt, 
amend or reject a decision only under Section 11517 (c) and (e) and 
solely on the basis of the record; (d) Section 11513.5 shall apply to 
the commissioner; (e) discovery shall be liberally construed and 
disputes determined by the administrative law judge.

    1861.09. Judicial review shall be in accordance with Section 
1858.6. For purposes of judicial review, a decision to hold a hearing 
is not a final order or decision; however, a decision not to hold a 
hearing is final.

    Consumer Participation
    1861.10. (a) Any person may initiate or intervene in any proceeding 
permitted or established pursuant to this chapter, challenge any action 
of the commissioner under this article, and enforce any provision of 
this article.

    (b) The commissioner or a court shall award reasonable advocacy and 
witness fees and expenses to any person who demonstrates that (1) the 
person represents the interests of consumers, and, (2) that he or she 
has made a substantial contribution to the adoption of any order, 
regulation or decision by the commissioner or a court. Where such 
advocacy occurs in response to a rate application, the award shall be 
paid by the applicant.

    (c)(1) The commissioner shall require every insurer to enclose 
notices in every policy or renewal premium bill informing policyholders 
of the opportunity to join an independent, non-profit corporation which 
shall advocate the interests of insurance consumers in any forum. This 
organization shall be established by an interim board of public members 
designated by the commissioner and operated by individuals who are 
democratically elected from its membership. The corporation shall 
proportionately reimburse insurers for any additional costs incurred by 
insertion of the enclosure, except no postage shall be charged for any 
enclosure weighing less than 1/3 of an ounce. (2) The commissioner 
shall by regulation determine the content of the enclosures and other 
procedures necessary for implementation of this provision. The 
legislature shall make no appropriation for this subdivision.

    Emergency Authority
    1861.11. In the event that the commissioner finds that (a) insurers 
have substantially withdrawn from any insurance market covered by this 
article, including insurance described by Section 660, and (b) a market 
assistance plan would not be sufficient to make insurance available, 
the commissioner shall establish a joint underwriting authority in the 
manner set forth by Section 11891, without the prior creation of a 
market assistance plan.

    Group Insurance Plans
    1861.12. Any insurer may issue any insurance coverage on a group 
plan, without restriction as to the purpose of the group, occupation or 
type of group. Group insurance rates shall not be considered to be 
unfairly discriminatory, if they are averaged broadly among persons 
insured under the group plan.

    Application
    1861.13. This article shall apply to all insurance on risks or on 
operations in this state, except those listed in Section 1851.

    Enforcement & Penalties
    1861.14. Violations of this article shall be subject to the 
penalties set forth in Section 1859.1. In addition to the other 
penalties provided in this chapter, the commissioner may suspend or 
revoke, in whole or in part, the certificate of authority of any 
insurer which fails to comply with the provisions of this article.
Section 4. Elected Commissioner

    Section 12900 is added to the Insurance Code to read:

    (a) The commissioner shall be elected by the People in the same 
time, place and manner and for the same term as the Governor.
Section 5. Insurance Company Filing Fees

    Section 12979 is added to the Insurance Code to read:

    Notwithstanding the provisions of Section 12978, the commissioner 
shall establish a schedule of filing fees to be paid by insurers to 
cover any administrative or operational costs arising from the 
provisions of Article 10 (commencing with Section 1861.01) of Chapter 9 
of Part 2 of Division 1.
Section 6. Transitional Adjustment of Gross Premiums Tax

    Section 12202.1 is added to the Revenue & Taxation Code to read:
    Notwithstanding the rate specified by Section 12202, the gross 
premiums tax rate paid by insurers for any premiums collected between 
November 8, 1988 and January 1, 1991 shall be adjusted by the Board of 
Equalization in January of each year so that the gross premium tax 
revenues collected for each prior calendar year shall be sufficient to 
compensate for changes in such revenues, if any, including changes in 
anticipated revenues, arising from this act. In calculating the 
necessary adjustment, the Board of Equalization shall consider the 
growth in premiums in the most recent three year period, and the impact 
of general economic factors including, but not limited to, the 
inflation and interest rates.
Section 7. Repeal of Existing Law

    Sections 1643, 1850, 1850.1, 1850.2, 1850.3, 1852, 1853, 1853.6, 
1853.7, 1857.5, 12900, Article 3 (commencing with Section 1854) of 
Chapter 9 of Part 2 of Division 1, and Article 5 (commencing with 
Section 750) of Chapter 1 of Part 2 of Division 1, of the Insurance 
Code are repealed.
Section 8. Technical Matters

    (a) This act shall be liberally construed and applied in order to 
fully promote its underlying purposes.

    (b) The provisions of this act shall not be amended by the 
Legislature except to further its purposes by a statute passed in each 
house by roll call vote entered in the journal, two-thirds of the 
membership concurring, or by a statute that becomes effective only when 
approved by the electorate.

    (c) If any provision of this act or the application thereof to any 
person or circumstances is held invalid, that invalidity shall not 
affect other provisions or applications of the act which can be given 
effect without the invalid provision or application, and to this end 
the provisions of this act are severable.

    Senator Sununu. Thank you, Mr. Heller.
    Mr. Rahn?

         STATEMENT OF STEPHEN E. RAHN, VICE PRESIDENT,

        ASSOCIATE GENERAL COUNSEL, AND DIRECTOR OF STATE

 RELATIONS, LINCOLN NATIONAL LIFE INSURANCE COMPANY, ON BEHALF 
            OF THE AMERICAN COUNCIL OF LIFE INSURERS

    Mr. Rahn. Thank you, Mr. Chairman, and Members of the 
Committee.
    Much of the testimony this morning has focused on the P&C 
industry. I'm happy to be here today to testify on behalf of 
the life insurance industry. By way of background, my name is 
Steve Rahn. I'm the Director of State Government Relations for 
the Lincoln National Life Insurance Company. I am here today on 
behalf of the American Council of Life Insurers.
    I have spent my entire career dealing in state legislative 
and regulatory matters. Prior to joining Lincoln, I worked for 
the Indiana General Assembly.
    Now, if past experience with hearings and other committees 
is any guide, I think you're very quickly learning and can 
easily appreciate the fact that the current state-based system 
of insurance regulation has failed to keep pace as our business 
and our markets have evolved. There's clear consensus today 
that the current system is badly broken, and I would point out 
it's not a difference between a Federal system and a state 
system. There are already over 50 systems of regulation of 
insurance under the current state-based system.
    And I think it's fair to say that most agree that if 
substantial improvements are not made, and not made quickly, 
that it will be extremely difficult for life insurers to remain 
healthy and competitive, and, most importantly, in turn, to 
provide for the best products for our consumers at the lowest 
possible cost.
    Now, where the paths of the witnesses have diverged today, 
and will probably continue to diverge today, is on the best way 
to accomplish needed reform. State regulators are going to 
argue that there are, indeed, problems, but that the 
appropriate solutions can all be found within the existing 
state-based system of regulation and all that's really needed 
is more time for the states to act.
    Others here have suggested, and will continue to suggest, 
that the Federal Government should help move the remedial 
process along by enacting Federal minimum standards that the 
states could then enforce.
    Let me briefly address both of those approaches. As 
indicated in my written statement, life insurers believe that 
state regulation will always be an integral part of the 
insurance regulatory landscape, and it's for that reason that 
the ACLI and the life insurance industry remains firmly 
committed to working with the states to improve it.
    However, progress has been extremely slow, and there's no 
realistic expectation that the many aspects of the state system 
that need to be improved will be addressed within a reasonable 
period of time. That is why the ACLI has proposed a Federal 
insurance charter as an option. This would parallel the 
successful dual-chartering mechanism that we've seen in the 
banking system.
    In terms of geographic scope of the business of life, life 
insurers are quite similar to banks in that some carriers do 
business nationally, and some do it internationally, while 
others operate locally.
    We also don't believe that the Federal minimum standards 
are the answer either, as, by their very nature, they don't 
provide the uniformity that our industry so desperately needs. 
Minimum standards establish only a baseline that the states 
could modify as they see fit. For life insurance, laws and 
regulations need to be uniform from one jurisdiction to 
another. We may have life insurance that operates locally, but 
even they don't have local issues. It's very different than the 
P&C industry. By that, I mean that life insurance product 
standards, financial solvency requirements, and consumer 
protections can and should be uniform throughout the country.
    In addition, the Federal minimum standards approach would 
not create a Federal insurance presence in Washington that we 
believe is critical for an industry that is increasingly 
international in scope and plays an enormously important role 
in the economy. It is simply too critical of a cog in the 
Nation's financial machinery for the Federal Government not to 
understand our issues, nor for our industry to remain the only 
segment of the financial services industry without a primary 
Federal regulator.
    My last point is perhaps the most important. It's 
imperative that we be successful in modernizing the life 
insurance regulatory system, because if we aren't and if the 
life insurance franchise is minimalized--or marginalized, the 
consequences to consumers and the economy would be devastating.
    Consider this. We currently have 76 million baby-boomers 
nearing retirement. With life expectancies increasing, these 
retirees will have to depend increasingly upon the products and 
services that only the life insurance industry can provide. 
These include products that have guaranteed lifetime payments, 
long-term care, and lifetime financial security. As you are 
well aware, Social Security and Medicare alone simply aren't up 
to the task.
    Equally important to consider is the fact that the life 
insurance industry ranks fourth among institutional sources of 
funds supplying 9 percent of the total capital in the financial 
markets, or $3.4 trillion, and we're the principal source of 
long-term capital.
    Mr. Chairman, I again thank you for having this hearing. 
And while we have some concerns with his bill, I would like to 
thank Senator Hollings for introducing his Federal optional 
charter legislation. We're pleased that the Senate is beginning 
to focus in earnest on the critical question of how to 
modernize the insurance regulatory system, and we encourage 
you, in the strongest terms, to work with us to put in place an 
appropriate Federal charter option for insurance companies. We 
believe that's in the best interest of the industry, its 
customers, and our economy.
    Thank you.
    [The prepared statement of Mr. Rahn follows:]

 Prepared Statement of the American Council of Life Insurers given by 
    Stephen E. Rahn, Vice President, Associate General Counsel and 
   Director, State Relations, Lincoln National Life Insurance Company

    Mr. Chairman and members of the Committee, my name is Steve Rahn, 
and I am Vice President, Associate General Counsel and Director of 
State Relations for The Lincoln National Life Insurance Company. I am 
appearing today on behalf of the American Council of Life Insurers, the 
principal trade association representing domestic life insurance 
companies. The ACLI's 383 member companies account for over 70 percent 
of the life insurance premiums and 77 percent of annuity considerations 
of U.S. life insurance companies. I am also Chairman of the ACLI's 
Policy Advisory Group, which has spearheaded the association's efforts 
to develop a Federal legislative solution to the issue of regulatory 
modernization.
    I appreciate the opportunity to appear before you today to discuss 
the pressing need to modernize the life insurance regulatory framework. 
In survey after survey of the ACLI membership, including one this 
summer of life insurer CEOs serving on the ACLI Board of Directors, 
regulatory modernization is the very top priority of our business.
    My message to you this morning is both simple and urgent. 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. However, for the 
insurance business to remain viable and serve the needs of its 
customers effectively, our system of life insurance regulation must 
become far more efficient and be brought in line with the needs and 
circumstances of today's marketplace. This is not a call for less 
regulation. It is a call for strong regulation administered 
efficiently, preserving the paramount importance of effective solvency 
regulation and appropriate consumer protections.
    I would like to focus on three points the morning. First, why 
regulation is so important to us at this juncture. Second, what the 
ACLI has done to assess the current regulatory environment and identify 
areas that are in need of improvement. And third, the options for 
improvement we are focusing on and how we are pursuing them.

The Changing Marketplace and the Importance of Efficient Insurance 
        Regulation
    The marketplace environment in which life insurers and other 
financial intermediaries compete has changed dramatically in the past 
several years. Importantly, the role of regulation in this new 
competitive paradigm has increased significantly.
    Historically, life insurers competed only against other life 
insurers. Whatever the inefficiencies of insurance regulation, 
companies incurred them equally. Existing companies had learned how to 
cope with the unwieldy regulatory apparatus, and potential new entrants 
almost always looked to existing companies and charters because of the 
difficulty of creating a new one. The status quo, while often 
frustrating, did not present insurers with serious competitive 
problems.
    Today, the situation is radically different. A generation ago, the 
average life insurer took in almost 90 percent of its premiums from the 
sale of life insurance, compared to only 13 percent from annuities. 
Today, those numbers are almost completely reversed, with 70 percent of 
premium receipts coming from annuities compared to only 30 percent from 
life insurance products. Today, life insurers administer over $1.8 
trillion in retirement plan assets, amounting to over 25 percent of the 
private retirement plan assets under management in the U.S.
    The point is that life insurers, as providers of investment and 
retirement security products, find themselves in direct competition 
with brokerages, mutual funds, and commercial banks. These non-
insurance firms have far more efficient systems of regulation, often 
with a single, principal Federal regulator. Without question, the 
regulatory efficiencies they enjoy translate into very real marketplace 
advantages. Our system of insurance regulation now stands as perhaps 
the single largest barrier to our ability to compete effectively.
    In the context of this new competitive environment, insurers' 
inability to bring new products to market in a timely manner is the 
most serious shortcoming of the current regulatory system. National 
banks do not need explicit regulatory approval to bring most new 
products to market on a nationwide basis. Securities firms typically 
get regulatory approval for new products in several months. By 
contrast, life insurers must get new products and disclosure statements 
approved in each state in which the product will be offered, and 
different jurisdictions often have widely divergent standards, 
interpretations, and requirements applicable to identical products. 
Without question there are individual states that are quite prompt in 
reviewing a company's product form filings. Others are not. And the 
problem, of course, is getting approval in multiple jurisdictions, 
which is extremely costly, extremely time consuming, and can take a 
year or more--and in some instances much longer. With the average shelf 
life of innovative new life insurance products being approximately two 
years, it is easy to see why the current product approval process is so 
problematic.
    The advent of Gramm-Leach-Bliley and an increasingly diversified 
financial services landscape will only intensify concerns in this area. 
For example, there is clear evidence that firms having both insurance 
and securities operations are allocating capital away from the 
insurance unit due largely to the inefficiency of the insurance 
regulatory system. New securities products can be brought to market in 
a more timely and cost-effective manner than their insurance 
counterparts. Over the long run, the implications to insurers and their 
customers of these adverse capital allocation decisions are serious, 
and they can be expected to worsen as consolidation and cross-industry 
diversification continue.
    Even with respect to products such as whole life insurance, which 
have no direct analog in the banking or securities businesses, we face 
competition from other providers of financial services for the 
consumer's attention and disposable income. Moreover, the costs of 
regulatory inefficiency are necessarily borne directly or indirectly by 
the public.
    The present state-based system of insurance regulation was 
instituted at a time when ``insurance'' was not deemed to be interstate 
commerce. Consequently, the underpinnings of that system--which remain 
pervasive today--contemplate doing business only within the borders of 
a single state. Today, most life insurers do business in multiple 
jurisdictions if not nationally or internationally. And, the system has 
been cumulative, with new laws, rules and regulations often added but 
old ones seldom eliminated. In short, our system of regulation has 
failed to keep pace with changes in the marketplace, and there is a 
very wide gap between where regulation is and where it should be.
    For many life insurers, making regulation more efficient is now an 
urgent priority. Companies no longer believe they have the luxury of 
being able to wait for years and years while incremental improvements 
are debated and slowly implemented on a state-by-state basis.

Importance of the Life Insurance Franchise
    Failure to modernize the life insurance regulatory system risks 
marginalizing the life insurance franchise, and the resulting adverse 
consequences to consumers and the economy would be substantial. Life 
insurers are unique in that they are the only institutions capable of 
guaranteeing against life's uncertainties. Through life insurance, 
annuities, and other financial protection products, life insurers 
protect against living too long and not living long enough. With 76 
million baby-boomers nearing retirement, there is the potential for a 
true retirement crises. We not only have an aging population with 
increasing life expectancies, but must also confront the fact that the 
average American nearing retirement has only $47,000 in savings and 
assets, not including real estate. Fully 68 percent of Americans 
believe they will not be able to save enough for retirement. Over 61 
percent are afraid they will outlive their savings. The role of life 
insurers in addressing the retirement security needs of millions of 
Americans has never been more important. Retirees will depend 
increasingly upon the services only life insurance products provide; 
guaranteed income, long term care, and lifetime financial security. As 
the Congress faces the Social Security and Medicare challenges in the 
next fifty years, it will need a high performing life insurance 
industry to partner with and help shoulder the burden.
    Life insurers not only help in shaping how people plan for the 
future, but also in sustaining long-term investments in the U.S. 
economy. Fifty-seven percent of the industry's assets--$2 trillion--is 
held in long-term bonds, mortgages, real estate, and other long-term 
investments. The industry ranks fourth among institutional sources of 
funds, supplying 9 percent of the total capital in financial markets, 
or $3.4 trillion. Investments include: $417 billion in federal, state, 
and local government bonds, which help fund urban revitalization, 
public housing, hospitals, schools, airports, roads, and bridges; $251 
billion in mortgage loans on real estate-financing for homes, family 
farms, and offices; $1.2 trillion in long-term U.S. corporate bonds; 
and $791 billion in corporate stocks. In 2002, life insurers invested 
more than $304 billion in new net funds in the Nation's economy.

Lack of Uniformity Hampers Multi-State Insurers
    A significant impediment for multi-state insurers is the current 
state-based system's inability to produce, in crucial areas, both 
uniform standards and consistent application of those standards by the 
states. I'd like to give you a brief outline of the business and 
regulatory complexities commonly faced by life insurers under the 
current system.
    Before a company can conduct any activities, it must apply for a 
license from its ``home'' or ``domestic'' state insurance department. A 
license will be granted if the company meets the domestic state's legal 
requirements, including capitalization, investment and other financial 
requirements, for acting as a life insurer. If the company wishes to do 
business only in its home state, this one license will be sufficient. 
However, in order to sell products on a multi-state basis, a company 
must apply for licenses in all the other states in which it seeks to do 
business. Each additional state may have licensing requirements that 
deviate from those of the company's home state, and the company will 
have to comply with all those different requirements notwithstanding 
the fact that the home state regulator will remain primarily 
responsible for the insurer's financial oversight.
    Once a company has all its state licenses, it can turn its 
attention to selling policies. To do that, a company must first file 
each product it wishes to market in a particular state with that 
state's insurance department for prior approval. A company doing 
business in all states and the District of Columbia must, for example, 
file the same policy form 51 different times and wait for 51 different 
approvals before selling that product in each jurisdiction. And this 
process must be repeated for each product the insurer wishes to offer. 
Since these 51 different insurance departments have no uniform 
standards for the products themselves or for the timeliness of response 
for filings, a company may receive approval from one or two 
jurisdictions in 3 months, from another ten jurisdictions in 6 months, 
and may have to wait 18 months or longer to receive approval from all 
jurisdictions.
    This process is further complicated by the fact that each insurance 
department may have its own unique ``interpretation'' of state 
statutes, even those that are identical to the statues in other 
jurisdictions. As a result, a company will be required to ``tweak'' its 
products in order to comply with each individual department's 
``interpretation'' of what otherwise appeared to be identical law. 
Since a company has to refile each product after it has been 
``tweaked,'' the time lapse from original filing to final approval can 
very well be double that which was originally expected. And, as a 
result of the various ``tweaks,'' what started out as a single product 
may wind up as thirty or more different products.
    After a company has received approval to sell its products in a 
state, it needs a sales force to market those products. Here again we 
encounter the inefficiencies of the current state system. Each state 
requires that anyone wishing to act as an insurance agent first be 
licensed as such under the laws of that state. Each state has its own 
criteria for granting an agent's license, and this criteria includes 
differing continuing education requirements once the license is issued. 
Like companies, insurance agents wishing to work with clients in more 
than one state must be separately licensed by the insurance departments 
in each of those states. And, because of the differing state form 
filing requirements for companies noted above which results in products 
being ``tweaked'' for approval in each of the various jurisdictions, 
persons granted agent licenses by more than one state will not always 
have the ability to offer all clients the same products.
    After this multitude of licenses and approvals has been secured, a 
company can begin to sell products nationwide. However, the lack of 
uniformity in standards and application of laws will continue to be a 
complicated and costly regulatory burden that the company must 
constantly manage. The very basic things that any business must do to 
be successful--such as employing an advertising campaign, providing 
systems support, maintaining existing products, introducing new 
products and keeping our sales force educated and updated--are all 
affected 51 different sets of laws, rules and procedures under the 
current regulatory structure.
    Add to this the fact that states also police actual marketplace 
activity by subjecting a company to market conduct examinations by the 
insurance departments of every state in which it is licensed. Even 
though state market conduct laws nationwide are based on the same NAIC 
model laws, there is minimal coordination on these exams among the 
various states. As a result, a company licensed to do business in all 
51 jurisdictions is perpetually having states initiate market conduct 
examinations just as one or more other states are completing theirs, 
with the cost of each exam being borne by the company. And, because 
these examinations are largely redundant, the benefits derived relative 
to the costs incurred are marginal at best.
    In sum, these issues result in very real costs in terms of money, 
time, labor and lost business opportunities attributable to this 
cumbersome state regulatory system, which places a great competitive 
burden on individual companies, and on the industry as a whole.

ACLI Study of Insurance Regulation
    By the late 1990s, life insurers had concluded that it was 
imperative for the industry to address the issue of regulatory reform. 
In September of 1998, the ACLI Board of Directors instructed the 
association to undertake a detailed study of life insurance regulation. 
The objective of this study was to pinpoint those aspects of regulation 
that are working well and those aspects that are hindering life 
insurers' ability to compete effectively and thus in need of 
improvement. This study broke life insurance regulation down into 35 
individual elements (e.g., agent and company licensing, policy/contract 
form approval, solvency monitoring, guaranty associations, 
nonforfeiture). Individual elements were then rated based on eight 
factors (uniformity, speed/timing, cost, objective achieved, necessity/
relevance, expertise/capacity, sensitivity to industry needs/views, and 
enforcement/penalties) and assigned one of four overall ``scores'' 
based on the eight factors. The overall scores were excellent, good, 
needs improvement, and unsatisfactory.
    This study was completed in November of 1999 and revealed 
widespread dissatisfaction with the current regulatory system. No 
element of regulation was rated ``excellent,'' 14 elements were rated 
``good,'' and 21 of the 35 elements received negative scores, with 16 
rated ``needs improvement'' and five rated ``unsatisfactory.''
    The study concluded that life insurers generally believe the laws 
and regulations on the books are necessary and appropriate. However, 
these laws are seldom uniform across all states and, even where 
uniform, are frequently subject to divergent applications and 
interpretations. Having to comply with even uniform laws 50+ times is 
costly and time consuming. When those laws differ and when 
interpretations of identical or similar laws differ significantly 
state-to-state, an insurer's ability to do business in multiple 
jurisdictions is severely hindered. Given these considerations, the 
life insurers do not seek diminished regulation. Rather, they seek a 
far more efficient means of administering the laws and regulations to 
which they are now subject.
    A copy of the ACLI report, entitled ``Regulatory Efficiency and 
Modernization: An Assessment of Current State & Federal Regulation of 
Life Insurance Companies and an Analysis of Options for Improvement,'' 
is being made available separately to provide additional background on 
this issue.

Solutions
    Pursuant to a policy position adopted by our Board of Directors and 
embraced by our membership, the ACLI is 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 has developed draft legislation providing for an 
optional Federal charter for life insurers.

Improvements to State Regulation
    Improving a state-based system of regulation has never really been 
an ``option'' for the ACLI: rather, it is a given. While substantial 
changes to the present system must be made, regulation of insurance by 
the states will always be a fundamental part of our regulatory 
environment. From the ACLI's perspective, the yardstick for gauging the 
success of regulatory reform in the principal areas where change is 
necessary is quite simple: uniform standards; consistent 
interpretations of those standards; and a single point of contact for 
dealing with multiple jurisdictions. Only in this way will insurers 
doing a national business be able to operate effectively and provide 
their customers with the products and services they are demanding.
    The states and the leadership of the National Association of 
Insurance Commissioners (NAIC) deserve credit for the way in which they 
have stepped up to the task of developing strategies for implementing 
meaningful reform. The states are working to forge a strong consensus 
for progressive change. While the true measure of success, of course, 
will be the actual implementation of appropriate reforms, the NAIC has 
shown strong commitment and effort over the course of the last several 
years.

Optional Federal Charter
    At the same time the ACLI Board reaffirmed its commitment to 
improve state regulation, it also directed the association to 
aggressively pursue an optional Federal charter for life insurance 
companies. This decision reflects several different perspectives within 
our membership. A number of companies believe the insurance business is 
badly in need of a dual regulatory system analogous to that presently 
found in the commercial banking, thrift, and credit union businesses. 
Such a system enables institutions to select a state or Federal charter 
based on the particular needs and circumstances of their operations. 
For example, companies doing business in multiple jurisdictions might 
be more inclined to opt for a Federal charter so that they will have to 
deal with only a single regulator. On the other hand, companies doing 
business in a single state might find a state charter to be far more 
practical and cost-effective. Other companies are skeptical that at the 
end of the day individual state regulators and state legislators will 
be able to cede authority to the extent necessary to implement a system 
of uniform, efficient state regulation.
    Additionally, most life insurers are increasingly convinced that 
there is a need for a Federal insurance regulatory ``presence'' in 
Washington. More than at any other time in our history, issues 
dramatically affecting our business are being debated and decided in 
Congress. Yet, unlike any other segment of the financial services 
industry, there is no regulator in Washington that can serve as a 
source of information and perspective for lawmakers. This lack of 
insurance regulatory presence was illustrated dramatically in the wake 
of the events of 9/11/01 when lawmakers had no ready source of 
information and advice on the immediate and longer-term insurance 
consequences of those events.
    The ACLI spent approximately a year and a half developing draft 
legislation providing an optional Federal charter for life insurers. 
This effort involved over 300 ACLI member company representatives and 
brought to bear their considerable expertise on literally every aspect 
of life insurance regulation. The American Insurance Association and 
the American Bankers Insurance Association also developed draft 
optional Federal charter legislation. These groups have worked closely 
over the last year and have reached agreement on a consensus draft of a 
bill providing for a Federal charter option for all lines of insurance, 
insurance agencies and insurance agents.

Congress Should Avoid Incremental Federal Legislation
    There have been suggestions that Congress should defer action on 
optional Federal insurance charter legislation and instead see whether 
an incremental approach to regulatory efficiency might suffice. For 
example, discrete issues such as product approvals or coordination of 
market conduct examinations might be addressed along the lines of the 
NARAB provisions included as part of the Gramm-Leach-Bliley Act.
    Quite candidly, Mr. Chairman, I would argue strongly against this 
approach for a number of reasons. First, the effort of the states and 
the NAIC to enhance regulatory efficiency is, by its very nature, 
incremental. The states have identified several priority issues to 
tackle, and they are developing concepts to deal with them. Achieving 
some form of overall ``national treatment'' under a state regulatory 
regime should be an ultimate goal, but even the states have recognized 
that it is impractical to seek to achieve that goal in the near term. 
We simply do not need the states and the Congress employing incremental 
approaches to regulatory modernization.
    As noted above, ACLI is working aggressively with the states and 
the NAIC to improve state-based regulation. While we salute the NAIC 
and others for their efforts toward this end, the ACLI believes this 
effort should not be exclusive of but rather complementary to the 
pursuit of an optional Federal charter.
    One of the fundamental values of a Federal charter option is that 
it can achieve uniformity of insurance laws, regulations and 
interpretations the moment it is put in place. And only Congress can 
enact legislation that has this broad-based, immediate effect. As I 
noted at the outset, many life insurers believe regulatory 
modernization is a survival issue, and in that context the speed with 
which progressive change takes place is critical. Today's marketplace 
is intolerant of inefficient competition. And the prospect of having to 
wait a number of years to see whether incremental Federal legislation 
will even be enacted, and then, if it is, having to wait for some 
additional period of time to see whether it works is not even remotely 
appealing to me. Because if the answer turns out to be ``no,'' my 
company will likely have become irrelevant long before any meaningful 
steps have been taken. We are not willing to take that risk.
    In my judgment, Congress should not ``finesse'' this issue by 
putting a clock on the states either to force them to perform better or 
to see how much they can accomplish over some set period of time. This 
approach ultimately sidesteps the responsibility to protect a vital 
industry and the consumers it serves.
    I believe Congress should focus its attention on a global, 
comprehensive alternative to state insurance regulation expressly 
crafted to meet the needs of today's national and multinational 
insurers. I believe an immediate and concerted effort to put in place 
an optional Federal charter is the best course of action for providing 
needed regulatory solutions for our industry and for providing the 
states with strong incentive for improving their regulatory structure.
    In sum, the ACLI will work with the states to pursue important but 
incremental improvements to state insurance regulation. But we will 
look to Congress for the improvements that only Congress can provide in 
the form of an optional Federal insurance charter.

An Optional Federal Charter Is Not an Attack on States' Rights
    Insurance is the only segment of the U.S. financial services 
industry that does not have a significant Federal regulatory component. 
Under the optional Federal charter concept being advanced by the ACLI 
and others, the states would retain a greater, or at least as 
significant, a role in insurance regulation as their state regulatory 
counterparts now have in the banking and securities industries.
    The Federal charter proposal does not mandate Federal insurance 
regulation of all insurers. Rather, it allows an insurance company the 
option of seeking a Federal charter if company leadership believes that 
to be more complementary to the company's structure, operations or 
strategic plan.
    It is not an affront to states' rights to seek the elimination of 
conflicting or inconsistent laws. A principal objective of the ACLI 
proposal is to reduce the regulatory burden caused by such conflicts 
and redundancies and to do so by adopting the best state laws and 
regulations as the applicable Federal standards.
    A further objective of the Federal charter option is to modernize 
the insurance regulatory framework and, in so doing, make insurers 
significantly more competitive in the national and global marketplace. 
Enhancing competition is a sound and legitimate role for Congress and 
substantially outweighs concerns over any diminution of the regulatory 
role of the states.
    The importance of insurance protection was underscored by the 
events of September 11, as was the fact that it is in the national 
interest to have a Federal authority with expertise and involvement in 
the U.S. insurance industry given the industry's significant and 
substantial importance to the overall financial health of the Nation. 
Establishing an agency to fill this void is not, and should not be 
characterized as, a diminution of states' rights.
    Finally, the concept of an optional Federal charter is far less an 
infringement on states' rights and prerogatives than preemptive Federal 
standards, minimum or otherwise. The latter apply to all insurers and 
suggest that the states are incapable of dealing with important 
regulatory matters even as they pertain to state chartered carriers.

An Optional Federal Charter Will Not Foster Regulatory Arbitrage
    Some have suggested that the implementation of a Federal charter 
option will lead to regulatory arbitrage and a regulatory ``race to the 
bottom'' as companies seek increasingly lax regulation and regulators 
rush to accommodate. Nothing could be further from the truth.
    First and foremost, the ACLI and its member companies are not 
seeking to migrate to a Federal system of insurance regulation that is 
lax. To the contrary, we are seeking an strong regulator located in the 
Treasury Department that will administer a comprehensive system of 
regulation predicated on the ``best-of-the-best'' drawn wherever 
possible from existing state statutes or NAIC model laws. Only where 
the state system is irreparably broken (e.g., the product approval 
process) have we sought to create new regulatory concepts.
    Second, the notion that adding one more system of regulation on top 
of the 51 that already exist will somehow give rise to regulatory 
arbitrage is groundless. Today, companies have the right in virtually 
all jurisdictions to change their state of domicile--that is, to move 
to a different state that would have primary responsibility for the 
company's financial oversight. Consequently, there are 51 opportunities 
for regulatory arbitrage today.
    It is inconceivable that Congress would put in place a Federal 
regulatory option that was not at least as strong as the better--if not 
the best--state system. How, then, would we be creating some new 
opportunity for this dreaded ``race-to-the-bottom?'' What possible harm 
would come from companies moving to a Federal system of regulation that 
is as strong as, if not stronger than, the one they are leaving?
    Inherent in this assertion of possible regulatory arbitrage is the 
notion that a company executive could wake up one morning and simply 
decide to flip a company's charter. Quite simply, business does not 
work that way. Such a change carries with it countless significant 
consequences and considerations and is not entered into lightly. It is 
costly, time consuming and initially highly disruptive. The notion of 
regulatory arbitrage implies that companies would be inclined to move 
into and out of regulatory systems on a whim or whenever decisions were 
made or likely to me made that would be adverse to their interests. In 
the real world, this does not and would not occur.

The Federal Charter is Optional
    We urge you to keep in mind that all advocates for a Federal 
insurance charter believe that the charter should be optional. 
Companies that do a local business or that for other reasons would 
prefer to remain exclusively regulated by the states are perfectly free 
to do so. The ACLI has worked hard to draft a Federal charter option 
that, to the extent reasonably possible, remains ``charter neutral.'' 
For example, we have avoided building into the Federal option 
advantages (e.g., tax advantages) that companies would be hard pressed 
to turn their backs on even if they wished to remain state regulated.
    While individual motives may vary, our member life insurance 
companies are strongly united in our desire to modernize our regulatory 
system so we can regain our competitive footing and effectively serve 
our customers. Some feel that a Federal charter is in the long-term 
best interest of their company and customers. Others have indicated 
they would prefer to remain state chartered even if a Federal charter 
were available to them. Like other financial service firms, we believe 
insurers must have the ability to select the charter that best suits 
our operations, products, markets and long-term strategies

An Optional Federal Charter Will Not Disrupt State Premium Tax 
        Revenues
    Opponents of an optional Federal charter have suggested that if 
such an option were to become a reality, national insurers would, over 
time, somehow escape state premium taxes, which constitute a 
significant source of revenue for all states. This concern is totally 
unfounded.
    As this Subcommittee knows better than most, with the exception of 
Government Sponsored Enterprises, all for-profit federally chartered 
financial institutions such as commercial banks, savings banks and 
thrifts pay state income taxes. For insurers, this state tax obligation 
takes the form of a state premium tax. There is no precedent for, nor 
is there any expectation of, exclusion from this state tax obligation. 
Indeed, all versions of the optional Federal charter legislation 
expressly provide for the continuation of the states' authority to tax 
national insurers.
    There is presently debate in some jurisdictions over whether 
insurers should pay a state net income tax in lieu of a state premium 
tax. This debate will continue irrespective of whether there is an 
optional Federal insurance charter. Simply put, state tax revenue is 
not a material factor in the debate over an optional Federal charter.

Consumer Protections Will Not Diminish Under an Optional Federal 
        Charter
    We believe insurance consumers will also benefit if an optional 
Federal charter becomes a reality. Strong solvency oversight and strong 
consumer protections are the cornerstones of any effective insurance 
regulatory system. The ACLI draft optional Federal charter legislation 
and the consensus version being finalized by the ACLI and other 
interested groups is built on these cornerstones. In this regard, the 
draft legislation duplicates the following important aspects of state 
insurance laws:

   It guarantees that consumers are protected against company 
        insolvencies by extending the current successful state-based 
        guaranty mechanism to national insurers and their 
        policyholders.

   It ensures the financial stability of national insurers by 
        requiring adherence to statutory accounting principles that are 
        more stringent (conservative) than GAAP.

   It duplicates the stringent investment standards currently 
        required under state law.

   It mirrors the strong risk-based capital requirements of 
        state law to ensure companies have adequate liquid assets.

   It duplicates state valuation standards that ensure 
        companies have adequate reserves to pay consumers' claims when 
        they come due.

   It reproduces the requirement that companies submit 
        quarterly financial statements and annual audited financial 
        reports.

   It mirrors the existing nonforfeiture requirements under 
        state law that guaranty all insureds receive minimum benefits 
        under their policies.

    In addition, consumers who deal with national insurers may very 
well enjoy significant added protections and benefits over those 
afforded by the states. For example, consumers will experience uniform 
and consistent protections nationwide and will enjoy the same 
availability of products and services in all 50 states. Consumers will 
also benefit from uniform rules regarding sales and marketing practices 
of companies and agents, and for the first time consumer issues of 
national importance will receive direct attention from a Federal 
regulator.

Conclusion
    Life insurers today operate under a patchwork system of state laws 
and regulations that is not uniform and that is applied and interpreted 
differently from state to state. The result is a system characterized 
by delays and unnecessary expenses that harm companies and disadvantage 
their customers. Failure to reform insurance regulation will pose a 
severe and ever larger competitive burden that could threaten the 
viability of the life insurance industry and those it serves in an 
increasingly competitive global economy.
    Mr. Chairman, we encourage you in the strongest terms to work with 
us to put in place an appropriate Federal regulatory option available 
to insurance companies, insurance agencies, and insurance producers. It 
is in the best interests of our industry, its customers and our overall 
economy to do so as expeditiously as possible.
    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.

    Senator Sununu. Thank you very much, Mr. Rahn.
    I will defer to Senator Hollings for the first round of 
questions.
    Senator Hollings. Thank you very much, Mr. Chairman.
    Mr. Rahn, I think, most respectfully, that our bill, 
patterned after the California system, is not an option bill. 
Otherwise, trying to go down the roll call here of this 
outstanding panel, obviously Mr. Heller and Mr. Hunter favor 
the change or some kind of bill along the lines of 1373. Mr. 
Rahn wants to get Federal minimum standards reform, as 
necessary, so a Federal insurance charter option, as does Mr. 
Berrington. He wants the option charter. The only fellow in 
favor of staying in the--when in doubt, do nothing, and staying 
in doubt all the time, is my own Commissioner, Mr. Csiszar.
    [Laughter.]
    Senator Hollings. I speak affectionately of him, because he 
was a Canadian when the Governor first went to appoint him, and 
I had to rush around making him a citizen.
    [Laughter.]
    Mr. Csiszar. And I thank you for it.
    Senator Hollings. Yes sirree, and we're delighted to have 
you as a citizen. And, incidentally, the Republican Governor 
just reappointed him, so both sides have every confidence in 
him.
    Senator Sununu. Well, with all due respect, Senator 
Hollings, I very much appreciate the fact that both of you are 
from South Carolina, but I think I have an easier time with Mr. 
Csiszar's accent.
    [Laughter.]
    Senator Hollings. I do, too.
    [Laughter.]
    Senator Hollings. Now, having said that, the best 
testimony, if I were a juror, is Mr. Ahart. And the reason I 
say that, and I really want to yield to our friend, who was the 
insurance commissioner and knows way more about it than anybody 
else, Senator Nelson, because he's been in the pits and done an 
outstanding job down there in Florida--and, incidentally, Mr. 
Heller, that was in Florida. The witnesses all appeared back in 
the 1980s before this Committee, 25 years ago, and they said, 
``If we had product liability, product liability regulation, 
that immediately the rates would go down.'' And you jogged my 
memory, the State of Florida did do that, adopted a product 
liability bill, and St. Paul and the others, the rates went up. 
The rates went up. That's the actual record. I remember that. 
That's why I'm frustrated, but not with Mr. Ahart.
    [Laughter.]
    Senator Hollings. I'm not frustrated a bit, because he's 
the one I worry about. I've had relatives in the insurance 
business, I've had the agents--I lost a home, and thank 
goodness for the agent, Mr. McDowell, because the first 
question is, ``Was it a total loss?'' They couldn't believe it. 
They came down and took all the kind of pictures and everything 
else like that. They realized that I had to wait for an hour 
for my house to catch fire from the other houses down the 
street. Four houses went. And then, of course, the--FEMA 
grabbed me--I've been after FEMA for years, but they got after 
me----
    [Laughter.]
    Senator Hollings.--and raised the level--it's a seashore 
home, and all of a sudden I couldn't have the third floor, 
because of the--so I had to reconcile that with the insurance 
company and other regulations that they had with respect to new 
construction and everything else of that kind. And with the 
agent--I'm for the agents--I saw my way through, and we were 
totally satisfied.
    However, you want legislative tools. You want Federal 
regulation using Federal tools for the file-and-use forms, for 
the licensing, Federal regulations. There isn't any question, 
that everybody, except Mr. Csiszar, is for some kind of Federal 
regulation and fixing of the responsibility and fixing of the 
understanding and fixing of the responsibility.
    Let me go right to the point. Mr. Csiszar, what's wrong 
with the California bill or my bill, 1373? I'm trying to get 
criticism. What's wrong with it?
    [Laughter.]
    Mr. Csiszar. And criticism you will get, but polite 
criticism it will be.
    Senator Hollings. Surely.
    Mr. Csiszar. As I said, the first concern, of course, is 
that there is--if you just look at the California market, there 
is a vast difference in markets between California and a place 
like South Carolina, for instance. We have had experience in 
South Carolina with a very strict reapproval process. You might 
remember John Richards as a commissioner some years ago. And 
the experience we had with a very, very strict approval process 
and essentially no rate increases in many instances, was that 
companies simply left the state. And the end result was that--
for instance, in the automobile market, to which I referred 
earlier, we essentially were left with the South Carolina 
Reinsurance Facility, State Farm, and Allstate, and no one--
there were one or two others, but no one was writing insurance. 
And as a result, we had the $200 billion--$200 million a year 
deficits, and, of course, these recoupment fees that you might 
remember that angered everyone, every driver, particularly the 
good drivers, who suddenly realized that they were subsidizing 
the bad drivers through all of this.
    So my first response to your bill is that if we were to 
implement the California-style regulatory system in South 
Carolina, you'd be driving away the insurance companies, and we 
have a record of that happening, you know.
    Again, I think the fact that there is--that you would have 
Federal regulation, even though presumably this would entirely 
preempt, I suppose, any kind of state regulation, as I read 
your bill, I think you also have to be careful of a number of 
things, not least of which is that little thing called premium 
taxes on which states subsist. I think you would endanger that. 
I think the cost that you might incur with this new system 
might outstrip the cost of the state system. Even though you're 
looking at 50 states, Federal regulation, from one estimate 
that I've seen, consumes about $1.3 trillion a year, with lost 
opportunities adding another trillion dollars a year, in an $11 
trillion kind of economy. So it could be an expensive Federal 
system that you're implementing this way.
    The bureaucracies that go with it, obviously, we've--our 
record hasn't been good with new kinds of Federal entities. 
Look at the Energy Department, look at the Education 
Department. They have become large bureaucracies over the years 
since we've implemented them.
    And, last, I would say that the precedent of Federal 
supervision isn't necessarily encouraging. We've had long-term 
capital management, we've had the savings-and-loan crisis, 
we've had BCCI, which was another bank, we've had, even as 
recently as a year or two ago, a bank in Chicago, Superior 
Bank, for instance--I believe it was Superior--going under. So 
the entire record of Federal supervision isn't all that 
stellar, I'm afraid.
    Senator Hollings. Well, I think you hurt your credibility 
when you say that 50 state systems would cost less than one 
Federal system.
    But, in any event, you're right, we went into the savings 
and loan, we cleaned up BCCI. But here, as witnesses say, they 
need regulation. We've got the GAO report, and everybody says 
let's get Federal regulation for licensing, file-and-use forms, 
yes, that it would be an improvement to have the option, at 
least the option, of a Federal system. They don't talk about a 
big Federal bureaucracy and everything else of that kind. 
They're asking, the majority of the witnesses, for Federal 
regulation and the option.
    But, you're right, the automobile insurance market went 
down in California. And if there's one place where the 
automobile predominates, that's in state of California, and you 
and I know what troubles we've had with automobile insurance. 
When you say it's a different market, ours was lousy, until you 
came along. You helped clean it up.
    But I can tell you right now, the California market has got 
a stellar record. What's wrong with the California record?
    Ms. Csiszar. My understanding is that the numbers on the 
California record--and I would defer to some of the 
associations--but the numbers that I've seen, the price--the 
lower prices are largely as a result of not having seen any 
increases in earlier times, as I understand. And in other 
cases, in other states, you would have those increases. Now, I 
don't have the numbers at my fingertips, but I do know that 
that is one of the interpretations that one can take. With 
respect----
    Senator Hollings. Mr. Heller, do you want to comment on 
that?
    Mr. Heller. Certainly, Senator, if you don't mind. I mean, 
in a sense that's true. In California, prices weren't 
increasing, while they were around the nation, but that's 
because of the regulatory regime. In California, prior to 
Proposition 103, auto liability rates were the second-highest 
in the Nation. Now that has declined, and California's rates 
are lower than the national average, because the commissioner, 
under Prop 103, ordered the reduction of rates because they 
were excessive.
    Now, in--there have been times when rates have gone up 
slightly in California because that was appropriate, and that's 
the key to regulation, and this is why I suggest that Ms. 
Csiszar has--I think was off in the point that you don't allow 
rates--that rates stay frozen. They don't necessarily have to 
stay frozen; they stay appropriate, and that's what's good for 
the market. So if there's a need for an increase, the 
commissioner is obligated to allow it, and that has happened.
    In 2000/2001, California auto rates did go up by 3.3 
percent, because that's what the market needed, that's what 
consumers needed, and that's what the industry needed. But you 
don't see the wild swings, as we've seen recently in medical 
liability or in homeowners insurance, where rates go up 15, 30 
percent at times, because the market is trying to self-regulate 
and follow the economy.
    So, yes, rates went down in California, but they went down 
because Prop 103 imposed regulation on the system, and it's 
what was expected.
    Senator Hollings. Thank you, Mr. Chairman.
    Senator Sununu. Thank you, Senator.
    Mr. Csiszar, I think it was Mr. Berrington who indicated 
that there are over 300 different state rate review laws, and 
he said something over 200 different form review laws. Is that, 
in fact, the case? And is that really a good and a healthy 
thing for efficient and competitive markets?
    Mr. Csiszar. Each state, of course, admittedly has its own 
way of reviewing products and reviewing rates, and it varies by 
line, so I don't know the exact number that it would be, but 
certainly the 50 states and the District of Columbia have 
different regimes, so they vary.
    I think the answer, and what we're looking for at the NAIC, 
is--we understand the need for greater uniformity. There's no 
question about that. And, in fact, the reforms that we're 
advocating all move toward that greater uniformity. And I think 
what we're looking for is a system whereby you have a much 
greater coordination among the states than we've had in the 
past, across all areas. And let me give you an example.
    When we had the problems in the early 1980s and mid-1980s, 
one of the systems we came up with was on the financial side, 
and we came up with an accreditation system. And by virtue of 
that accreditation system, for instance, now we defer to the 
domiciliary state in terms of the solvency regime that we have 
in place.
    Now, what I'm suggesting is that there are ways of 
resolving the costs that you imply if you say you have all 
these systems. Given that we are trying to bring those into a 
more uniform, more homogenous state, I would say that, with the 
accreditation system, for instance, you have an example of how 
that can be done at the state level. The Federal level is not 
the only answer, in terms of making it more efficient and 
making it more effective, if you will. I'm suggesting that the 
states can do the same thing in a more coordinated manner, 
whether it be through some accreditation system or another form 
of coordination.
    Senator Sununu. Well, there is discussion of the Interstate 
Compact. I think that's what you're alluding to. It was 
formally adopted by the NAIC a couple of years ago. How many 
states have signed onto the compact?
    Mr. Csiszar. I might wish to correct you on the 2 years 
ago. The adoption really was--it was actually earlier this 
year. And part of the reason was, we had agreed on a model, and 
then the Attorney General has commented on it, consumer groups 
came back with some comment, so it really wasn't until very 
recently that we adopted it. Since then, NCOIL and NCSL have 
both come out in support of that. So the whole process of 
implementing that compact is really going to occur within the 
next state legislative session from state to state.
    Senator Sununu. So you think things are really going to 
change. It's been a slow, painful----
    Mr. Csiszar. I think----
    Senator Sununu.--dragged-out process----
    Mr. Csiszar.--I think we can make a change----
    Senator Sununu.--but things are about to change.
    Mr. Csiszar.--and I--you know, as I said, you know, and 
I've been criticized for it, but I welcome this kind of 
opportunity, in a sense, because it does put pressure on us to 
change. And I don't think that's necessarily bad. But I think 
that that pressure to change, between that pressure--between 
that and the willingness of commissioners to set an example, in 
some instances--for instance, in South Carolina, we've made it 
much more difficult, by implementing our automobile system, for 
other states to say that that system can't work. So I think 
between that, between setting examples, between pressure by the 
industry, we--it can change, and it will change. And we know 
there's a limited amount of time. It can't take forever.
    Senator Sununu. Mr. Hunter, Mr. Csiszar talks about 
uniformity and the move to uniformity. Do you think 
uniformity--that movement to uniformity at the state level--is 
anti-consumer?
    Mr. Hunter. It doesn't have to be. It can be, obviously, if 
you gut needed regulations. You know, the fact that they have 
300 rate approaches is not necessarily surprising, because they 
have several lines of insurance with different needs, that, if 
you divide by 50, it's about six rate approaches per state, if 
that's right. I mean, life insurance has no rate regulation. 
That's one approach. Some have file-and-use, some--and as I 
pointed out in my testimony, there is a reason for different 
rate approaches for different lines of insurance. Some lines of 
insurance absolutely have to be regulated, because they're 
anti-competitive lines of insurance, like the assigned risk 
plan or something like that, where everyone agrees it's not 
competitive; it has to be regulated. Other lines should not be 
regulated at all, and then there are degrees in between, 
depending upon the situation, how informed the consumer is, and 
so on.
    So there are ways to get uniformity within the states, but 
that doesn't mean there wouldn't still be different approaches 
to different lines of insurance.
    Senator Sununu. You also mentioned speed to market in your 
testimony.
    Mr. Hunter. Yes.
    Senator Sununu. Do you think efforts to accelerate speed to 
market is anti-consumer?
    Mr. Hunter. No. In fact, I worked very hard at the NAIC 
level. When I was a commissioner and after I left as a funded 
consumer rep at the NAIC, we met almost weekly for a whole year 
to work out a system of speed to market that would get products 
and prices approved within a 30 day timeframe that we agreed to 
that would eliminate all these funny, odd rules in individual 
states. We agreed to that. We helped work through all that. 
Consumers do not want inefficient regulatory systems.
    However, when it comes to the point of gutting protections 
which are going on right now, that's where we say no.
    Senator Sununu. You suggested that even an optional Federal 
charter would result in a race to the bottom.
    Mr. Hunter. Yes.
    Senator Sununu. I think that was the phrase you had used.
    Mr. Hunter. Yes.
    Senator Sununu. We effectively have an optional Federal 
chartering system for banks.
    Mr. Hunter. Yes.
    Senator Sununu. We have state chartered banks, Federal 
chartered banks.
    Mr. Hunter. Yes.
    Senator Sununu. Has that resulted in a race to the bottom 
in the banking industry?
    Mr. Hunter. Yes.
    Senator Sununu. Would you support--if we repeal the 
antitrust provisions, antitrust protection, for insurers, 
either at the state level or by Federal legislation, would you 
support the elimination of price controls?
    Mr. Hunter. Depends. Depends on the line of insurance and 
what else is in place. Do you have an informed consumer? Are 
there systems of consumer information? Is it really a 
competitive market? You have lines of insurance, like credit 
insurance, that absolutely have to be regulated----
    Senator Sununu. Right.
    Mr. Hunter.--regardless of whether there's an antitrust law 
or not.
    Senator Sununu. Mr. Ahart, we were just talking about speed 
to market. Your association has a number of proposals that are 
out there. Could you maybe speak to the issue of speed to 
market and how your proposals would improve and affect speed to 
market?
    Mr. Ahart. Sure. We would actually have Federal legislation 
which would be adopted which would preempt state rights. On 
forms, it would allow file-and-use, and then you'd file the 
form 30 days prior, the state would have the right to reject it 
within that 30 days. If it was approved or they've done--they 
did nothing with it over 30 days, then it would be deemed to be 
approved, and they'd be able to use it. So that would clearly 
speed up the issue of forms.
    On rates, we would actually look for just the marketplace 
to take control and just file-and-use without--unless those 
areas are uncompetitive, and then the state would still 
regulate them.
    Senator Sununu. Can you quantify the kind of impact that 
you think or would hope that this would have on speed to 
market?
    Mr. Ahart. I don't know what you mean by quantify, except 
that all I can say is----
    Senator Sununu. What's the average speed to market in a 
given state?
    Mr. Ahart. Oh, it can take----
    Senator Sununu. What's the average speed----
    Mr. Ahart. Right now it can----
    Senator Sununu.--to market nationally?
    Mr. Ahart. Sure.
    Senator Sununu. How would it affect the speed to market, 
either as a percentage or a reduction in months, weeks----
    Mr. Ahart. Absolutely.
    Senator Sununu.--days?
    Mr. Ahart. It can take up to 18 months now to get new 
products formed. And, at times, companies put in new forms or 
rates, and actually so many years go by, where they just ignore 
them and don't do anything with them anymore and try to do a 
new product, so that opportunity has been missed, where this 
would actually do everything within 30 days.
    Senator Sununu. But you haven't set a specific goal with 
your legislative proposal that you want to reduce time to 
market by 3 weeks or by 10 percent or by 30 percent?
    Mr. Ahart. Well, it would----
    Senator Sununu. Do you----
    Mr. Ahart.--reduce everything----
    Senator Sununu.--try to quantify----
    Mr. Ahart.--to 30 days. So, I mean, and all those ones--I 
don't think there's anything out there that is quicker than 30 
days. There are ones out there that take 18 months, there are 
ones out there that take forever, and so it would----
    Senator Sununu. Fair enough.
    Mr. Ahart.--quantify it that way.
    Senator Sununu. Why don't I defer to Senator Nelson and 
then we'll have a second round.
    Thank you.
    Senator Nelson. Thank you, Mr. Chairman.
    All the old memories come back.
    [Laughter.]
    Senator Nelson. And you all have been an excellent panel. 
You've presented, most articulately, the questions in a 
changing environment in which change is needed.
    Now, I approach this from the standpoint of--for a product 
that is essential for the functioning of our society, which 
insurance is, how can you best produce a product that is the 
most efficient at the least cost with the least amount of fraud 
that is an environment in which companies can offer a decent 
product and make a good living?
    So, naturally, I'm going to ask the questions about the 
protection of the consumers and providing a healthy 
marketplace. Our experience in Florida--for example, with 
homeowners--was one of the most disrupted marketplaces in the 
world, of which the government had to step in, create quasi-
governmental insurance companies to take up the slack when the 
insurance companies fled the state because of the massive 
losses from the most costly natural disaster in the history of 
the country to that point in insurance losses, Hurricane 
Andrew.
    And yet the government wasn't going to be what was solving 
it. That was just temporary. What was going to solve it was to 
nurture that private marketplace back to life, to health, so 
that it could supply the product, in this case, of homeowners 
insurance.
    So how do we blend all of this together? How do we get 
balance?
    Now, let me ask a couple of questions here. First of all, 
I'm concerned, Mr. Csiszar, that the National Association of 
Insurance Commissioners, which had performed a magnificent 
service in the past, I'm concerned that it has lessened, 
because of the duration of an insurance commissioner's term, 
its ability to represent the best interest of consumers. Let me 
ask you, what is the average time that an insurance 
commissioner in a state is in office?
    Mr. Csiszar. I think you need to talk to George Dale, Mr. 
Nelson, I think George is the longest-serving commissioner----
    Senator Nelson. That's not the question. The question is, 
what is the average time?
    Mr. Csiszar. Probably one Governor's term.
    Senator Nelson. To the contrary. It's less than one year, 
the average time.
    And where does that insurance commissioner usually come 
from, Mr. Csiszar?
    Mr. Csiszar. Not always from the industry or with the 
experience from the industry. Oftentimes from a political or a 
legal environment.
    Senator Nelson. Usually that insurance commissioner is 
appointed because that insurance commissioner has knowledge of 
insurance and he comes from the insurance industry.
    And at the end of his term, in less than an average of 1 
year, where does that insurance commissioner, when he or she 
leaves public service, where do they go?
    Mr. Csiszar. I think the record there is that they do tend 
to go back to the industry or, in some shape or form, go to the 
industry.
    Senator Nelson. And that's my concern. And that leads me to 
want to support an approach like Senator Hollings' approach, 
because not only of Gramm-Leach-Bliley--and, by the way, the 
U.S. Supreme Court case was--I guess it was Barnett Bank versus 
Bill Nelson. I was the one standing up for the insurance 
industry. I happened to be insurance commissioner at the time, 
inherited a case that had come--had started before my term. But 
on a technical reason, with a unanimous U.S. Supreme Court, 
they decided that, for technical reasons, the early in-the-
century law said that banks could do insurance business. And so 
that led, ultimately, to enormous changes, that led to Gramm-
Leach-Bliley. Enormous changes have occurred, and here we are.
    Now, let me ask Mr. Hunter, you, I think, want some Federal 
participation here. It's the Federal charter that you're 
concerned with. Tell us about that.
    Mr. Hunter. Commissioner--I mean, Senator.
    [Laughter.]
    Mr. Hunter. Well, you know, I've been an insurance 
commissioner, too, and I have, in my entire life, supported 
state regulation. And, as I say in my written testimony, I'm at 
a crossroads. I think state regulation is failing.
    Now, I think CFA and I are going through a process, and I 
think we're going to come out that we support a Federal 
approach, like Senator Hollings, over and against the state 
approach, but we would not support a dual charter. We don't 
like that idea. But we would support a Federal approach that 
would be ``the'' approach for at least some of the companies, 
perhaps along the lines of the Hollings approach, which I think 
makes sense.
    But we have not finally crossed the Rubicon. We're having 
meetings with other consumer groups that are coming up. We're 
having a major summit of consumer leaders and others coming up. 
And that's going to be the primary question, are we going to 
move it toward abandoning our--my lifelong support of state 
regulation, which is hard. It's hard. It's, sort of, like 
leaving a church or something, you know. It's a difficult 
process.
    Senator Nelson. It's been difficult for me, too.
    Mr. Hunter. But I am----
    Senator Nelson. Because I saw how it could----
    Mr. Hunter.--I am at the Rubicon, you know.
    Senator Nelson.--I saw how it could work, but I've also 
seen the flaws of how it doesn't work.
    Mr. Hunter. And I think, you know, to the--the Gramm-Leach-
Bliley is only part of it. It's this massive giving away--a 
willingness to give away consumer protections over the last few 
years in order to preserve the turf, instead of saying, ``Well, 
we'll preserve the turf by being strong and protecting 
consumers,'' which is what they should have done, in my view.
    Senator Nelson. Mr. Chairman, may I ask two more questions, 
just so I--I'm kind of, you know, in a groove here----
    [Laughter.]
    Senator Nelson.--and I'd like to continue.
    Mr. Berrington, you represent an association of which your 
leader, the president, Bob Bagley, is a friend, we've worked on 
things. You support a Federal charter, but there are many other 
associations that don't support the Federal charter. Tell me 
about that.
    Mr. Berrington. There are other trade associations in the 
property-casualty business that have different views. I think 
all of them recognize the problems that have been set forth 
this morning with regard to the current state of state 
regulation. And with--those organizations ought to speak for 
themselves, of course, but I know that there are companies 
within those organizations which are moving toward the idea of 
a Federal charter, an optional charter, with the rights kinds 
of standards--strong consumer protections----
    Senator Nelson. Yes.
    Mr. Berrington.--and a competitive-based----
    Senator Nelson. Do you support----
    Mr. Berrington.--regulatory system.
    Senator Nelson.--the Hollings bill?
    Mr. Berrington. We have some difficulties with the bill.
    First, the bill----
    Senator Nelson. I don't want to get----
    Mr. Berrington. I'm sorry.
    Senator Nelson.--into all the details.
    Mr. Berrington. No, it----
    Senator Nelson. If you would submit it for the record.
    You're inclined to look at it, but you don't necessarily 
support it. Is that it?
    Mr. Berrington. We don't support the prior-approval 
regulatory regime, rather than an Illinois-type of competitive 
regime.
    Senator Nelson. How about you, Mr. Rahn?
    Mr. Rahn. No. From the life insurance perspective, the 
approach that's taken in Senator Hollings' bill would not 
really work for us. The bill has been crafted primarily to 
address the property and casualty industry, and there would 
need to be accommodations made to address the life industry.
    We also feel very strongly that there should be an option, 
that there should be an ability for the states to have a say, 
and insurance regulation to have two competing systems, and 
then to also allow companies, depending on their business, mix 
of products, and other things, to have that option.
    Senator Nelson. OK. Let me move on----
    Mr. Rahn. All right.
    Senator Nelson.--because of the time here.
    Final question is, Do you think--the Hollings approach, as 
I understand, does have the regulation of rates at the Federal 
level.
    Mr. Berrington. Right.
    Senator Nelson. What's your opinion about whether or not a 
Federal panel can do regulation of rates?
    Mr. Berrington. Our view, Senator, is that there should be 
no rate regulation, that it should be a competition----
    Senator Nelson. You would----
    Mr. Berrington.--like the Illinois----
    Senator Nelson.--like to have no rate regulation.
    Mr. Berrington. That's--and we're prepared to give up the 
antitrust exemption to get that. The proposal, the Prop 103 
approach, which is what's used in 24 other states----
    Senator Nelson. Yes.
    Mr. Berrington.--has not been the cause of lower rates in 
California----
    Senator Nelson. Well, let me just----
    Mr. Berrington. So we would hope--we would suggest a 
different regulatory regime.
    Senator Nelson. I understand. And I'll tell you, it's going 
to be a long day before I can get to that point, because in the 
aftermath of Hurricane Andrew, when I was looking at rate 
increases of 200 percent, and I was the only thing standing 
between those rate increases and the consumer, there just 
simply is going to have to be some rate regulation somewhere in 
the process.
    Mr. Chairman, thank you for your indulgence. I think, 
again, just--this is an excellent starting point. I think the 
Hollings bill is an excellent starting point. I think we can do 
some blending of ideas here. Market conduct, I think, in large 
part's got to be done at the state level, but this is the 
beginning of seeing if we can get some consensus. But, in this 
industry, Mr. Chairman, getting consensus on anything----
    [Laughter.]
    Senator Nelson.--is very difficult to do.
    Senator Sununu. Thank you, Senator Nelson.
    Mr. Berrington, I do want to give you a chance to just 
respond to the question, in the interest of fairness, regarding 
why you would be supportive of the optional charter proposal 
you talked about in your testimony and questions here, and what 
your concerns would be about the mandatory regulatory structure 
proposed by Senator Hollings.
    Mr. Berrington. Thank you, Mr. Chairman.
    We think the optional approach is one which is most likely 
to get consensus in the industry ultimately, because there are 
companies with different needs. Smaller companies have more 
comfort with a local regulatory regime. Certainly for national 
companies or large regional companies, the Balkanization that 
has occurred at the state level adds cost and is difficult to 
do.
    We believe that the Federal approach, for those who choose 
it--let me come back to it for a moment, if I might--would be 
one that would have very tough consumer protections--it is not 
to the benefit of any our member companies that there not be 
tough consumer protections--tough financial regulation, so that 
we don't have the kinds of stresses going forward in the 
guarantee fund system that we have today, but one would that 
would, quite frankly, utilize competition for the establishment 
of rates.
    There's been much talk this morning about Prop 103, and the 
conversation about Prop 103 has been basically in the context 
of automobile insurance. But Prop 103 really related to all 
insurance except workers' compensation. And the--what it did 
do, Senator Hollings, because your bill follows that approach--
what it did was to take, as a rate regulatory approach, 
something which is called a prior-approval system with a 
deemer. That's insurance talk. Commissioner Nelson certainly 
recalls that, and you may well, from your days as Governor. But 
basically the approach that was taken by Prop 103 was already 
the law in 23 other states with regard to workers' 
compensation.
    The changes that have resulted in California automobile 
insurance rates coming down have had nothing to do with Prop 
103. Indeed, the rates did not begin to come down until six or 
seven or 8 years after Prop 103 was passed.
    But what things happened during the interim? Among other 
things, California passed a very tough seatbelt law. We all 
know that the greater the use of seatbelts, the lower the 
injury levels there are in accidents. It also passed 
legislation which stopped the subsidization of high-risk 
drivers by those in the regular market. That brought rates down 
dramatically, as well. It took other reforms. And as those 
began to work through the system, they brought rates down.
    But as Senator Lautenberg said earlier today, New Jersey 
has had some of the highest rates of auto insurance in the 
country. They had almost exactly the same prior-approval system 
that California had. The difference, I think, should be drawn 
not between California and the rest of the country, but between 
California, which does not rely principally on competition for 
rate regulation, and Illinois, which does, and has for decades.
    Let me just show you quickly a chart. This is homeowners 
insurance, which is also regulated by Prop 103. Here is the 
comparison between homeowners insurance rates in California and 
in Illinois from 1991 through the year 2000, just after Prop 
103 got its legs, so to speak. In every year, homeowners 
insurance rates in Illinois, also a state with substantial 
population density and rural areas, has been 40 percent less, 
approximately 40 percent less, than what they pay in 
California. If Prop 103 were the magic elixir, why didn't it 
bring down rates with regard to homeowners insurance to the 
same level as Illinois?
    Senator Sununu. Mr. Berrington, you're welcome to submit 
that for the record, and I'll give you a minute to conclude 
your answer.
    Mr. Berrington. Sure.
    Senator Sununu. But I just want to note that we'll go to 
Senator Hollings after the conclusion of your answer to my 
question.
    Thank you.
    Mr. Berrington. Thank you very much. I appreciate the 
indulgence.
    And I would also like to submit for the record the 
California auto insurance premium chart, which, as you can 
see--this is Prop 103, and the rates didn't start to come down 
until many years after that, and in every----
    Senator Sununu. Without objection.
    [The information referred to follows:]

    
    
    
    
      Myths and Facts about California's Proposition 103, Insurer 
             Investments, and Workers' Compensation Reform

    In recent testimony before the Senate Committee on Commerce, 
Science and Transportation, Douglas Heller (Foundation for Taxpayer and 
Consumer Rights) and Robert Hunter (Consumer Federation of America) 
made claims about the purported benefits of California's Proposition 
103 (''Prop 103''); insurance company investments; and the impact of 
various reforms on California's workers' compensation system.
    We do not believe their claims have merit, but since their long-
term agenda includes trying to federalize a Prop 103-type insurance 
regulatory system, it is critical that policymakers understand the 
nature of Prop 103. In addition, their erroneous assertions about 
insurer investment practices and how rate regulation reforms affected 
California's workers' compensation system should not be allowed to go 
unchallenged. Therefore, set forth below are myths and facts about each 
of these issues.

I. Myths about Proposition 103
    Myth: Prop 103 saved the California auto insurance market through 
its prior approval regulatory structure.
    Fact: While everyone agrees that the California auto insurance 
market improved dramatically, it was not due to Prop 103. Prop 103 set 
up a government-centered price control system for insurance, in 
contrast to market-based rate regulation. Numerous academic studies, 
have demonstrated conclusively that states with prior approval 
regulatory regimes have more significant problems in their insurance 
marketplaces than states that allow free market competition.
    In fact, the California auto insurance marketplace improved because 
of other factors (e.g., lower liability costs, improved fraud 
detection, and greater public safety) and in spite of Prop 103. It is 
critical to underscore that substantial premium savings did not occur 
in the auto insurance market until nearly eight years after Prop 103 
had been approved. During those years, other policy changes that 
impacted accident rates, loss costs and the claiming environment were 
being implemented. All of those had a meaningful and positive impact on 
the auto insurance market.
    Myth: Since Prop 103 was successful in California, it should be 
used in other states and nationally.
    Fact: As stated previously, Prop 103 did not stabilize or improve 
the insurance market in California. Its essential regulatory mechanism 
(price controls) has failed in states that use it. Moreover, if Prop 
103 had been good for insurance markets and consumers, it also would 
have helped the homeowners insurance market in California. In fact, 
average homeowners premiums in California in 2000 were 44 percent 
higher than in Illinois, a state which has market-based regulation and 
price flexibility. As the attached chart shows, California's homeowners 
insurance premiums were consistently higher than those in Illinois 
during the 1990s.
    Those offering Prop 103 as ideal regulation fundamentally 
misrepresent both insurance and economics. The prices consumers pay for 
insurance (premiums) are generally based on the underlying claims costs 
associated with their policies. Consumer advocates incorrectly argue 
that auto insurance premium decreases following Prop 103's passage were 
due to its ``rate rollback'' provisions, rather than the more obvious 
explanation: that the decreases were a direct response to declining 
loss costs.
    Myth: Arguments that substantial decreases in claims costs in 
California, rather than Prop 103's price regulation, were responsible 
for reducing auto insurance premiums in California are subjective and 
just insurance industry ``spin.''
    Fact: In addition to the overwhelming academic research on the 
destructive effects of price regulation on insurance markets and 
consumers, there has been empirical analysis specifically on Prop 103 
and the California auto insurance market. David Appel, Ph.D., a 
principal with the actuarial firm Milliman, USA, and one of the 
Nation's foremost scholars on insurance regulation and an expert in 
actuarial science, analyzed the specific claims of alleged benefits of 
Prop 103. His carefully specified econometric analysis \1\ of the 
California experience indicates that Prop 103 had no statistically 
significant impact on California loss costs. Put simply, factors other 
than Prop 103 brought claims costs-and premiums--down.
---------------------------------------------------------------------------
    \1\ An Analysis of the Consumer Federation of America's ``Why Not 
the Best?,'' David Appel, Milliman, USA, December 2001.
---------------------------------------------------------------------------
    So what brought loss costs down?

   Fundamental changes in the tort system: A court decision in 
        1979 (Royal Globe) unleashed an onslaught of litigation in 
        California courts, both for auto liability claims as well as 
        other liability claims. Between 1980 and 1987, California 
        Superior Court auto liability claims filings increased 82 
        percent. In addition, average claim severity quadrupled, 
        leading to dramatic increases in auto liability insurance 
        costs--and premiums--in the state. In 1988, the year that Prop 
        103 passed, the California Supreme Court overturned the Royal 
        Globe doctrine (in Moradi-Shalal); the court even acknowledged 
        the ``undesirable social and economic effects of the [previous] 
        decision . . . [such as] excessive jury awards, and escalating 
        insurance, legal, and other 'transactions' costs.'' This 
        dramatic change in the legal environment was a significant and 
        crucial factor in reducing claims costs in California.

   Policy initiatives on safety, fraud, and excessive claiming 
        behavior helped to reduce loss costs as well: Seat belt usage 
        increased substantially and the blood alcohol standard for 
        driving under the influence of alcohol (DUI) was reduced to 
        0.08 percent in 1990. None of these changes were part of Prop 
        103, and all of them occurred wholly separate from Prop 103. 
        Moreover, the enforcement of DUI laws intensified; this 
        resulted in the number of DUI-related claims dropping 
        substantially, by about 60 percent through the 1990s.

    The California legislature also passed laws (e.g., SB 953 in 1991) 
        that aggressively cracked down on fraud and excessive claiming 
        behavior. Additionally, there were dramatic increases in the 
        California Department of Insurance anti-fraud budget. As Appel 
        notes in his analysis, by 1998, the empirical factors actuaries 
        use to measure fraud and claiming behavior (e.g., the Bodily 
        Injury to Property Damage ratio), which had been 2.3 times 
        higher for California in 1992, dropped to rough parity with the 
        rest of the Nation by 1998.

    The effect of these initiatives was dramatic, Appel determined. 
        Average claim cost growth slowed substantially in California, 
        compared to the rest of the Nation, and the slowdown was 
        particularly greater for liability-related coverages than for 
        physical damage and theft coverage, which would be expected 
        given the positive changes in the litigation environment.

    Myth: Even considering other factors, Prop 103 did no harm to 
California's insurance market.
    Fact: The Appel econometric analysis showed that California 
consumers could have saved in excess of $10 billion from 1989 to 1998 
had market based pricing been permitted to function in the place of 
Prop 103's price controls. Appel notes that the post-Prop 103 
regulatory environment in California was likely to induce insurers to 
defer reductions in premiums in response to declining costs. Why? 
Because they feared that regulatory ``rigidity'' would not allow them 
to raise premiums if costs rose again in the future. By interfering 
with market forces, and the ability of insurers to compete in that 
market by raising or lowering premiums in response to changing costs, 
Proposition 103 was, and continues to be, detrimental for consumers.
    Myth: The antitrust exemptions provided to insurers are anti-
competitive and allow companies to set prices collusively rather than 
compete against one another. The industry can act in concert to raise 
prices at a future date. Without the antitrust exemption, insurers 
would need to price more reasonably and based on their actuarial needs 
because they would not be assured of the higher future prices that 
collusion allows.
    Fact: Setting aside for the moment the fact that insurers do comply 
with antitrust laws, this scenario does not accurately portray how 
companies operate in the marketplace. From an economics perspective, 
the idea that firms collude together, even tacitly, in a competitive 
market--and the insurance market is very competitive--by acting in 
concert to raise or keep prices higher than warranted by actuarial 
standards is not borne out by either real world experience or economic 
theory. In order to succeed in the market, insurers must keep premiums 
as low as possible in order to keep their customers from shifting their 
business to another insurer. Any attempt by a company to keep prices 
artificially high in order to gain additional profit would allow that 
company's competitors to increase their market shares by merely 
lowering their prices.
    Premium data for California indicate that insurers were reluctant 
to significantly lower prices in auto insurance until 1996--eight years 
after Prop 103 was passed and when it was clear that the favorable loss 
trends generated by non Prop 103 factors (discussed elsewhere) were 
substantial and relatively permanent. In a market-driven system, 
insurers would have been free to raise and lower prices as needed,.
    Myth: Prior to Proposition 103, auto insurance premiums in 
California rose dramatically each year. The average auto liability 
premium dropped 22 percent in California between 1989 and 2001 while 
premiums throughout the rest of the Nation rose 30.2 percent.
    Fact: As detailed above, auto liability insurance premiums dropped 
substantially in California because of the favorable changes in the 
litigation environment, improving safety and reduced fraud, not because 
of Prop 103. Two trends explain both the drop in California's auto 
premiums and the simultaneous rise of such premiums in the rest of the 
country. First, until 1989 and the legal decisions and policy changes 
that resulted in decreasing liability costs, California was a 
litigation nightmare for insurers. Since then, costs (and premiums) 
have dropped to about the national average. Second, the overall 
litigation environment in the Nation has worsened in recent years, thus 
becoming more costly to both insurers and consumers as a general 
matter.

II. Insurer Investment Practices
    Myth: Insurers have foregone their traditional conservative 
investment philosophy and strategies for maintaining reserves (in order 
to pay future claims payments) in favor of riskier stock market and 
other exotic investment products.
    Fact: The property-casualty insurance industry invests very 
conservatively, putting a large majority (ranging from 66-71 percent 
over the last decade) of its investments for future claims payments in 
U.S. government, municipal, special revenue, and public utility bonds. 
While there was a slight increase in the proportion put into common 
stock during the 1990s, investment in highly stable bonds still 
continues to dominate property-casualty insurance. The percentage 
invested in common stocks grew from 16.1 percent in 1991 to 20.8 
percent in 2001, when property-casualty insurers held 66.1 percent of 
their $782 billion total investments in bonds. By being one of the 
largest investors in state, municipal, and special revenue bonds, the 
property-casualty insurance industry not only exhibits stable and 
conservative stewardship of funds for claims payments, but also makes 
major contributions to the public infrastructure and economic 
development of local communities and states.
    Myth: Property-casualty insurers lost substantial amounts of their 
investment portfolios in such stocks as Enron, WorldCom, Tyco, and 
volatile high tech/dotcom stocks such as AOL, Cisco, JDS Uniphase and 
others. Losses in these stocks by some insurers constitute evidence of 
risky investment behavior on the part of property-casualty insurers and 
are the cause of recent insurance price hikes.
    Fact: This is patently false. Important and well-known factors, 
such as World Trade Center terrorism losses, water damage and mold 
claims, and natural disaster losses, have dramatically increased 
insurance losses in recent years, and have led, in turn, to increases 
in insurance prices. In addition, rising liability insurance losses 
caused by an aggressive lawsuit industry have greatly destabilized the 
insurance marketplace.
    In recent testimony, one group tried to suggest that $37 million 
insurers lost from the bankruptcy of Enron was responsible for premium 
increases. Insurers were not the only ones who lost money because of 
the Enron scandal. Millions of investors, and sophisticated mutual 
funds, brokers, and pension funds lost billions. However, relative to 
the $782 billion that property-casualty insurers invest annually, the 
Enron losses represent less than one thousandth of one percent (.005 
percent) of annual investments. Even when other losses such as those 
from WorldCom are included, the overall impact is trivial as a 
percentage of overall investments. This group also failed to 
acknowledge that many of the other stock losses cited may eventually be 
recovered as those companies' financial conditions improve. Because 
insurers are most heavily invested in less volatile bonds, they can 
often wait to recover some losses on stocks, since stocks comprise 
about one-fifth or less of the industry's investments.
    Myth: A Proposition 103-style prior approval state regulatory 
system will result in less risky investment practices on the part of 
insurers.
    Fact: As previously highlighted, investment practices are already 
very conservative in the property-casualty insurance industry and 
covered by solvency regulation, industry best practices, and state 
laws. The addition of a Prop 103-type regulatory system would not 
improve investment practices or solvency regulation because the major 
focus of Prop 103 is command-and-control price and product regulation. 
Prop 103 could threaten the efficacy of solvency regulation by 
channeling resources and focus away from the kind of oversight and 
enforcement functions that truly benefit consumers and form the 
foundation of a financially healthy insurance market. A regulatory 
system that relies on competition, state and Federal antitrust 
provisions to regulate prices and products, on the other hand, can 
concentrate resources and expertise on solvency and market conduct 
regulation, ensuring the viability of the insurance marketplace.
    Myth: Insurance companies make all of their profits off of 
investments and routinely expect to lose money on underwriting.
    Fact: This statement is palpably untrue. As a general matter 
insurers attempt to price products so that a reasonable profit can be 
generated from the insurance operation itself. Property-casualty 
insurance is a highly competitive business with over 1,100 major 
insurer groups representing nearly 4,000 companies. As such, there are 
differing assessments of the correct balance of underwriting and 
investment profit. In an environment where investment returns allow for 
a premium to be decreased, the competitive marketplace may result in 
those reductions. This may vary by line of insurance, with some 
insurers electing to consistently make underwriting profits in every 
line of business they write.
    Myth: Insurers resort to a ``tort reform'' strategy whenever 
interest rates decline and the investment environment becomes tougher.
    Fact: Property-casualty insurers are the biggest players in the 
U.S. tort system. As such, the industry seeks tort reform not as a 
convenience, but because reform of the tort system will result in 
decreased litigation costs. Because of the steady increase in class 
action lawsuits, the aggressiveness of the trial bar in asbestos, 
medical malpractice, product liability, and even new areas, such as 
obesity, claims costs have soared. When insurance losses increase 
because of these rapidly rising liability losses tort reform is urgent 
and must remain an important goal through periods of both good and bad 
environments for underwriting and investments.
    Myth: Tort reforms never result in a stabilization of insurance 
costs and premiums and are used by insurers as a ruse to hide their 
poor results in investments.
    Fact: Substantial tort reforms in the late 1980s in many states, 
following a major escalation in the frequency and severity of lawsuits, 
did lead to a marked stabilization of liability insurance costs and 
premiums that lasted through much of the 1990s. Tort reform was a key 
factor in producing more stable insurance prices, and, along with 
robust competition among insurers and good investment results, resulted 
in billions of dollars in savings for commercial and individual 
consumers during the 1990s. There is simply no getting away from the 
fact that underlying claims costs are the major part of insurance 
premiums, and to the extent that tort reform can reduce fraud, 
questionable and exaggerated claims, and novel lawsuits, it can 
significantly help to keep claims costs--and premiums--in check.

III. California Workers' Compensation
    Myth: Workers' compensation has not been as profitable in 
California as it has been nationally because of price deregulation in 
1993. Because of ``deregulation,'' the California workers' compensation 
system is currently in crisis because insurers became foolish, engaged 
in cut-throat competition, and underpriced their products.
    Fact: There are numerous inaccuracies in the above claims. 
Regulatory modernization, brought about by a more market-driven rating 
law for workers' compensation in 1993, saved California businesses and 
consumers billions of dollars in the first six years following 
implementation. The 1993 reforms repealed the so-called ``minimum 
rate'' law, through which the government established the final price of 
workers' compensation insurance and thereby prevented workers' 
compensation insurers from giving employers greater choice of carriers. 
By enacting a more modern rating system, California eliminated a rigid 
government price setting mechanism, thus finally allowing some price 
competition in the workers' compensation marketplace. However, 
California did not relinquish its authority to prevent workers' 
compensation rates that were ``inadequate.'' Thus, if at any time 
California regulators thought that an insurer's rates were in fact 
``inadequate,'' the regulators had the right and the responsibility to 
reject that rate.
    Rather, the problem with the California workers' compensation 
system is an absence of system controls over medical treatment costs 
and payments for lost wages, combined with a hyper-complex statute 
generating a high level of dispute and litigation. Average ultimate 
loss per indemnity claim in California has more than doubled in the 
past 6 years--from $25,849 in 1996 to $52,142 in 2002.
    Although workers' compensation reform was a significant issue in 
the recent campaign to recall Governor Gray Davis and election of the 
new Governor, it is telling that none of the major candidates advocated 
a return to price controls or a Prop 103-type regulatory regime for 
California's workers' compensation insurance. Indeed, all pointed 
correctly to system costs as the culprit.
    Contending otherwise is merely an attempt by those with a stake in 
keeping the current dysfunctional system to change the subject.

American Insurance Association, December 2003.

    Mr. Berrington.--and in every single year, Illinois auto 
insurance rates, relying on competition, have been less than in 
California.
    Thank you for your indulgence.
    Mr. Hunter. I'd like to also submit something----
    Senator Sununu. Senator Hollings----
    Mr. Hunter.--responding to that, if I could.
    Senator Sununu. Without objection, Mr. Hunter, you'll be 
allowed to submit whatever you'd like for the record.
    [Mr. Hunter submitted the Consumer Federation of America 
``Industry Comments on CFA Study of Insurance Regulation in 
California'' available at www.consumerfed.org and retained in 
Committee files.]
    Senator Sununu. Senator Hollings?
    Senator Hollings. Mr. Berrington and Mr. Rahn both complete 
your statements for the record, not just this minute, but fill 
it out and submit it to the Committee, because I'm anxious to 
find out what's the best way to do it. I've been looking at 
it--incidentally, I've been the state fellow protecting state's 
rights up there for so many years. And Mr. Csiszar, when I 
changed insurance commissioner, I not only put him in there, 
but I put a lot of Hollings people in there that got jobs----
    [Laughter.]
    Senator Hollings. You talk about Federal bureaucracy.
    [Laughter.]
    Senator Hollings. I filled up the state bureaucracy with 
it.
    [Laughter.]
    Senator Hollings. I've been up here 37 years, and I haven't 
gotten anybody a job at the FAA, the FTC, the FCC, the Defense 
Department. Now, Strom did.
    [Laughter.]
    Senator Hollings. He knew how to do it. But I've been 
faulted for not getting everybody a job. Every time I call over 
to the Defense Department, they say, ``Well, let them fill out 
the forms'' and everything else like that.
    [Laughter.]
    Senator Hollings. So I want that criticism, Mr. Rahn and 
Mr. Berrington, but let's--incidentally, I organized the state 
life insurance company, the state life. It was bought out. 
Incidentally, I guaranteed insurance trusts before the 
Securities and Exchange Commission before Manny Cohen, the 
Chairman, in 13 days, and it still stands as a record, before 
the Securities and--all you've got to do is take the water out 
and all the fees out and all the racket out, and you can get a 
good company. And so when I get out the year after next, Mr. 
Berrington, I'll be looking you up, because you and I can 
organize one and we can make money.
    [Laughter.]
    Mr. Berrington. So we both have life after this.
    [Laughter.]
    Senator Hollings. Really. It's a sure shot, man, that 
mortuary table. You don't lose.
    Mr. Hunter, what's your comment, please?
    Mr. Hunter. Oh, I just was going to respond to Mr. 
Berrington. I have been----
    Senator Hollings. Will you, please?
    Mr. Hunter. Well, I--we responded to all these points 
before, and I wanted to submit for the record the fact that the 
seatbelt use level has changed in every state. I mean, all 
these arguments are just bogus. California Prop 103 worked. It 
was--it's different than New Jersey, it's different than these 
other states he points to. It was unique, and it had a huge 
impact. When it became law, the rates were, like, $200 higher 
than Illinois, and now they're almost even. So Illinois is no 
great shakes. It hasn't driven rates down in Illinois.
    Senator Hollings. Mr. Heller?
    Mr. Heller. Yes, and, Senator Hollings, if I could just add 
one point. Mr. Berrington did note that workers' compensation 
was not covered by Proposition 103. In fact, in 1993, 
California law deregulated, to open competition, the workers' 
compensation market. And if anybody followed what happened in 
the California gubernatorial recall, one of the big discussions 
was a dramatic workers' compensation crisis in which every 
single company has left the state. Our state fund, which is the 
state-subsidized insurance fund, has 56 percent of the market, 
and nobody else will sell policies. That's the one line that is 
not covered by Proposition 103. It's the one line that was 
subject to open competition, and it failed miserably.
    Senator Hollings. I just don't understand Mr. Berrington's 
comparison on property insurance, because Warren Buffett, he 
says that he doesn't pay anything out there in California on 
his multimillion dollar properties; whereas, in Nebraska he's 
got a very modest home and he's paying a fortune. What's the 
answer to that?
    Mr. Berrington. Well, I think, Senator Hollings, although I 
am--I follow California matters perhaps less than others, I 
think Warren Buffett was talking about property taxes, not----
    Senator Hollings: That's right.
    Mr. Berrington.--in California----
    Senator Hollings. He was talking about property taxes, but 
they ought to sort of parallel the insurance rate.
    Mr. Berrington. Well, he wasn't talking about insurance 
rates, I don't believe, but----
    Senator Hollings. No, I know he wasn't talking about 
insurance rates, but common sense would parallel it. Do you 
disagree?
    Mr. Berrington. I'm not sure I follow. All I'm--the point 
I'm trying to make is that homeowners insurance rates in 
California have been much higher consistently with a prior-
approval regulatory system than homeowners insurance rates in a 
peer state, Illinois.
    Senator Hollings. Well, Mr. Chairman, let me thank you and 
thank the panel. This has been an outstanding panel, and anyone 
on the panel that has further submission that want to elaborate 
on the points made, please do so. The Committee is anxious to 
learn and put out the best product possible, because everybody 
wants some Federal options or Federal regulations or licensing 
or forms or whatever else, and I find out, in talking, whether 
or not to give that option. As they said, ``For Lord's sakes, 
don't give us two systems that we've got to conform to.'' One 
bureaucracy, Mr. Csiszar, is enough, be it state or Federal. 
And yet I'm hearing they want that Federal option.
    So thank you very much, Mr. Chairman.
    Senator Sununu. Thank you very much, Senator Hollings. And 
perhaps before we close the record, we can find someone in the 
Senate that can answer for those high insurance rates in 
Nebraska.
    [Laughter.]
    Senator Sununu. Mr. Ahart, under your proposal, we would 
have Federal statute that sets certain minimum standards in a 
number of areas for insurance, but how would those standards or 
those requirements be enforced?
    Mr. Ahart. Yes. It would still be enforced on a state 
regulation basis.
    Senator Sununu. And what if the headstrong members of Mr. 
Csiszar's organization don't agree with the statute, don't feel 
comfortable adopting those standards?
    Mr. Ahart. I mean, it would be Federal law, so, I mean, I 
believe they would have to follow Federal law. But if for some 
reason they wanted to challenge it, that's why they have the 
court system, the same way they can challenge things now.
    Senator Sununu. So there aren't--would there be specific 
fines or penalties assessed on the states, or would it just be 
a question of encouraging further litigation?
    Mr. Ahart. Well, the--I mean, it could be drafted any way. 
The bill really hasn't been completely drafted yet, so--I mean, 
it's in the process, so things will all be looked at.
    Senator Sununu. And are there other associations or 
insurance companies that have lent their support to this 
proposal, or is that something that you haven't done yet?
    Mr. Ahart. No, we've actually met with a lot of people, and 
I think we have a lot of support from different groups, 
specific insurance companies, even in associations that support 
Federal charters, that agree with our proposal and that believe 
that a middle-of-the-ground proposal is the way to go.
    Senator Sununu. So could you provide a list of----
    Mr. Ahart. Sure, we'll provide----
    Senator Sununu.--organizations, entities----
    Mr. Ahart. Sure.
    Senator Sununu.--companies that are supporting----
    Mr. Ahart. Absolutely.
    Senator Sununu.--the initiative, for the record, please?
    Mr. Rahn. Mr. Chairman, could I respond to that, just----
    Senator Sununu. Yes, please, Mr. Rahn.
    Mr. Rahn.--on the life side?
    You know, looking at it from the life perspective again, I 
think that the minimum standards approach, we would consider to 
perhaps be the worst place to start. In a sense, what it does 
is it, from a state rights perspective, forces upon the state 
certain things to happen. It could also allow the states to 
adopt additional requirements on top of those minimum 
standards, so you end up, again, with the lack of uniformity, 
that our industry seeks. And it really doesn't address the 
array of issues that need to be addressed. It's kind of a 
piecemeal approach. So that is why, from our association's 
standpoint, again, looking at it from the life perspective, 
we'd prefer to see an optional Federal charter addressing all 
those things rather than having just a minimum standards 
approach.
    Mr. Ahart. Can I just say that we don't--I mean, he's----
    Senator Sununu. Please.
    Mr. Ahart.--interpreting that we're supporting minimum 
standards. We don't support Federal minimum standards. We 
support Federal standards, for instance in the rates and 
whatever. I mean, we've said what we support. It's not 
considered to be minimum standards.
    Senator Sununu. I appreciate the distinction.
    Mr. Rahn, is it fair to say that your biggest concern is 
speed to market?
    Mr. Rahn. Well, it's clearly one of our biggest concerns. I 
think there are two focuses that we want to look at.
    If you look at how the life industry has changed, it's gone 
from an industry that was pretty much considered not to be 
interstate commerce to an industry that is very interstate 
commerce and that is competing with other financial services 
industries. So that when we go to market, clearly getting speed 
to market is one of the key issues. But, in addition to that, 
if you look at how our business is regulated, even though we're 
state regulated, the tax writing and tax policy and pension 
writing of Congress really decides what types of products we'll 
have, what'll be available, how we go to the consumers. Once 
those changes are made, we don't have a presence here in 
Washington of a regulator that you turn to before those types 
of decisions are made. So I think one of the key drivers for us 
is having a regulatory presence.
    In other words, when you're getting ready to consider tax 
legislation or pension legislation, unlike the banking industry 
or the securities industry, you don't have anyone to pick up 
the phone to talk to, and I think that was dramatically shown 
after 9/11 when there was not an insurance industry 
spokesperson to go to to immediately answer questions that were 
arising after that.
    So speed to market is clearly one of the important aspects, 
but there's a whole array of things, from market conduct, 
Washington presence, and other things, that are important to 
us.
    Senator Sununu. Have the compact proposals put forward by 
the NAIC addressed any of these concerns adequately, 
particularly with regard to speed to market?
    Mr. Rahn. Yes. The NAIC is clearly trying to address some 
of these issues, but they're addressing it, again, on an 
incremental basis, which is how, when you're having to deal 
with over 50 jurisdictions, you're going to have to approach 
it. But if you look at the interstate compact, you're looking 
at a situation where we've taken 3 years to develop that 
compact. There's a hope that within a few years, by 2008 or 
2009, we might have enough states to have the compact 
operational, and may have as much as maybe 60 percent of the 
market. That's simply too slow. In the meantime, you know, our 
industry continues to face competition and other things, so 
while we support what the NAIC's doing, that slow, incremental 
approach is not going to get us where we need to be, nor does 
it address the presence issue.
    Senator Sununu. Mr. Csiszar, along those lines, one of your 
members--I have a wire-service report--was recently quoted as 
saying, ``The current regulatory framework with each of the 50 
states and the District of Columbia having individual licensing 
setups is akin to driving across the country and having to stop 
and get a new driver's license at every state border.'' This 
commissioner said, quote, ``You would never get across the 
country. It would take you months. And, in my view, there's no 
reason for running the insurance industry that way.'' Now, that 
seems like a very strong statement from a member of your 
organization.
    Mr. Csiszar. And, actually, as director of the State of 
South Carolina, I would concur with that. My view, also, is 
that the process is too slow. That is why we're trying to 
change it, and that is why we have efforts such as the 
Interstate Compact, that is why we have a new electronic filing 
system, for instance, for rates and for forms served. So we're 
doing everything we can.
    And let me--the timetable that you're looking, or that you 
heard, in a sense is driven by realism. And one of the 
realities at the state level is the fact that, for instance, 
not every legislature sits every year. We have states in which 
legislatures only sit every 2 years. So that from the 
standpoint of implementing the state compact, making the 
legislative changes that are needed, I think those states have 
to take that into account, and that's why you see the numbers 
where they are.
    Senator Sununu. This commissioner also supported an 
exemption for large commercial insurers from having to obtain a 
license in every state. Is that something that you also concur 
with?
    Mr. Csiszar. I think that's something that's under 
consideration. At this point, I think--I don't think there's 
universal agreement on that within the NAIC, but there are 
certain--certainly, one of the avenues open in all of this is 
some type of domiciliary deference for licensing. So I think 
that's an open issue. While it is an open issue, I think there 
are those to whom it would have appeal.
    Senator Sununu. I have one final question, and I'd like Mr. 
Rahn, Ms. Csiszar, and Mr. Heller to address it, just to get a 
spectrum of views.
    First, how much is collected nationally each year in 
premium taxes? How much is used to fund regulation among the 50 
states? And is that arrangement good for the insurance 
industry? And is it good for consumers?
    Mr. Rahn?
    Mr. Rahn. Thank you.
    I--and Mr. Hunter may have it here--I don't have the exact 
number of what the premium tax collected are for--so you can--
he can give you that number.
    Senator Sununu. Can I suggest a working figure of about $10 
billion? Mr. Hunter, will we agree on that?
    Mr. Hunter. Let me just--why don't you talk to them and 
I'll find the exact number for you.
    Senator Sununu. Does somebody want to venture----
    Mr. Csiszar. It's the figure I'm getting.
    Senator Sununu. Ten billion?
    Mr. Csiszar. That's about right.
    Senator Sununu. OK. So we have--it's $10 billion in premium 
taxes. We can all agree on that? Maybe I should have started 
with Mr. Csiszar. What percentage of that is used to fund the 
regulatory efforts of your members?
    Mr. Csiszar. Our collection--well, I don't know the 
average, to be honest with you, but I think we can get you 
those.
    Senator Sununu. I'm actually a little bit more curious to 
know the aggregate. So of the $10 billion, what percentage of 
that is used to fund----
    Mr. Csiszar. I would have to get back to you on that----
    Mr. Hunter. 8.4.
    Senator Sununu. $8.4 billion of the $10 billion?
    Mr. Hunter. 8.4 percent.
    Senator Sununu. So less than 10 percent of that goes to 
fund the regulatory organizations.
    Now the easy one, I suppose. Is that good for the insurance 
industry, those that are being regulated? And is that good for 
consumers?
    Mr. Hunter, since you had all of that helpful information, 
I'll start with you.
    Mr. Hunter. Originally, the idea was to collect premium 
taxes to regulate insurance.
    Historically, they've been running under 5 percent. The 
Consumer Federation of America, other consumer groups, and the 
agents got together and worked on a proposal for at least 
trying to reach 10 percent, as a minimum, required to get 
consumer protections, based upon an analysis we did. And the 
agents groups and we put some pressure on, and we moved it up 
slowly year by year. It's now at 8.4 percent, which is better, 
but it still doesn't even meet our minimum requirement for what 
needs to be done. That's why there are so few market conduct 
exams. That's why market conduct exams are an abject failure 
to----
    Senator Sununu. But should the goal----
    Mr. Hunter.--protect consumers.
    Senator Sununu.--should the goal be to attain a particular 
percentage to achieve----
    Mr. Hunter. No.
    Senator Sununu.--these goals, or to attain----
    Mr. Hunter. No.
    Senator Sununu.--an appropriate level of spending?
    Because I'm sure the states----
    Mr. Hunter. Yes.
    Senator Sununu.--could hit that goal by just----
    Mr. Hunter. Yes.
    Senator Sununu.--they could just double----
    Mr. Hunter. No, of course. We----
    Senator Sununu.--double the tax and spend twice as much, 
but still not be spending----
    Mr. Hunter. When we came out----
    Senator Sununu.--10 percent.
    Mr. Hunter.--with the 10 percent goal, working with the 
agents groups, we, obviously, split it up between various 
things that needed to be done to protect consumers, including 
upgrading market conduct, which is not--it's not a new problem 
that we see in market conduct; it's a problem decades old.
    Senator Sununu. Mr. Rahn?
    Mr. Rahn. Yes. From the life insurance perspective, it's 
correct, most of the premium tax is used to go to state general 
funds and is not directed, as the numbers show, to insurance 
regulation, generally. That can also take place in the form of 
fees that aren't--that are imposed on insurers and don't take 
the form of premium tax. To a certain extent, our view on that 
is--and that's been a cost of doing business in a state. Just 
like any other entity doing business in a state, there is a 
cost for doing business in that state.
    One of the things I want to clarify is that if you look at 
the optional Federal charter approach that we've proposed, and 
others, we would keep that premium tax in effect. There would 
be no loss of premium tax to the states as a result of the 
optional Federal charter.
    Now, you may ask, from the insurance company perspective, 
why would you do that when you have this cost? Well, we think 
that the cost of having a Federal regulator, in terms of fees 
that would be imposed on us to have that system, would cost us 
more; but, in the long run, having one system of regulation 
would be so much more efficient, we'd still come out ahead in 
the aggregate. And I think you would get, you know, a better, 
more streamlined, uniform approach to regulation in the 
outcome, also.
    Mr. Csiszar. Well, let me respond, first of all, to the 
comment about the taxes. We think that that's utopia. The 
reality of it is, and the history seems to show, that if you're 
going to have regulation at the Federal level, that tax is 
going to go, eventually, to the Federal level. So we are very 
concerned about that. But that's not our prime concern.
    Insofar as the level of spending is concerned, let me say 
this. It really--it has to vary by state, and I don't think you 
can set a necessary target level of 10 percent or of premium 
taxes or 5 percent. We operate, for instance, at 5 percent, but 
I only have about 50 domestic companies. Whereas, a state such 
as New York or Pennsylvania may have three or four or five or 
six times that number of domestic companies, and we defer to 
their analysis.
    So the level of employment, the level of activity within 
the department really varies from state to state. So I think 
that the target approach is not one. It's a question of, given 
what is necessary within a given state, what needs to be done? 
Is that being done? And I think, quite frankly, South Carolina, 
we're at 5 percent, and we do a pretty darn good job at it. So 
I think the question really has to be addressed in the context 
of the different departments.
    Senator Sununu. But why not support a system whereby 
premium taxes are leveled at a rate sufficient and necessary to 
pay for the regulatory burden and the resulting reduction in 
premium taxes are passed on to benefit consumers?
    Mr. Heller?
    Mr. Heller. Yes, thank you, Mr. Chairman.
    I think this question is very important, not only to the 
question of taxes, but to the broader issue of regulation. We 
can't forget that most insurance companies don't pay other 
taxes, other than their premium tax. So this is, in a sense, a 
great benefit, and they pay very--it's a substantial amount of 
money, but as an exchange for the gross premium tax, you avoid 
other taxes.
    The amount of money that's being spent on insurance 
regulation state by state is really the big problem, the fact 
that there isn't enough being appropriated to the regulator 
from this--what should be considered an insurance regulation 
tax. And when you discuss issues of speed to market, from the 
consumer perspective it's not speed that matters, it's quality 
of regulation and the quality that get into the marketplace, 
just as you would want--you need drugs to go through a vetting 
process at the FDA before they get to market. You don't want 
speed, you want quality.
    If you have the right amount of money put forward to the 
insurance regulator and they were able to actually go ahead and 
regulate, as we do in California--we do a pretty good job, 
though there are certainly many flaws--then you could actually 
have, if not the fastest market, you could have the best 
marketplace. And I think appropriating the right amount of 
money to the regulators would be a very good start.
    Senator Sununu. Senator Nelson?
    Senator Nelson. Thank you, Mr. Chairman. You've started a 
very important line of inquiry with regard to the premium tax.
    Senator Hollings. Excuse me, too. Our bill retains the 
premium tax.
    Senator Nelson. Yes, sir.
    And, indeed, the testimony that you just elicited from Mr. 
Hunter, that 8.4 percent of the total $10 billion in premium 
tax actually goes to the regulatory function, says that this is 
a nice little source of revenue for the states to be used on 
other things other than insurance regulation. And that ought to 
be addressed in this whole issue. So I appreciate you bringing 
it up.
    Since we're limited on time here, and that's why I was 
rushing through before. I didn't know that I could get back 
here, because other things that are going on this morning. What 
I'd like to do, Mr. Berrington and Mr. Rahn, since your 
industry is split on the issue of the Federal charter, if you 
could have Governor Keating and Mr. Bagley come in and let's 
discuss this, because just in, for example, life insurance, the 
National Alliance of Life Companies opposes the Federal 
charter; whereas, you all support it. On the P&C, the AIA, as 
you've testified, supports it, but the AAI, the NAII, the NAMIC 
oppose it; whereas, the reinsurers support it.
    So there's nothing unusual. I mean, this is typical of the 
insurance industry, but let's see what we can get in the way.
    And now, to follow up, let's take the Hollings bill as a 
starting point. Licensing and standards for the insurance 
industry, it provides that this Federal commission would do 
that. Is that generally supported by this panel here? Licensing 
and standards for the insurance industry? Not long answers. I'm 
just trying to get concepts.
    Mr. Berrington. For those that chose the Federal approach, 
all of this would come within the Federal regulatory regime. 
Whether it be a commission or the Treasury Department, which we 
propose, is a different issue.
    Senator Nelson. Anybody violently disagree with this----
    Mr. Ahart. Yes.
    Senator Nelson.--at a Federal commission?
    Mr. Ahart. Senator, from the agents' standpoint, we would 
disagree with it. Again, we think that that should be done on a 
state basis and just attack the issues. I mean, most of this 
is--unfortunately, is just general and it doesn't deal with 
specific issues. It's passing the problem on to a Federal 
commission, and it could be the same problems you have at the 
state level. So it doesn't really address specific issues of 
speed to market or licensing, uniformity, things like that. It 
just says we're going to switch it to this group. They could do 
as poor a job, or poorer, than most of the states in the 
country.
    Mr. Rahn. I'll offer you two quick comments. I think that 
the Federal regulator should have the responsibility for those. 
Our proposal is that they be based upon the best of the best of 
the existing state models and state laws.
    Second, one disagreement that we have, and I think that 
there needs to be further consideration of, is whether the 
regulator should be in Commerce or Treasury, which would be the 
more appropriate regulator, who could do the regulations, has 
the most experience.
    Senator Nelson. OK. How about another requirement under the 
Hollings bill for the Federal commission would be annual 
examinations and solvency review. Does anybody violently 
disagree with that?
    [No response.]
    Senator Nelson. How about establishment of accounting 
standards? Does anybody violently disagree with that, by a 
Federal commission?
    [No response.]
    Senator Nelson. OK. Well, then you get down to 
investigation of market conduct. Anybody violently oppose that?
    [No response.]
    Senator Nelson. Mr. Hunter?
    Mr. Hunter. No.
    Senator Nelson. How can a Federal commission do the market 
conduct in 50 states?
    Mr. Hunter. Well, first of all, most insurance companies 
operate in 50 states. Most of the big companies where, for 
example, the Prudential and Met Life type crises that we had in 
market conduct were national in scope, and they were training 
people how to do these bad things. No one was catching it until 
lawsuits started occurring. Those could--might have been caught 
by a Federal market conduct review if it was done well by FTC 
or somebody who was interested in consumer protections. And it 
seems to me that those could have been caught.
    Now, it's true, when you get to smaller companies, I think 
Mr. Hollings--under the bill, the smaller state-based companies 
would not be regulated by the Federal entity, and, therefore, 
those smaller companies would remain subject to a market 
conduct review by the states, as I understand the bill.
    Senator Nelson. In that one case that we busted open, where 
we found a major national company was charging higher rates for 
African Americans for small-value burial policies, we busted 
that open, because, I mean, we dug, and we dug, and we dug, and 
we found it. Would a Federal commission be able to do that as 
well as a state regulator?
    Mr. Hunter. Obviously not today, because the state 
regulators have the horses today. But a Federal commission 
could, yes, because there are several--it was more than one 
company, by the way. Some of the companies sent--the NAIC was 
onto it a decade earlier than you caught it, and they sent out 
surveys saying, ``Are you doing it?'' And a lot of companies 
just lied and said, ``No, we're not.'' And so the NAIC might 
have caught even earlier. A Federal regulator, if it had sent 
out a survey, might have caught it even earlier, but they might 
have also been lied to. I think it's possible. Obviously, it 
would take time, and, you know, there would probably need to be 
some kind of transition.
    Mr. Heller. Senator Nelson, if I could just add one point, 
because we do have some concerns. And where Bob is at the 
Rubicon, we're still a little bit more protective of the 
state's right to regulate. Perhaps that's because we've seen 
some good success in California.
    It is our view, on the whole, that as you get more local 
with insurance products, which in many ways can be very local, 
and the issues are very local, the market conduct should, and 
we still retain the view that they should be regulated by the 
state. But what we appreciate so much about the Senator 
Hollings approach is that it does take a comprehensive 
approach, and it wants to do it seriously. Our fear is, of 
course, that if you lose the seriousness and the diligence 
that's, I think, implied by this approach, then you get into a 
world which is much more dangerous than the state-by-state 
approach. So we would certainly reserve our faith in the state 
market conduct approach at this point, because we think, at the 
local level, there is a greater understanding of the local 
problems.
    Mr. Rahn. Senator, I would----
    Senator Nelson. The final Hollings standard for the 
Commission would be the regulation of rates and policies. That, 
of course, is a controversial one. Do you want to give just a 
quick summary of that?
    Mr. Rahn. Yes. With regard to--that's where I think that 
the bill is drafted more in line with P&C requirements than 
life requirements, and I think there would have to be some 
accommodation for the way that life products are regulated. We 
do think that the product approval process is broken and that a 
new process needs to be put in place in that.
    The other thing I wanted to say on market conduct is, you 
already have examples of very powerful and effective Federal 
regulators that do market conduct standards--the SEC, the 
Department of Labor, and others--so I'm sure that a Federal 
regulator could work out a system that would be quite 
effective.
    Senator Nelson. And I appreciate that. I just--you know, 
you come to the table from your own experience, and I remember 
that so many things, how we found them was because we paid 
attention to complaints that we were getting out in the field 
with our examiners or with our outreach office. We'd get these 
complaints, and you'd have to diligently follow up, instead of 
a cursory kind of looking at it, and then dig underneath and 
you'd find some of the bad practices that were going on.
    Well, this is certainly going to be an interesting----
    Mr. Csiszar. Senator, if I can only add to that, I would--
obviously, we feel the same way with you, and I think if what 
you're looking at, for instance, in New York these days with 
investigations being carried on against mutual funds, with the 
investigations that were carried on with the various banks and 
the investment banks, they were at the state level, and they 
were driven by the state level. So I think I would share that 
concern about the difficulty that a Federal commission would 
have.
    Senator Nelson. Well, Mr. Ahart, you spin up your agents, 
because they have--politically, they have the effect on the 
system, because there's an agent in everybody's hometown. And 
y'all start working on this, because obviously the trends are 
moving in this area, and something's got to be done.
    I think Senator Hollings' bill is a good first start. Now 
let's see what we can do with it.
    Senator Sununu. Senator Hollings?
    Senator Hollings. Yes, thank you, Mr. Chairman.
    Mr. Csiszar is an excellent witness. He goes right away to 
Spitzer. But Spitzer is the exception. The GAO report, Senator, 
was exactly what they found, the biggest fault with the state 
regulatory bodies. They had come up to snuff, so to speak, on 
solvency, because they had all kind of difficulties during the 
1970s and 1980s. So they had gotten uniformity there, they had 
looked into the solvency, but practically no market conduct 
surveys. That was the GAO report. So the states are not doing 
it. They might have the capability, but they've not been doing 
it at all. That was the criticism in the GAO report.
    Senator Sununu. Thank you.
    Senator Hollings, I have a couple of final questions. Let 
me begin with you, Mr. Ahart.
    Senator Nelson mentioned the agents--I mean, thousands and 
thousands of agents, for the most part entrepreneurs, small-
business owners, family owned businesses--and those issues 
broadly get a lot of discussion and focus here in Congress, and 
for good reason. And I don't know that you've had an 
opportunity to talk directly from their perspective on the 
optional charter issue, in particular. What kind of concerns 
would you want to be addressed, or do you have, with an 
optional charter proposal?
    Mr. Ahart. Yes, well, I mean, first of all, we would oppose 
any kind of Federal charter, Federal commission, or Federal 
department of insurance, any kind of Federal bureaucracy, which 
is promulgating standards. You know, we truly believe that it 
should be Congress that mandates uniform standards, and that 
the states then regulate it. And those should be only on the 
issues that need to be addressed.
    As I've said before, you know, a lot of our consumers and 
our agents like dealing with their states when there are 
problems and consumers have problems and they want to deal with 
a regulator. They feel comfortable talking with their state. I 
find it very hard to believe that they would feel very 
comfortable calling somebody in Washington, D.C.
    So, you know, once again, our issue is to deal with the 
issues that are a problem. And as those issues are a problem, 
we can deal with them with Federal legislation.
    Senator Sununu. Do you prefer the optional approach to 
Senator Hollings' bill? And are your concerns with the two 
different approaches the same, or do you----
    Mr. Ahart. The concerns are----
    Senator Sununu.--have different concerns----
    Mr. Ahart. No, the concerns are basically----
    Senator Sununu.--with the different approaches.
    Mr. Ahart.--the same--is that, first of all, neither one of 
them is proven. Basically, what you're doing is switching state 
regulation to Federal regulation without specifying exactly 
what you're doing, and that body could have the same problems--
or could have the same problems that some of the poor states' 
regulations are having. So I don't think it ever solves the 
problem, and we're more concerned with solving the actual 
problems that we see, which most people are saying is--in fact, 
everybody's testified to--is speed to market, uniformity in 
licensing, and consumer protections.
    Senator Sununu. Well, thank you, to all the witnesses, for 
your time, for your input. As we have indicated, you'll be 
allowed to submit additional information for the record.
    This hearing is adjourned.
    [Whereupon, at 11:30 a.m., the hearing was adjourned.]
                            A P P E N D I X

     Prepared Statement of Brian K. Atchinson, Executive Director, 
              Insurance Marketplace Standards Association

Introduction
    Thank you for the opportunity to address the issue of Federal 
Involvement in the Regulation of the Insurance Industry.
    I am Brian Atchinson, Executive Director of the Insurance 
Marketplace Standards Association (IMSA). IMSA is an independent, non-
profit membership 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 200 of the Nation's top 
insurance companies representing approximately 65 percent of the life 
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 non-insurance industry directors. 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.
    From 1992-1997, I served for five years as Superintendent of the 
Maine Bureau of Insurance. In 1996, I was President of the National 
Association of Insurance Commissioners (NAIC). Prior to joining IMSA, I 
served as an executive officer in the life insurance industry. As a 
former regulator and company person, my views on the regulation of 
insurance are based upon a number of different vantage points.

The Changing Role of Market Conduct Regulation
    Insurance regulation is intended to ensure a healthy, competitive 
marketplace, protect consumers, and create and maintain public trust 
and confidence in the insurance industry. An integral component of 
insurance regulation is the appropriate oversight of the manner in 
which insurance companies distribute their products in the marketplace; 
namely, market conduct regulation.
    The history of market conduct regulation goes back to the early 
1970s 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 2001, the states employed 353 market conduct examiners 
and 103 contract examiners, 815 Complaint Analysts, and 494 Fraud 
Investigators. In 2001, departments reported a total of 1,163 market 
conduct exams and 439 combined financial/market conduct exams.
    Yet, as noted in the report on market conduct regulation issued by 
the General Accounting Office last month, there is little uniformity in 
the manner in which individual states perform market conduct 
examinations today. Knowledgeable observers agree that the current 
state-based system of market conduct regulation presents challenges 
that even many in the regulatory community acknowledge is in need of 
improvement/updating. State market conduct examinations have been 
described as being like snowflakes--no two are alike. Insurance 
companies often are subject to simultaneous or overlapping market 
conduct examinations from different states applying different laws and 
regulations. This lack of uniformity places significant costs and human 
resource burdens upon insurance companies that translate into higher 
costs which are ultimately passed on to consumers in the form of higher 
prices for their products.

Making Market Conduct Regulation More Efficient
    The challenge going forward is to create a uniform system of market 
conduct oversight that creates greater efficiencies for insurance 
companies while maintaining appropriate consumer protections.
    The NAIC has been working toward uniform regulation for some time. 
But, unfortunately, the efforts developed since issuance of the NAIC's 
Statement of Intent over three years ago have not attained substantial 
improvements in market conduct regulation. The pace of change has been 
slow and has prompted the industry to promote more efficient and 
effective alternatives.
    Establishing Federal standards to regulate the market conduct 
practices of insurers could improve the current regulatory system in 
several ways. As the GAO Report indicates, many states do not maintain 
a formal market conduct analysis or examination process. By introducing 
a uniform set of national standards for market conduct regulation, 
consumers could be assured that all insurers would be subject to some 
degree of regulatory oversight.
    Establishing national market conduct standards would allow 
regulators to focus upon 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 upon 
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 
conduct standards also would establish a more efficient regulatory 
process which would eliminate the costs and 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 an IMSA-qualified company, an 
insurer voluntarily undergoes an internal assessment of their existing 
policies and procedures to determine whether they comply with IMSA 
standards. They must then successfully complete a review by an 
independent assessor to qualify for IMSA membership. By undergoing the 
independent review required to attain IMSA qualification, a company 
must have in place a comprehensive system of compliance throughout the 
organization.
    Companies that qualify for IMSA membership devote considerable 
resources to maintaining IMSA's standards. They also are well-
positioned to respond quickly and effectively to state market conduct 
inquiries and to comply swiftly with new Federal or state legislative 
requirements.
    In the last two years, IMSA has gained greater acceptance by 
regulators and rating agencies. In fact, a small, but growing, number 
of state insurance departments use IMSA membership as an informational 
tool when planning and conducting market conduct exams. We applaud 
these efforts and would like to see more state insurance departments 
using IMSA information to create greater efficiencies in the market 
conduct examination process. A recent study released earlier this year 
by the research arm of the National Conference of Insurance Legislators 
(NCOIL) acknowledged the important benefits independent standard-
setting organizations such as IMSA can provide to promote sound 
marketplace practices. During a period of time in which state insurance 
department budgets are under tremendous pressure, we encourage 
regulators to pursue all available means to leverage increasingly 
limited market conduct examination 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 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 that the marketplace is always operating in a fair and 
appropriate manner at all times. Organizations like IMSA, working in 
conjunction with regulators, can offer invaluable support to reform 
market conduct regulation and may even offer a blueprint for uniform, 
national reform solutions.

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 must be more uniform and efficient. IMSA 
qualified companies stand as the benchmark for excellence in the life 
insurance industry and provide a de facto nationwide set of uniform 
market conduct and compliance standards that can serve as a template 
for true market regulation reform.
    We, at IMSA, will continue to explore ways to improve market 
conduct regulation for the benefit of regulators, insurers and 
consumers 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.
                                 ______
                                 
  Prepared Statement of the National Association of Mutual Insurance 
                           Companies (NAMIC)

Introduction
    Mr. Chairman, members of the Committee, the National Association of 
Mutual Insurance Companies (NAMIC) is pleased to submit this statement 
for your consideration on the matter of Federal involvement in the 
regulation of insurance.
    NAMIC is the Nation's largest property/casualty insurance trade 
association with 1,350 members that underwrite more than 40 percent of 
the p/c insurance premium written in the United States. NAMIC's 
membership includes 4 of the largest p/c carriers, every size regional 
and national insurer and hundreds of farm mutual insurance companies.
    As you may know, the first successful insurance company formed in 
the American colonies was actually a mutual: The Philadelphia 
Contributionship for the Insurance of Houses from Loss by Fire. It was 
created in 1752 after Benjamin Franklin and a group of prominent 
Philadelphia citizens came together to help insure their properties 
from fire loss.
    In the early days of our nation, most insurance companies followed 
the Contributionship model; that is, groups of neighbors or business 
owners formed mutual insurance companies to help each other avoid the 
certain financial ruin that would befall them if their properties or 
businesses were destroyed by catastrophic events.
    While we honor our history, today's mutual insurance industry also 
has a clear vision of the future. Insurance regulation should remain 
close to those who understand the needs and preferences of their 
constitutencies. The states should continue to regulate the business of 
insurance however not without significant reforms to incorporate modern 
day efficiencies. Artificial barriers to competition and regulations 
that vary from state to state without serving any public purpose make 
it more difficult than necessary to do business n a regional or 
national basis.
    NAMIC member companies believe that a reformed system of state 
insurance regulation is superior to an unproven system of Federal 
regulation. Achieving reform of state insurance regulation is our 
highest policy priority, and every year, we devote a larger percentage 
of our resources to achieving this objective. Given the profile of our 
membership, NAMIC's position is representative of a dynamic cross 
section of the property/casualty insurance industry.
    Because of our official position, NAMIC welcomes this hearing. Not 
only are we confident that this committee will reach the same judgment 
as our member companies, we believe that any indication by the Congress 
of an interest in insurance regulation will motivate state policymakers 
to act.

The Road to Reform from the NAMIC Perspective
    In 2002, NAMIC released a public policy paper articulating our 
argument against Federal regulation of insurance. Entitled Regulation 
of Property/Casualty Insurance: The Road to Reform, it is the 
culmination of years of member study. Our member companies began their 
consideration with an open mind, but as work progressed it became clear 
that the best option for consumers and the insurance industry is to 
reform the state system rather than coming to Congress for a solution 
that promises to be worse than the original problem.
    The insurance industry is at a crossroads. Many in our industry 
already have chosen the path of reform that runs through Washington. 
They believe the state system of regulation is irreparably broken and 
only can be fixed by Congressional action. Others take a wait and see 
approach to reforming the state system. Indeed, they are engaging in 
efforts of reform, but with one eye on the clock, almost waiting to 
jump on the bandwagon making the most progress.
    Missing from this debate is the point of view that a Federal 
regulator, or even a dual charter, is not in the best interest of the 
industry or consumers. It is this point NAMIC emphasizes based on the 
following reasons:

Federal Involvement is the Wrong Answer at the Wrong Time
    In developing our public policy paper, NAMIC identified a series of 
defects in the rationale for seeking Federal involvement in the 
regulation of insurance. They include:

  1.  Federal involvement is often used to enact social regulation. 
        Under a Federal system, insurance is likely to be treated as 
        another ``government entitlement'' with all the trappings 
        associated with that term. This would cause serious erosion to 
        the basic principles of risk sharing upon which the industry is 
        built.

  2.  Asking Congress to intercede is fraught with danger for consumers 
        and industry. Proponents of Federal regulation may design their 
        idea of ``a perfect system,'' but they can neither anticipate 
        nor prevent the imposition of social regulation in exchange for 
        the new regulatory structure. In our judgment, the chances of 
        the ``perfect system'' going from draft legislation into law 
        are almost nil.

  3.  A Federal or dual charter not only would not reduce regulation, 
        it would add regulatory layers and complexity to the current 
        system. It is by no means certain that a new Federal regulator 
        would be the ``single'' regulator for even the largest 
        property/casualty insurance companies. Dual regulation, 
        proposed by some, would produce an unfair environment for the 
        thousands of smaller companies, and create regulatory 
        competition that often produces poor policy in financial 
        institution regulation.

  4.  Costs and bureaucracy will increase under a Federal framework. 
        Will a Federal charter reduce regulatory costs that are 
        indirectly paid by consumers and/or taxpayers, and will it 
        bring about less bureaucracy for companies choosing this 
        option? There is no evidence that a Federal insurance regulator 
        is going to depart from the tradition of creating an expensive 
        and inefficient government program. In addition, each state has 
        its own unique tort laws that significantly affect insurance. 
        Because state tort laws do not constitute the regulation of 
        insurance, and have historically been shown great deference by 
        the courts, federally licensed insurers would have to tailor 
        products to accommodate each state's tort laws. These factors 
        will significantly hamper gaining efficiencies from a Federal 
        system.

     The cost to consumers will inevitably rise as well. Currently, 
        states derive significant income from premium taxes, which 
        exceed the cost of regulation. The cost of a new layer of 
        Federal regulation must be accounted for somehow. The necessary 
        funds must either come directly from the Federal budget, or 
        from fees assessed to insurers. Since taxes and fees must be 
        passed on to consumers, they will have to pay for two 
        regulatory systems under a dual charter approach, unless the 
        states forego premium tax revenue.

  5.  When the single national regulator makes a mistake, it has 
        significant economy wide consequences. When a state regulator 
        makes a mistake, the damage is localized and can be more easily 
        ``fixed.'' In other words, what if a national regulator gets it 
        wrong? Industry proponents argue that Congressional action 
        could produce a national system resembling the open competition 
        found in Illinois--a regulatory model that NAMIC strongly 
        supports. But what if the system created looks more like highly 
        regulated states? The economic fallout from a strict national 
        regulatory climate would be crippling, and the accountability 
        would be at Congress' door.

  6.  The time for further change has not arrived. The new balance 
        necessitated by GLBA is still evolving. It has shown great 
        promise, but requires more time to mature fully. Unlike 1999 
        when GLBA passed, there is no major impetus, such as 
        convergence of the financial services industry, to further 
        change the balance between Federal and state regulation. In 
        times past, momentous change has been the consequence of 
        significant needs or events. No such need exists today. Change 
        without need could destabilize a system that has worked well 
        throughout our Nation's history.

State Regulation is More Pro-Consumer
    From a consumer's perspective, the state system of regulation has 
performed admirably. It has proven to be adaptable, accessible, and 
relatively efficient, with rare insolvencies and no taxpayer bailouts. 
Proposals for Federal and dual charters offer few advantages for 
consumers, and consumer interests are rarely cited as reasons for 
changing from the state system.
    Federal regulation is no better than state regulation in addressing 
market failures or consumer interests. Regulated industries of all 
types have had failures at both regulatory levels. Neither can claim 
immunity from market failure. Additionally, claims that consumers are 
well served by Federal bureaucracies seem dubious.
    The clear advantage to consumers in the state system is 
accessibility. It is easier for an insurance consumer to deal with a 
regulator in their home state than having to contact a regional Federal 
office to intervene in disputes.

A Reformed System of State Insurance Regulation is Superior
    Changes must be made to create a reformed, competitive and 
consistent system that will benefit both consumers and industry. NAMIC 
is working to achieve four specific areas for state reform:

Rate Regulation
    States should eliminate the approval process for pricing insurance 
products. NAMIC has endorsed the NCOIL Property/Casualty Modernization 
Act approved in 2001. The model lays out a ``use and file'' regime for 
personal lines in competitive markets and a ``no file'' standard for 
commercial lines. There is unanimous support among the industry trades 
for this language.
    Still, this is a potentially controversial issue among some state 
legislators. However, rate modernization not only is not radical, it is 
not new. Two brief examples speak to its success as public policy:

   In 1969, the Illinois legislature repealed outright the 
        prior approval law that was put in place following passage of 
        McCarran-Ferguson in 1945. Property/casualty rates in Illinois 
        remain unregulated today. Several vital signs demonstrate that 
        this policy works well. Today, consumers enjoy stable rates, 
        ranking in the middle of all states in average personal 
        expenditures because the Illinois market attracts the largest 
        share of all private passenger auto and homeowner insurers in 
        the Nation. Low residual markets indicate affordability and 
        availability. These positive signs are all the more remarkable 
        when you consider that Illinois includes the third largest 
        urban area in the United States, and two-thirds of the state's 
        residents live in the Chicago area. With over three decades of 
        success and no legislative proposals to reinstitute regulation, 
        there can be no argument that this structure is well tested and 
        beneficial to everyone involved.

   The demonstrably negative impact of prior approval on South 
        Carolina's state auto insurance market prompted the Legislature 
        to act in 1999. Only 78 companies offered policies in the state 
        in 1996 and over 40 percent of all insured drivers were in the 
        assigned risk pool. With the elimination of prior approval in 
        favor of a flex rating system, 105 new companies are in the 
        market, rates are lower and residual market participants, once 
        numbering over a million, have declined to 58,000.

    Recent progress demonstrates that states are beginning to take 
responsibility for the negative results of their regulatory policies. 
New Jersey and Louisiana, two of the most restrictively regulated 
states in the nation, have begun to overhaul their public policies 
regarding rate regulation in the face of shrinking pools of insurance 
providers.
    As has been often and loudly stated, the product approval process 
is especially challenging for the life industry because of direct 
competition with banks in certain financial services. NAMIC agrees that 
the life industry and its consumers would be well served by a 
streamlined regulatory process and believe the life compact could help 
address this need. Efforts to create a more competitive marketplace for 
insurers and consumers alike must not begin and end on the life side of 
the equation.

Market Surveillance
    States vary widely in how they staff and approach their market 
surveillance activities. A few states, for example, regularly schedule 
market conduct exams, regardless of whether problems have been reported 
with a particular insurer. The open-ended costs of these exams 
(salaries, meals and lodging) are charged to the company under 
examination. A lack of uniformity and coordination among states in 
performing exams often results in duplicative and costly processes, 
especially for multi-state insurers, who are most likely to be targeted 
for review.
    As state insurance departments spend less time on ``front end'' 
regulation (i.e., prior approval), states need to adopt a market 
regulation program that relies on analysis of existing and available 
market data to reveal performance deviations rather than largely open-
ended market conduct examinations relied upon today. With this 
approach, regulators can focus their limited resources on companies 
that fall outside a predetermined set of standards developed from data 
analysis. Any new market regulation process must be proportional, 
allowing insurers to mitigate complaints or market inconsistencies 
before being subjected to more severe actions like a market conduct 
exam, administrative penalty or fine.

Solvency Monitoring
    State regulators have adopted several solvency tools over the past 
decade to strengthen oversight of the insurance industry. While the 
industry has supported improvements in solvency monitoring, there 
remains a high degree of variation among states in how financial exams 
are conducted. NAMIC has helped produce an industry white paper that 
identifies three primary recommendations to facilitate discussion of 
the examination system by all stakeholders. Recommendations under 
consideration by the NAIC center on controlling expenses, integration 
of private CPA auditor work and risk-oriented financial reporting.

Company Licensing
    States, working through the NAIC, have made some progress in the 
past few years in bringing more uniformity to the company licensing 
process. One outcome is the Uniform Certificate of Authority 
Application (UCAA), which is now used in all insurance jurisdictions. 
The states should now consider draft language so future amendments to 
the UCAA can be adopted without seeking legislative approval each time. 
However, the key to more uniformity of this process is ensuring that 
state deviations are reduced or eliminated.

Response to S. 1373: The Insurance Consumer Protection Act
    One bill the Senate is considering is S. 1373, The Insurance 
Consumer Protection Act. In our analysis, the legislation brings to 
life many of the concerns we have about Federal regulation.
    Government approval of insurance prices. S. 1373 is an anti-
competition bill in that it would require prior approval for all rates 
by a Federal regulator. Not only is competition a much better regulator 
of rates than government, regulators in states with prior approval are 
routinely backlogged in their reviews. One super-agency is unlikely to 
be capable of staying current with rate applications. The result will 
be the imposition of needless bureaucracy and less efficiency with 
national implications.
    Massachusetts' repressive auto rating structure provides living 
proof that restrictive regulation is unnecessary and harmful to 
insurers and consumers alike. In Massachusetts, the Insurance 
Commissioner is charged with setting every aspect of the auto insurance 
rate, even including the amount of money that an insurer may allot to 
expenses. This rate applies to all companies doing business in 
Massachusetts, which gives large national insurers who enjoy economies 
of scale a distinct advantage over smaller insurers. Despite this 
advantage, these insurers avoid this state. Massachusetts' auto 
insurance market is in a severe state of decline. Currently, there are 
less than 20 companies writing auto insurance in the state, while NAIC 
statistics show that their auto insurance rates are some of the most 
expensive in the Nation. On May 16, 2003, the Massachusetts 
Commissioner of Insurance held an annual hearing to determine whether 
competition existed in their auto insurance market. Had she found in 
the affirmative, she would not be obligated by state law to set rates 
as described above. This hearing, which was widely attended by the 
insurance industry, proved that regional and national insurers would 
like to re-enter this market. However, they will not do so until this 
punitive regulatory environment is reformed a change that has been made 
by other states.
    The number of insurers who compete in the competitive Illinois 
market is at least 6 times the number who seek to survive in 
Massachusetts. In today's world, harmful regulatory structure has an 
impact beyond state borders. Many regional and national companies have 
simply decided that it is too costly to contend with this regulatory 
relic, so they avoid the state altogether, denying choices to consumers 
and removing incentives for companies to lower rates. True reform will 
result in the elimination of unnecessary regulatory burdens.
    This proposal promises to slow regulatory processes even more 
through a provision that would allow anyone to challenge a rate filing. 
This is a serious flaw, particularly in the absence of provisions 
prohibiting frivolous or malicious objections. While consumers do not 
want to pay higher insurance rates, they also want to their insurance 
carrier to be solvent. Ideally, premium decisions should be based on 
adequacy of the rate and competitive pressure--not political pressure. 
Subjecting the critical calculation of ratemaking to a political 
process, as this provision would, will harm not help consumers by 
creating a supercharged environment in which defending rates that are 
actuarially sound will be needlessly difficult. This is the kind of 
``social regulation'' that will ultimately harm this industry's ability 
to charge a price based on risk.
    Increased market conduct burdens. This proposal dramatically 
increases the use of market conduct examinations. While regulators and 
industry agree that this can be a useful regulatory tool, the way in 
which exams are triggered and conducted is already under an 
extraordinary level of scrutiny. Currently, the states that conduct 
these exams do so on a scheduled basis-regardless of the company. The 
result is that a company on solid footing may face an intensive review, 
while the bad actor next door knows that they won't be subject to an 
exam for another 3 or 4 years. Even when bad actors are revealed, 
regulatory resources will be spread so thin that dealing aggressively 
with the problem may not be possible. This proposal would radically 
increase the indiscriminate use of this tool at a time when there is a 
growing consensus that a more thoughtful, and perhaps targeted, 
approach is more desirable.
    A far more constructive use of regulatory resources is to focus on 
identifying and intervening in problem situations. Systems to 
facilitate this more effective form of regulation are currently under 
consideration. Diverting resources away from identifying and addressing 
problems in their earliest possible phases can only harm the cause of 
responsible regulation. Not only would this result in needless use of 
public and private resources, but also it would be a mistake felt 
nationally.
    Destabilized state guaranty funds. State guaranty funds are one of 
this industry's greatest consumer protection stories. Their creation 
and continued success provides further proof of this industry's ability 
to adapt to the needs of the times. By removing all federally licensed 
insurers from state guaranty funds, this proposal would leave the 
viability of the state guaranty funds in question. It is unclear 
whether the remaining local companies in each state would have 
sufficient resources to protect consumers whose insurers become 
insolvent. Once again, this mistake will result in needless 
bureaucratic duplication, and will be felt on a national basis.
    A related and troubling aspect of this proposed legislation would 
create a Federal guaranty fund system, and protect its officers from 
personal responsibility, ``for any act or omission''. This provision is 
particularly curious in light of the heightened corporate governance 
provisions in this Act. While CEOs of insurance companies would be 
required to personally attest to portions of their annual reports, 
guaranty fund officials are given civil immunity for ``any act or 
omission''. This inequity is compounded by what can only be described 
as the Act's victim-pays provision. If insurers are victims of official 
misconduct, they will be forced to fund their own compensation for 
damages, in that repayment will come from the guaranty fund.
    Suspect uniformity. One of the few advantages that could 
potentially be offered by Federal regulation is a degree of uniformity 
by eliminating unnecessary regulation. However, this proposed 
legislation would not provide uniformity because it subjects federally 
licensed insurers to state regulations that are more stringent than the 
Federal standards.
    Not all differences between the states are unnecessary, but reflect 
unique conditions in each state. For instance, the states are prone to 
a diverse series of risks that inevitably result in different 
regulatory requirements. Those risks include: earthquakes, floods, 
draught, forest fires, hail, tornadoes and hurricanes. The p/c industry 
provides insurance for natural disasters, and our products must vary to 
address the particular situation in each region. When it comes to these 
kinds of differences, one size does not fit all, and a government-
sponsored incentive in one area would make no sense in another. These 
variations will continue regardless of the regulatory structure.
    Tort laws will also continue to vary by state. Because tort laws do 
not appear to constitute the regulation of insurance, and have 
historically been shown deference by the U.S. Supreme Court, a Federal 
insurance regulator would not have the authority to create tort 
uniformity.
    Even the sponsor of S. 1373 recognizes the primacy of state law, in 
the aforementioned provision that subjects federally regulated insurers 
to state standards that are more restrictive than the Federal 
standards, unless the state standard prohibits something authorized by 
the Federal law.
    New bureaucracy. It creates a new regulatory bureaucracy, while 
leaving state systems and premium taxes in place. It is commendable 
that this proposal does not seek to deny states much needed premium tax 
revenues in these difficult fiscal times. However, the result will be 
that policyholders would have to fund two regulatory structures. This 
is particularly troubling in light of the fact that state systems have 
a proven ability to adapt to the needs of the times.

The Role of the NAIC in Regulatory Reform
    Calls for reform of the state insurance regulatory system have been 
heard for years but little substantive reform, other than the NAIC 
financial accreditation program, has occurred. Frustrations have grown 
as the marketplace becomes more competitive and more global. 
Complicating matters further is that the NAIC is often--wrongly in our 
view--held to account for implementation of sweeping reform.
    The NAIC is just one piece of the reform puzzle. Public policies 
defining reform must be established by state legislatures. Yet the NAIC 
has been looked to for years by Congress and others as the source of 
regulatory reform.
    The first decision by the Supreme Court of the United States on 
state versus Federal power to regulate insurance was Paul v. Virginia 
(1869). The Court held that delivery of an insurance policy in Virginia 
issued by a New York company was not interstate commerce. The Court 
employed a narrow definition of ``commerce''. As a mere contract rather 
than a physical good or commodity, Congress was not empowered to 
regulate it.
    Two years after Paul, the National Convention of Insurance 
Commissioners (later the NAIC) convened for the first time to help its 
member regulators oversee companies doing business in one state. 
Uniformity in legislation affecting insurance and departmental rulings 
was high on the new organization's list of objectives.
    In 1944, the Supreme Court overturned Paul, redefining insurance as 
interstate commerce and triggering passage of the McCarran-Ferguson Act 
by Congress the following year. Under McCarran, states can preempt 
Federal anti-trust laws by regulating the business of insurance. The 
industry and the NAIC were given three years by Congress to devise a 
regulatory framework that could be put into effect across the country 
to halt enforcement of Federal anti-trust and discrimination acts.
    The NAIC responded by developing model acts and regulations related 
to insurance rates and policy form language that were quickly enacted 
by the states. This set of circumstances gave birth to the present 
regime of prior approval for property-casualty products now operational 
in more than half the states and opposed by NAMIC today.
    In the late 1980s, the House Energy and Commerce Committee's 
persistence in challenging regulators was instrumental in the NAIC 
adopting its Financial Regulation Standards and Accreditation Program 
in 1989. The program consisted of a set of financial regulation 
standards for state insurance departments, which identified model laws 
and regulations, and regulatory, personnel and organizational processes 
and procedures necessary for effective solvency regulation.
    Nearly all the states, with the help of their legislatures, 
subsequently adopted the accreditation standards, but this has not 
stopped Congress and others from continuing to ask probing questions 
about the continued viability of the program. As recently as August 
2001, a report prepared by the General Accounting Office outlined 
``gaps and weaknesses'' in the accreditation program in response to the 
Martin Frankel fraud scandal. This, in tum, has caused the NAIC to re-
evaluate certain aspects of its accreditation standards.
    Clearly, this type of oversight of state insurance regulation seems 
appropriate for Congress to continue to pursue. It is also important 
here to mention another ``role'' that Congress has played with respect 
to state insurance regulation in the past decade. In 1992, Congress 
enacted legislation that had the effect of standardizing the Medicare 
supplemental insurance policies. While Congress mandated this 
requirement, it was left to the NAIC and the states to ``design'' the 
standardized forms and to implement their use in each state.
    While this particular piece of legislation appears to have worked 
well in protecting citizens from purchasing unnecessary multiple 
Medigap policies, it is not yet clear to us whether this approach would 
work for other lines of insurance or in possibly bringing more 
uniformity to certain state regulatory functions.
    The Gramm-Leach-Bliley Financial Services Modernization Act (GLBA) 
contained at least two provisions directly affecting state insurance 
regulation. The first called on state regulators to develop a better 
system of licensing out-of-state insurance producers, or face a 
Congressionally mandated entity to perform that function. Regulators 
responded with a uniform producer licensing model act and two years' 
worth of effort enacting it in most state legislatures. The other GLBA 
provision required insurers to protect the nonpublic personal 
information of their policyholders. Forty-nine states and the District 
of Columbia have met the GLBA privacy standards, largely based on the 
NAIC privacy model.
    Taking the intent of GLBA one step farther, regulators agreed to a 
``Statement of Intent'' in March 2000 outlining their desire to change 
the organizational structure of insurance regulation to better address 
the rapidly evolving changes to the financial services industry.
    This brief review of the NAIC's actions over the years naturally 
leads to the conclusion that the NAIC is the protector of the 
principles of insurance regulation in general and state regulation in 
particular and as such it should be the source of comprehensive reform.
    However, in our judgment this is incongruent with reality. In 
describing its own work, the NAIC has said that regulators have long 
realized that diversity and experimentation are strengths of the state 
system, but they also recognize that the basic legislative structure of 
insurance regulation requires some degree of uniformity throughout the 
states. This inherent tension between sovereignty and uniformity in the 
context of a voluntary organization of mostly appointed state officials 
with no authority to enact the models they write has produced both 
large expectations and large disappointments.
    The NAIC deserves recognition for focusing attention on key 
marketplace improvements such as speed-to-market and market conduct for 
which NAMIC member-companies are asking. Out of necessity, much of 
their work concerns the procedural or functional aspects of regulation. 
Unfortunately, by themselves, better procedures do not satisfy the 
deeper needs of the industry.
    While individual state regulators can recommend standards for 
reform and raise the profile of important market reform issues, they 
cannot act alone. Simply put: the NAIC cannot be expected to do what it 
is not empowered to do, that which is the most pressing task for all of 
us concerned about the future of the insurance industry: enactment of 
fundamental public policy reform.
    In the final analysis, before Congress intercedes, state 
legislative action must be the focus of modernization initiatives. 
There are important and effective national organizations prepared to 
lead reform efforts in the states.

The Role of National Legislative Organizations in Regulatory Reform
    NCOIL. The National Council of Insurance Legislators was formed in 
1969 to help legislators make informed decisions on insurance issues 
affecting their constituents and to oppose any encroachments of state 
authority in regulating insurance.
    NCOIL members collectively represent residents in states where 90 
percent of insurance premium is written each year. In addition to 
conducting annual meetings/seminars for its members, NCOIL has been 
instrumental over the years in developing its own set of model laws 
that have been enacted in several states. These models have addressed 
issues such as financial information privacy, mental health parity, 
life settlements, long-term care tax credits, Federal choice no-fault, 
commercial lines deregulation and property/casualty domestic violence.
    The leadership of NCOIL also has testified at several Congressional 
hearings in opposition to initiatives that would have created a dual 
system of insurance regulation, in opposition to Congressional 
initiatives that would have usurped the existing authority of states to 
regulate insurance rates, and on the viability of having an interstate 
compact to govern key aspects of insurance regulation.
    ALEC. The American Legislative Exchange Council was founded in 1973 
by a small group of bipartisan state legislators with a common 
commitment to the Jeffersonian principles of individual liberty, 
limited government, federalism, and free markets. Today, ALEC has grown 
to become the Nation's largest bipartisan individual membership 
organization of state legislators, with more than 2,400 members in 50 
states.
    ALEC remains committed to preserving the state regulation of 
insurance and has developed its model Property/Casualty Insurance 
Modernization Act to facilitate the replacement of outmoded, 
inefficient insurance regulations with market-based reforms. In 
addition, ALEC has developed a special project, national in scope, 
designed to educate state lawmakers about the importance of making 
insurance regulatory changes that are less intrusive and more uniform 
in nature, which is one of the primary goals of those clamoring for 
Federal preemption.
    One of the most exciting aspects of ALEC's involvement with this 
issue is its extraordinary record of success in affecting public policy 
changes in other areas. ALEC, for example, is the preeminent force for 
state level tort reform efforts facilitated through ALEC's Disorder in 
the Court Project. ALEC legislators have introduced more than 100 bills 
in over two-dozen states. Over 20 of these bills have been enacted. 
Members are also responsible for passing model pension reform 
legislation in 13 states over the past two years, a monumental success. 
This leadership is likely to continue. More than 100 ALEC members hold 
senior leadership positions in their state legislatures, while hundreds 
more hold important committee leadership positions.
    NCSL. The largest state legislative organization is the National 
Conference of State Legislatures, formed in 1975. The primary component 
of NCSL's mission is to advise Congress and the Administration as to 
the effect of Federal action on the states.
    Recently, the organization's Executive Committee Task Force to 
Streamline and Simplify Insurance Regulation approved a Statement of 
Principles to guide state legislatures in the pursuit of regulatory 
reform for the property and casualty industry. Also approved was an 
interstate compact that would facilitate the approval of annuity, life 
insurance and disability income products by a single entity for use in 
all insurance jurisdictions. For the NCSL to depart from its Federal 
advisory function to make specific state proposals is an extraordinary 
step.
    While NCSL has no more power to bind than does the NAIC, there is a 
fundamental difference in authority. Its members are elected 
officeholders with obvious influence over the outcome of legislative 
proposals in the states.

Conclusion
    NAMIC joins with our colleagues in asking for fundamental reform of 
insurance regulation. While we disagree with some on the method to 
bring this about, we all agree that unnecessary regulatory barriers 
between the states must be eliminated. True reform must also preserve 
the meaningful differences between the states. This balance can best be 
achieved through reforms within the states.
    History has proven that state insurance regulation can be reformed 
through emphasis on state legislatures. In taking this stance, we are 
not relying solely on history. We have cited significant changes that 
are currently underway: within the states, at NCSL, NCOIL, and ALEC, 
and at the NAIC. These changes are happening with the cooperation, 
assistance, and advocacy of the insurance industry.
    At the same time, we are deeply concerned about calls for Federal 
regulation of insurance. After extensive study, NAMIC has determined 
that Federal regulation of insurance was undesirable because:

  1.  It is likely that social regulation would be employed, harming 
        the industry's ability to price risk.

  2.  There is no guarantee that proven free market reforms would be 
        employed.

  3.  Any system of dual regulation would add a layer of bureaucracy 
        and cost that would ultimately be paid by policyholders.

  4.  Regulatory mistakes will not be contained within a single state, 
        but will have an immediate national impact.

    When we first articulated these concerns, some argued that they 
were only theoretical. However, with the introduction of S. 1373, the 
Insurance Consumer Protection Act of 2003, many, if not all of our 
concerns have been justified.
    The areas for reform have been defined. Now it is up to the states 
to enact changes in public policy that will make the difference. We 
urge you to continue your efforts to assure that change takes place in 
the states. As it has in the past, your interest alone will prompt a 
renewed resolve on the part of the states. We believe this pressure, 
given time, will bear fruit.
    Thank you for your consideration of our comments.
                                 ______
                                 
  Prepared Statement of the Independent Insurance Agents & Brokers of 
                            Arizona (IIABA)

    Chairman McCain, Ranking Member Hollings, and Members of the 
Committee. My name is Lanny Hair, and I am pleased to have the 
opportunity to give you the views of the Independent Insurance Agents & 
Brokers of Arizona (IIABA) on the current state of insurance regulation 
and IIABA's views on the role Congress can play to reform and improve 
the current system. I am the state executive of IIABA, and our 
association represents approximately 300 agencies in Arizona as well as 
an additional 100 ``Associate'' members engaged in support services to 
independent agencies. It is our membership that is the ``front line'' 
communication to insurance consumers, and we feel a strong allegiance 
and obligation to represent those consumers and their interest in 
insurance regulatory issues.

Introduction
    At the outset, Chairman McCain, 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 expectation 
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.
    In the last few years, the perceived need for reform has increased. 
The enactment of financial services modernization legislation and the 
emergence of an increasingly more consolidated, more global financial 
services industry have sparked new interest in the concept of an 
``optional'' Federal insurance charter and, more generally, in Federal 
regulation of the business of insurance. Proponents of such proposals 
argue that Federal insurance regulation would promote greater 
uniformity, reduce costs and cause less frustration than the current 
multi-state system.
    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 deficiencies and inefficiencies that exist today, and there is no 
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 insuring that insurance consumers--both 
individuals and businesses--receive the insurance coverage they need 
and that any claims they may experience are paid. These aspects of the 
state system are working well, and I have little doubt that this 
Committee will hear any testimony to the contrary. The optional Federal 
regulation proposals, however, would displace these well-running 
components of state regulation as well and, in essence, thereby ``throw 
the baby out with the bathwater.''
    IIABA supports state regulation of insurance--for all participants 
and for all activities in the marketplace. Yet despite this historic 
and longstanding support, we are not confident that the state system 
will be able to resolve its problems on its own. In fact, we feel there 
is a vital role for Congress to play in helping to reform the state 
regulatory system, and such an effort need not replace or duplicate at 
the Federal level what is already in place at the state level. 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.
    Due to our concerns with the current state regulatory system, our 
national association, the Independent Insurance Agents and Brokers of 
America (IIABA) has drafted a proposal that addresses many of our 
concerns. Under the proposal that IIABA has been developing in 
conjunction with a broad-based group of insurers and insurance 
producers, these overarching principles would be satisfied through an 
approach under which--

  (1)  Every insurer, agent and broker would be subject to only a 
        single--albeit a state--regulator for licensing determinations, 
        solvency regulation, financial audits, corporate transaction 
        reviews and corporate governance requirements;

  (2)  The procedures under which states review proposed insurance 
        policy forms would be limited to 30 days, and the requirements 
        that apply to rate approvals essentially would be eliminated 
        for any insurance coverage sold in a ``competitive'' 
        marketplace; and

  (3)  Although no substantive consumer protection requirements would 
        be eliminated or displaced, incentives for states to create 
        compacts to streamline the market conduct examination process 
        would be provided and limitations would be placed on the 
        ability of state regulators to conduct costly ``fishing 
        expedition''-type examinations.

    To explain the rationale under girding this approach, I will first 
offer an overview of both the positive and the negative elements of the 
current insurance regulatory system. I will then provide a more 
complete explanation of IIABA's proposal to address the negative while 
retaining the positive elements of the current system.

1.  The Current State of Insurance Regulation
    As the United States Supreme Court has so aptly put it, ``[p]erhaps 
no modern commercial enterprise directly affects so many persons in all 
walks of life as does the insurance business. Insurance touches the 
home, the family, and the occupation or the business of almost every 
person in the United States.'' \1\ ``It is practically a necessity to 
business activity and enterprise.'' \2\ Insurance serves a broad public 
interest far beyond its role in business affairs and its protection of 
a large part of the country's wealth. It is the essential means by 
which the ``disaster to an individual is shared by many, the disaster 
to a community shared by other communities; great catastrophes are 
thereby lessened, and, it may be, repaired.'' \3\ Thus, it is ``the 
conception of the lawmaking bodies of the country without exception 
that the business of insurance so far affects the public welfare as to 
invoke and require governmental regulation.'' \4\ Since the inception 
of the business of insurance in the United States, it is the states 
that have carried out that essential regulatory task. Today, state 
insurance departments employ over 11,000 individuals and address 
hundreds of thousands of consumer complaints and inquiries annually, 
and they draw on over a century-and-a-half of regulatory experience 
they endeavor to protect the insurance consumers of this country.
---------------------------------------------------------------------------
    \1\ United States v. South-Eastern Underwriters Ass'n, 322 U.S. 
533, 540 (1944).
    \2\ German Alliance Ins. Co. v. Lewis, 233 U.S. 389, 415 (1914).
    \3\ Id. at 413.
    \4\ Id. at 412.
---------------------------------------------------------------------------
    These core regulatory tasks of state insurance regulators can 
essentially be divided into the following eight categories:

  (1)  Regulation of the coverage parameters of insurance contracts;

  (2)  Sales practices regulation;

  (3)  Claims practices regulation;

  (4)  Claims dispute mediation/resolution;

  (5)  Claims payment guarantees--state guaranty funds regulation and 
        solvency regulation;

  (6)  Claims payment guarantees--qualification standards and financial 
        audits;

  (7)  Insurer licensing, merger review and corporate governance 
        regulation; and

  (8)  Insurance agent/broker licensing and qualifications to do 
        business regulation.

    As a general matter and as explained in more detail below, the 
regulatory performance of the state system on the first five of the 
eight categories--all of which directly involve regulation of the 
interaction between the consumer and the insurer--is superlative. It is 
only with respect to determining and monitoring insurers, agents, and 
brokers' qualifications to do business and financial health that the 
state system has developed the inefficiencies that are now the focal 
point of the cries for reform.

a. The Positive--Protecting Consumers and Ensuring Claims Are Paid

    The goal of all insurance is to protect the purchaser (or their 
heirs) from calamity. At its most basic level, this means that the 
consumer purchases an insurance contract and, in exchange for the 
premium paid for that contract, the consumer receives a promise from 
the insurance company that they will be compensated for any losses they 
experience that are covered under that contract. From the consumer 
perspective, it is imperative that the insurance contract be adequate 
for their needs and that the insurer actually pay any claims that are 
made under that contract. In both of these respects, the historical 
performance of state insurance regulators is impeccable--they ensure 
that necessary coverage minimums are included in insurance contracts 
and, perhaps even more importantly, they make sure legitimate claims 
are paid.
    Regulators play two very distinct roles in ensuring that claims are 
paid. First, they are responsible for guaranteeing that funds are 
available to pay any and all claims that arise. Despite their best 
efforts to oversee and audit insurers' financial solvency, insurance 
companies--like national banks and savings and loans--sometimes fail. 
The state system of insurer guaranty funds--which are like Federal 
Deposit Insurance Corporation (FDIC) insurance but for insurance 
companies instead of banking institutions--works. It has paid out over 
$11 billion to cover claims asserted against insolvent insurers since 
they were first created in the mid-1970s, and none of that money has 
been at taxpayer expense. The Arizona Guaranty Fund has on several 
occasions been activated to protect Arizona consumers from carrier 
insolvency, and local access to Arizona Guaranty Fund employees to help 
the consumer process claims has been most valuable in expediting 
payment of monies due Arizona consumers.
    Second, state regulators play a vital role in mediating disputes 
that arise on a daily basis between consumers who have submitted claims 
and insurers who contend that the claims either are illegitimate or are 
not covered by the insurance policy. The respective bargaining 
positions between tens of millions of insureds--such as individuals and 
small businesses--and their insurers is tremendously skewed. Insurance 
consumers therefore regularly rely on the intervention of state 
regulators on their behalf when claims disputes arise. Large segments 
of every insurance department in the country are dedicated to assisting 
with the resolution of such disputes, and all available evidence 
suggests that insurance consumers are very satisfied with those local 
efforts. The Arizona Department of Insurance is staffed with insurance 
professionals and attorneys that are recognized as consumer advocates, 
individuals ready and waiting to become involved in the claims process 
to assure that the consumer is treated fairly and receives benefits 
they are due.

b. The Negative--Product Regulation and Duplicative Oversight

    It has become evident that all of the perceived 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. The reality of today's marketplace is 
that banking institutions and securities firms are able to develop and 
market new and more innovative products and services quickly, while 
insurance companies are hampered by lengthy and complicated filing and 
approval requirements in 50 states. As a result, some argue that 
insurance companies--and, derivatively, agents and brokers selling 
their products and services--are at a competitive disadvantage compared 
to their counterparts in other financial services industries.
    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. While most 
insurance codes provide that policy rates shall not be inadequate, 
excessive or unfairly discriminatory, and that policy forms must comply 
with state laws, promote fairness, and be in the public interest, there 
are a multitude of ways in which states currently regulate rates and 
forms. These systems include prior-approval, flex-rating, file-and-use, 
use-and-file, competitive-rating and self-certification. These 
requirements are important 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, arbitrary and 
inconsistent with the advance of technology and regulatory reforms made 
in other industries. In recent years, the Arizona Legislature has 
recognized the need for reform in that area, and has been proactive in 
``deregulation'' of rates and form approval for commercial insurance, 
as they recognize that segment is comprised of a more sophisticated 
group of buyers of consumers. However, as you have heard previously, it 
often takes two years or more to obtain regulatory approval to bring 
some new insurance products to market on a national basis. Cumbersome 
inefficiencies create opportunity costs, and the regulatory regime in 
many states is likely responsible for driving many consumers into 
alternative markets mechanisms. As a result, the costs of insurance 
regulation are exceeding what is necessary to protect the public, 
particularly in the area of commercial insurance. In order to keep 
insurers competitive with other financial services entities and 
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 financial solvency and market-conduct practices, 
to review mergers and acquisitions, and to dictate how the insurer 
should be governed. With the exception of market-conduct examinations, 
it is difficult to discern how the great cost of this duplicative 
regulatory oversight is justified, especially in light of the fact that 
the underlying solvency requirements are essentially identical from 
state to state. Market conduct examinations present a somewhat more 
thorny issue because, although the majority of sales and claims 
practices requirements and prohibitions are similar across the country, 
there are local variations. It is, of course, difficult for a regulator 
to determine compliance with another jurisdiction's requirements. At 
the same time, it seems wholly unnecessary for each regulator to 
examine every insurer on every aspect of their compliance practices 
given that there is such an extensive overlap in requirements. The 
Arizona Department of Insurance recognized the need for reform in this 
area, and earlier this year streamlined their market conduct 
examination process with the objective to target those insurance 
companies which have provided cause to believe are in violation of 
State Statute or regulatory process. The new procedures will reduce 
costs and better direct the State's resources to protect the consumer.

2. Solutions
    Although heroic efforts have been made to date, state regulators 
and legislators face the near impossible challenge of addressing and 
remedying the identified deficiencies unilaterally. For the most part, 
these reforms must be made by statute, and state lawmakers face 
practical and political hurdles and collective action challenges in 
their pursuit of such improvements on a national basis. Despite the 
actions of the states on producer licensing reform over the last two 
legislative sessions, real-world realities suggest that it is 
extraordinarily difficult, if not impossible, to pass identical bills 
through the 50 state legislatures.
    Although the proposed optional Federal regulation proposals might 
correct certain deficiencies, the cost is incredibly high. The new 
regulator would serve to 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. 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. Federal models propose to charge a 
distant and likely highly politicized Federal regulator with the 
implementation and enforcement of a single set of rules that would 
apply equally across all states and all insurance markets. Such a 
distant Federal regulator may be completely unable to respond to 
insurance consumer claims concerns and its mere creation could spark 
fears that this will prove to be the case. Nor can a single regulatory 
system harmonize 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. Arizona has 
a long and proud history of successful State regulation that 
demonstrates that the unique needs of Arizona consumers have been 
addressed. The large populations of retired and/or elderly citizens 
have required that consumer safeguards for this group be put in place, 
and both the Arizona Legislature and Arizona Department of Insurance 
accomplished that in a rapid and effective manner. The potential 
responsiveness of a Federal regulator to both industry and consumer 
needs in several critical areas could therefore jeopardize the 
fundamental purpose of insurance regulation and must be considered 
questionable at best.
    This year, Sen. Fritz Hollings (D-S.C.) has introduced the 
Insurance Consumer Protection Act (S. 1373). This legislation takes a 
very dramatic approach by proposing to repeal the McCarran-Ferguson 
Act. In addition, S. 1373 would create a ``Federal Insurance 
Commission,'' an independent panel within the Department of Commerce. 
The commission would be the sole regulator of all interstate insurers 
offering property and casualty insurance as well as life insurance. As 
with any proposal that would shift regulation from the states to the 
Federal government, IIABA strongly opposes this legislation.
    There are several key components to S. 1373 that IIABA strongly 
objects to. Under this legislation, a newly formed commission would 
have full authority over both rates and policies, while at the same 
time allowing consumers to have a right to challenge rate applications 
before the Commission. The Commission would also be responsible for 
licensing and standards for the insurance industry, annual examinations 
and solvency reviews, investigation of market conduct, and the 
establishment of accounting standards. The bill would also allow the 
Commission to investigate the organization, business, conduct, 
practices and management of ``any person, partnership or corporation in 
the insurance industry.'' It would appear that insurance agents and 
brokers would fall under this definition. IIABA believes that by 
creating this commission, S.1373, would only take everything that is 
wrong with the current state system and shift it to the Federal level, 
where there is even less accountability. We are specifically troubled 
that this legislation would regulate agents from all states and for all 
lines of business who do business across a state line in what will 
inevitably be a new massive Washington bureaucracy. While IIABA does 
have problems with the current multi-state licensing system, we think 
that adding another layer of regulation on top of this is a big 
problem.
    We believe that the states are better positioned to accommodate 
diversity and to respond to change. Certainly history shows that the 
State of Arizona has done an outstanding job responding to needed 
consumer protections. However, weaknesses exist in state regulation 
today. Unnecessary distinctions among the states and inconsistencies 
within the states thwart competition, reduce predictability and add 
unnecessary expenses to the cost of doing business. Similarly, outdated 
rules and practices do not serve the goals of regulation in today's 
financial services marketplace. Nevertheless and as noted previously, 
there is much that is good about the current state-based system that 
would be jettisoned through the creation of a Federal regulator, 
including an enforcement infrastructure upon which consumers throughout 
the Nation heavily rely to protect their interests. Federal charters 
and the establishment of a full-blown, unprecedented, untested and 
likely politicized regulatory structure at the Federal level are not 
the answer.
    What is needed is a third way--a system that builds on, rather than 
dismantles, the States' inherent strengths to meet the challenges of a 
rapidly changing insurance environment. It must include mechanisms to 
promote the establishment of more uniform and consistent regulations 
and regulatory procedures, but must be poised to respond faster and 
more fully to the reality of electronic distribution and to emerging 
industry trends such as globalization and consolidation. It must 
modernize areas in which existing requirements or procedures are 
outdated, while continuing to impose effective regulatory oversight and 
necessary consumer protections. The result, for all stakeholders, 
should be a more efficient, modernized and workable system of insurance 
regulation.
    For the last year, IIABA has been spearheading a cooperative 
attempt to develop just such a proposal. We have been working with 
other trade associations and directly with an array of national and 
regional insurers in an effort to identify precisely what must be fixed 
and how that might be done without displacing the components of the 
current system that work so well and without creating additional layers 
of government bureaucracy. Through this process, four specific areas 
for reform and the constraints on the mechanisms for that reform have 
been identified, and we have begun assembling a draft proposal for 
accomplishing these reforms. In my remaining testimony, I will outline 
the four components of this draft proposal.

a. Rate and Form Filing and Review/``Speed to Market'' Reform
    As previously discussed, the product regulation requirements in 
most states require insurers to file new rates and forms with the 
insurance commissioner and obtain formal regulatory approval before 
introducing them in the marketplace. Accordingly, an insurer that 
wishes to introduce a new product on a national basis may be forced to 
seek approval in up to 55 different jurisdictions. The process can be 
inefficient, paper intensive, time-consuming, arbitrary and 
inconsistent with the advance of technology and the regulatory reforms 
made in other industries. These cumbersome inefficiencies create 
unnecessary costs and delays, reduce industry responsiveness and drive 
many consumers into alternative market mechanisms. The regulatory 
regime in many states exceeds, in terms of scope and cost, what is 
necessary to protect the public.
    In evaluating potential solutions to these problems, it is 
essential to recognize that uniformity is very difficult to achieve for 
property and casualty lines product regulation. Due to geography and 
other factors, some states must take into account issues that other 
states need not address. In addition, states may subject rates and 
forms to different levels of regulatory scrutiny, and as in Arizona 
personal lines and commercial lines products may be treated 
differently.
    Unnecessary or unreasonable consumer protection concerns also limit 
the range of potential options to some extent. The concern is that the 
quicker and easier it is to have a new product or rate approved, the 
less protection consumers will receive. The solution thus must strike a 
balance between timely and quality reviews and appropriate consumer 
protections. In addition, ``race to the bottom'' and ``turf'' concerns 
have to be taken into account. Particularly under a scheme that employs 
a single point of review, states that use more stringent rate and form 
processes will be hesitant to accept the introduction of products or 
policies approved under more lenient guidelines. We believe it is 
possible, however, to strike an appropriate balance between realizing 
meaningful speed-to-market reform and protecting consumer interests.
    Based on these objectives and considerations, the IIABA proposal is 
designed to do three things: (1) make the system more market-oriented; 
(2) make the system faster; and (3) create greater accountability. On 
the form approval side of the equation, this would be accomplished by 
preempting any state law that requires more than allowing all proposed 
forms (both commercial and personal lines) to be used no later than 30 
days after they have been filed with the insurance commissioner unless 
the rate or form is disapproved within that time period. Under such a 
system, an insurer must at most file a proposed form with the insurance 
department 30 days in advance of the proposed effective date, and the 
form must be used at that time unless affirmatively disapproved by the 
regulator. If a department affirmatively approves the filing at any 
time within the 30-day period, the insurer may use the form 
immediately. Under the proposal, regulators would be entitled to a 
single 15-day extension of this disapproval period if an approval 
application is incomplete, and more permissive state filing/approval 
requirements would not be affected.
    Under this approach, the current requirement that filings be done 
in every state in which the product will be offered would not be 
disrupted and current state form requirements would not be preempted 
(except as discussed below). In both the personal and commercial lines 
context, any disapproval must be articulated in writing and be based 
substantively on a properly promulgated statute, regulation or final 
court order. Many regulators have historically disapproved policy forms 
based on unpublished and unsubstantiated ``desk drawer rules,'' but 
such actions would be impermissible under our approach. As noted 
previsously, more permissive form filing and approval requirements 
would not be displaced by the Federal rules.
    Under our draft proposal, rate approval is treated much differently 
than form approval because the competitive market generally is the most 
efficient and effective regulator for rates. At the same time, in 
markets that are not sufficiently competitive, regulators need to 
retain the ability to monitor rates and to intervene to disapprove 
rates when necessary. Accordingly, under the draft proposal, any 
regulatory review requirement for rates in competitive markets that 
requires more than the filing of the rates with the insurance 
department would be preempted. States, however, will remain empowered 
to approve or disapprove rates in ``non-competitive'' markets if an 
affirmative finding has been made determining that the market is ``non-
competitive.'' That determination would be subject to Federal court 
scrutiny under the proposal.

b. Producer Licensing
    Insurance agents and brokers must be licensed in every state in 
which they conduct business, and many producers face considerable 
hurdles in complying with inconsistent, duplicative and unnecessary 
licensing requirements when they operate on a multi-state basis. 
Although state licensing reforms adopted over the last two years offer 
great promise, additional improvements and refinements are necessary. 
The core proposal that we are developing to address this problem is to 
mandate licensing reciprocity in all states and thus achieve meaningful 
licensing reform that is national in scope. This could be accomplished 
by prohibiting a state in which an agent or broker is seeking to be 
licensed on a non-resident basis from imposing any licensure 
requirement on that person other than submission of proof of licensure 
in their home state and the requisite fee. Under a reciprocal licensing 
system that is national in scope, any individual agent or broker would 
only be confronted by a single set of licensing requirements.
    The largest potential impediment to such a proposal is the concern 
by some that it could create incentives for certain states to establish 
lenient requirements with the hope that producers might flock there for 
resident licenses. Such a ``race to the bottom'' would be detrimental 
to the goal of fair, responsible regulation. To address the concern, 
the draft proposal would empower the NAIC to establish minimum 
standards for licensure. Only agents or brokers licensed as a resident 
in states that satisfy these minimum standards would be able to benefit 
from the preemption of state licensing authority over non-resident 
agents. If an agent or broker resides in a state that does not adopt 
the minimum-licensing standards, the proposal would explicitly enable 
that producer to apply to a state in which they do business and that 
has adopted such minimum standards to be licensed as a resident. 
Through this mechanism, Congress also could dictate minimum licensing 
standards. Under the draft proposal, for example, the minimum licensing 
standards would be required to include the performance of a criminal 
background check, utilization of standardized licensing cycles and 
application forms and fees in the filing process, imposition of a 
standardized trust account requirement for use in any state that 
requires maintenance of such accounts, and the mandatory availability 
of agency-level licenses.

c. Company Licensing/Transaction Review/Corporate Governance/Insolvency 

        Standards/Financial Audits
    Like insurance agents and brokers, insurers currently must be 
licensed by every state in which they do business. They also must 
satisfy a variety of corporate organization, solvency and governance 
requirements and go through multiple reviews of proposed corporate 
transactions (i.e., change in control, mergers and acquisitions) and 
financial audits. Insurers need a single set of requirements; requisite 
compliance with the rules of multiple states creates delays and adds 
unnecessary costs without adding any tangible consumer benefit. 
Compliance with multiple audit procedures also is needlessly 
inefficient, costly and administratively cumbersome for insurers.
    As in the insurance producer context, in developing potential 
solutions, the possibility of a race to the bottom and regulatory turf 
concerns of state insurance departments must be considered. In 
particular, state insurance departments likely will be hesitant to 
accept licensing, solvency and auditing determinations made by other 
states where the insurer does a significant amount of business in their 
states.
    Regulation in this area also must contemplate the financial risks 
at stake if insurer solvency is not sufficiently regulated and 
companies become financially unsound. Concerns about possible strains 
on the guaranty system and the need for bailouts (such as in the 
savings-and loan-crisis) are never far from the surface when dealing 
with this area of regulation.
    To remove duplicative and inconsistent requirements and examination 
procedures while at the same time maintaining sufficient protection for 
policyholders and the public, the proposal for companies tracks the 
producer licensing proposal by preempting the ability of all states to 
impose any licensing/transaction, review/corporate or governance/
solvency standards or requirements on any non-resident company that is 
licensed by a state that is accredited by the NAIC. An insurer would be 
able to select as its ``home state'' either its state of domicile or 
its state of incorporation. States still would be free to require non-
resident companies to be licensed but only upon proof of home-state 
licensure and the submission of a fee. The draft will clarify that any 
company that satisfies such Federal ``passport'' requirements can offer 
products in a non-resident state even if the state does not try to 
license them through the federally approved process (if the state does 
license in a federally permissible way, an insurer would have to comply 
with the state requirements, however). Hence, although any state could 
impose more stringent requirements on its resident companies, the 
system would remain uniform from the perspective of each individual 
insurer because each insurer would need to comply with only one set of 
substantive requirements.
    To stem a potential ``race to the bottom,'' a company will be 
required to be licensed in an ``accredited'' state in order to use its 
license as a passport to do business in other states and have the 
preemption outlined above apply to its activities in those non-resident 
states. The legislation would empower the NAIC to continue to conduct 
the accreditation process, subject to two new requirements.
    First, additional accreditation requirements would have to be 
incorporated into the NAIC's accreditation requirements, including the 
new producer licensing minimum standards and any company minimum 
licensing, solvency or other standards that Congress chose to 
incorporate.
    Second, the NAIC's accreditation criteria and any determination 
that a state is (or is not) accredited would be subject to review and 
disapproval either by a Federal agency or by a Federal court. Such 
oversight would be limited to reviewing NAIC determinations regarding 
what standards must be satisfied to become accredited and applications 
of those standards to states that have applied for accreditation.
    To ensure that no company would be penalized (and thus unable to 
qualify for the ``passport'' rights) by virtue of the fact that it is 
domiciled in a non-accredited state, the legislation would permit an 
insurer to choose an alternative state of ``residence'' for licensing 
purposes if its state of domicile and its state of incorporation both 
are not accredited. Tentatively, the legislation will allow such an 
insurer to be licensed in the accredited state in which it does the 
most business based on premium volume. This should increase the 
pressure on all states to become accredited.
    The legislation also must account for the possibility that the NAIC 
will refuse to implement the program and/or that the states will decide 
to boycott the process. In either event, the legislation will 
incorporate the back-up provisions included in NARAB. Hence, either if 
the NAIC refuses to implement the accreditation procedures as required 
under the Act or if a majority of states do not become accredited 
within a specified number of years, an independent body would be 
established either to stand in the shoes of the NAIC in conducting the 
accreditation process or--if states refuse to comply--to act as a 
licensing clearinghouse so that insurers will qualify for the 
licensing/solvency/etc. single set of requirements envisioned under the 
overarching approach. The proposal utilizes a combination of the NARAB 
back-up provisions and the Risk Retention Act non-resident state 
regulatory provisions to create these fall-back sets of provisions. The 
tighter they are designed, the less likely it is that the NAIC and/or 
the states will refuse to comply with the intended NAIC accreditation 
procedures.

d. Market Conduct Examinations

    Insurers are subject to examinations from insurance departments in 
multiple States. Exam procedures are inefficient and requirements are 
duplicative as a result of lack of coordination between States. 
Multiple exams are costly and administratively cumbersome for insurers. 
There often does not appear to be a sound justification for the 
examination and there are no restrictions on most insurance 
department's exercise of their market conduct examination power. As 
stated earlier, the Arizona Department made major reforms in its Market 
Conduct Examination procedures this year. Not all states, however, have 
shared our motivation to improve this aspect of the regulatory process.
    It must be noted that market conduct examinations directly involve 
consumer protection issues and, as a result, turf concerns and 
political concerns can be prevalent. Moreover, the focus of market 
conduct examinations is supposed to be on sales practices that occur 
where the customer is located rather than where the company resides, 
undermining the practicality of mandating a home-state regulation 
approach.
    To reduce the administrative costs of compliance by clarifying the 
circumstances under which a regulator of a non-resident insurer may 
conduct examinations, the frequency with which such examinations may be 
conducted, and the review procedures that will apply, the proposal 
would require that, in the non-resident state, examinations may be 
conducted only to review compliance with properly promulgated statutory 
and regulatory requirements, and that no insurer can be deemed to have 
``failed'' such an examination unless it is provided with an 
explanation in writing that sets forth the statutory and/or regulatory 
requirement that allegedly has been violated. The proposal includes a 
provision permitting any claim that a regulator is exceeding the scope 
of his or her authority to be brought in Federal court.
    In an effort to facilitate greater coordination of market conduct 
examinations where appropriate, the proposal includes a provision 
authorizing and encouraging the use of multi-state compacts to 
facilitate market conduct examinations.

Conclusion
    Although IIABA supports the preservation of state regulation of the 
business of insurance, we believe that reforms to the current system 
are necessary and essential. Specifically, 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 Federal legislative action 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 marketplace and to 
achieve the same level of overall reform as the imposition of a Federal 
regulator. State regulation in Arizona has proven to be effective and 
responsive to Arizona consumer needs. Arizona consumers wish to 
maintain their say in how insurance regulation protects them. Arizonans 
prefer to be regulated by Arizonans. The specific ideas outlined above 
are just a few of the many specific solutions that could be adopted 
under this type of approach. Instead of relying on the agenda of a 
displaced and possibly politicized Federal regulator, however, 
insurance regulation would continue to be grounded on a more solid 
foundation--the century-and-one-half worth of skills and experience 
that the states have as regulators of the insurance industry. The 
advantage of this approach is that it offers the best of all worlds. It 
will promote the establishment of more uniform standards and 
streamlined procedures from state to state, protect consumers while 
enhancing marketplace responsiveness, and emphasize that the primary 
goals of insurance regulation can best be met by improving, not 
abandoning, the state-based system that has been in place for over 150 
years.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Olympia J. Snowe to 
                          Craig A. Barrington

    Question 1. In your testimony, you provide arguments in support of 
an optional Federal system of chartering insurance companies. You 
identify many benefits of such a system, in which insurance companies 
would have the option of remaining subject to state regulation, or of 
becoming federally-chartered. In addition, you suggest that policy-
makers at the Federal level should act to create a more market-based 
system of regulating insurance companies, to reduce obstacles and allow 
companies to provide more efficient services and products. If insurance 
companies were able to move to a market in which rates and prices were 
more market-based, rather than strictly regulated by government 
entities, what would be the primary consumer protections that currently 
exist, or that you would recommend, to ensure that insurance providers, 
in their desire to provide the best price to beat competition, did not 
``over-sell'' themselves and their products and thereby increase the 
risk of insurance providers having insufficient resources to satisfy 
claims?
    Answer. Our Optional Federal Charter (``OFC'') proposal 
incorporates strong consumer protection provisions, including national 
regulatory oversight of financial solvency and market conduct, thus 
establishing a new national regulatory system designed to detect 
significant financial issues and multi-state patterns of market 
misconduct much more effectively than is possible under the current 
fragmented state approach. In fact, our OFC proposal enhances consumer 
protection by focusing Federal regulators on those core financial and 
market behavior oversight functions, rather than on the ``government 
price controls'' and ``product creativity hostility'' that are the twin 
hallmarks of state regulation in most states most of the time.
    However, it is important to note in this regard, that within the 
general pattern of state price controls, there are some noteworthy 
exceptions. Your question assumes that insurers are strictly price-
regulated for all products in every state today. This is not uniformly 
the case. In Illinois, for example, there are no government price 
controls, and market-based rate regulation has worked to create a 
stable insurance environment for consumers. The Illinois experience 
substantiates that consumers are well-served by a system where the 
market sets prices rather than the Illinois insurance regulator setting 
them. Moreover, there are no government price controls whatsoever with 
regard to life insurance products, and there is no evidence that free 
market pricing has resulted in diminished consumer protection for these 
lines. It is neither good economics nor effective government policy to 
believe that the financial responsibility of an insurer will in any way 
be assured through government price controls. Indeed, to the contrary, 
financial responsibility is protected through a regulatory system that 
focuses specifically on the financial examination and marketplace 
conduct of companies operating in that marketplace. This is what our 
OFC proposal contemplates.
    As a matter of general background, insurance regulation today can 
be categorized in two broad ways. The first approach focuses on 
government price and product controls that require companies to file 
insurance rates and policy forms with state regulators and get their 
approval. The second type of regulatory approach focuses on the 
financial health and stability of insurance companies--so they can keep 
the promises they make--and emphasizes oversight of the market behavior 
of those companies. The former mode of regulation--a government 
``command-and-control'' system--has been discarded for every other 
major industry except property and casualty insurance. There is no 
economic justification for its continuation. More importantly, 
government price and product controls actually deny consumers the kind 
of marketplace options they enjoy with respect to other products. This 
type of regulation makes the state regulatory agency the focus of 
political power, forcing companies to essentially beg the government 
for approval of prices and products. Regulatory delays in reviewing 
insurance rates and forms, coupled with reluctance to approve rate 
increases where necessary or to approve new or innovative products, 
provides a disincentive for insurance companies to develop a broad 
range of products. In turn, this hurts consumers by shifting attention 
away from financial solvency and marketplace regulation, which are the 
two core ``consumer protection'' functions of regulators. Government 
price and product controls create an unhealthy marketplace that relies 
on government approval, not on consumer demand.
    The latter kind of regulation--based on financial health and market 
conduct--is utilized for every other industry. Focusing regulatory 
resources on the financial health of those companies operating in the 
marketplace protects consumers by ensuring that the companies have the 
financial strength to pay claims when due. Allowing marketplace forces 
to regulate insurance prices and products empowers consumers, rather 
than regulators. Regulatory reform (especially elimination of 
government price and product controls) frees up government resources 
and allows a redirection of regulatory attention where it is most 
needed, including effective solvency regulation and rehabilitation or 
liquidation of troubled companies. Ultimately, consumers also benefit 
from a streamlined and efficient insurance regulatory system that 
reduces regulatory costs for insurers.

    Question 2. You testified that one possible benefit of a Federal 
regulatory regime would be the increased speed with which insurance 
products could be brought to market. Reflecting upon the testimony of 
Mr. Hunter, I am compelled to echo his question as to what benefit 
consumers might draw from the increased rapidity in which insurance 
providers could bring insurance products to market? Wouldn't such 
rapidity increase the chance that a product could be sold which 
contained unnecessary risks for consumers?
    Answer. AIA advocates removing burdensome, and economically 
indefensible, impediments to bringing safe new products to market. We 
do not think there is any justification for this type of system--a 
system that not only wastes resources, but places such a high barrier 
to bringing new products to market that it stifles innovation.
    Subsequent to the Senate Commerce, Science and Transportation 
Committee hearing, the Capital Markets, Insurance and Government 
Sponsored Enterprises Subcommittee of the House Financial Services 
Committee held a hearing at which Neal Wolin, Executive Vice President 
and General Counsel of The Hartford Financial Services Group, 
testified. The following quotes from his November 5 written testimony 
are instructive of the state regulatory problems experienced by our 
industry:

        ``To give you a sense of impact on our operations, our 
        property-casualty companies make an average of 5,500 filings 
        each year with the 51 jurisdictions . . . and [those filings] 
        often result in lengthy dialogue between our lawyers and 
        actuaries and insurance department personnel. If significant 
        changes are made in one jurisdiction, we may need to restart 
        the process with jurisdictions that have already approved the 
        forms.''

        ``This elaborate process is burdensome on our industry, but 
        more importantly, has negative effects on the customers we seek 
        to serve. First, consumers ultimately pay the cost of our 
        compliance with this regulatory scheme through higher premiums. 
        Second, the complexity of the process interferes with our 
        ability to get new products to consumers rapidly. We live in a 
        time when consumer preferences change rapidly, and when 
        industries are generally judged by their ability to discern and 
        meet these changing preferences. In contrast, it can easily 
        take more than a year in our industry to secure the approvals 
        necessary to market a new product nationally.''

    The magnitude of the problem becomes even more astounding when you 
consider the aggregate number of property-casualty filings made each 
year. The volume of submissions, in addition to entrenched hostility 
toward innovative new products and/or enhancements, diverts regulatory 
attention. Our OFC proposal emphasizes strong market conduct and 
financial regulation by the Federal regulator and does not displace 
mandatory coverage provisions of state reparations laws; these are the 
principal mechanisms for making certain insurers conduct their business 
appropriately and for highlighting to the regulator problematic 
behavior across jurisdictional lines.
    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. But 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. It 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 administered by a single Federal regulator.
    In summary, this question is closely linked to your first one. 
AlA's response there aims to address your concerns about regulator 
review and consumer protection. We obviously do not advocate that new 
products violate the law. In fact, to reiterate, not only does our OFC 
proposal preserve and enhance consumer protections, but the 
jurisdictions that today do not provide price obstacles show no 
evidence of placing consumers at higher risk. Indeed, the opposite is 
true: presently the state regulatory system spends the majority of its 
time, energy, and scarce resources preventing all but the most standard 
insurance policy forms from getting to the marketplace, instead of 
monitoring the financial health and marketplace activities of insurers. 
Consumers would be well-served by regulatory focus on those activities.

    Question 3. The American Insurance Association's (``AlA'') proposal 
for an optional Federal charter would apparently leave the insurance 
guaranty funds at the state level, where they are now. It seems that, 
taking an example from the Federal insurance for banking deposits, 
there might be certain benefits to the federalization of large guaranty 
funds that exist, in part, to reassure consumers and provide confidence 
that the insurance system as a whole can weather difficulties in 
certain regions or within certain companies. What are your thoughts 
regarding the positive and negative aspects of increased Federal 
participation in the guaranty funds held to protect against 
insolvencies? Would Federal participation in the guaranty funds reduce 
the possibility that insurance consumers in one state might be 
reimbursed at levels lower than other consumers in other states, and, 
if so, would this result be sufficient, in your opinion, to justify 
establishing Federal guaranty funds to replace state guaranty funds?
    Answer. This is an important question. Although there is a 
reasonable argument that a Federal guaranty system should be created 
for federally-chartered insurers, we drafted our OFC proposal-after 
substantial thought on the issue-to leave the state guaranty fund 
system in place so long as those state funds provide nondiscriminatory 
coverage for federally-chartered insurers.
    In crafting the OFC proposal, we decided to leave the state 
guaranty funds in place for a number of key reasons. First, we believe 
the state guaranty fund system has admirably performed its 
responsibilities for more than three decades and it may be best not to 
uproot a system that has had a successful history. Second, we were told 
by advocates of the state guaranty fund system that, by removing 
federally-chartered insurers, the state fund system may be weakened, 
given it would have fewer participating insurers, and ultimately may be 
threatened. While we strongly believe insurers should have the option 
to be federally chartered, we do not want to encourage arguments that 
the OFC proposal impairs elements essential to the state system.
    Nevertheless, the state guaranty fund system is under significant 
stress today based on the recent increase in insurer insolvencies. An 
ultimate decision about their proper role in an OFC environment is 
ultimately a matter of thorough legislative debate and discussion. Our 
current OFC proposal was crafted with a goal of not needlessly 
disrupting state based institutions and sources of funding.
                                 ______
                                 
  Response to Written Question Submitted by Hon. Olympia J. Snowe to 
                            J. Robert Hunter

    Question. As we seek to achieve the proper balance between state 
and Federal regulation of insurance companies, the need to protect 
consumers' interests is of paramount importance. As such, we need to 
weigh the value of protecting consumers against abusive practices, as 
well as the desire to allow consumers to obtain the best prices 
possible for products, stemming from free competition among insurance 
providers and the absence of overly burdensome regulations. What are 
the primary concerns and complaints that consumers raise regarding the 
provision of insurance? What lessons regarding insurance regulation do 
these concerns provide?
    Answer. Thank you for your thoughtful question, Senator Snowe.
    There are three main areas of concern for insurance products--
policy forms, risk classifications and overall rate levels. Market 
forces will not protect consumers on policy forms and risk 
classifications (such as introducing credit scoring to rate policies). 
If unregulated in these two areas, insurers are in an overwhelming 
position to take advantage of consumers. There must be prior approval 
of policy forms and risk classifications. The issue of risk 
classification must command more scrutiny by legislators and 
regulators. Insurers are using all sorts of personal information--
completely unrelated to the insurance transaction--to segment the 
market into smaller and smaller pieces. These actions are undermining 
the basic principles and policy goals of insurance.
    If these two areas--policy forms and risk classifications--are 
effectively regulated, then an argument can be made that market forces 
will constrain overall price levels in most lines of insurance (there 
are exceptions, such as non-competitive lines like assigned risk plans 
and lines with reverse competition, such as credit insurance). Insurers 
point to Illinois to support their case for complete deregulation. But 
consumers point to massive rate hikes in homeowners insurance in 
unregulated Texas, the worker comp rate explosion in unregulated 
California and other failures of deregulation to make their case. At 
best, the evidence is mixed about the role of market forces in 
regulating overall insurance price levels. Theoretically, then, a file 
and use system for overall rate levels--combined with prior approval of 
policy forms and risk classifications--might best balance consumer 
protections with reliance on market forces.
    However, CFA's analysis of regulatory methods throughout the 
nation, including the file and use systems, concluded that the 
California auto insurance system--installed as the result of California 
residents voting for Proposition 103--is the best system for consumers 
and insurers alike. This analysis can be found at www.consumerfed.org. 
(The report is called ``Why Not The Best? The Most Effective Auto 
Insurance Regulation in the Nation,'' dated 06/06/01.) Under this 
system (used for most of property-casualty insurance, but not workers' 
compensation), competition is maximized by eliminating the state anti-
trust law exemption, allowing banks to compete with insurers, removing 
state impediments to competition, such as anti-group and anti rebate 
laws, and improving consumer information. It also uses regulation to 
backstop the competitive forces, understanding that regulation and 
competition both seek the same goal: the lowest possible price 
consistent with a fair return for the service providers.
    As I point out in my testimony, 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.
    Updating this information through 2001 \1\ shows that, as of2001, 
the average annual premium in California was $688.89 (Rank 23) vs. 
$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.
---------------------------------------------------------------------------
    \1\ State Average Expenditures & Premiums for Personal Automobile 
Insurance in 2001, NAIC, July 2003.
---------------------------------------------------------------------------
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Olympia J. Snowe to 
                             Douglas Heller

    As we seek to achieve the proper balance between state and Federal 
regulation of insurance companies, the need to protect consumers' 
interests is of paramount importance. As such, we need to weigh the 
value of protecting consumers against abusive practices, as well as the 
desire to allow consumers to obtain the best prices possible for 
products, stemming from free competition among insurance providers and 
the absence of overly burdensome regulations. What are the primary 
concerns and complaints that consumers raise regarding the provision of 
insurance? What lessons regarding insurance regulation do these 
concerns provide?

    Question 1. What are the primary concerns and complaints that 
consumers raise regarding the provision of insurance?
    Answer. For more than fifteen years the consumer advocates at the 
Foundation for Taxpayer and Consumer Rights have heard from insurance 
consumers about their frustrations, concerns and complaints regarding 
insurance. The two chief concerns and complaints by insurance consumers 
relate to exorbitant rates and the failure to efficiently and equitably 
handle a policyholder's or injured victim's claim.
    A good example of the former complaint came from a motorist in 
Pennsylvania:

        I am a consumer who is mandated to carry auto insurance in the 
        state of PA. However, after 15 years of a perfect driving 
        record, and one accident later, my auto insurance rates 
        skyrocketed. After numerous calls to the insurance company, 
        insurance commissioner's office, district attorney, consumer 
        protection agency, I ended up in the same place; no where. All 
        I wanted to know is how does an insurance company determine 
        what an adequate price increase is? Who makes sure they are not 
        overcharging their policy holders? Is it the same people who 
        are salaried by the insurance companies they are suppose to 
        watch over?

    An example of the latter comes from New York:

        In 1994 our house in New York was destroyed by a fire that was 
        caused by an accident. On that day we were assured . . . that 
        we would be back in our house in six months, however they have 
        not offered us a settlement that would replace our loss (we 
        were insured for replacement value), and (the insurer) has 
        fought our claim . . . for the past seven and a half years . . 
        .

        We have had countless appraisals, and an arbitration that was 
        refused by the insurer. The fact is that My mother paid every 
        month, for thirteen years, to insure that if a catastrophe 
        struck it would be fixed promptly and fully, but our insurer 
        has only offered 2/3's of the replacement cost at any given 
        time, even though we had full replacement coverage. My family 
        has been put through great pain and suffering over this 
        problem, we have in effect been raked over the coals of our 
        burnt out house.

    Of course, various iterations of these problems are repeated time 
and again, not only to consumer protection organizations like ours, but 
to insurance commissioners and lawmakers throughout the country. 
Additionally, we often see complaints that merge the two issues. 
Consumers often complain that an insurer improperly blamed an accident 
on them, without a proper investigation and then increased their 
premium. In recent years there has been an upsurge in complaints from 
homeowners who file a legitimate claim and then are non-renewed by 
their insurer. Next they find that only very expensive policies are now 
available to them, because their claim has been filed with a national 
claims database known as the Comprehensive Loss Underwriting Exchange, 
or CLUE, which is used by virtually all insurers to discriminate 
against homeowners with prior claims.
    These problems, particularly rate related complaints, are not 
exclusively the problems of individual consumers of personal lines 
insurance. This year, Congress and many state legislatures have 
considered the problem of massive rate hikes for physicians and 
hospitals purchasing medical malpractice insurance. Unfortunately, the 
discussion on this issue has focused exclusively on approaches that 
limit the rights of injured patients, leaving the possibility of 
regulating insurance company rates (as opposed to victims' rights) 
virtually out of the picture. Over the years, unregulated medical 
malpractice insurers have pushed rates wildly up and down, following 
the trajectory of the broader economy rather than the actual assumption 
of risk. While the accessibility of insurance in the mid-1990s--even 
for doctors with terrible records and conduct--went unquestioned, the 
incredible swing upward in recent years has engendered an angry 
constituency of doctors who cannot tolerate the vagaries of the 
unregulated insurance marketplace, even if their fury is misdirected 
towards the innocent victims of malpractice who try to use the 
insurance system as it was meant to be used.
    On the claims side of the insurance equation, the complaints come 
from small businesses and associations such as condominium associations 
as well as individuals. After the very destructive 1994 Northridge, 
California earthquake, thousands of personal and commercial property 
insurance claims were low-balled and delayed by insurers. Market 
conduct exams by the state Department of Insurance indicated that 
approximately 50 percent of claimants were mistreated or defrauded to 
some degree by their insurer. However, those exams, which suggested 
that insurers owed policyholders more than $200 million in unpaid 
claims, were quashed by the insurance commissioner, who resigned in 
disgrace when the public learned of this six years later. The 
commissioner allowed insurers to avoid penalties and repayment by 
paying a few million dollars into private foundations controlled by the 
commissioner. Because the regulatory powers of the Department staff 
were stymied by the Insurance Commissioner, consumers were left 
unprotected and underpaid.
    In short, the main concerns of insurance consumers are that they 
pay the right amount for their policy and that they get what they pay 
for.

    Question 2. What lessons regarding insurance regulation do these 
concerns provide?
    Answer. It is our view that these concerns and complaints serve as 
a strong indication that insurance consumers are best served when the 
insurance marketplace is well regulated. As the auto insurance 
policyholder from Pennsylvania notes, all drivers are required by law 
to purchase the insurance companies' product. Homeowners who have a 
mortgage are required to purchase insurance, a de facto mandate. 
Indeed, a variety of insurance products have become so integral to the 
functioning of our economy and consumers' financial lives that it could 
be said that insurance is akin to a utility in contemporary America.
    When a product is mandated or otherwise unavoidable, it is 
impossible to ensure a competitive marketplace in which the consumer is 
on an equal playing field with the seller without regulatory 
intervention. That is, no matter what the insurers charge, a motorist 
must by auto insurance; a consumer cannot put off buying a policy like 
they might forgo a new car for another year. Also, a consumer cannot 
retroactively choose not to buy a policy if an insurer does not pay 
claims properly; the consumer has already paid for the policy in 
advance.
    As such, we believe that some of the assumptions about delivering 
consumer protections must be analyzed. You state that ``we need to 
weigh the value of protecting consumers against abusive practices, as 
well as the desire to allow consumers to obtain the best prices 
possible for products, stemming from free competition among insurance 
providers and the absence of overly burdensome regulations.''
    First, the ``best'' insurance premiums do not stem from free 
competition. As we have learned in California and throughout the 
nation, so-called free competition, or unfettered markets, led to the 
incredibly volatile and high rates of the insurance crises of early 
1970s and the mid-1980s. Second, we are wary of language such as 
``overly burdensome regulations'' because, while we see plenty examples 
of inefficient and ineffective regulation, it is hard for us to 
identify examples of overly burdensome regulations.
    The insurance industry, which is not even subject to anti-trust 
laws in most states, has been able to undercut most regulation 
throughout the country, with the notable exception being California. In 
order to successfully protect consumers from excessive rates and unfair 
insurer conduct, new laws should be enacted to strengthen the 
regulatory oversight of insurance companies. As is the case under 
California's Proposition 103 the burden to justify insurance rates 
should be on the companies, rather than on the public to contest rates. 
Further, insurers should be expected to meet stringent standards of 
conduct with respect to the treatment of claimants.
    The real life concerns of insurance consumers continually teach us 
that, around the country, the products and services provided by 
insurers are not sufficiently overseen by regulators. They teach us 
that the price of insurance is of the utmost importance to consumers 
and businesses and that, because insurance is a service we pay for in 
advance, vigilant regulation is essential to ensure that companies 
fulfill their obligations to consumers.
    As we describe in our full testimony, the stringent regime of 
California's Proposition 103 provides the best example of regulatory 
efficacy in the Nation. California has successfully regulated insurance 
rates for 15 years, since the enactment of Proposition 103. The effect 
of regulation has been to lower rates for consumers while maintaining a 
healthy and profitable marketplace for insurers. Our full testimony 
explains in greater detail that insurers' profits in California over 
the past ten years have been higher than the national average. That 
tells us that insurance regulation not only protects consumers from 
unjustifiable premiums, but it also protects insurers from errant and 
risky practices.
    I hope these responses assist you as you look for ways to improve 
insurance consumer protections. Thank you for considering our views.
                                 ______
                                 
  Response to Written Question Submitted by Hon. Olympia J. Snowe to 
                              Thomas Ahart

    Question. In your prepared testimony you provided a proposal for 
the licensing of insurers, insurance agents, and brokers, under which 
each insurer, agent or broker would be subject to one state regulator 
for licensing determinations, solvency regulations, financial audits, 
corporate transaction reviews, and corporate governance requirements. 
You also propose that state regulators would be limited to 30-day 
reviews of proposed insurance policies, and states would be prohibited 
from enforcing requirements for prior rate approvals for insurance 
coverage sold in a ``competitive'' marketplace. Finally, you suggest 
that state regulators should be limited in their ability to conduct 
examinations. At a time when we hear so many concerns expressed by 
consumers that they are overwhelmed by the complexity of the insurance 
products offered to them, and that they are unsure of the solidity of 
the providers from which they seek to buy products, how would your 
proposal for a new licensing regime protect the consumer? Would your 
proposal decrease the ability of regulators to adequately examine new 
and complicated products, at the same time you were reducing the 
ability of regulators to go in and examine insurance providers or 
agents that might be behaving in an unethical manner?
    Answer. There is near universal consensus that insurance regulation 
must be modernized and reformed, but there are differences of opinion 
about how best to address the flaws and deficiencies that exist with 
the current regulatory system. 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 large international and domestic insurers, 
would result in the dangerous and unprecedented establishment of full-
blown Federal regulation. The Independent Insurance Agents and Brokers 
of America (IIABA) believe the first option is unlikely to result in 
the desired results or in achieving greater regulatory uniformity among 
the states. We also believe the second option would unnecessarily 
jettison the expertise and experience of state regulators, create 
confusion among consumers, and exempt federally chartered insurers from 
the consumer protection framework that exists today at the state level.
    In response to the need for reform and because of the deficiencies 
associated with the approaches outlined above, IIABA has developed a 
third approach and middle-ground solution. Specifically, we are calling 
on Congress to use the legislative tools at its disposal to overcome 
the structural impediments to reform and ultimately achieve a more 
efficient and effective regulatory framework. In other words, we 
advocate using Federal legislative action to bring about greater 
consistency and other needed reforms across state lines. In this way, 
we can assure that insurance regulation will continue to be grounded on 
the proven skills and experience of state regulators. This pragmatic 
concept would address many of the legitimate criticisms lodged against 
the current system and improve and enhance state insurance regulation 
without replacing it altogether.
    Working in conjunction with organizations and policymakers 
interested in this approach, IIABA continues to consider the potential 
applications of this concept. Although this development process is 
still underway, there are some areas where our work is more evolved and 
refined. In order to give you some perspective concerning the possible 
applications, I have highlighted some of the ways in which this 
approach could perhaps be implemented, focusing below only on producer 
licensing and speed-to-market issues.

   National Licensing Reciprocity--In the licensing arena, we 
        propose implementing reciprocity on a 51-jurisdiction basis and 
        preempting all non-resident licensing laws that are 
        inconsistent with the GLBA/NARAB standards. By using Congress's 
        preemptive authority, we could provide that a producer licensed 
        in his/her home state may obtain a non-resident license by 
        simply completing the NAIC's uniform application and paying the 
        requisite fee.

   National Uniformity--Additional uniformity is necessary in 
        producer licensing, and Federal legislation could be used to 
        establish greater multi-state consistency. Such uniformity 
        standards could address a broad array of issues, including, but 
        not limited to, resident licensing requirements, the licensing 
        cycle and renewal process, entity licensing, the use of the 
        Producer Database, etc.

   Countersignature Laws and Other Restrictive Barriers--This 
        type of proposal could also provide for the outright preemption 
        of countersignature laws and similar barriers to effective 
        multi-state commerce.

   Parameters for Rate and Form Review--Through the use of 
        preemption, a Federal proposal could establish parameters for 
        the purpose of standardizing and streamlining the review and 
        approval of insurance products. This could be done on the form 
        side, for example, by making a traditional file-and-use system 
        (with a strict deemer provision, limited to 30 days, and other 
        mandates) the most stringent form of review available to state 
        regulators. Rate regulation could be addressed in similar ways, 
        and IIABA supports using preemption to move to a competitive 
        rating system that would eliminate the traditional review and 
        approval of rates and only require rates to be filed 
        electronically at the time they are introduced in the 
        marketplace.

    Your question appears to focus on three aspects of our proposal--
the manner in which in would address product regulation, solvency 
regulation, and market conduct oversight--and I have attempted to 
address each of these issues below:

   Product regulation--Many states regulate the development and 
        introduction of new products into the marketplace in ways that 
        cause significant and unnecessary delays, undermine the forces 
        of competition, and create affordability and availability 
        problems for consumers. We seek to eliminate the unnecessary 
        delays associated with introducing a new product into the 
        marketplace, and we believe that competition plays an important 
        role. Some state insurance departments actually establish the 
        prices that can be charged for insurance products, but IIABA 
        believes that insurers should be free to set their own 
        insurance rates in any market that is competitive. With regard 
        to policy forms, IIABA believes that states should be mandated 
        to take action on a proposed product within 30 days or some 
        similar, reasonable timeframe. States that have enacted similar 
        reforms, including Illinois and South Carolina, have had great 
        success.

   Solvency regulation--This is one area of insurance 
        regulation that operates effectively and efficiently, and 
        IIABA's proposal does not interfere with this functional aspect 
        of insurance regulation. State regulators generally do an 
        excellent job in this area. We do, however, have some strong 
        concerns about how solvency regulation and guarantee funds 
        would be affected by proposals calling for Federal regulation.

   Market conduct oversight--IIABA strongly believes that 
        market conduct review should be a primary focus for state 
        regulators, and we do not seek to undermine the work being 
        performed in this area. We do not believe the level of scrutiny 
        should be reduced; we simply believe there should be greater 
        coordination among the states and a greater reliance on home 
        state regulators. Today, insurers are often the subject of 
        lengthy, cumbersome, and duplicative market conduct reviews by 
        multiple state regulators. These regulators do not coordinate 
        their exams and do not share or communicate their findings with 
        other states. IIABA simply seeks to improve the process, 
        enhance multi-state coordination, and eliminate exams that are 
        nothing more than unjustified ``fishing expeditions.''

    IIABA believes that solvency regulation and consumer protection are 
the two most important functions that are performed by state insurance 
regulators, and we do not intend to undermine these areas in any way. 
Our proposal, which calls on Congress to use its legislative and 
preemptive powers to bring about reform and enhanced consistency, does 
not dislodge consumer protections in any way.

                                  
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