[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]




 
                         SMART INSURANCE REFORM

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                     CAPITAL MARKETS, INSURANCE AND
                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 16, 2005

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-38



                    U.S. GOVERNMENT PRINTING OFFICE
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio                  MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio                  GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair   DARLENE HOOLEY, Oregon
RON PAUL, Texas                      JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio                BRAD SHERMAN, California
JIM RYUN, Kansas                     GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio           BARBARA LEE, California
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       JOSEPH CROWLEY, New York
VITO FOSSELLA, New York              WM. LACY CLAY, Missouri
GARY G. MILLER, California           STEVE ISRAEL, New York
PATRICK J. TIBERI, Ohio              CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota           JOE BACA, California
TOM FEENEY, Florida                  JIM MATHESON, Utah
JEB HENSARLING, Texas                STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey            BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida           DAVID SCOTT, Georgia
J. GRESHAM BARRETT, South Carolina   ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida            AL GREEN, Texas
RICK RENZI, Arizona                  EMANUEL CLEAVER, Missouri
JIM GERLACH, Pennsylvania            MELISSA L. BEAN, Illinois
STEVAN PEARCE, New Mexico            DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin,
TOM PRICE, Georgia                    
MICHAEL G. FITZPATRICK,              BERNARD SANDERS, Vermont
    Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
JOHN CAMPBELL, California

                 Robert U. Foster, III, Staff Director
  Subcommittee on Capital Markets, Insurance and Government Sponsored 
                              Enterprises

                 RICHARD H. BAKER, Louisiana, Chairman

JIM RYUN, Kansas, Vice Chair         PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut       GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio                DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama              BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware          GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma             DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois         MICHAEL E. CAPUANO, Massachusetts
EDWARD R. ROYCE, California          HAROLD E. FORD, Jr., Tennessee
SUE W. KELLY, New York               RUBEN HINOJOSA, Texas
ROBERT W. NEY, Ohio                  JOSEPH CROWLEY, New York
VITO FOSSELLA, New York,             STEVE ISRAEL, New York
JUDY BIGGERT, Illinois               WM. LACY CLAY, Missouri
GARY G. MILLER, California           CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota           JOE BACA, California
PATRICK J. TIBERI, Ohio              JIM MATHESON, Utah
J. GRESHAM BARRETT, South Carolina   STEPHEN F. LYNCH, Massachusetts
GINNY BROWN-WAITE, Florida           BRAD MILLER, North Carolina
TOM FEENEY, Florida                  DAVID SCOTT, Georgia
JIM GERLACH, Pennsylvania            NYDIA M. VELAZQUEZ, New York
KATHERINE HARRIS, Florida            MELVIN L. WATT, North Carolina
JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
RICK RENZI, Arizona                  MELISSA L. BEAN, Illinois
GEOFF DAVIS, Kentucky                DEBBIE WASSERMAN SCHULTZ, Florida
MICHAEL G. FITZPATRICK,              BARNEY FRANK, Massachusetts
    Pennsylvania
JOHN CAMPBELL, California
MICHAEL G. OXLEY, Ohio


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 16, 2005................................................     1
Appendix:
    June 16, 2005................................................    57

                               WITNESSES
                        Thursday, June 16, 2005

Covington, J. Lee II, testifying as the former Director, Ohio 
  Department of Insurance........................................    17
Koken, M. Diane, Pennyslvania Insurance Commissioner, testifying 
  as President, National Association of Insurance Commissioners..    22
Muhl, Edward J., testifying as the former Insurance Commissioner 
  of Maryland and the former Superintendent of Insurance, New 
  York State Insurance Department................................    24
Pickens, J. Michael, testifying as the former State Insurance 
  Commissioner, Arkansas Department of Insurance.................    10
Serio, Gregory V., testifying as the former Superintendent of 
  Insurance, New York State Insurance Department.................    13
Shapo, Nathaniel S., testifying as the former Director, Illinois 
  Department of Insurance........................................    19

                                APPENDIX

Prepared statements:
    Kelly, Hon. Sue..............................................    58
    Kanjorski, Hon. Paul E.......................................    60
    Covington, J. Lee II.........................................    62
    Koken, M. Diane..............................................    72
    Muhl, Edward J...............................................   123
    Pickens, J. Michael..........................................   127
    Serio, Gregory V.............................................   134
    Shapo, Nathaniel S...........................................   140


                         SMART INSURANCE REFORM

                              ----------                              


                        Thursday, June 16, 2005

             U.S. House of Representatives,
        Subcommittee on Capital Markets, Insurance,
              and Government-Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:02 a.m., in 
Room 2128, Rayburn House Office Building, Hon. Richard Baker 
[chairman of the subcommittee] presiding.
    Present: Representatives Baker, Ryun, Bachus, Manzullo, 
Royce, Kelly, Ney, Fossella, Biggert, Barrett, Feeney, 
Hensarling, Davis of Kentucky, Kanjorski, Moore, Israel, Clay, 
McCarthy, Lynch, Miller of North Carolina, Scott, Watt, Davis 
of Alabama, Wasserman Schultz, and Pomeroy.
    Chairman Baker. I would like to call this meeting of the 
Capital Markets Subcommittee to order and welcome all our 
participants this morning.
    The committee is again revisiting a subject which we have 
examined over the course of literally years on many occasions, 
the goal of which is to provide a regulatory system which 
enables creativity and innovation in insurance product while 
serving the interests of consumers in the most responsive 
manner possible.
    The history of insurance regulation in the Nation is one of 
some considerable interest to anyone who has reasons to 
purchase or rely on deliverability of an insurance product, and 
the work of the committee specifically over the past several 
years has been to try to seek out a balance of all the 
competitive stakeholder interests and at the same time move 
toward a system which is more reflective of free market 
principles.
    It is difficult to understand how a very simple, 
straightforward life insurance policy, which is intended to be 
sold nationally, will require 54 different regulatory entities' 
approval before it is permissible to market nationwide.
    I will simply go back to comments of commissioners over the 
course of the last few years. In 1999, the then-president of 
the National Association of Insurance Commissioners, President 
Reider, stated that regulation and regulators will have to 
change if they expect to maintain relevance, admitting his own 
frustration in hearing people say not just in his own 
department but in commission meetings that they are not going 
to change because they have always done it in that way in the 
past. He was committed to change.
    In the year 2000, NAIC President Nichols stated that if 
regulation of insurers market conduct does not change, then the 
States' right to regulator insurance could be lost.
    In 2002, NAIC President Terri Vaughan stated, ``There are 
many cases where it is difficult to rationalize the different 
regulatory requirements across States. Many of our regulatory 
differences are the result of historical accident rather than a 
reasoned response to differing market conditions.''
    In 2004, NAIC President Ernie Csiszar stated, ``The system 
has outlasted its usefulness in many ways. Regulators tend to 
overregulate the trivial, such as the reams of paperwork, and 
underregulate the essentials, like solvency and corporate 
governance issues.''
    In an earlier committee hearing, two commissioners 
participated. Michigan's Insurance Commissioner Fitzgerald and 
then-Ohio Commissioner Covington responded to a question from 
Chairman Oxley, which was, ``If Congress sets a goal of 3 or 4 
years for achieving comprehensive uniformity by NAIC for 
product approval, do you and Mr. Fitzgerald feel confident you 
can meet the goal?''
    Mr. Covington responded, ``Chairman Oxley, I think we have 
got to meet that kind of goal. As we have said before, the 
current system is not good for consumers, not good for the 
companies. We must meet that goal.''
    Mr. Fitzgerald responded, ``I agree with that, and if over 
the next 2 to 3 years you have not seen significant progress, I 
think there is a need to have questions raised about whether we 
can effectively, at the State level, solve problems that you 
have helped to identify and that we are identifying as well.''
    The disappointment is that was 4 years ago, and I think 
that is the platform from which I would like to begin today. 
This is not about assigning responsibility to any individual, 
to any organization. It is merely the point that the Congress 
has been, over a period of many years, been saying to those who 
are in the regulatory business, ``Let's get this fixed.'' And 
we have had many different approaches to get it fixed. 
Unfortunately, at least in my perspective, it is still not 
fixed.
    If the SMART Act is viewed as an inappropriate response to 
the identified problems, then I am still looking for someone to 
place on the table the response that is appropriate in light of 
all the identified concerns that most commissioners have agreed 
in fact do exist.
    So as we go forward, we will again revisit the provisions 
of the SMART Act, attempt to come to some agreeable resolution 
on an approach which the committee finds advisable and hope to 
move forward in the coming months with a proposal that provides 
the relief that I think all of us agree is warranted and 
justified.
    Mr. Moore, did you have an opening statement?
    Mr. Moore. Yes, I do. Thank you, Mr. Chairman.
    Chairman Baker, I would like to thank you for holding this 
hearing today on ways that Congress can improve and strengthen 
the State-based system of insurance regulation.
    And I also want to thank our witnesses who have flown in 
from around the country to testify here today and the ones at 
the table.
    I look forward to hearing from our witnesses ways in which 
this committee and Congress can work together toward greater 
uniformity in insurance regulation with the goal of modernizing 
regulation of an industry that plays an important role in our 
economy and in the daily lives of our constituents.
    I also look forward to hearing from our witnesses the ways 
in which NAIC is currently attempting to achieve uniformity at 
the State level. I appreciate the efforts of Chairman Oxley and 
Chairman Baker to modernize insurance regulation, and while I 
do not support the SMART Act as currently drafted, I think the 
debate over how Congress can and should reform the State-based 
system of insurance regulation is certainly worth having.
    I hope that as this process moves forward, this committee 
will be able to forge a compromise that will result in uniform 
improved standards in the areas of market conduct, insurer and 
in producer licensing and multi-State filing of life insurance 
forms, among others, as well as more competitive markets for 
personal lines, which will ultimately benefit our consumers.
    In the area of fostering greater competition in the 
insurance marketplace, Mr. Chairman, I have real concerns with 
Title 16 of the SMART Act, as currently drafted. The State of 
Kansas currently operates under a relatively competitive file 
and use system for most lines of insurance, and while greater 
competition and market-based pricing would apply downward 
pressure on rates, total rate deregulation could have a 
potentially detrimental effect on consumers.
    As the SMART Act process moves forward, I will continue to 
explore the flex rating provisions in Title 16, which would 
allow for greater pricing freedom without wholly preempting the 
States' ability to review rate increases or decreases.
    The National Conference on Insurance Legislators has an 
interesting flex rating model law that may be worth 
considering, and the States' experience with flex rating from 
Alaska to South Carolina and many in between could be 
instructive as well.
    Again, Mr. Chairman, thank you for holding this hearing, 
and I look forward to hearing from our witnesses.
    Chairman Baker. I thank the gentleman for his statement.
    Mr. Ryun?
    Mr. Ryun. Mr. Chairman, thank you for convening this 
hearing.
    And I want to thank all of our witnesses. I look forward to 
your testimony.
    Our goal in this reform process is to improve uniformity 
between States but also to increase competition and improve 
consumer choice.
    As we move toward this goal, I am hopeful that we are able 
to achieve it through existing State-based systems. I believe 
that our end goal must continue to make the State systems work 
without a Federal regulator.
    Throughout this process, the committee has received input 
from all sides of the industry, including the State insurance 
commissioners, and I am pleased that we have a number of our 
commissioners, both past and present, here with us today, and I 
would particularly like to welcome our Kansas State insurance 
commissioner, Sandy Praeger, whose advice I appreciate and 
whose input I will continue to look forward to.
    There are certainly differences of opinion on what form 
this effort should take, but there is wide consensus that 
improvements need to be made. I believe that we must continue 
to focus on improving uniformity between States. This will help 
avoid the race to the bottom with companies drawn to States 
with less stringent laws.
    Mr. Chairman, I appreciate the attention you are giving 
this matter. I look forward to the hearing and our witnesses, 
and I yield back my time.
    Chairman Baker. I thank the gentleman for his statement.
    Mr. Scott?
    Mr. Scott. Thank you very much, Mr. Chairman. I want to 
first thank you for holding another important hearing regarding 
the SMART Act.
    And I also want to thank the distinguished panel members 
and witnesses today for their testimony on this important 
subject.
    Efforts to streamline insurance regulation by the States 
have been slow in development, and I agree with those that say 
that interstate insurance products need to be treated as 
interstate commerce by our regulators. However, this is my 
point: I remain skeptical about the need for a new, large 
Federal bureaucracy to completely replace the current State 
regulatory structure we have.
    Now, since Chairman Oxley and Chairman Baker have announced 
their road map for insurance regulatory modernization, I have 
been interested in understanding the differences between the 
different States' insurance rate regulations. I look forward to 
a discussion today about the States that have moved toward less 
regulation and the effects that that has on consumers.
    Any legislation the committee considers must balance 
streamlined regulations for businesses with consumer 
protections. I will not support any legislation that does not 
provide strong consumer protection against discriminatory 
practices and that does not protect personal financial data and 
personal health data.
    The States have strong regulations against discriminatory 
practices and anticompetitive practices, and many of these laws 
do not harm overall market competition.
    Thank you again, Mr. Chairman, and I yield back the balance 
of my time.
    Mr. Royce. [presiding] Thank you, Mr. Scott.
    Let me begin by commending Chairman Baker but also 
commending Chairman Oxley for their efforts to modernize the 
regulation of our Nation's insurance industry. I think we can 
all agree that consumers of insurance products can benefit from 
more efficient regulation, and it is clear to me that the 
leadership of this committee is trying to help the marketplace 
for the better.
    I support the intent of the SMART Act, which is to 
harmonize regulatory standards of over 50 regulatory regime 
insurance providers, the regime that frankly every one of these 
providers must face in 50 States, in 50 jurisdictions.
    Let me add, though, that in addition to SMART, I believe 
that this committee should also consider creating an optional 
Federal charter for insurance companies. And in my view, this 
optional Federal charter would improve the insurance 
marketplace to the benefit of consumers.
    If we take the life insurance marketplace as an example, 
life products do not share geographic characteristics that may 
be prevalent in other insurance sectors. If life insurers could 
go to one regulator for approval to offer their products, then 
insurance firms would spend less time in negotiations with 55 
different regulatory bodies and more time developing market-
friendly products.
    Furthermore, fewer obstacles to entry would create a more 
competitive market, giving consumers more choices and certainly 
more choices at better prices if they did not have to go 
through this regulatory conundrum.
    I have great confidence that an optional Federal charter 
would drive much needed market-based reform, and frankly the 
consumer would be the greatest beneficiary with lower costs if 
this were done.
    The benefits of an optional Federal charter would not be 
limited to the consumer, however. As a member of the 
International Relations Committee, I have pressed other nations 
to open up their markets to our financial services products, 
such as India and Korea and countries across Africa.
    Unfortunately, in many of these government-to-government 
negotiations, the insurance sector is not well represented 
because there is no Federal regulatory body with a seat at the 
table. Banks and thrifts have many voices to drive pro-growth 
policies--the Fed, the FDIC, the OTS, the OCC. However, the 
insurance industry does not have a strong voice speaking on its 
behalf.
    The creation of an optional Federal charter would go a long 
way to solve this problem and will result in more jobs, higher 
wages for thousands of employees in the insurance industry and 
better returns for debt and equity investors.
    I am a strong supporter of increasing efficiency in our 
insurance marketplace. Consumers will be the greatest 
beneficiaries, but our economy would also benefit.
    Again, I appreciate the leadership of Chairman Oxley and 
Chairman Baker on the SMART Act, and I hope they will also 
entertain the idea to create an optional Federal charter for 
insurers.
    And at this time, let's go to the next member in 
succession, that would be Mr. Miller. No statement?
    Mr. Watt, do you have an opening statement?
    Mr. Watt. Thank you, Mr. Chairman. I will not take 5 
minutes or 3 minutes, whatever the time limit is.
    I would just observe from my service, both on the Financial 
Services Committee and the Judiciary Committee, how striking it 
is that a group of people who came to power professing support 
for States' rights have just so completely and thoroughly 
disregarded the notion in so many ways that I just cannot allow 
it to go without mention.
    I guess the reason I came to this hearing was to try to 
understand how this or anything else in this area, as I have 
been trying to understand in tort law, which throughout my 
lifetime had been reserved to the States, in insurance law, in 
predatory lending. I mean, the list just keeps growing and 
growing and growing of areas in which people who have come into 
government railing against the power of the Federal Government 
and talking so aggressively about how they support the rights 
of States just think that States are stupid now and that they 
somehow have a monopoly on the ability to regulate everything 
and do it correctly.
    I just do not understand it, and I mean, I keep trying in 
every context in which we are given the opportunity, and I 
still do not understand. Maybe some of these witnesses or the 
Chair or somebody will tell me how this fits, because I do not 
get it. I do not get it.
    I yield back, Mr. Chairman.
    Mr. Royce. I thank the gentleman for yielding back. I will 
just point out that the Articles of Confederation did not work 
that well for this Republic, so several hundred years ago we 
went to a system that was federalist in nature where the 
Federal Government handled--
    Mr. Watt. Is this in response to my--
    Mr. Royce. I am just continuing my remarks, taking the 
opportunity since the gentleman yielded back.
    Mr. Watt. I thought you had already made your remarks.
    Mr. Royce. Well, I am using up the remainder of my 5 
minutes just explaining that in other areas of commerce this 
has worked out fairly well, but there was a reason why we gave 
up on the Articles of Confederation and why we found that 
interstate commerce was very efficient when handled at the 
Federal level.
    And with that said, let me move to Mr. Ney of Ohio for his 
opening remarks.
    Mr. Ney. Thank you, Mr. Chairman.
    I want to thank Chairman Baker for holding the hearing 
today.
    Personally, I will be in and out at some meetings, but I 
intend to come back and also look over the testimony, because I 
think it is important. Also, I think your testimony today will 
be interesting, as some of these are former commissioners, of 
course. Lee Covington is here, who was our commissioner in 
Ohio.
    When I was in the State senate, I chaired the Insurance and 
Banking Committee. That is what we called it, Insurance and 
Banking. At that time, back in Ohio, it was said that if 
interstate banking came to the State of Ohio, it would 
completely finish the State off, and how dare there be a 
concept of interstate banking. A lot of things have changed, a 
lot of things have blended.
    But I will give an observation at that time in the State 
senate, up to 1994 when I left there, whether it was Dick 
Celeste as Governor, with his insurance commissioner, or after 
that, Voinovich, or even before that, Jim Rhodes, when he was 
Governor, Democrat or Republican, the insurance commissioners 
would come to us and their staff and they would say, ``This is 
what has happened.'' The National Association of Insurance 
Commissioners and States would start to fall in line to conform 
to some Federal policies of adopted provisions. I thought that 
worked pretty good.
    I am not sure, and this is not a dispersion on individuals 
or anything, I am just not sure that that has happened in the 
recent past.
    Ann Benjamin, our insurance commissioner, comes and talks 
to us regularly. I think she does a great job, as I think Lee 
did in our State. I think we have had a good, well-run State. 
But as I told Ann, if there are internal disputes there where 
something is not working right today, that is not going to cut 
it here on Capitol Hill, and it will lead to questions about 
should we have this type of legislation. I do not pretend to 
know this legislation backwards or forwards, but I give 
Chairman Baker and Chairman Oxley credit for introducing this 
to get the subject laid out on the table. Some people want an 
optional Federal charter.
    The only thing I would warn, though, because I remember 
with the insurance agents and different groups, when they came 
to talk to you in the legislature, you had to raise your hand 
and say, ``I swear to the McCarran and Ferguson principles,'' 
and then you could have a decent conversation. So things 
change.
    But the one thing I would throw out there, and it has got 
to be thought well through, this is just not an easy piece of 
legislation or law to look at. If you have a Federal entity and 
this Federal entity is created and something does not go right 
and we create another Federal entity and hire more staff and 
they become the regulators, and then everybody runs to Capitol 
Hill saying, ``We just had a Federal rule proposed and we hate 
that and let's go fight it,'' sometimes people will get what 
maybe they wish for. And I just think as the process goes, that 
we just have to consider the States' end of it but also 
consider how this would be pieced together, will it really 
work?
    So I am up in the air on some things, but I think your 
testimony will be valuable today to take a good look at maybe 
what has went right and what has went wrong in putting this 
together nationally through the States.
    Thank you, Mr. Chairman.
    Mr. Royce. Thank you, Mr. Ney.
    The ranking member, Mr. Kanjorski, of Pennsylvania.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    We return this morning to a topic that we have often 
discussed in recent years, the need for insurance regulatory 
reform. No matter what side one takes in this long-standing 
debate on regulatory efficiency, it has become clear to me that 
this is no longer a question of whether we should reform 
insurance regulation in the United States; instead, it has 
become a question of how we should reform insurance regulation.
    As you know, Mr. Chairman, we have begun to develop a 
growing consensus in the Congress about a need to improve 
insurance regulation. In an attempt to advance these efforts, 
you have also crafted a lengthy and complex outline for 
achieving regulatory reform in the insurance industry. This 
evolving proposal has, at best, received lukewarm support from 
many of the parties to which I have spoken about the draft 
reform plan.
    Many participants in the insurance community have also 
expressed strong reservations and deep concerns about this 
plan. For example, the North Dakota legislature has passed a 
resolution indicating that the proposal would ``impair, erode 
and limit the ability of State governments to regulate the 
business of insurance.''
    A committee in the Ohio assembly has also urged us to 
oppose the plan. In addition, the National Association of 
Realtors has expressed its opposition to efforts to impose ``a 
system of mandatory, uniform national standards for personal 
and commercial property insurance.''
    Moreover, the consumer groups have determined that the 
sweeping proposal would override important State consumer 
protection laws, sanction anticompetitive practices by 
insurance companies and incite State regulators to further 
weaken insurance oversight.
    After expending considerable time and effort studying these 
matters, Mr. Chairman, the National Association of Insurance 
Commissioners have raised their own concerns about your 
proposal to reform insurance regulation. I am therefore very 
pleased that we will have before us today the leader of this 
venerable organization. Diane Koken is a savvy and confident 
overseer of Pennsylvania's insurance markets. Because she has 
also served under Republican and Democratic governors, she can 
offer us a bipartisan perspective on insurance regulatory 
reform.
    During our previous hearings on insurance reform, we have 
received extensive testimony from many witnesses advocating the 
creation of an optional Federal charter.
    Mr. Chairman, although your evolving plan still does not 
address this important issue, the consensus for creating such a 
charter continues to grow. Rather than overlaying the Federal 
bureaucracy on top of State regulation, an optional Federal 
charter would, in my view, create a sensible, separate and 
streamlined regulatory system. Such a dual oversight has worked 
generally well in the banking industry for many decades, and we 
should now consider applying it to the insurance industry as 
well.
    Moreover, because of its standardized products and 
nationwide marketplace, the life insurance industry, from my 
perspective, is particularly ready for the adoption of an 
optional Federal charter.
    While the issue of insurance regulatory reform is an 
important one, I am very disappointed that we are meeting on a 
bill that has yet to be introduced, for which there is no 
pressing need before resolving the critical issue of extending 
the Terrorist Risk Insurance Act.
    After tomorrow, we will have just 9 weeks remaining on the 
official legislative calendar for this session. The Federal 
backstop to provide economic stability for American workers and 
businesses, however, will expire at the end of this year. We 
need, therefore, to move expeditiously on matters of the 
greatest importance.
    We need to improve the Financial Services Committee 
legislation to extend this important program. We need to write 
a report. We then need to pass the bill on the House floor. We 
also may need to work to resolve any differences with the 
Senate's version of the legislation to extend the program. The 
time is short, we need to act now to extend the Terrorism Risk 
Insurance Act.
    In closing, Mr. Chairman, I commend you for continuing to 
focus our committee on issues of insurance regulation. I also 
hope, however, that we will henceforth get our priorities in 
order and resolve the issue of extending the Terrorism Risk 
Insurance Act as quickly as possible. These are important 
discussions for us to have and important matters for us to 
resolve.
    Thank you.
    [The prepared statement of Mr. Kanjorski can be found on 
page 60 of the appendix.]
    Mr. Royce. Thank you, Mr. Kanjorski.
    We will go to Mr. Hensarling from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman.
    And I certainly want to thank Chairman Baker for his hard 
work on this issue that is very important to American 
consumers.
    I believe the best and most effective consumer protection 
is always going to be a competitive marketplace. That is where 
I believe we should concentrate our legislative efforts. That 
is why I am very glad to see that the SMART Act draft takes a 
number of serious steps to make our insurance markets more 
competitive and thus more consumer friendly.
    History, hundreds of years of history and including recent 
history shows us that competition works. In the not-too-distant 
past in our Nation's history, the airline trucking industry, 
long distance industry, natural gas industry, to name a few, 
were all heavily regulated. Many had barriers to entry, all had 
some facet of price controls. And yet we finally came to a more 
enlightened view, and as a Nation, as we deregulated these 
industries, real prices fell 15 to 40 percent in a 2- to 5-year 
period.
    And so I think we need to look at history as our guide. It 
shows us that in order to get to a point of effective 
competition in the insurance industry, we have got to carefully 
examine what has been limiting choice and driving up costs for 
consumers. I believe one of the most important factors is, 
quite simply, price controls.
    And, certainly, I believe the evidence continues to mount 
that consumers living in States with minimal or no price 
controls pay significantly less for most types of insurance 
than do consumers residing in States with significant price 
controls. These consumers have experienced firsthand the 
benefits of a deregulated insurance system, so it is important 
that we look to these States as models when considering any 
type of regulatory reform.
    I am particularly looking forward to the testimony of Mr. 
Shapo--did I pronounce your name right? Shapo. I am 
particularly looking forward to Mr. Shapo's testimony in regard 
to the Illinois experience, which I think will be quite 
instructive.
    And, so, again, Mr. Chairman, I look forward to working 
with all my colleagues in doing something that can make 
insurance more affordable for the vast majority of Americans.
    And with that, I yield back my time.
    Mr. Royce. Thank you.
    Mrs. McCarthy of New York, do you have an opening 
statement?
    Mrs. McCarthy. Thank you, Mr. Chairman. No, I will wait for 
listening to the witnesses and then ask my questions. Thank 
you.
    Mr. Royce. Thank you. We will go to Ms. Sue Kelly of New 
York.
    Mrs. Kelly. Thank you, Mr. Chairman.
    The McCarran-Ferguson Act enshrined the principle of State 
regulation of our national insurance market. State regulation 
of insurance insured that customers received the best 
protection and that developers of insurance products were 
meeting the needs of all consumers in the market.
    In the 60 years since the McCarran-Ferguson Act was passed, 
financial markets have changed immensely, and competition 
within the insurance industry and between insurers, banks, and 
securities firms has become really fierce.
    While national and international standards exist, the 
emerging insurance retains the same regulatory patterns, 
unfortunately.
    Several years ago, this committee took the lead in passing 
NARAB to encourage States to adopt a uniform licensing standard 
or face a National Association of Retail Agents and Brokers. 
And we wrote that bill so that we would encourage the industry 
to police itself. The measure has worked to bring the States 
together but has not eliminated duplicate regulation, and it is 
not finished.
    I support States' rights, and I oppose Federal preemption 
of States. Consumers, however, are the ones who are harmed by 
the inability of the insurance industry to compete nationwide 
on financial products. The sick and the elderly need access to 
new products that recognize changes in medicine and retirement 
savings. Homeowners and small businesses need new products to 
match their growth in equity and opportunity.
    I urge the current and former commissioners who are present 
here to work with each other, to work with the industry and to 
work with this committee to develop an insurance market for the 
21st century. We are not there yet.
    I also want to note that TRIA, the Terrorism Risk Insurance 
Act, expires at the end of this year. Millions of policyholders 
around the country are already being notified that their 
terrorism insurance will not be available for them next year if 
this Congress does not act. Our economy cannot afford to be 
slowed down by the fear of loss from terrorism. We must have 
terrorism insurance, and it must be available, and it must be 
available soon.
    I am pleased to see that New York's former insurance 
commissioner, Greg Serio is here. He has been a tireless 
advocate for TRIA and for insurance consumers in New York 
nationwide. I look forward to hearing from him, and I look 
forward to hearing from all of the witnesses here today.
    Thank you.
    Mr. Royce. Thank you, Ms. Kelly.
    Now we will go to our testimony from our panel of 
witnesses. We thank them for joining us today.
    We are going to hear first from Mike Pickens, testifying as 
the former State insurance commissioner, Arkansas Department of 
Insurance; and then Greg Serio, testifying as the former 
superintendent of insurance, New York State Insurance 
Department; Lee Covington, testifying as the former director of 
the Ohio Department of Insurance; Nat Shapo, testifying as the 
former director of the Illinois Department of Insurance; Diana 
Koken, Pennsylvania Insurance commissioner, testifying as 
president of the National Association of Insurance 
Commissioners; and Ed Muhl, testifying as the former insurance 
commissioner of Maryland and the former superintendent of 
insurance for New York State Insurance Department.
    We will start with Mike Pickens.

STATEMENT OF J. MICHAEL PICKENS, TESTIFYING AS THE FORMER STATE 
    INSURANCE COMMISSIONER, ARKANSAS DEPARTMENT OF INSURANCE

    Mr. Pickens. Mr. Chairman, ranking member and committee 
members, thank you once again for this opportunity to testify 
on the important issue of insurance regulatory reform.
    I want to take this opportunity to commend the chairman and 
all the committee members on your continued interest in and 
enlightened progressive work on this important issue. This is 
an issue that is vital to all of us who are insurance 
consumers, to our financial services marketplace, and to the 
United States economy.
    It is consumers, not the insurance industry, who bear the 
burdens and pay the costs when regulation is ineffective and 
when regulation is inefficient. This issue of regulatory 
modernization is not about deregulation, it is about better 
consumer protection, it is about more competition, and it is 
about better products and better prices for consumers.
    When I was NAIC president in 2003, our membership, which 
included at that time some 22 brand new chief regulators, made 
it clear they wanted the NAIC to have a strong, credible voice 
in Washington, D.C. That is why we created a Governmental 
Affairs Committee, we created the State-based ASSURE 
initiative, and we hired Washington insiders to help us educate 
Congress about our issues.
    At that time, as now, State regulators were faced with 
essentially three options. Number one, we could develop our own 
modernization plan and get it passed in each State, one State 
at a time. We could engage the House Financial Services 
Committee and the subcommittee and provide technical expertise 
and input on the Federal tools of the SMART approach where the 
threat of preemption could be used as both a carrot and a stick 
to help expedite necessary and appropriate State-based reforms. 
Or we could do nothing and confront the very real possibility 
of the creation of a so-called optional Federal charter, which 
would result in total preemption and the total loss of all 
State authority.
    Wisely, in 2003, our membership chose options one and two. 
We met in Austin, Texas, and we pounded out our plan, which we 
entitled, ``A Reinforced Commitment Insurance Regulatory 
Modernization Action Plan.'' We also began to work hard 
implementing this plan in each and every State in the country. 
And, in addition, we began working to develop a relationship 
based on credibility, trust and technical expertise with 
Members of Congress.
    It is in this spirit of consumer protection, reform, 
credibility and trust that I began working with this committee 
when I became an NAIC officer. It is also in this spirit that I 
and others were asked earlier this year to work with committee 
staff in providing objective, expert input on the SMART 
initiative.
    Now, let's give credit where credit is due. State 
regulators, working through the NAIC, have in fact made some 
progressive progress in implementing the 2003 action plan and 
their 2004 road map. They have worked hard, and they have made 
significant progress in bringing about uniformity of laws and 
administrative and regulatory processes in the areas of 
producer and company licensing, making better products 
available to consumers just as quickly as possible and working 
to protect consumers from fraud in areas like viatical sales 
and sales of insurance policies on military bases. And where 
appropriate, State regulators have provided their expertise to 
Congress on Sarbanes-Oxley, the Terrorism Risk Insurance Act, 
the U.S.A. Patriot Act, asbestos, civil justice and medical 
malpractice reform and international insurance issues, among a 
host of others.
    Still, as hard as they are working, State regulators are 
somewhat limited in how much they themselves can do to pass 
needed laws and implement what I think we all agree are long 
overdue reforms. State regulators must have the help and 
support of their governors and their legislators to implement 
the reforms.
    However, in far too many States, and all of us have seen 
this, when budget gets tight, State regulators see their 
consumer trust funds raided for other purposes, their programs 
are frozen or they are cut, their legislation gets caught up in 
the politics of the moment, whatever that may be, and some of 
their most experienced personnel leave State government for the 
perceived greener pastures of the private sector. Reforms get 
stalled, they languish, and are eventually pushed aside.
    This is not in the best interest of our consumers or of our 
insurance markets. Regardless of how hard they work, State 
regulators cannot do the job alone, and they need your help and 
support.
    Now, I am a strong supporter of State insurance regulation, 
and that is why I have been willing, and I appreciate the 
committee asking me to engage and work with the committee on 
the SMART approach. I want to make it very clear today that I 
am opposed to Federal preemption of State insurance laws, but 
it must be noted, under the SMART approach, preemption need 
never occur.
    SMART does not use preemption but rather it uses the threat 
of preemption to help State regulators overcome the political 
and other obstacles that exist in some States so that they can 
in fact implement, enforce, and continue to regulate the 
reforms that they already have promised under our 2003 action 
plan and the 2004 road map. Honestly, I see SMART as an 
opportunity for State regulation, not as a threat.
    Gramm-Leach-Bliley required States to develop and implement 
producer licensing reforms, and as Representative Kelly 
mentioned, if this was not done within a specified period of 
time, State regulators would lose their authority to a newly 
created Orwellian-sounding Federal agency--the National 
Association of Registered Agents and Brokers. How did the 
States respond to this threat of preemption? They set an NAIC 
speed record in creating a model law and getting it passed and 
implemented in all the States, including the largest markets in 
the country.
    Similarly, following a rash of high-profile insolvencies in 
the late 1980's and 1990's, Representative Dingell of Michigan 
encouraged, and I use that word kindly, encouraged State 
regulators to reform or to be eaten alive by the Federal 
Government. State regulators responded affirmatively and 
developed the NAIC Financial Solvency Accreditation Program. So 
this approach that is used under SMART has been used in the 
past, and State regulators have responded positively.
    You know, it is said that the greatest champions respond to 
the greatest challenges. They rise to the occasion, they work 
best and they deliver the most when the stakes are the highest. 
In my book, State insurance regulators are in fact great 
champions who will, as they have always done, respond 
courageously and prove to be victorious when the chips are 
down.
    But from my objective perspective, they need your support 
and your help, and SMART just may--just may--be the tool State 
regulators need to help expedite promised reforms in the State.
    Thank you for this opportunity to work with you on this 
initiative, and I look forward to answering your questions.
    [The prepared statement of Mr. Pickens can be found on page 
127 of the appendix.]
    Chairman Baker. Thank you very much, sir. I appreciate your 
good statement.
    Next witness is Mr. Gregory V. Serio, former 
superintendent, New York State Insurance Department.

    STATEMENT OF GREGORY V. SERIO, TESTIFYING AS THE FORMER 
     SUPERINTENDENT OF INSURANCE, NEW YORK STATE INSURANCE 
                           DEPARTMENT

    Mr. Serio. Good morning, Mr. Chairman and members of the 
subcommittee.
    Modernizing insurance regulation is a multifaceted 
undertaking, comprising the dual tasks of updating both 
insurance statutory standards as well as insurance regulatory 
standards, in addition to monitoring case law developments that 
also serves a role in the evolutionary process of the law.
    Insurance regulators and legislators both saw the need for 
modernization as a matter of culture rather than as a static 
event, and their representative groups--the NAIC, the National 
Conference of State Legislatures and the National Conference of 
Insurance Legislators--undertook a series of initiatives over 
the past 5 years to help construct a coordinated approach to 
insurance reform.
    Key to that effort was the creation of a productive 
dialogue with key members and committees in Congress, this 
subcommittee and you, Mr. Chairman, and your members, chief 
among them, to forge a consensus on the key areas needing 
reform and the best way to achieve these mutually desirable 
goals.
    The underlying common thread among all the players, both 
Federal and State, in the early stages of the insurance reform 
dialogue was to avoid replication of the awkward dynamics of 
the discussions leading up to the passage of the Gramm-Leach-
Bliley legislation where it is universally agreed that State 
insurance, legislative and regulatory community members, did 
not have an effective voice in that process.
    Having a seat at the table, as they say, and, more 
importantly, a voice that would and could be heard, was a 
critical condition precedent to engaging in any discussion on 
insurance modernization.
    Equally well understood, however, was that seats at the 
table had to be earned by a willingness to compromise for the 
larger good of meaningful insurance reform. Quality of the 
insurance reform being considered in these early discussions 
was measured by the same standard that is still being applied 
to the current deliberation: Can adequate uniformity in laws 
and regulations be achieved so as to be able to justify the 
continued support of the State-based system of regulation?
    Uniformity was, and continues to be, the gold standard for 
measuring effective modernization of State insurance 
regulation, but it also has proven to be a far more elusive 
goal than many had thought. Perhaps it is because some did not 
realize that the quest for uniformity within a State-based 
system would still require some States to shed some individual 
autonomy. Perhaps it is because some erroneously thought that 
uniformity would mean deregulation when it clearly does not. Or 
perhaps it is because at the end of the day there may not be 
the same level of commitment to modernization of insurance 
policy and practice, as many had originally thought.
    The ongoing dialogue between public policymakers and 
regulators must continue to focus on the issue of uniformity if 
we are to assure that laws keep pace with the rapidly changing 
dynamics of the domestic and international insurance market.
    Uniformity is also a crucial element to the public's better 
understanding of insurance, how it works and what they can 
expect and should expect from it. In the mobile society we live 
in today, the public should have reasonable expectations that 
the rules applied in one jurisdiction are reasonably similar to 
those in another jurisdiction and that they are not forsaking 
adequate insurance regulatory protection simply because they 
are moving from point A to point B.
    Uniformity also allows regulators to more smoothly and 
effectively join in joint regulatory actions with less concern 
for nuances from one State to another that could undermine or 
complicate a multistate market conduct or financial 
examination.
    Indeed, uniformity would seemingly be the regulators' 
friend, allowing them to focus on examination, enforcement and 
consumer protection activities and the enemy of the 
unscrupulous market player who arbitrages the vast variety and 
the bodies of law and regulatory environments by opportunizing 
inconsistency in those State laws for mischievous purposes.
    It would be unfortunate if the efforts to have regulatory 
modernization were hampered or stalled because of the inability 
to achieve consensus on uniformity of standards in certain 
critical areas. Inability to gain agreement on uniformity would 
also undermine all that which has occurred up to this point in 
time in the name of uniformity.
    The NAIC's accreditation program, the many model laws and 
regulations promulgated by the NAIC and NCOIL, the successful 
implementation of the Gramm-Leach-Bliley functional regulation 
of financial holding companies by both Federal and State 
authorities and now the SMART legislative model put forward by 
the House Financial Services Committee are all examples of 
efforts taken individually and jointly by these entities to 
pursue greater uniformity in the statutory basis of State 
insurance regulation.
    Most notably, the insurance industry compact, now passed by 
more than 15 States, a concept embraced by the NAIC and 
executed by the NAIC, first championed by NCOIL so many years 
ago and included within the SMART draft, provides a structural 
framework for assuring uniformity across the spectrum of issues 
over the long term.
    To promote the concept of uniformity as the keystone to 
insurance regulatory modernization, the NAIC issued last year 
its road map for regulatory improvements to serve as a 
complementary document to Chairman Oxley's vision for 
improvement of the State-based system of insurance regulation, 
as he laid it out to the NAIC at its spring 2004 national 
meeting.
    Identifying points of consensus and earmarking points of 
disagreement allowed all participating in the working dialogue 
to find areas of agreement quickly on the so-called low-hanging 
fruit and to concentrate our efforts on the more specific 
questions before us. Indeed, the NAIC in its vision statement 
expanded the perspective of the chairman's view, at his 
invitation, I should say, by including provisions of greater 
financial surveillance and holding company oversight, two 
issues that have taken on even greater importance given the 
events of the past several months.
    The two road maps were and are not competing documents. 
They were and are the basis upon which consensus on national 
standards can be built. The SMART bill, as currently drafted, 
is a worthy progeny of the original road map initiative. It 
contains many provisions that were originally in the NAIC 
vision statement. The SMART dialogue does not presume that the 
SMART draft will be the final word on any issue, as serious 
discussion still needs to be had on issues like rate 
regulation, the national partnership, and preemption powers. 
And State insurance regulators need to know that they are 
gaining the tools they need to effectively regulate the 
business of insurance in a new world order.
    From the mutually constructive beginnings of these 
discussions and the valuable work products that have come from 
the open dialogue that has been the hallmark of this public 
policy undertaking, though there has been some erosion in the 
trust and confidence of all players with respect to that joint 
commitment to see this process through to what was once the 
articulated goal of all involved, to modernize State insurance 
regulation in a manner that benefits both insurance consumers 
and industry participants.
    Consequently, those who would prefer a more radical reform 
of insurance regulation or those who envision a weakening of 
insurance regulation in the name of reform now see new life 
being breathed into their efforts largely on the strength of 
the notion that those who prefer to improve State-based 
regulation are now a camp divided.
    Uniformity of laws and regulation will allow the State-
based system of regulation to become more effective and 
efficient in its enforcement of the law, as already noted. It 
will also allow the industry's own efforts to improve 
regulatory compliance, internal controls and corporate 
governance to be more effective.
    The self-regulatory mechanism model now in place in the 
securities market and embodied in the NAIC can be greatly 
replicated and enhanced in the insurance sector with greater 
uniformity of laws and transparency of regulatory processes.
    Organizations like the Insurance Marketplace Standards 
Association, once challenged by the regulators to provide 
greater disclosure of information and transparency in their 
processes, has shown that self-regulatory bodies can thrive in 
insurance and even achieve greater regulatory efficiencies for 
its companies, as we have seen in New York, Texas, 
Massachusetts and now incorporated into the NAIC Market 
Examiners Handbook, accepting IMSA work product and analyses in 
the planning and execution of market conduct exams.
    Greater uniformity in laws and regulation can and will make 
self-regulatory and best practices organizations like IMSA even 
more effective at promoting good market conduct by insurers and 
better at integrating their activities into the standard 
regulatory process.
    Uniformity, where applied, has paid dividends. In producer 
licensing, the flow of information between the States has given 
the United States for the first time a real national system of 
agent licensing regulation. At the same time, it has also made 
it infinitely easier for agents to expand beyond the borders of 
their space, creating a far more dynamic insurance marketplace.
    The leveraging of technology by State insurance departments 
in this new regulatory paradigm has made life for agents and 
regulators even better. In product development, as seen in the 
concentration of efforts on life products in the Interstate 
Compact Initiative, and in the speed to market advancements 
made in New York, Ohio and elsewhere, real benefits in 
uniformity of process and policy are being realized.
    Uniformity of laws, regulation and processes has been the 
stated goal of the NAIC since its origin over 130 years ago. It 
has been true to the quest and has made particularly impressive 
strides over the past 5 years from its statement of intent to 
its reinforced commitment to modernization, to the road map, to 
the passage of interstate compact legislation and producer 
licensing initiatives and other uniform standards.
    Its members also know that modernization of regulation and 
the uniformity upon which it is based is very much a process 
and not an event. Changes will be necessary from time to time, 
and the ebb and flow of negotiation and compromise will always 
benefit all parties in the long run even if it seems that one 
side is giving more than the other at any given moment.
    Maintaining the long-term perspective of preserving the 
State-based system of insurance regulation, not simply because 
it is the historical method of regulation but because it is the 
system best suited to meet the demands of a changing world, 
will be all the motivation that regulators to understand and 
embrace the give and take of the SMART deliberative process.
    The Congress will also understand that it stands within the 
best position when it works with the States in a cooperative 
venture to improve the State-based system rather than 
substituting a new Federal regulatory body for a regulatory 
system that already works quite well and is poised to be even 
better with greater uniformity of policy and process.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Serio can be found on page 
134 of the appendix.]
    Chairman Baker. Thank you very much, sir.
    Our next witness is Mr. Lee Covington, testifying as a 
former director, Ohio Department of Insurance.
    Welcome.

STATEMENT OF LEE COVINGTON, TESTIFYING AS THE FORMER DIRECTOR, 
                  OHIO DEPARTMENT OF INSURANCE

    Mr. Covington. Thank you, Mr. Chairman.
    Mr. Chairman, Chairman Oxley, ranking member, members of 
the committee, I thank you for the invitation to testify before 
your committee today on the important issue of insurance 
regulatory reform.
    First, Mr. Chairman, I want to express my deep appreciation 
for your past courtesies to me during my service as Ohio 
insurance director and the outstanding support and working 
relationship I had with you and your tremendous staff on a 
number of very important pieces of legislation. It is very good 
to be with you again today.
    I have had the pleasure of working with the committee 
during the development of SMART, providing high-level policy 
and structural insights and technical assistance on specific 
issues addressed in SMART. I appreciate the opportunity to work 
with you to ensure consumers have the necessary regulatory 
protections, consumer choice, and competitive markets inuring 
to their benefit as well as assuring a reasonable regulatory 
environment for companies and agents delivering vital insurance 
products and services to policyholders.
    During the past 5 years, since adoption of the NAIC's 
statement of intent, the NAIC, NCOIL, NCSL have all had great 
leadership, including one of the very best, my good friend, 
Commissioner Diane Koken, current NAIC president. Each 
organization has had an unprecedented level of commitment, 
focus, work, and energy throughout this time period, and their 
current and past efforts are really remarkable.
    Significant progress has been made on a number of 
initiatives contained in the original statement of intent, as 
outlined in my written testimony, including operationalizing 
the national insurance producer registry and enhancing and 
deploying SERF under the strong leadership of Alabama 
Commissioner Walter Bell, who is with us today.
    For very understandable reasons, other initiatives have 
been slower in development and implementation, and the 
effectiveness of some initiatives, as currently 
operationalized, remains unclear. For example, the NAIC-NCOIL 
market conduct surveillance model law was approved 4 years 
after the adoption of the statement of intent in 2000, and to 
my knowledge, only one State has adopted any version of that 
model to date.
    And the property and casualty commercial rates and foreign 
policy model law, adopted in 2002, which incorporates a 
competitive rating system for most commercial lines insurance, 
based on actuarially sound principles, has not been adopted, 
and to my knowledge, has not been introduced in any State in 
the country.
    After all the efforts to institute regulatory reforms over 
the past 5 years, regulators, legislators and other 
stakeholders widely recognize the challenges and obstacles to 
achieving reform, which includes most significantly the 
collective action issue.
    The development of model laws and initiatives through the 
NAIC's extensive committee and consensus process takes 
substantial time, something all of your members have 
experienced here in Congress, I am sure, and in the end, the 
NAIC has no authority to pass model laws, and the challenge of 
seeking adoption by individual State legislators is 
substantial, even with the strong support and work of NCOIL and 
NCSL.
    And, also, another challenge is the continued proliferation 
of unwritten rules, known by most as ``desk drawer'' rules, and 
the lack of execution, according to the intent of a particular 
model law or reform initiative.
    Based on the Ohio experience, necessary reforms can be 
implemented. Ohio was one of the first, or the first State, to 
adopt its own reform initiatives or the NAIC's reform 
initiatives, including SERF in 2000, with 40 percent of all 
filings now submitted via SERF, and the average review time of 
15 to 20 days, a reciprocal agent licensing system enabling 
agents to be licensed within 5 days in Ohio and in all NIPR 
States, the use of market analysis data calls to focus 
resources on companies having the greatest likelihood of 
regulatory noncompliance and the implementation of a risk-
focused approach to financial examinations, long used by the 
Federal banking regulators.
    While no new measures were implemented with respect to rate 
filings, Ohio has long embraced a competitive rating system 
based on sound actuarial principles. And as a result, Ohio 
citizens consistently enjoy homeowner rates ranking from 2nd to 
5th best in the country and automobile rates ranking between 
14th and 17th best in the country.
    With regard to the current national rate and form review 
process, which I understand Mr. Shapo is going to address in 
more detail, a little background may be helpful.
    In December 2000, the NAIC issued its Speed-to-Market 
Working Group report, and in that report it recommended a no-
filing system or informational-only filing for most 
commercialized rates and forms, and in spring 2002, based on 
the report, adopted the property and casualty commercial rate 
and policy form model law. While a very limited number of 
States have enacted independent incremental reform, no State, 
to my knowledge, has enacted the NAIC model.
    With respect to personal lines rates and forms, with a very 
limited number of exceptions, the status quo remains in tact, 
and little interest appears to exist among regulators to even 
address the issue of personal lines rates.
    In Ohio, for homeowners insurance, consumers enjoy an 
average savings of $160 to $170 compared to the yearly average 
for the rest of the Nation of $535. For automobile insurance, 
that savings again is around $170 off of the average of $775. 
And when compared to States with price control rate regulatory 
schemes, those savings would be even more. Competition works, 
Mr. Chairman, and I am pleased that you and your committee 
continue to pursue a competitive marketplace that benefits 
consumers.
    Most, if not all, insurance regulatory stakeholders agree 
reform is needed, and the debate is about how, by whom and 
under what timeframe reform should be accomplished. 
Commissioner Koken, in her usual eloquent and thoughtful 
opening address during the NAIC summer meeting, reinforced this 
point.
    To this end, fair questions for this committee to consider 
include: first, whether the States will ever be able overcome 
the collective action issue; second, how long will it take 
States to complete this work; and, third, even if the necessary 
model laws are actually adopted, will States ever be able to 
operationally coordinate their work, as intended, when 
executing their duties under those laws?
    SMART provides the opportunity for States to maintain a 
State-based regulatory system with needed reform. While some 
may object to the preemption provisions, which should only be 
used as a last resort, the question exists as to what other 
options do policymakers have if the States cannot institute the 
agreed upon reform initiatives?
    Mr. Chairman and members of the committee, thank you again 
for the very positive working relationship in the past. I look 
forward to continuing to work with you and my friends and 
former colleagues at the NAIC to assure SMART meets our common 
goals of necessary consumer protection, consumer choice and 
competitive markets that benefit consumers.
    I look forward to answering your questions.
    [The prepared statement of Mr. Covington can be found on 
page 62 of the appendix.]
    Chairman Baker. Thank you very much, sir.
    Our next witness is Nathaniel S. Shapo, former director, 
Illinois Department of Insurance.
    Welcome, sir.

   STATEMENT OF NATHANIEL S. SHAPO, TESTIFYING AS THE FORMER 
           DIRECTOR, ILLINOIS DEPARTMENT OF INSURANCE

    Mr. Shapo. Good morning, Mr. Chairman. Thank you for the 
opportunity to appear before you again as you consider 
important issues pertaining to interstate commerce.
    Mr. Chairman, if I generically describe the insurance 
market, hundreds of sellers intensely competing with each other 
for customers who actively comparison shop, no one would say 
that the industry should be subject to price controls, but 
insurance has a long history of government rate regulation. I 
will review this background briefly to explain why I believe 
these price controls in today's marketplace should be presumed 
unjustified.
    Government regulation of insurance rates is entirely 
appropriate at its conception. In the 1800's and early 1900's, 
the fire insurance marketplace developed a unique market 
defect. Carriers routinely underpriced their products in the 
quest for market share. Crude reserving methods and 
unsophisticated financial oversight led to mass insolvencies 
following catastrophic urban fires, leaving consumers exposed 
in their hour of greatest need.
    So beginning in the early 20th century, legislatures passed 
statutes which allowed and encouraged carriers to collude 
through rating bureaus. These statutes empowered insurance 
regulators to review rate levels for adequacy and 
excessiveness. These price controls were necessary to 
substitute for the usual regulator of price--competition--which 
had been intentionally destroyed.
    Price controls were thus used to keep rates up to promote 
solvency, not down to ensure affordability.
    In 1944, the Supreme Court declared that insurance was 
interstate commerce and that Federal law, including the Sherman 
Act, applied. The next year, convinced by industry and State 
regulators that competition was harmful to solvency, Congress 
passed the McCarran-Ferguson Act, limiting the Sherman's Act 
applicability to insurance.
    The Act intentionally incentivized all the States to allow 
collusion and to pass rate regulatory laws. This was a 
reasonable choice given conditions in 1945, but the auto and 
homeowners markets have changed since then. Independent 
carriers began competing with the fixed bureau rates that 
resulted from McCarran-Ferguson. Rate advances and carrier 
actuarial techniques and government financial regulation 
obliterated the need to artificially prop up prices for 
solvency purposes.
    The market was transformed by competition, which is obvious 
to the most casual observer. For instance, many car insurers 
broadcast ads on national TV, each claiming to offer a better 
price, directly naming competitors and giving examples of 
better rates offered to specific consumers.
    Even though rate collusion between carriers is over, price 
controls still thrive. They have morphed, however, from their 
original legitimate purpose as a solvency tool and are now used 
as a means to ensure product affordability.
    Summarizing this history, since collusion was officially 
sanctioned by congressional and other policymakers, price 
controls were once entirely appropriate, but government rate 
regulation for the purpose of keeping a product affordable, as 
practiced today, is a cardinal sin in a competitive 
marketplace.
    The mismatching of means and ends in insurance rate 
regulation is not benign. This committee has gathered extensive 
evidence demonstrating that rate regulation has not kept prices 
down; rather, it routinely distorts markets and withers supply 
to the detriment of consumers.
    For instance, as this committee has heard, the New Jersey 
marketplace was ruined by rate rollbacks and aggressive prior 
approval regulation. Carriers left the State in droves, prices 
did not go down, and qualified applicants could literally not 
find coverage.
    I was privileged to serve as Illinois director of insurance 
for 4 years. Illinois has no law prohibiting excessive or 
inadequate rates in personal, auto and homeowners insurances, 
but rates are surely regulated in Illinois. Instead of 
government passing on the proper price a seller can pay in a 
competitive market, personal lines, auto and homeowner rates 
are regulated by the most ruthless force in a capitalist 
economy: The law of supply and demand.
    Illinois has consistently had the most or nearly the most 
carriers writing auto and homeowners insurance of any State in 
the country. Prices have been stable, either in the middle of 
the State rankings or below average. Coverage in Illinois is 
not just affordable, it is widely available. The assigned risk 
plans have far less than 1 percent of the market.
    Illinois regulates the insurance marketplace in areas where 
consumers are in need of government intervention. Consumers 
cannot fully understand solvency forms and market conduct where 
the State affirmatively regulates these aspects of the market 
to prevent a race to the bottom. This includes monitoring the 
market for unfair discriminatory practices.
    Government must do this to protect consumers. The consumers 
do know how to protect themselves by comparison shopping based 
on price. They do it every day in every other competitive 
market. Competition keeps prices reasonable, it reacts to the 
marketplace far more nimbly than government can ever hope to, 
and it ensures a capital without fear of irrational government 
capture flows to market, producing adequate supply. Nothing 
about insurance makes it immune from these laws of economics.
    Because of this, I note that market-based reforms in other 
businesses were referenced by the committee this morning. None 
of these markets, as described, were nearly as competitive as 
insurance. Why is the more competitive industry still subject 
to price control? Thus, the Illinois system should not be 
considered an experiment, nor should it be regarded as unusual. 
Illinois' approach could not be more mainstream.
    Instead, government price controls in a competitive market 
are strained. This is very much Congress' concern. Insurance 
price controls greatly affect interstate commerce in many ways, 
since government capture of insurers' capital in one State 
affects policyholders in other States by putting the common 
fund at risk. I believe that Representative Kelly and I spoke 
about this issue the last time I testified here.
    Rate regulation does not serve the purpose for which it is 
used today, and it diverts scarce government resources from 
areas where consumers cannot protect themselves and where 
government must regulate. And, quite unfortunately, price 
controls needlessly antagonize property casualty carriers. 
These companies should be natural allies of State regulation, 
because their products are attune to local markets which are 
affected by backers particular to individual States, like tort 
law.
    But more and more such carriers, including former staunch 
supporters of State regulation, are openly supporting a Federal 
charter in Congress. This is particularly disconcerting to 
someone like me whose strong preference has always been to 
retain the primacy of State regulation if feasible, because I 
believe that State regulators are professional and dedicated 
public servants who ably perform an essential social function.
    Thus I urge the committee that if it pursues insurance 
reform legislation, rate regulation should be at the top of the 
list, bar none. Nothing could be more appropriate than for the 
congressional committee tasked with regulating a particular 
kind of interstate commerce to examine that market, which this 
committee has done, create a full record which demonstrates 
that the conditions which spurred a previous and unique 
congressional policy choice are no longer present, which this 
committee has done, and to update the law to bring an outlier 
industry into line with prevailing American public policy, 
favoring a regulation of competitive markets by supply and 
demand, which this committee is considering.
    I would like to conclude by sincerely thanking Chairman 
Baker for his outspoken support of competitive markets. The 
chairman should be commended for his clear thinking and 
political courage in making this a priority.
    Thank you again for your time and consideration.
    [The prepared statement of Mr. Shapo can be found on page 
140 of the appendix.]
    Chairman Baker. Thank you very much, sir. I appreciate your 
courtesy.
    Our next witness is Ms. Diane Koken, the Pennsylvania 
insurance commissioner, also appearing here today as president 
of the National Association of Insurance Commissioners.
    Welcome, Ms. Koken.

      STATEMENT OF M. DIANE KOKEN, PENNSYLVANIA INSURANCE 
COMMISSIONER, TESTIFYING AS PRESIDENT, NATIONAL ASSOCIATION OF 
                    INSURANCE COMMISSIONERS

    Ms. Koken. Mr. Chairman and members, thank you very much 
for the opportunity to be here with you today.
    And I am pleased to also mention my fellow regulators that 
are joining me here today. Sitting behind me is the president-
elect of the NAIC and the superintendent of Maine, Alessandro 
Iuppa, and secretary treasurer of the NAIC and elected 
commissioner from Kansas, Sandy Praeger, and also the 
commissioner from Alabama, Walter Bell, and the director from 
Idaho, Gary Smith.
    I was first appointed as insurance commissioner of 
Pennsylvania in 1997. I have since served under three different 
governors, starting with Tom Ridge, Governor Schweiker and 
currently Governor Rendell.
    Prior to my 8 years in public service, I was the general 
counsel of an insurance company and had been there for 23 
years. So I have over 30 years of commitment to insurance, 
because I believe it is important to American families and to 
American businesses.
    It is important for insurance regulation also to be 
responsive to the needs of a modern and evolving regulatory 
marketplace. State insurance regulators recognize the 
importance of safeguarding insurance consumers. We believe that 
the State regulators perform well as functional regulators and 
that State officials are in the best position to respond 
quickly and to fashion remedies responsive to local conditions.
    State insurance regulators are public servants elected and 
appointed, representing the same people who are your 
congressional constituents. We share your goals regarding the 
importance of regulation that balances the need for vigorous 
consumer protection with vigorous business competition to 
provide a healthy insurance marketplace for consumers. We are 
proud that responsive and effective consumer protection is the 
hallmark of State insurance regulation.
    The States and the NAIC are on time and on target to 
modernize State regulation where improvements are needed while 
preserving the benefits of consumer protection that is our real 
strength. In some areas, the goal is to achieve national 
uniformity because it makes sense for both consumers and 
insurers. In areas where different standards among States 
reflect regional needs, we are harmonizing State regulatory 
procedures to ease compliance by insurers and agents doing 
business in those markets.
    The system today works, and today in fact the property and 
casualty industry is sitting on record surpluses with loss 
ratios better than they have been in the last 30 years. The 
draft SMART Act incorporates unacceptable levels of Federal 
preemption that we believe would create both legal and 
practical problems for the insurance industry and its 
customers. A thorough analysis of the SMART Act by 117 
insurance regulatory experts from your home States identified 
concerns where the bill would preempt many important State laws 
to protect consumers.
    Federal preemption of State insurance regulation denies 
your congressional constituents the benefits of important State 
services and protections, as has already been proven in 
existing Federal programs, such as FEMA in its administration 
of the National Flood Program, and ERISA, through its taking 
away State authority to assist your constituents.
    Unlike banking and securities, insurance policies are 
inextricably bound to the separate legal systems of each State. 
The policy itself is a contract written and interpreted under 
the laws of each State. When a property and casualty or life 
claim arises, their legitimacy must be determined according to 
State legal codes. State courts have more than 100 years of 
experience in interpreting and applying these State laws.
    Although the NAIC and the States can accomplish most 
modernization goals without Federal legislation, there are four 
areas where new Federal laws are needed to help State insurance 
regulators do our job even better. One, to give State insurance 
regulators access to the FBI's criminal database in the same 
manner as Federal banking and securities regulators. Two, to 
protect the sharing of confidential regulatory information 
among Federal and State banking, securities and insurance 
regulators. Three, to amend Title 31, USC, section 3713, to 
assist State insurance company conservation, rehabilitation and 
liquidation. And four, to restore the Federal income tax 
exemption for certain insolvent insurance companies.
    And, of course, I would be remiss not to mention our own 
strong support of the important TRIA initiative to protect 
consumers in all of our States.
    The NAIC wants to play a positive role in helping the House 
Financial Services Committee evaluate the draft SMART Act by 
providing technical assistance as regulatory experts and policy 
input as State officials. However, the NAIC cannot support 
Federal legislation that includes broad Federal preemption of 
State consumer protection laws or Federal supervision of State 
insurance regulation.
    As the SMART Act has not yet formally been introduced as a 
bill, it is premature for the NAIC to take a position to either 
support or oppose it. The NAIC and its members have cooperated 
fully over the years with important inquiries by Congress into 
the adequacy of the State regulatory system. We believe these 
inquiries have demonstrated clearly that local and regional 
State regulation of insurance is the best way to meet the 
demands of the consumers for this unique financial product.
    We will continue to work with Congress and within State 
government to improve the national efficiency of State 
insurance regulation while preserving its long-standing 
dedication to protecting the American consumer.
    I thank you again for this opportunity and for your 
continued interest in what we believe is a very important 
topic, and we look forward to continue to be engaged with this 
committee.
    [The prepared statement of Ms. Koken can be found on page 
72 of the appendix.]
    Chairman Baker. I thank you for your statement.
    Our next witness is Mr. Edward J. Muhl, testifying today in 
his capacity as a former insurance commissioner of Maryland and 
also a former superintendent of insurance for New York State 
Insurance Department.
    Welcome, sir.

STATEMENT OF EDWARD J. MUHL, TESTIFYING AS THE FORMER INSURANCE 
   COMMISSIONER OF MARYLAND AND THE FORMER SUPERINTENDENT OF 
         INSURANCE, NEW YORK STATE INSURANCE DEPARTMENT

    Mr. Muhl. Thank you, Mr. Chairman and members of the 
subcommittee. My name is Ed Muhl, and I very much appreciate 
the opportunity to be on this panel.
    My background spans nearly 40 years in the insurance 
industry, serving in both the public and the private sectors. I 
was first appointed insurance commissioner of Maryland by the 
Democratic administration of Governor Hughes, was reappointed 
by a second Democratic administration of then-Governor 
Schaefer, and during that tenure I was elected president of the 
NAIC.
    I was subsequently appointed superintendent of insurance 
for the State of New York by the Republican administration of 
Governor Pataki, and my wife says if I ever decide to do it a 
third as a regulator that I will be all by myself.
    I have also served in the private sector with insurance 
companies, accounting firms, as well as consulting firms. Over 
these 40 years, I have experienced regulation from the 
perspective of a company official, a regulator, a consultant 
and as a consumer.
    Mr. Chairman, I strongly suggest to you and the 
subcommittee members that there is an enormous redundancy of 
costs and procedures in the present system of regulation which 
serves only to add premiums paid by the consumer, and it also 
raises the level of frustration in trying to deal with the 
complexity of this process.
    I am very pleased that this committee is taking the 
initiative to look at the basic processes that affect all of 
us, and hopefully you will conclude that the present system is 
in need of some change.
    Having said that, I believe that State regulation of the 
business of insurance remains better positioned to respond to 
unique issues of both consumers and companies in certain 
geographic areas. Unfortunately, the difficulty remains in the 
inability of the present system to attain the uniformity that 
is necessary to eliminate the redundancy of these costs. There 
are simply too many independent and diverse focal points of 
authority in the States and the U.S. territories to be able to 
gain consensus. The result is a very costly and a very 
redundant system.
    Now, I started in regulation in 1982 and have seen efforts 
of individual regulators and the NAIC to try to simplify the 
process, gain uniformity and eliminate the unnecessary. 
Unfortunately, there has been only limited evidence of success 
over 20-plus years.
    Now, when I became the New York superintendent, my 
experience was that the New York Insurance Department was one 
of the strongest in the United States. It was and remains 
today. And, certainly, it was one of the slowest in responding 
to timeline issues.
    For an example, we conducted a review of all 160-plus 
regulations to determine if any needed to be updated or were 
obsolete or no longer useful to effective regulation. Some of 
these regulations were unchanged for 100 years but were still 
strictly enforced by the department despite the costs and the 
inefficiencies.
    Now, the review resulted in the elimination of 50 outdated 
ones, and the remainder were changed, which benefited many and 
certainly increased the effectiveness of the department.
    Now, the career staff in many insurance departments prove 
every day to be extraordinary and dedicated individuals, and 
they take their task of regulating the insurance industry quite 
seriously. Many of the oversight processes are handed down 
generation to generation with no time available to look beyond 
the daily work because of the volume. The entire system needs 
to be looked at, it needs to be stirred to find a better way to 
deal particularly with the more important issues.
    And, finally, Mr. Chairman, one point on rating. I served 
as a regulator at a time when the rating law of the State was 
prior approval. Then it was changed by the State legislature to 
competitive rating. And, finally, when I moved on to New York 
as the superintendent there, that State had flex rating.
    Going from a prior approval to an open competition forum 
proved to me that competition is an effective regulator of 
rates, which allowed me to make better use of my limited staff 
resources by putting them to use in the area of market conduct 
examinations and other sensitive areas. It was not an easy 
transition, but once the competitive forces came into play and 
the interest of the consumers and the industry were in balance, 
the system worked very, very well, and I would urge a close 
review of the benefits of such a rating mechanism.
    Now, I have had the privilege to have been asked by the 
committee chairman and the staff to review many of the titles 
of the SMART draft and to offer comment and my views as a 
former regulator. I applaud this committee's efforts in looking 
into the current system. I look forward to offering additional 
support, and I wish to thank the chairman and the staff in 
giving me the opportunity to voice my opinions.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Muhl can be found on page 
123 of the appendix.]
    Chairman Baker. Thank you, Mr. Muhl.
    I will start with you. Attempting to establish a consensus 
on the trigger required for the committee to act in an 
appropriate and timely manner, there have been numerous 
discussions over the past 5 or 6 years where the particular 
regulator would come forward and say, ``We have this plan, and 
if it does not achieve the operable results we want in X years, 
then the Congress perhaps should consider acting.''
    Virtually, every one of those self-established timelines 
has come and gone with regularity. Is there something tangible 
you could see on the horizon that if it did not occur in some 
fixed time clock that the Congress should then act or is it 
your considered opinion, based on all that has preceded us, 
that it is just time for the committee to go ahead, take up the 
bill and have a vote and just let people establish their 
perspective on whether there needs to be continued defense of 
the system we now have or take the modest step that I think the 
proposal that we have circulated for comment suggests?
    Mr. Muhl. The short answer, Mr. Chairman, is that I am not 
sure if you will ever get to a point under the present system 
of gaining the uniformity that is really necessary. I think a 
lot of the things that the Congress has done in the past to 
generate some activity by the States to hold, if you will, the 
hammer and the carrot out has given the States some incentive 
to finally say, ``Yes, we need to do something, and all of 
these small things and concerns that we have had in the past, 
we can really just ignore those and let's get to a point where 
we can solve the problem.''
    As I mentioned earlier, I am a firm believer in State 
regulation. I am also, though, equally concerned about the 
costs that are in the system that you just simply cannot get 
out unless you reach a consensus. In other present systems, 
with what I have seen over the years, it is difficult, if not 
impossible, that you are going to reach that consensus.
    So I think a push from Congress, I think there are 
certainly provisions within the SMART draft that I have seen 
and offered my opinions on, that certainly will do that, giving 
the States opportunities to say finally, ``Here is a timeframe, 
you need to do this. It makes good logic and sense. It is going 
to ultimately benefit the consumer as well as the companies 
themselves. So you really should do this,'' giving the States 
an opportunity to accomplish that on their own but drawing the 
line somewhere, and that somewhere would be a 2- to 3-year 
period. I think that is going to serve well to try to advance 
some of these issues that are very important.
    Chairman Baker. Well, you have mentioned the carrot-and-
stick approach. I regret to inform you they have eaten all our 
carrots. I mean, we have got no more time left.
    Mr. Serio, in prior discussions in your former capacity, we 
had discussed what and when. I am just trying to get the day to 
a point where we establish the line Mr. Muhl was talking about. 
I think it is time to draw it and to act on a bill and let 
members take a position on the proposed reform.
    Given this subcommittee's work only, 20-something hearings, 
meetings, discussions, we have circulated the draft to every 
stakeholder we can find, I have got all sorts of letters 
establishing all sorts of perspectives, do we need to do 
anything else or is it time to take up a bill, in your 
perspective?
    Mr. Serio. In my view, the SMART process has allowed the 
coalescing of all these issues and all these discussions and 
all these positions to come into one place.
    As Mr. Muhl mentioned a moment ago, the regulatory review 
that we did in New York when Governor Pataki first came into 
office was a thorough process. I was Mr. Muhl's first deputy at 
the time, and it went beyond just identifying the regulations 
that were old or obsolete, it was getting them actually off the 
books on the regulatory side but then also going back to the 
legislature and saying the underlying legislative authority was 
no longer necessary.
    The SMART process has given us that same type of discipline 
that we went through back in 1995, that it was this thorough 
baseline review. And, look, a lot of people did not like the 
regs that we were taking off the books or did not like the 
``desk drawer'' rules that were being abandoned because 
everybody has their own little piece of this. But when we told 
them what the overall and the overarching purpose of this was 
is to focus on those things we really need to do, we really got 
some consensus on that, and the process under Executive Order 
number 2 turned out to be a tremendous success.
    I think you can equate that experience with what the SMART 
process has done, but now it is time for people to start making 
some baseline decisions about, Okay, what can they go for, what 
can't they go for? Maybe we put this into two steps instead of 
one step, as I would suggest on rate regulation, for example, 
taking a step to flex before you get to competitive rating, but 
let's make that call now.
    Let's figure out what can we do and let's get it done, the 
low-hanging fruit that I talked about, things that I think 
everybody at the table can agree on, and I think Commissioner 
Koken also mentioned a number of things that there are not 
disagreements on. That should be done, and I think that the 
SMART process can show a real positive yield by getting some 
final decision-making done on those issues that we can at least 
agree on.
    Chairman Baker. Thank you. My time has expired.
    Mr. Kanjorski?
    Mr. Kanjorski. Thank you, Mr. Chairman.
    In my opening remarks, I discussed the need for the 
committee and the House to get our priorities in order and 
particularly resolve the question of terrorism risk insurance. 
I know that the chairman of the subcommittee shares my interest 
in seeing this process move along.
    Anyone on the committee who wants to, tell us whether or 
not you think this terrorism risk insurance is essential and 
whether it should be extended and what type of priority is it?
    Diane?
    Ms. Koken. Well, the NAIC is fully supportive of extending 
TRIA, and we believe that it is critical and essential and in 
fact also recommended that group life be included in any 
extension. We have concerns about the ramifications on 
consumers, small businesses, large businesses alike if in fact 
this is not extended.
    Mr. Kanjorski. Thank you. Does anybody else want to voice 
an opinion on that?
    Yes, Mr. Pickens?
    Mr. Pickens. Mr. Chairman, I certainly would agree that 
TRIA should be extended. That has been NAIC's position for a 
number of years now. Adding group life at this time I think 
makes perfectly good sense, and I would just address Mr. 
Kanjorski's concerns.
    I do believe TRIA is certainly a more urgent issue at this 
time, but I know all of you ladies and gentlemen are capable of 
walking and chewing gum at the same time, and I think you can 
deal with the TRIA issue and also hold a hearing like this one 
looking forward and again appreciate the opportunity to be 
here.
    Mr. Serio. Mr. Kanjorski, I got faked out by that question 
the last time I was before you when you asked pretty much the 
same question, but then you followed it up with, ``Well, if you 
are coming to us looking for TRIA help and for financial 
support, why are you telling us that we cannot do insurance 
regulation,'' and so I will not take the bait twice.
    But I will say this: I mean, clearly, and this is something 
that we have discussed with the New York congressional 
delegation many times over, and I think New York is clearly in 
the forefront of support for TRIA extension, but I take your 
point seriously about this idea of why can't we do these things 
together. We can do a TRIA together and work it out, and the 
States and the NAIC specifically provided much of the technical 
support behind the TRIA bill and was also responsible for a lot 
of the implementation of TRIA components in terms of working 
with the industry.
    Likewise, when the Fair Credit Reporting Act came up for 
renewal a year or 2 ago, there were some people that got very 
nervous about the idea of a Federal preemption and making it 
permanent. Well, once we sorted through that at the NAIC, we 
came out supporting the permanency in the preemption on fair 
credit reporting, because that was something that really had a 
uniform basis across all State lines.
    So I think the idea that TRIA is one of those 
manifestations that we can use to show that we can do this on a 
uniform basis, that it is not just a terrorism act for New York 
or for Washington, D.C. or Chicago but it is something that we 
need to do on a uniform basis the same way across all State 
lines, not only helps support the idea that TRIA needs to be 
extended but the fact that the Federal Government can actually 
work in concert with the States and can create some of these 
uniform standards.
    Mr. Kanjorski. Very good. I just want to add to that 
comment, though, that we all are aware that the delay that is 
occurring out there is a tremendous blockage, and I think it is 
a challenge maybe to the six members of the panel.
    You should show us the capacity of the industry to come 
together and alert the leadership in both parties in the House 
and the Senate that this is intolerable, that we have nine more 
weeks left and then we are not going to have terrorism risk 
insurance in the United States, and the destabilizing nature of 
that to the economy as a whole and to the construction industry 
and potential technical defaults that are going to occur out 
there are huge.
    So I guess I will not take any more time, other than to 
challenge the panel. We cannot seem to break the loggerhead or 
the delay, and we are certainly encouraging the industry to 
come together and show your ability, at least on this single 
issue, to work together to help us get something positively 
done. So take that as a challenge.
    Thank you, Mr. Chairman.
    Chairman Baker. I thank the gentleman.
    Mr. Hensarling?
    Mr. Hensarling. Thank you, Mr. Chairman.
    Obviously, we had a lot of testimony with six of you here, 
and I tried to listen very closely. If we could just for a 
moment set aside the argument of preemption and federalism, I 
would like to focus on the price control issue. And just as a 
matter of public policy, is there anyone on the panel who 
wishes to share with me why price controls are necessary or 
even helpful to the consumers? I can see where they may be 
helpful to the producers, those who are marketing, but why if 
we have a competitive marketplace, why are they necessary or 
helpful?
    Mr. Serio, please, you want to--
    Mr. Serio. I will start with that, and it goes back to 
something that Mr. Muhl referred to, the breakout between prior 
approval of rates, flex rating and open competitive rating.
    We had an interesting experience in New York that jaundiced 
me a little bit about a direct move to open competitive rating, 
and it happened in a part of the auto market that a lot of 
people do not see on a daily basis. We actually have open 
competitive rating in the livery market. You file a rate and 
you can charge anything within that filed rate. And the taxi 
companies, the taxi insurance companies got into a very 
overheated, competitive price war.
    Now, first of all, for the financial regulators, that 
becomes a very difficult thing to manage because you have to 
make sure that there is not money just there today, and I 
understood your point earlier about deregulation in other 
industries, but those other industries do not make promises for 
5 years or 10 years down the road. They deliver a product, that 
product is delivered well, and pretty much the economic 
transaction is complete. Well, you have to make sure that these 
companies have got this money somewhere down the road.
    Well, anyway, delivery insurance companies got into this 
fierce competitive battle in this open rating system. All 
brought rates down very far only to find out that the rates 
were inadequate. And when we started to tell them they had to 
start bringing those rates back up, they came in and started 
asking for rates not just back to the rates they had filed but 
rates on top of that. So there were some companies that had a 
vicious price war where rates went down 30 or 40 percent but 
within 2 years rate requests in the 100 percent range were 
being asked for.
    Now, to go from prior approval to competitive rating 
without a mid station like a flex rating system where you can 
start to gauge what the competitive environment is and what it 
will accommodate, I think that is a very important first step 
to take.
    Mr. Hensarling. And I think I understand the argument in 
favor of some type of transition, I understand that, but I am 
trying to understand does anybody favor the ultimate goal of 
being necessary to protect the consumer to have price controls 
since arguably if I am buying a car or a hamburger or anything 
else in society, with the exception of those handful of items 
that have traditionally been viewed as natural monopolies, we 
allow market forces to ``protect me.'' My observation is that 
they work pretty well.
    Yes, ma'am?
    Ms. Koken. I would also point out that part of the economic 
incentive or disincentive can be that in many of the coverages 
in the personal lines they are mandatory coverages, which 
really throws a bit of a wrench into the competitive model. 
Auto insurance is not something that people have an option in 
most States to purchase; they must purchase. But the 
overarching concern also needs to be, and certainly from the 
regulators' perspective is, that in addition as we look at the 
whole equation and the inadequate excess of our unfairly 
discriminatory rate aspect, what we are primarily focusing on 
is the solvency issue.
    As was pointed out by Mr. Serio, because you are buying a 
promise today that is not going to be paid off for a 
substantial period of time and there are and can be incentives 
to undercut and charge inadequate rates as well as excessive 
rates, we do believe that there needs to be a balance for that 
overall--
    Mr. Hensarling. I understand the solvency argument. I thank 
you.
    Mr. Shapo, I sense that you may have a different opinion.
    Mr. Shapo. Yes. The argument about a mandatory product is 
something I have heard before, and it is a mandatory product, 
but I am not sure why that would change the laws of economics. 
If it is an inelastic demand curve, I would think that would 
mean we were more interested in making sure there was adequate 
supply, and price controls, if they do anything, choke off 
supply. So I mean, I am not aware of any economic study that 
would suggest that there needs to be price controls for a 
mandatory product.
    Like I said, I am not an economist, but I think that if we 
were going to adjust because of that, the last thing we would 
want to do is turn to measures which would reduce supply when 
everybody needs the product.
    Also, we do not regulate the price of food and we have to 
eat. There are all kinds of things that are necessary in life 
which we do not do price controls on.
    Mr. Hensarling. Thank you. I see my time has expired.
    Chairman Baker. I thank the gentleman.
    Mr. Israel?
    Mr. Israel. Thank you, Mr. Chairman.
    Let me join Ms. Kelly in welcoming Mr. Serio who did an 
outstanding job as the superintendent of insurance in New York.
    We had an interesting meeting of the Democratic whip team 
this morning with Mr. Hoyer, and some of the discussion was 
about an outbreak of partisan eruption in the Judiciary 
Committee, and Ms. Wasserman Schultz stood up, who is a member 
of the Judiciary Committee, and said, ``You know, I am on the 
Financial Services Committee, which is one of the most 
bipartisan committees, one of the most constructive committees. 
We always find a way to work together.''
    And that certainly is true. We found a way on GSE's, we 
found a way on SCRA, and hopefully we will find a way on TRIA, 
because as valuable and as important as this discussion of 
Federal regulation of insurance may be, we can walk and chew 
gum at the same time. We need to address TRIA. It is critically 
important.
    When I talk about TRIA at home, most people's eyes glaze 
over, and so I would like--and perhaps Ms. Koken can lead us 
off, because I know the NAIC has passed a resolution on this--
what would happen if we did not extend TRIA? What would the 
implications and ramifications be if we only focused on Federal 
optional charters and did nothing to TRIA by the end of this 
year in the nine legislative weeks left?
    Ms. Koken. I think that not acting on TRIA is going to 
create difficult market issues, because in fact in a free, 
competitive marketplace on the issue of terrorism coverage, the 
carriers will choose not to cover it. There are certain 
circumstances in which they will be required to cover it, like 
workers' comp, which cannot be excluded from policies
    And so I think that we are likely to see impacts on small 
employers, large employers perhaps with concentrations in one 
location that cannot find workers' comp coverage or in the 
building sector where it is difficult based on the location to 
get the proper liability coverage. And I think, therefore, it 
will have an economic impact on the communities that we all 
live in.
    Mr. Israel. Thank you.
    Mr. Serio, would you comment on that?
    Mr. Serio. Yes. The superintendent between Ed Muhl's tenure 
and my tenure was our friend Neil Levin, who liked to say that 
the past is prologue. I do not think there is any guessing game 
about what is going to happen, because we already saw it 
happen.
    Now, in the 14 months it took between 9/11 and the passage 
of TRIA 1, you already saw the disruption that occurred in the 
marketplace. There were not only economic disruptions because 
coverages were constrained and because prices went up, but you 
also saw the industry going to State regulators or State 
legislatures saying, ``We need relief from the standard fire 
policies,'' the so-called New York standard fire policy that 
had allowed for coverage for fire following any kind of an 
event, including a terrorism event.
    That same dynamic is going to occur all over again. You are 
having these discussions not just on the economic impact if 
TRIA does not get extended but also what are the policy 
implications, and that is a discussion going on in a lot of 
places right now, and I think you will end up having the same 
type of result. I think what occurred in 2001-2002 is likely to 
occur again if TRIA is not extended, and that will be that you 
are back to this issue again of each State individually having 
to take up the question about what they do for their own 
market.
    And bringing it back to the issue at hand today, TRIA 
allows uniformity across State lines so you do not have a 
depletion of things like standard fire policy, so that you do 
not have a further mismatch of policy regulations around the 
States.
    Mr. Israel. Thank you, Mr. Chairman. I yield back my time.
    Chairman Baker. Thank you, Mr. Israel.
    Ms. Kelly?
    Mrs. Kelly. Thank you, Mr. Chairman.
    Commissioner Koken, it is not any secret, in the press or 
here on the Hill about the relationship between the NAIC and 
Congress. This has not been a very good relationship. I am 
wondering if you can explain to the committee what steps you 
have taken to improve that relationship in terms of personnel 
and in terms of outreach?
    Ms. Koken. Well, I would first point out that the NAIC and 
the officers have been committed to continuing the dialogue and 
being available for any Members of Congress at any time. And, 
in particular, I think what you are referring to is that last 
year at the NAIC there was a change of officers where the 
president left in mid-year, in June, and I was not elected to 
fill that vacancy until September. We took steps at the NAIC, 
first of all, to change our bylaws to put in place a president-
elect so that we could assure that there would always be 
continuity in the NAIC in our relationships and our dialogue, 
and in fact the president-elect is here with me today.
    So that was certainly one step, but we recognize that we 
needed to be able to respond to this committee on the draft 
proposal that was put together, and so we put together a team 
of 117 regulators to go through each of the titles and develop 
a response.
    In addition, I would say that the head of our Washington, 
D.C. office also left and we were in the process of replacing 
that individual. We do have someone who will be officially 
starting on July 1st, and so certainly to the extent that there 
has been a perception of our lack of dialogue on this, we 
remain and are very engaged, have been engaged through over a 
1,000 hours of work in analyzing this important piece of draft 
legislation, and certainly we remain willing to discuss and 
meet with any members of this committee on any insurance issue, 
because we do believe that we possess a level of technical 
expertise based in our State experience.
    Mrs. Kelly. I thank you for that response. I think the NAIC 
is really too important to the insurance industry for the doors 
to be closed between us.
    Ms. Koken. I agree.
    Mrs. Kelly. And for some time I felt that they were.
    I would like to just pose a question to the entire panel. 
Chairman Greenspan has said before this committee that the 
market for terrorism reinsurance just does not really exist, 
and I would like to know from each of you, would you prefer a 
Federal Government run reinsurer or a sponsored entity with a 
corporate structure?
    Let's just start with anybody who wants to pick up on that.
    Why don't we start with you, Mr. Pickens?
    Mr. Pickens. I certainly would prefer private market 
solutions, and I believe there are some out there. In fact, 
Ernie Csiszar, the NAIC president last year in 2004, has 
recommended some very good private market solutions for the 
problem of terrorism risk insurance and catastrophes in 
general, and one of those is a tax-free catastrophe reserve, 
passing a law that would allow insurance companies to place 
money aside, put money away for a rainy day, if you will, when 
you have a catastrophe or a terrorism attack. That is something 
that would be very helpful.
    There are also other mechanisms in securitization that are 
good private sector approaches. But in the meantime, I think we 
truly need to reenact TRIA, because it has provided a safety 
valve for the market, and it does give reinsurers some relief 
and keeps them in the game, if you will.
    But there are some good private market approaches. I would 
like to see those in the long run. Whether or not those can be 
included in the current TRIA bill, I do not know, but certainly 
prefer a private sector approach as opposed to a government-run 
program.
    Mrs. Kelly. Mr. Pickens, I want to point out one thing: If 
we just have a mere extension of TRIA, it does not solve 
anything. So we really need to fix this problem.
    Anybody else on this panel want to respond to me--Mr. 
Serio?
    Mr. Serio. You may need the same carrot-and-stick approach 
that we were talking about with respect to modernization of 
insurance regulation for the industry. It is a little 
perplexing that over the last 3 years since TRIA has been in 
effect that there has not been a private sector solution 
percolate to the top of everybody's attention, and I think it 
is because at the end of the day TRIA is not really an 
insurance industry bill; it is an insurance consumer bill.
    And so maybe we need to reconnect TRIA to the insurance 
industry and give it kind of that carrot-and-stick approach 
that we want to foster the development of a uniform 
catastrophe-reserving type of mechanism, whether it is for 
terrorism or otherwise, because if you are talking on the east 
coast or in the Gulf coast, you can use this for hurricanes as 
well, particularly after last year's events in Florida.
    But there needs to be some kind of a compulsion to get the 
private sector to bring some of those ideas that Mike referred 
to the surface. And I think a bill that kind of broaches that 
issue that way will get the industry reengaged in that 
discussion in a meaningful way.
    Mrs. Kelly. Anybody else want to tackle it? Yes?
    Ms. Koken. Well, I would suggest that putting in TRIA again 
for, say, a 3-year period would allow the marketplace and the 
industry to have the time necessary to put together a model, 
and I know there are discussions that are ongoing now, but put 
together a model that would work to create a private long-term 
solution. Because I agree with you, it would remain a stopgap, 
but I think it is a critical stopgap, and then there needs to 
be some time and effort put into a longer-term solution.
    Mrs. Kelly. Ms. Koken, it has been 3 years since we have 
had TRIA, and in 3 years we have people coming back saying, 
``We need 3 more years.'' There is no guarantee that in 3 more 
years there will not be people coming back saying, ``We need 3 
more years.'' There is a time when we need to have closure on 
this.
    So I respectfully disagree with the fact that we need 3 
more years. An extension has to have an end at some point, 
because the Federal Government cannot always be expected to be 
the insurer of first resort.
    Thank you, Mr. Chairman.
    Chairman Baker. Mr. Miller?
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    I do have some questions about the proposals to eliminate 
State price regulation. My concerns are about some of the other 
factors that go into underwriting decisions, about what price 
to offer to consumers, and my understanding is that the draft 
document would eliminate a lot of the State classification 
systems.
    I think, Mr. Shapo, I think you perhaps have spoken most 
forcefully on the panel opposing State regulation of premium 
insurance. Would you also eliminate the State regulation of 
what may be considered in underwriting? Some things I want to 
be considered. I want driving records to be considered in 
automobile insurance. I do not want the neighborhood someone 
lives in to be considered. Would you also repeal all of that 
State regulation of what may be considered in underwriting in 
the prices that are offered to consumers?
    Mr. Shapo. Representative, most States have an unfair 
discrimination law that starts with the presumption that if a 
rating factor is actuarially justified--
    Mr. Miller of North Carolina. I am sorry, speak up.
    Mr. Shapo. I am sorry. Most States have a rating law that 
creates a presumption in a statute, and it has been affirmed in 
case law, that actuarially justified underwriting and rating 
factors are presumptively legal. Most States allow territorial 
rating or some form of territorial rating.
    I would start with the presumption that if the factor is 
actuarially justified, it should be allowed, and the 
presumption could be rebutted and overcome. For instance, most 
States have laws that prevent--in fact, all States have laws 
that prevent using race as an underwriting factor. And if there 
are other factors that are considered socially noxious and 
unacceptable, then I think that the system now allows that.
    And I think it is a different issue than what I was trying 
to testify about before. I was talking about laws that give the 
authorization to review rates for inadequacy and excessiveness, 
which, essentially, today is basically used an excessiveness 
tool when the focus used to be inadequacy.
    As I said before, I have a strong presumption about that, 
and I do not think the amounts, the levels, the number should 
be regulated, and I would start with a presumption that--
    Mr. Miller of North Carolina. And you do support the 
States' ability to set classification systems of what 
information can be considered in setting rates and what rates 
are being offered to consumers.
    Mr. Shapo. I would certainly support some oversight body's 
ability to do that. And I think that will be something that 
this committee will have to grapple with, whether such 
exceptions to actuarial justification are okay, whether that is 
a decision that needs to be made at the Federal level or the 
State level. I think some oversight legislative committees and 
legislature should have the ability to declare certain factors 
socially noxious and unacceptable.
    Mr. Miller of North Carolina. Okay. Anyone else?
    Mr. Pickens?
    Mr. Pickens. Yes, sir, just to follow up on what Nat said. 
All States do have unfair discrimination laws which prohibit 
certain types of underwriting, and my understanding, from my 
reading at least of the SMART drafts, that that would not be 
adversely affected.
    Now, just one cautionary note, though: I do not think that 
any regulatory body wants to get too much into the details of 
underwriting, and the reason for that is you can adversely 
affect solvency. For example, if there are--anything that 
increases the risk, if there is not an increase in price 
associated with that, then losses will increase and the company 
will lose money, and the company will eventually go out of 
business or have solvency problems.
    So I do not think you want to play politics, if you will, 
with underwriting, other than the fact that in insurance we 
want to prohibit unfair discrimination, price increases based 
on race and other, as Nat said, socially obnoxious or 
unconscionable type factors. I would caution that we do not 
want to get too much into underwriting decisions, because if we 
do, what I think may be fair and you think may be unfair 
becomes subjective at some point. And also, again, ultimately, 
if it increases the risk, there has to be I guess a 
corresponding increase in the price or you will have solvency 
problems and lack of availability.
    Mr. Miller of North Carolina. Well, the problem with your 
answer is I cannot tell you what you have said. For instance, 
do you think it is actuarially sound to distinguish premiums 
based upon the income of the insured in homeowners or 
automobile insurance?
    Mr. Pickens. Based on the income of the insured?
    Mr. Miller of North Carolina. Or credit history. Income or 
credit history of the insured.
    Mr. Pickens. Now, credit history is something that 
obviously has been shown that there is a corresponding--on an 
actuarially sound basis, there is an increase in the risk of 
somebody that has a high credit score.
    Now, what we have done using the NCOIL model, the National 
Conference of Insurance Legislatures, State regulators, and we 
passed it in Arkansas, was a model that prohibited certain 
factors being considered in the credit score. That is certainly 
justified. If somebody the has had medical bills that were 
beyond their control, things of that nature, that is justified.
    Basically, when I say, ``increase the risk,'' what I am 
talking about, as Nat said, if you understand the term, 
``actuarially sound,'' if you do not keep rates actuarially 
sound, you will end up with solvency problems with companies.
    Mr. Miller of North Carolina. What I understand actuarially 
sound is that there really is a difference in risk based upon 
these factors, which I understand, but some of the limitations 
on classification systems, as Mr. Shapo seemed to acknowledge, 
was that, yes, some of them may be actuarially sound in the 
sense that, yes, these two different people may actually pose a 
different risk. What makes the risk different is not one we 
want to allow a distinction based upon for societal reasons.
    Mr. Pickens. And, again, most States do not, and that is 
what I was saying, socially unconscionable things. Income is 
not allowed as an underwriting factor, race is not allowed as 
an underwriting factor. There are a number of things that are 
not allowed at this point. But I guess the question I ask is, 
where do you draw that line, and I think you have to be careful 
that you do not step over that line, because when you do you 
end up with solvency problems with companies.
    Chairman Baker. The gentleman's time has expired.
    Mr. Tiberi?
    Mr. Tiberi. Thank you, Mr. Chairman.
    Chairman Baker. Excuse me, I made an error. I passed over 
Mr. Manzullo.
    Mr. Tiberi. I think that is correct.
    Chairman Baker. In the regular order, he is next.
    Mr. Tiberi. Thank you.
    Chairman Baker. Mr. Manzullo?
    Mr. Manzullo. Thank you. I appreciate that.
    I have, actually, more comments than questions. Coming from 
Illinois, I appreciate the fact that there is a lot of 
competition involved in insurance. When we decided to shop for 
insurance on our farm, even though farm casualty insurance has 
gone up substantially in the past several years, we noticed a 
lot of competition going on, and there are some surprising 
differences in rates.
    But I also noticed more in automobile liability insurance. 
We have 4 cars and 5 drivers, and 3 of those drivers are ages 
17, 19 and 21, and we work with a very aggressive agent in 
Illinois who is continually combing the market to get the best 
rates. And I just laugh when I see some of these national 
advertisements where you call and they are not centered in 
Illinois, and I call the 800 number and they think they are 
giving me a deal, and one actually quoted me a rate that was 
twice what we are paying now, which we think obviously is too 
high. But that is only because of competition. It has to be.
    So anything that would interfere with the ability of States 
to allow competition would be difficult for me. I have a 
federalist issue here, and that is States have the right, as 
far as I am concerned, to regulate or not regulate. It is not 
an issue of the Federal Government. Where I think the Federal 
Government has a role is with regard to products. I have seen 
where insurance products are very similar to banking products, 
investment products, and the banks can get those approved 
lickety split, and sometimes the insurance products going 
through the individual States can take so long that by the time 
the approval occurs, that product has worn out.
    And the reason I could see some Federal jurisdiction with 
regard to the product is the fact that these products cross 
State lines, they are all over the place, whereas an insurance 
policy is centered where the cars, where the individual lives 
or where their home is. Any comments on that?
    Yes. However you want to take it. Well, go ahead, both of 
you, don't fight.
    Ms. Koken. Well, I think you raise some valid points and 
certainly we have a great deal of concern about the issue of 
encouraging competition. For example, in Pennsylvania, we do 
have 1,700 companies that write insurance, but on a national 
level, we are concerned about speed-to-market and getting those 
products out quickly. And we looked at this in different ways, 
and one of the things that we did develop is the interstate 
compact which we believe would provide a single point of filing 
for life annuity, long-term care policies that would address 
that concern for those products.
    We passed the interstate compact in 2003, in July, and in 
the first year we had nine States that passed the compact. This 
year, we have had six States so far, plus we have Texas and 
Vermont that have passed it but the governor has not yet signed 
it. So we are almost up to 17 States and 23 percent of the 
premium. When we get to 26 States, or 40 percent of the 
premium, the compact will be implemented. So we recognize that.
    But for property casualty products, we have done a great 
deal of work in the States in setting up checklists and 
developing a technology-based filing program, which is SERF, 
and I can tell you that in 2001 there were 5,000 filings on 
SERF, and so far this year there have been 210,000 filings on 
SERF.
    Mr. Manzullo. Let me hear what Mr. Shapo has to say on it.
    Thank you.
    Mr. Shapo. Thank you, Representative.
    I wanted to follow up on the question of what Congress' 
role would be in overseeing this. I think when it comes to 
rates that it is not an impingement on federalism or if you 
have a strong belief in State rights, because in many ways the 
prevalent rate regulation today is a result of congressional 
action itself. Congress incentivized the States to encourage 
collusion and to pass rate regulatory laws 60 years ago. And in 
large part today's system grows from that. So I think it is not 
Congress going any further than it has gone before. It has no 
further intrusion on States' rights.
    Also, it clearly affects interstate commerce, rate 
regulation. There are studies that argue that rate regulation 
has led to the industry being less capitalized, not as much 
supply available, which clearly affects interstate commerce 
when the practices of some States.
    Mr. Manzullo. Well, I mean, what Congress did 6 years ago 
just because it is precedent does not make it right.
    Mr. Shapo. No, but--
    Mr. Manzullo. I mean, the issue is whether or not this body 
has the authority to tell a State or not to tell a State that 
it has to fix the rates or not fix the rates. I mean, either we 
are wholly excluded from the area or we are not, and I think it 
is the latter.
    But what I wanted to add in there is I noticed on page 4 of 
the Covington testimony and page 7 of the Koken testimony is 
the fact that what you are trying to do is something similar to 
the Commission on Uniform State Laws where, for example, the 
uniform commercial code was adopted. There is a uniform 
Commission on Traffic Laws trying to get the States to come 
together on a consensus because it used to be bills and notes 
that differed by States and now I think it is Article 6 or 7 of 
the other uniform commercial code. Is that what you are trying 
to do?
    Chairman Baker. And that will be the gentleman's last 
question, as his time has expired, but please respond.
    Mr. Shapo. Mr. Chairman, if I might, it is not just that 
Congress has set a precedent generically, it is just that 
Congress has, in large part, contributed to the varied 
situation in the market today. So it is quite appropriate, I 
believe, for Congress to revisit its past policy decision, 
which had led to serious ramifications in the market, and 
consider whether that had a negative impact on interstate 
commerce.
    Mr. Manzullo. Thank you.
    Chairman Baker. I thank the gentleman.
    Before I recognize the next member, I just owe members, and 
then I realized observers, an explanation as to recognition 
procedure. I have been informed by the Democrats side that 
members would be recognized in order of seniority. We continue 
to observe on our side by time of arrival, if you are here, to 
be recognized. So despite my insistence on uniformity, we are 
now beginning to look like the NAIC up here.
    Accordingly, I recognize Mr. Clay.
    Mr. Clay. I thank the chairman, and seniority does have its 
benefits.
    Chairman Baker. Depending on where you are, I guess.
    Mr. Clay. My question is for Mr. Pickens. The SMART Act, we 
all know, has not been supported by consumer groups. Many have 
written that the SMART Act would override State consumer 
protection laws, promote anticompetitive practices by insurance 
companies and preempt State regulation of insurance rates. Why 
do you believe that SMART will use only the threat of 
preemption and not use preemption? Are there guarantees of 
this, and please elaborate. Additionally, please detail your 
opposition to the optional Federal charter.
    Mr. Pickens. First of all, I believe the reason that 
consumer groups are opposed to the SMART approach is largely 
because they would like to see the creation of a Federal 
insurance regulator. Some of those people, Bob Hunter being one 
of those, has made it very clear that he would like to see the 
creation of a Federal insurance regulator.
    The reason that I am opposed to an optional Federal charter 
really is pretty simple. Number one, I believe that a State-
based approach to regulation, which is encompassed to SMART, is 
much preferable to the creation of a new, huge bureaucracy in 
Washington, D.C. I do not think we need the creation of a new 
Federal agency to regulate insurance.
    I think what you would see ultimately is--bottom line is, 
State regulators are closer to insurance consumers in both 
proximity and in their philosophies. It is easier for me to get 
a hold some regulator in Little Rock than it would be to get a 
hold of one in Washington, D.C.
    I think also, bottom line, and I think one of the reasons 
the State legislators have been concerned and governors have 
been concerned, is that you would ultimately, I think, see a 
flow of premium tax dollars, which all of the States depend on, 
coming to Washington, D.C. We collect around, I think, $110 
million, $112 million in premium taxes. None of that money goes 
to the Insurance Department in Arkansas. It all goes to run 
other State agencies for a number of programs. So if we were to 
lose a fraction of that to the Federal Government in Arkansas, 
it could hurt us a lot.
    So that is primarily the reason I am opposed to an optional 
Federal charter, and I think we are all in agreement.
    The reason I say the threat of preemption is what SMART 
poses as opposed to preemption and why I see it as an 
opportunity is because my understanding of SMART, of what the 
ultimate goal of the SMART process is, and I know we have a 
market that will be thrown out there very soon, but the 
ultimate goal is to basically take the work that the NAIC has 
done through the 2003 action plan, through the 2004 road map, 
and say, ``Okay, States, here is what you all have committed to 
do. We are going to give you a set period of time to do to keep 
this commitment that you have made to us these number of years, 
and if you do not do it, what you already have come up with 
will be the law of the land.'' And you will enforce it, you 
will continue to be the enforcer.
    Now, what I understand there is some misunderstanding about 
or some disagreement about is really on what the details of the 
legislation are. There may be some on the committee who would 
like to see things in the SMART Act that are not necessarily 
contemplated under the 2004 road map or the 2003 action plan. 
So I think that is where the debate should be centered, and, 
again, I think it is totally appropriate to throw down this 
bill as a marker to get everybody to come to the table and 
let's talk about it.
    Mr. Chairman, we have a saying in Arkansas, ``Fish or cut 
bait,'' and you guys have it in Louisiana, and we have some 
more colloquial sayings that we cannot say in public. But the 
bottom line is, it is time to get down to business, I think, 
and take some action.
    Mr. Clay. Let me ask one more question before my time runs 
out, and this is on TRIA.
    And I will ask Mr. Muhl. He looks like he wants to answer a 
question.
    I was in favor of the immediate triggering of the make 
available requirement for the 2005 program year. I agree that 
the Federal backstop should be extended for terrorism risk 
insurance until the Congress, the administration and private 
sector stakeholders can agree on a permanent solution for 
problems associated with trying to underwrite acts of 
terrorism. I do not, however, favor a permanent government 
backstop.
    How long do your studies indicate that the backstop may 
need to remain in place? Are there differences in present-day 
government estimates and the industry estimates regarding the 
amount of time a backstop is needed?
    Mr. Muhl?
    Mr. Muhl. Thank you. I actually have no idea how long it 
would take to hopefully come up with a private solution versus 
a Federal solution. I am in favor of, being that there is not a 
private solution at the present time, I know there are efforts 
that they are trying to get the private sector involved in that 
process, to get something up and running, but it does not exist 
right now. But I am a firm believer in just to keep the markets 
calm that in fact you need some sort of a solution.
    My preference is to see a private solution versus a Federal 
solution, but, again, whether ultimately there is going to be a 
private solution, I have absolutely no idea. But if there is 
not one in the next couple of years, then I think the direction 
that everybody is going about not pushing this TRIA for 
expansion I think is the right thing to do, but I think it is 
appropriate to do it now because there is no solution.
    Mr. Clay. Thank you for your response.
    And thank you, Mr. Chairman.
    Chairman Baker. Mr. Tiberi?
    Mr. Tiberi. Thank you, Mr. Chairman.
    Mr. Covington, good to see you. We miss you in Ohio.
    I apologize for missing your testimony, but let me harken 
back to June of 2001 when Chairman Oxley had asked you a 
question that if Congress set a goal of 3 to 4 years for 
achieving comprehensive uniformity by the NAIC for product 
approval, could the NAIC meet that goal, and you answered, yes.
    Can you tell me what the progress has been at the NAIC over 
the last 4 years since that question was asked? And is there, 
in your opinion, comprehensive nationwide uniformity?
    Mr. Covington. Thank you, Representative Tiberi.
    As you know, I have been out of NAIC for 2 years, and so I 
might defer that question to Commissioner Koken as to the 
progress that has been made over the last 2 years, but I will 
note that in my testimony I noted that the NAIC adopted a 
commercial lines rate and form model, and to this date no State 
has adopted or, to my knowledge, even introduced that model. So 
I think the record speaks for itself with regard to that. And 
there appears to be, as I indicated, little interest in 
addressing the personal lines rate modernization issue.
    So, again, I think because of the challenges and the 
obstacles noted in Nat Shapo's testimony and in my testimony, 
that it will be difficult, if not impossible, to achieve those 
particular reform initiatives under the current framework.
    But I would defer the progress question to Commissioner 
Koken.
    Mr. Tiberi. Okay.
    Ms. Koken. I would comment that the State regulators are 
very concerned about always balancing the interest of fee 
markets against the importance of the consumer and protecting 
that consumer in all circumstances. But I would say that I 
believe that the States have made huge progress in establishing 
checklists and feeding off the approval time within each State 
as well as our initiative for life and health of the compact. 
So I think that there have been a lot of changes.
    I can tell you that I talked to a major company recently to 
ask if they were going to support the compact in New York, and 
they said to me that with the new checklist and the procedure 
in place, an approval time of 30 days would actually be going 
backwards because they are getting much quicker approvals. So I 
think there has been tremendous progress in both large and 
small States across the country, but totally focused on what 
they believe is in the best interest of the consumers in their 
State.
    Mr. Tiberi. Just a follow-up, Commissioner, do you think 
that the SMART Act, by setting deadlines and standards for 
States to meet, will help achieve nationwide uniformity 
quicker?
    Ms. Koken. Well, I am not sure that nationwide uniformity 
is necessarily the goal across the board. The goal is to 
protect the consumer, that is our number one goal, and in some 
cases that means we are looking for uniformity, in some cases 
it means uniformity of process and not uniformity of law.
    There are certainly dramatic differences around the 
country, and each State faces different types of risk for their 
consumers. I mean, we do not have coastal issues in 
Pennsylvania but we have mine subsidence issues which they do 
not have in Idaho. So we think that pursuing the standard of 
uniformity across all lines, across all States is not 
necessarily the approach as much as streamlining, improving, 
modernizing and continue to evolve the regulation of insurance.
    Mr. Tiberi. My sister, who lives in Cincinnati, a consumer, 
butting the district of my colleague to the right here, would, 
I think, benefit from uniformity in terms of being able to buy 
products in Kentucky versus Cincinnati. Isn't the advantage to 
the consumer if there was more uniformity in that sense?
    Ms. Koken. Well, it is a balancing factor. There certainly 
are benefits to having uniformity, but, certainly, the tort 
law, the contract law in Kentucky, I would suspect, is 
different than the laws in Ohio. And the State insurance 
departments and the State policies have to reflect those 
particular issues in each location.
    Mr. Tiberi. Thank you.
    I yield back, Mr. Chairman.
    Chairman Baker. I thank the gentleman.
    Mr. Scott?
    Mr. Scott. Thank you very much, Mr. Chairman.
    You know, I just cannot support a legislation that does not 
provide strong consumer protections especially against 
discriminatory practices, and I have some concerns that the 
SMART Act would not and does not currently provides protections 
against insurance redlining and other discriminatory practices. 
There are many States that do.
    Each of you are either present or former directors or 
insurance commissioners, and I would like to ask you, given 
that, given my concern about the lack of discriminatory 
protections in this bill, do you believe that the SMART Act 
should adopt stronger protections against discriminatory 
practices?
    You first, Mr. Shapo.
    Mr. Shapo. I was really asked to testify about competition 
generally, only specifically, not on the draft of the bill, but 
I do believe that the bill, in its draft form anyway, 
specifically preserves unfair discrimination laws with respect 
to the standard list of prohibitive factors, including race.
    Mr. Scott. Okay.
    Mr. Serio?
    Mr. Serio. Yes. That is my reading of it as well. Let me 
take your question from a slightly different perspective also. 
The consumer protection issue is the greatest thing to wave 
around, and we all do it. When we were in office, we made sure 
that the consumer was being protected. You have a 
responsibility as public officials to make sure the consumer is 
being protected. But there are a couple of different ways to 
get at that issue of consumer protection.
    When Ed and I first came into the insurance department in 
1995, we were told that New York does not allow certain types 
of products because they are bad for the consumer. Well, two 
things we found out. Number one, there were consumers who 
actually wanted some of the things that we were prohibiting, 
and, number two, if they were not getting it from us, they 
would go right across the line and go and get it someplace 
else.
    So one of the things that I think uniformity would allow, 
and I think the deliberative process behind the SMART bill 
would be to try and create a uniformity so you have the same 
level of consumer protection from one State to the next, that 
instead of having these varying degrees, and it goes back to 
the previous question also, the varying degrees of consumer 
protection or the notion of consumer protection, you actually 
have one set of uniform standards across the lines.
    Particularly for people who live in media markets that 
intersect two or three States at a time, they have no idea what 
the rule is in one State versus the other. All they know is 
that, ``I want that kind of coverage, and if I cannot get it in 
my State, I am going to go across the State line and get it 
someplace else.''
    And so you have this issue, and I think the SMART bill 
already reflects a lot of that because it is trying to create a 
foundation of the protections that are already largely afforded 
by all of the States, redlining being one of them. That is 
uniform across all the States. Gender discrimination, age and 
demographic and race discrimination are all prohibited on most 
lines of insurance coverage, and I do not think that is really 
going to change with the enactment or whatever the final SMART 
bill might look like. And we know that is not going to happen 
because you will not let it happen, because no public official 
is going to allow the undoing of redlining laws.
    Mr. Scott. Ms. Koken, I believe you are the only sitting 
commissioner of insurance among all of you; is that right?
    Ms. Koken. Yes.
    Mr. Scott. Could you provide a comparison between the 
Illinois insurance regulatory environment and the SMART Act? 
Specifically, what I am getting at is, does the SMART Act 
provide the level of consumer protection, especially against 
discrimination, that your State provides?
    Ms. Koken. Well, I guess it is my understanding from the 
review that was done by the review committee, the group of 
regulators, that there were Illinois regulators that looked at 
the SMART Act provisions with regard to a comparison of 
Illinois. I did not personally do that.
    And there were lists, I think, of around 12 specific 
consumer protections that the Illinois regulator believed would 
be lost to consumers if in fact the SMART Act was passed in its 
current draft proposal.
    Mr. Scott. Good. Thank you very much for that answer.
    Let me ask about rate controls, another issue that is on my 
mind. What is the effectiveness of rate controls now in the 
States? Are they holding down rates or are they reducing 
competition? And would national deregulation increase 
competition or encourage consolidation within the insurance 
industry?
    Chairman Baker. And that will have to be the gentleman's 
last question, as his time has expired, but please respond.
    Mr. Shapo. I think that it is well established, generally, 
in scholarly literature and in front of this committee in 
previous hearings that price controls do not have the effect of 
lowering prices, and in fact they have the effect of greatly 
limiting availability. They choke off supply.
    The most extreme example is New Jersey which had the most 
aggressive price controls with rate rollbacks and very tough 
prior approval regime. And what happened there was the carriers 
began to restrict how much business they wanted to write, 
which, in itself, explains the problem with the system.
    Whenever sellers are going out of their way to try to sell 
less rather than more, I think it is a pretty good sign that 
the market is not working, and carriers pulled out of the 
market. And the issue there was supply, supply, supply, which 
was badly impaired while rates did not lower, and it became a 
fact of life there that well-qualified risk could go out 
looking for coverage for weeks without getting it. People could 
walk into an agency with a terrific driving record and 
excellent credentials otherwise and not get coverage, which is 
a perverse result.
    Mr. Scott. Ms. Koken?
    Ms. Koken. I guess I am not a New Jersey regulator, however 
New Jersey does border my State, so I have some familiarity, 
and I believe that Mr. Shapo is talking about their auto 
marketplace. And in fact it was more than price restrictions 
that created the problems in New Jersey. It had to do with the 
fact that they also regulated by providing that the entire 
State would have the same territory rating. So what that 
encouraged is people in the rural areas were actually 
subsidizing people in the urban areas, and so it paid for 
companies not to write in the urban areas because they were 
getting more per customer in the rural areas. And then they 
required all companies that write there to participate in their 
insurer of last resort, which created more problems.
    And so really it is a classic case of essentially 
overregulation ultimately choking the market, but I think that 
I cannot say that price restrictions were not a factor but they 
were certainly not the only factor in what happened there. And 
we certainly believe that the review of rates to assure that 
they are not inadequate or excessive or unfairly discriminatory 
is an important consumer function that State regulators do in 
each State.
    Chairman Baker. The gentleman's time has expired.
    Just for the sake of clarity of the record, Mr. Scott, I 
want to, not taking your time, just add a response to your 
question relative to SMART Act provisions and discrimination 
practice. It occurs in Title 16 of the proposal, Protection of 
State Antidiscrimination Provisions. We have chosen to rely on 
the State consumer advocacy process to address those general 
concerns, and specifically, it says, ``Nothing in this title 
shall preempt any State statute, regulation or order to the 
extent that it prohibits the use of race, color, religion, 
creed, ethnicity or national origin as an underwriting or 
rating factor or classification.''
    To the extent that any State now protects consumers from 
those ill-advised approaches to market regulation, the SMART 
Act makes clear the States are in control of those concerns.
    Mr. Scott. Thank you for that clarification, Mr. Chairman.
    Chairman Baker. Thank you, Mr. Scott.
    Mr. Davis?
    Mr. Davis of Kentucky. Thank you, Mr. Chairman.
    As Mr. Tiberi mentioned, I have a district down south from 
him in the Commonwealth of Kentucky, spent my business career 
helping companies simplify their business processes, come to 
common standards of information to be able to share back and 
forth, and the benefit was invariably reduced cost, reduced 
transaction time, improvements in customer service. But I come 
to this hearing as not an expert in insurance but really with a 
question.
    The commonwealth, we have in place a system that is very 
similar to the SMART approach. It has a competitive rating 
under certain circumstances which include a flex band, and for 
example, for forms, all forms need to be filed with the State 
but they are deemed approved by default unless they are 
specifically disapproved within the waiting period of 60 days.
    My first question, our commonwealth has a competitive 
stable property and casualty insurance market, which 
incorporates a file-and-use system for forms filing. In other 
words, companies can file their products with the State and 
then go ahead and use them. SMART incorporates on a nationwide 
basis a file-and-use system for forms review, and my question, 
just from our local experience, and I would like Mr. Muhl to 
comment on this first, do you think that that will reduce 
filing time and bring improvements to the marketplace?
    Mr. Muhl. I believe that it will. I am sorry, did--
    Mr. Davis of Kentucky. Go ahead. Mr. Muhl first and then 
Mr. Covington can comment.
    Mr. Muhl. I believe that it will reduce the time involved 
in getting products out on the street, being able to make them 
available to consumers for their purchase and use. I am a firm 
believer in the competitive rating system. I think a use-and-
file system is good. A flex band rating is also good.
    I have found, though, through my experience that in fact 
getting involved in a prior approval mechanism and then a 
competitive rating and a file-and-use system that if you create 
a very competitive situation, that those rates involves in that 
process are going to find the lowest levels. There is going to 
be product availability, there is going to be choice for the 
consumer.
    And I think that kind of a process, that kind of a system 
is good for everyone. It is good for the industry having those 
products to sell, certainly good for the consumer in having not 
only prices that are very reasonable in, say, a lot of these 
products but particularly having available a lot of these 
products. And I think those kinds of systems if you can create 
it, I think everybody benefits.
    Mr. Davis of Kentucky. Mr. Covington, you wanted to add 
something?
    Mr. Covington. Yes, Congressman. Let me just be clear that 
file-and-use is only a name, and the relevant issue is how that 
system is executed. Today, we have examples across the country 
where States have file-and-use, use-and-file, but many view 
those States and some of the most price controlled rate 
regulatory environments in the country. And so as you move 
forward, I encourage the committee to explore ways how you can 
achieve your goals and ensure that the legislation is specific 
enough to ensure that any system is operated as intended.
    Mr. Davis of Kentucky. I think personally wherever we can 
come to common standards, especially where the industry comes 
together working with the States to have common standards of 
information, form-sharing can be very helpful.
    One question I would like to follow-on with that, if a rate 
moved with a flex band, for example, 25 percent and it did not 
have to be approved by the State, my question is, SMART 
incorporates a transitional flex band system with a full 
competitive rating. Do you think that nationwide competitive 
ratings for insurance sectors that are stable and healthy, not 
in the controversial high-risk areas, will consumers more 
choices, will be a better way to deal with it as well as 
addressing the cost issue?
    And maybe Mr. Shapo would comment on that.
    Mr. Shapo. I am sorry, could you rephrase it?
    Mr. Davis of Kentucky. Do you feel that the flex band 
system, for example, if there was a percentage set, for 
example, like a 25 percent flex band common standard for--
    Mr. Shapo. Did you mean as a transition method or as an end 
result?
    Mr. Davis of Kentucky. Looking as an end result.
    Mr. Shapo. My presumption would be that the end result 
would better be competition for supply and demand, which are 
the most ruthless regulators in the marketplace, are allowed to 
work. I fully acknowledge that there may be very good reasons 
to phase toward that result, but my preference would be that 
the end result would be competition for many reasons.
    I mean, I think we presume that competition is the best 
regulator for price throughout the economy. I am not aware of 
any reason to believe that insurance is immune from the laws of 
economics. The reasons for price controls previously in 
insurance had nothing to do with availability and 
affordability. And for all the reasons I spoke of before and 
got into more depth in my written testimony, I think that that 
should be our presumption.
    And it is not entirely benign to even have a more open 
system, as you are describing, because it takes resources to 
administer that, and there are things that government must do 
to protect consumers.
    Consumers can protect themselves shopping for price, they 
do it all the time, in every market. The average consumer is 
not an accountant, cannot figure out the balance sheet of a 
company. Government has got to do that for the consumer. The 
average consumer is not a contract lawyer. Government should be 
reviewing forms.
    Mr. Davis of Kentucky. I appreciate that. We saw in 
Kentucky how a lack of competition in health insurance areas, 
just as a business owner, led to a 400 percent increase in 
premiums for most business providers as opposed to the road to 
ruin was paved with good intentions.
    Did you want to share something, Mr. Serio, and then Ms. 
Koken?
    Chairman Baker. That will be the gentleman's last question. 
His time has expired, but please respond.
    Mr. Serio. I will give you a real-life example of how flex 
rating can help and how open competitive rating can help but 
not from the typical perspective of prior approval. Prior 
approval is generally done to avoid increases of insurance 
rates.
    New York and a number of other States have seen a 
significant decrease in the loss costs on automobile insurance 
across the board, and it has been a very positive development 
in automobile insurance. Yet since flex rating had expired in 
New York, there was no system compulsion for the carriers to 
start to reduce their rates. And it took the department to have 
to start going and prodding these guys to start to reduce their 
rates.
    If flex rating had still been in place, I can tell you that 
the rates would have gone down a lot faster, as they should be. 
And now, only now, after 8 months of this process, has the 
marketplace started to gin up the competition and only because 
some companies are advertising relentlessly for lower insurance 
rates that the other guys have started to pick on to it. But it 
was very slow in developing because nobody felt that 
competitive pressure, because everybody knew they were going to 
have to come pass through the regulatory process in order to 
get any rate reduction.
    If you have a flex rating system, and I think the flex 
protects from the rate going too low where it becomes 
irrational or inadequate, the flex would still allow those 
rates to go down by the competitive pressure rather than having 
to wait for an insurance commissioner to have to approve a 5 or 
8 or 10 percent rate decrease. Just like we should not be 
approving a 2 or a 3 percent rate increase because let the 
competitive market deal with that issue. That is not going to 
be material to the financial condition of that company.
    Mr. Davis of Kentucky. Okay. Thank you.
    Chairman Baker. The gentleman--oh, I am sorry.
    Ms. Koken. Well, I would just comment very briefly that 
certainly there can be rate creep that does occur in a flex 
band situation that may not benefit the consumer and I will not 
go into that, but the other point I would make is that of 
course there are certain lines where there is very little 
competition within the State where it is critical to have a 
greater level of oversight, for example, in a number of States 
medical malpractice insurance is one where there is very little 
competition, and in some States there is very little 
competition in the health insurance arena also.
    And so, certainly, I think that an across-the-board 
approach is not one that is going to balance the interests of 
the consumers versus the industry, and you need to look more 
closely.
    Mr. Davis of Kentucky. Thank you.
    I yield back my time, Mr. Chairman.
    Chairman Baker. Thanks.
    Ms. Wasserman Schultz?
    Ms. Wasserman Schultz. Thank you, Mr. Chairman, and let me 
just tell you that I now live for the day that I am a couple of 
rows back from here and understand why. And since my assignment 
to the Judiciary Committee, I have an even greater appreciation 
for our ability to work in a bipartisan spirit here. So I 
appreciate it very much.
    Let me just comment that I think, not across all lines 
necessarily, but definitely in some lines, particularly life 
insurance, that we should consider that it might make sense to 
have some Federal aspect of regulation, not necessarily a 
national charter but with some good consumer protection, I 
think we could go in that direction.
    Mr. Pickens, you talked about potential insolvency and the 
politics of underwriting. We have experienced that in Florida, 
no question about it. After Hurricane Andrew, we had seven 
insurance companies, I think it was at least seven insurance 
companies, that went insolvent because of the politics of 
underwriting and the politics of the competition of 
underwriting.
    Insurance companies were low-balling rates, were 
significantly undercharging for property and casualty 
insurance, way undercharging, and as a result, after Hurricane 
Andrew, a 100-year storm, almost a lifetime storm, 7 of those 
companies went under.
    And today, in 2005, our consumers are still struggling. We 
still do not have a fully restored P&C market in Florida 
especially after last year when we got hit by four hurricanes 
in 6 weeks.
    The gentlelady from New York made a reference to her 
frustration with TRIA and how long is it going to go on and you 
need another 3 years. Let me tell you, I can feel her pain, 
because I have been feeling it for 15 years. We all have in 
Florida. There is certainly more certainty in the fact that we 
both know that we will get hit by a hurricane somewhere in this 
country as compared to a terrorist act and where we will get 
hit by a hurricane. We have a much more narrow region and more 
predictability.
    So with that in mind, how would States make the necessary 
adjustments with Federal regulation because the SMART Act 
includes property and casualty insurance. With Federal 
regulation, how would a State like mine make the adjustments 
that they need to make based on our unique needs?
    And secondly, we have struggled with the insurance of first 
resort, the insurance of last resort, we have multiple JUA's, 
joint underwriting associations, that although by law in 
Florida they have to be the insurance of last resort, 
essentially when there is no market they become the insurance 
of only resort. And that really is extremely problematic.
    So while we are talking about that, what has not been 
raised here is the issue of a national catastrophe fund, and 
while we are talking about Federal regulations, I think it 
would be important to reinsert that issue into the dialogue, 
because I think it is necessary. Every State in this country, 
every region in this country suffers from some type of Federal 
disaster. So I would like to hear your comments on that, all of 
you, actually, before my time expires.
    Ms. Koken. I guess I would just mention that is an issue 
that the NAIC and the commissioners are very concerned about. 
In fact, we have a working group that the Florida commissioner 
is very active on looking at just that issue on how we could 
create a mechanism for major catastrophes.
    Ms. Wasserman Schultz. If you can comment on what you see 
as the obstacle in Congress to a national catastrophe fund, 
because I know that it has been discussed before and sort of 
fallen by the wayside and is adrift at this point.
    Mr. Serio. Money is probably the biggest problem, the 
concern being that, and I think Mike Pickens mentioned it in 
his testimony, there have been these discussions about 
catastrophe reserving or catastrophe fund, the concern being, 
if you go back to TRIA 1 and the discussion there, there was 
real concern about bottling up a lot of capital, and what would 
become non-working or non-performing capital, in a fund like 
the British Pool Re has for their terrorism.
    How do you make this thing work without really hamstringing 
that capital, and catastrophe reserving is one way you can do 
that. Because what it does, it really keeps the capital in the 
insurance companies and working for them but allowing them to 
accumulate the kind of capital that they need to deal with a 
Florida situation or some other kind of a natural disaster, 
anything.
    Another way to do that, and, again, everybody thought that 
maybe the securities markets and the swaps market would come up 
with a workable program for doing swaps on catastrophes, that 
in New York, it is terrorism; Florida, it is coastal and the 
hurricane; in California, it is earthquakes. Can we really do 
this? That has not really developed the way people had hoped it 
would. We really had a vibrant marketplace for these things, 
because at the end of the day the smart money knows that they 
cannot really control the weather, and they cannot control a 
spate of earthquakes or four hurricanes, which never happened 
before.
    So I think there is going to have to be some new thinking 
in this before anybody can say, ``Yes, this is the right way to 
do it.'' Because the sharing of that risk has been hard to do 
in that way. Individual State funds always get overwhelmed on 
that 1 year in 100 years. And so the reserving issue may still 
well be the best way to do it. That is how New York got through 
9/11 by having essentially a reserve account on hand.
    And maybe catastrophe reserving and promoting that among 
the insurance companies is the best way to actually get at that 
issue. So wherever it is that they are writing and whatever 
risks they are facing they have that money put aside to deal 
with those one in 50-year events. And then you figure out a 
way, how do you get that money back out when you find out that 
that event has not occurred?
    Chairman Baker. Mr. Pickens, did you want to jump in?
    Mr. Pickens. Mr. Chairman, just very quickly, you asked 
what would be in something like SMART for Florida, and I would 
draw a distinction between Federal regulation and what I see as 
the ultimate goal of the SMART bill.
    To me the ultimate goal of the SMART bill is to preserve 
State regulation, not to create a Federal regulator. What I see 
would be in the SMART legislation or something positive for a 
State like Florida would be the flex band rating, would be the 
fact that it would be easier in Florida for insurers to get 
rate when they needed to get rate, and moving toward a 
competitive marketplace, I think, would be a benefit to the 
State.
    Florida, as all of us know, has a tough rating environment. 
It can become highly politicized, as you read about in the 
newspapers. So I think that could be the best thing for 
Florida. And for a Florida regulator, it seems like to me 
something like a flex band rating would take a lot of heat off 
of the regulator if your law would allow for more flexibility 
in rates without the regulator having to be involved.
    Chairman Baker. The gentlelady's time has expired.
    Mr. Bachus?
    Mr. Bachus. I thank the chairman.
    First, I would like to say, welcome, Walter Bell, who is 
the Alabama insurance commissioner, who is serving as chairman 
of NAIC's Speed to Market Task Force.
    And I guess my first question would be on that, and I will 
ask Ms. Koken--did I pronounce that right?
    Ms. Koken. Yes, Koken.
    Mr. Bachus. Okay. I know that this compact goes into effect 
when you get either 40 percent of the States or the premium or 
either 26 States. How soon do you think that will come about?
    Ms. Koken. Well, given the significant progress we have 
been making with 9 States in 2004 and at least 8 States this 
year and we think there will still be more, we really think 
that we are on track to have the 26 States or 40 percent of the 
market by the end of next year.
    Mr. Bachus. Okay. End of 2006?
    Ms. Koken. Yes.
    Mr. Bachus. Okay. Let me ask the entire panel this: Do you 
think that State regulation of insurance has served the 
consumer or protected consumers? Do you think it has done a 
good job?
    Mr. Muhl. My personal opinion, if I may, is that I think 
State regulation has been very sensitive to the needs of 
consumers, particularly in certain geographic areas. It is 
closer to some of the unique issues that come up, and I think 
the consumer, as well as a lot of the industry, has benefited 
from State regulation. So I am a believer that it is the better 
of regulation.
    Mr. Bachus. Is there anybody that disagrees?
    I will say this: When you have price controls, I think they 
can impact consumers negatively. When you have high 
administrative costs on getting products out, that is a 
negative impact on the consumer. When you run up the 
administrative costs on licensing or delaying products in 
getting to the market, I think those negatively impact 
consumers.
    But I guess my question is on what we more traditionally 
call consumer protection, you know, fraudulent products, 
misrepresentation. And I have not really heard any debate and I 
do not know about other Members of Congress but I have not 
heard anyone offer and argue that the State system is not 
protecting consumers. I do hear that it is unnecessarily 
driving up the cost because of these delays and having to deal 
with 50 different States.
    I will ask Insurance Commissioner Koken, I think in your 
testimony you said that normally 8 to 10 years is reasonable 
for putting these reforms in place; is that right?
    Ms. Koken. The statistics show that I think it is around 
there for implementing a compact, an interstate compact is what 
I was comparing. We believe that there continue to be a lot of 
important initiatives underway for modernizing, but it is an 
evolving marketplace, and that is not going to stop. But I 
would support the belief that the State regulators are very 
involved in addressing the concerns of the consumers on a local 
level.
    I know in your State Commissioner Bell was very active in 
assisting the flood victims and was there immediately to help 
address their concerns. So we do believe that there are 
substantial numbers of questions that are dealt with by State 
insurance commissioners. They live in the communities, they 
have a sense.
    Mr. Bachus. I guess what I am saying, there has been some 
talk about 4 to 5 years is appropriate time, but I do know that 
in prior times when we have dictated to Congress certain 
actions be taken, I think 8 to 10 years is more a norm than 3 
to 4 years. Does anybody disagree with that or agree?
    Are you saying 8 to 10 years is a reasonable amount of 
time?
    Now, would you say that we started in 1999 or 2003 for most 
of these things that we are asking you to come into compliance 
with?
    Mr. Pickens. Mr. Bachus, I would say that 8 to 10 years is 
an awfully long period of time, to be honest with you. What the 
appropriate period of time is I am not sure, but I know that 
when you look at things like the NARAB provision in Gramm-
Leach-Bliley, insurance regulators were able to accomplish that 
within a 3-year period, well within a 3-year period, 
accreditation. And Mr. Pomeroy was around for that battle and 
certainly one that I am glad I missed. But when Mr. Dingell and 
Congress put heat on State regulators, they did what they 
needed to do in short order.
    So I do not know that this body would be willing to wait 8 
to 10 more years based of some of the things that I have heard 
and read. What the period of time is I think is something that 
is the subject for debate.
    Mr. Bachus. Could I ask one more question?
    Chairman Baker. Sure.
    Mr. Bachus. And you call can respond very quickly.
    I noticed, Mr. Pickens, you have I think endorsed the SMART 
Act; is that right?
    Mr. Pickens. No, sir. I have not endorsed the SMART Act, 
per se. What I have said is that I believe, and I said it in my 
testimony, that when considered against the optional Federal 
charter or enacting a State-by-State approach over a period of 
time, SMART certainly could be a useful tool to State 
regulators to help them expedite the reforms that we have 
already agreed to and committed to this body that we would 
enact.
    Mr. Bachus. I am going to just ask that each of the 
members--Commissioner Koken has outlined, I think, starting on 
page 12 or 13 of her testimony what she thinks is wrong with 
SMART. I would ask the rest of you all to read that testimony 
and give me a one- or two-page response to whether you agree or 
disagree and what parts you would agree or disagree with what 
she said. Because I think that is at least a valuable piece of 
testimony and a good starting point in considering this 
legislation.
    Thank you.
    Chairman Baker. I thank the gentleman. The gentleman's time 
has expired.
    I would ask unanimous consent for the gentleman, Mr. 
Pomeroy, to be recognized and seated as a member of the 
subcommittee for the purposes of the hearing today. As a 
distinguished former commissioner himself, he fits right in 
with the panel.
    Welcome, sir.
    Mr. Pomeroy. Thank you very much, Mr. Chairman, and I very 
much appreciate the ongoing diligent work you have brought to 
the somewhat obscure but highly important issue of insurance 
regulation. Clearly, everyone who has watched you work, whether 
or not we are necessarily agreeing with where you are going, 
understands the sincerity of the effort you put behind it. It 
really is to be commended.
    Unique to hearings, I did not really care what the panel 
said, it was just a pleasure to be in their company again. I 
consider myself personal friends with each of them and would 
like to note for the record that each has made a significant 
personal effort to improve the function of the insurance 
marketplace, always to the benefit of the consumer. And I was 
very impressed with your public sector work, and for those of 
you no longer in the public sector, I am impressed with your 
private sector.
    Ed Muhl is somewhat unique having served as a regulator, 
then he went on to a distinguished performance in the private 
sector, came back as a regulator again. They called him Retread 
Ed in Albany.
    I am also pleased, Mr. Chairman, that this panel was able 
to capture the dynamic of the discussion of those presently 
regulating and those who now have different perspectives 
perhaps because they no longer are regulators. I think that 
this is a useful dynamic.
    While up at the NAIC meeting last weekend, I mean, we are 
all friends, we are all trying to in the end advance the same 
aims, we just have different perspectives and those will vary 
over time depending on how you look at things. But this has 
been a good panel, I think, having this mix.
    I would have a couple of points of observation relative to 
earlier comments that have been made, as to the terrorist 
coverage afforded by TRIA. I think that we are not at a point 
in time where we want to walk away from that. I think that TRIA 
ought to be extended. I think it has worked. And, essentially, 
if you are going to have private capacity to entirely handle 
the still infant, undefined and somewhat infinite risk of 
terrorist exposure, you are going to have to have higher rates 
and extraordinary reserves established.
    I think that dealing with this as a contingent funding 
mechanism, as TRIA has done, has really gotten us tremendous 
capacity without much up-front dollars. And that has saved the 
American people a lot of money. And so I hope that we can 
continue with the TRIA approach, at least for the immediate 
future.
    As to the SMART legislation, and I have been interested in 
this discussion, I think that--let's throw our cards on the 
table--the most controversial part of the bill is the property 
casualty rate preemption piece of it. And if the chairman wants 
that included, he is to be commended for his courage, I 
suppose, but it has made passing the bill, in my opinion, much 
less likely.
    So let's go across the panel and I would ask you whether 
you think that the property casualty State rate approval 
preemption whether that is a critical part of the legislation, 
as you see it.
    Let's start with Mr. Pickens and just run right on down the 
panel.
    Mr. Pickens. Mr. Pomeroy, first of all, thank you for your 
comments, and I certainly second all of those right back at 
you. You have been a good friend and appreciate your advice 
over the years.
    I do believe it is important to include some rate 
provisions in the SMART legislation. And the reason is because 
I think that in a competitive market, in a competitive market, 
not in a noncompetitive market, but in a competitive market, 
the best regulator of rates is the marketplace.
    And I believe the regulators should always have the 
authority in a competitive to determine when rates are 
excessive, inadequate or unfairly discriminatory, but for prior 
approval of rates I think the time has come and gone for prior 
approval of rates. And I think if you look at the States where 
prior approval exists or has existed, even though it may not be 
the only reason that there are problems in those markets, it 
certainly is a primary reason.
    And, again, I think something like flex band rating is a 
good transition to a competitive rating scenario, but I would 
always like to see the regulator be able to determine that 
rates are inadequate, excessive or unfairly discriminatory on 
the back end. I think regulators always need that ability.
    Mr. Serio. I think the SMART dialogue has brought us a long 
way on the rate issue. Yes, it is crucial as far as an issue, 
and it has been an issue of particular importance to me, but I 
think where the dialogue has gone, the dialogue has gone from 
where it was just a competitive rating, moved just to 
competitive ratings, and now talking about a transitional 
period and understanding the value of flex rating, I think that 
that kind of a construct can work.
    So long as there is enough backsize authority for the 
regulators to make sure there is enough financial support for 
the rates that are being charged, I think that the rating issue 
can be resolved amicably for everybody involved in the SMART 
bill.
    Mr. Covington. Thank you, Congressman Pomeroy, and thank 
you for your kind comments. I too think that the rate issue is 
a critical issue to be included in the legislation. It works, 
it has been proven to work. It works in Ohio, it works in 
Illinois. I have not been given any evidence that it does not 
work in some place, other than with maybe respect to coastal 
type issues.
    And right now it diverts scarce resources that should be 
spent on other priority regulatory issues and really distorts 
the marketplace. That is what really all the studies show.
    So I do think that the rate issue should be included in 
SMART.
    Mr. Shapo. My answer is, yes. We were talking about it the 
other day. I did not get to finish my hard sell on you. I had 
to leave to go see a client, if I remember correctly.
    Yes, I think it should not only be included, I think it 
should be the first issue that is dealt with, not the last. It 
should not be the first one jettisoned, it should be the first 
one dealt with. And that is because it is the biggest 
impediment to interstate commerce in the regulatory system. It 
is the most mismatched aspect of the regulatory regime, harmful 
to consumers, it hurts supply, diverts scarce resources, and it 
is very much Congress' business. This a result of past 
congressional action. Congress made a policy choice 6 years ago 
to disable competition to enable collusion. So it could not be 
more Congress' business.
    And if the goal of the SMART Act is to protect the 
fundamental primacy of the States in regulation and if the goal 
is to try to come up with a workable system and to stave off a 
Federal charter, again, I think this is the first issue that 
should be included, not the first issue that should be 
jettisoned. Because it unfortunately needlessly antagonizes 
natural allies of State regulation: The property casualty 
industry.
    Property casualty carriers definitely do need to be attuned 
to local markets and have traditionally been, not all of them, 
but generally have been strong supporters of State regulation, 
and that is changing now. There is--
    Mr. Pomeroy. The chairman is being very lenient on time, so 
you will have to move this along.
    So I hear we have to preempt the States to protect their 
primacy.
    Mr. Shapo. Yes, and it is particularly apt on this issue, 
because the States are doing what they are doing because 
Congress incentivized them to do it. It was explicit 
congressional policy to try to get the States to pass prior 
approval rate regulation across the board.
    Ms. Koken. I would say that all of the members of this 
panel have all been commissioners, and all support the 
importance of streamlining rate regulation. However, we believe 
that how that is done and the balancing for the benefit of the 
consumer and balancing that against the needs of the insurers 
should be done by the States. So we would not support 
preemption of rates.
    Mr. Muhl. Mr. Pomeroy, it is good to see old friends and 
colleagues. Life and time has treated you well.
    An answer and a response to what you had asked, I believe a 
less restrictive rate regulation is a key element to making the 
process less costly ultimately for the consumer and creating a 
very competitive process that the companies can function in. I 
think everybody benefits. So I think it is very much a key in 
the SMART draft to have that as a key piece of the legislation.
    Mr. Pomeroy. I would just, in closing, Mr. Chairman, 
indicate that I believe, just talking about politics, there is 
some considerable feeling here, probably on both sides of the 
aisle, that this might be a judgment best left to the States 
and they will find their own way based upon what works for 
their marketplace. And if there would need to be a Federal 
preemption of that State decision-making, I think there would 
need to be a demonstration beyond inefficiency for insurance 
companies and inefficient functioning of the marketplace, 
really more of a demonstration of severe market dislocation of 
an irreparable dimension that required this type of action.
    But it is early and who knows, there has been a lot of 
things passed around here that I would have never guessed would 
have made it. So I think this dialogue and the chairman's 
substantive dealing with this topic are certainly key 
strategies to advancing the ball here.
    Thank you very much.
    Chairman Baker. I thank the gentleman for his contribution, 
and my assurance is we are not going to surprise anybody. It 
will not be a sneak attack.
    Ms. Biggert?
    Mrs. Biggert. Thank you, Mr. Chairman.
    You probably all thought you were just about finished till 
I walked in, so I will not take very long. I just wanted to ask 
one quick question of my friend from Illinois, the former 
insurance commissioner, Mr. Shapo. I would be remiss if I did 
not.
    My question is, don't government price controls on 
insurance reduce consumer options and make insurance less 
available, and then it would drive more consumers into the 
secondary residual markets? More States have such markets.
    Mr. Shapo. Representative, thank you. It is very good to 
see you. Thank you for all your past kindnesses.
    The answer is, yes, price controls will not reduce prices 
but they will reduce supply. They will reduce availability. 
Affordability and availability end up running into each other, 
and attempts to increase affordability fail for themselves but 
then they end up hurting availability.
    In Illinois, where market forces are used to regulate 
prices, as they are throughout the economy, the assigned risk 
plans are infinitesimal, far less than 1 percent of insureds in 
the State.
    Mrs. Biggert. Yes. We seem to have the Illinois model where 
we really have a lot of competition.
    Mr. Shapo. Yes, ma'am. And it has a 30-year track record. 
And it is not to be seen as an experiment, I don't think, or 
kind of a unique outlier that somehow manages to work. I mean, 
it would be bizarre if it did not work. This is the way 
commerce is regulated throughout the economy, and if not for 
strange historical circumstances which do not exist anymore, 
there would be no talk about regulating insurance rates.
    Mrs. Biggert. Thank you.
    Thank you, Mr. Chairman. I yield back.
    Chairman Baker. I thank the gentlelady.
    I feel I need to make at least sort of a summary statement 
as to the public expressions I have made on the subject of the 
necessity for a proposal seeking some sort of uniformity that 
is clearly not there today and the probability that at least I 
will propose, subject to Chairman Oxley's consent, some action 
by the committee in the course of the remaining legislative 
time.
    There have been numerous hearings and meetings. We even had 
things called roundtables. Everybody just come in and sit down 
and talk. I mean, I wake up and think about insurance, and if 
that is not a distressing thought.
    At least you got Fannie Mae off my mind. Maybe that is the 
improvement.
    The point, though, in trying to be objective and 
understanding, this is a very convoluted process to alter with 
State legislatures and governors and commissioners and 
companies and agents involved in all of this, it is not easy to 
point to a particular direction and say, ``Let's go there and 
get this fixed.''
    But let me just run through some things to put it on the 
record. Ms. Koken, I am not citing you as the current NAIC 
Chair as responsible for any. This is an ongoing discourse with 
the NAIC and the general NCOIL, everybody, to try to how do we 
get where we believe we need to go?
    The Health Carrier Prescription Drug Benefit Management 
Model Act, zero States; Health Carrier Claim Audit Guidelines 
Model Act, one State; Individual Health Insurance Portability 
Model Act, one State; Model Regulation to Implement Individual 
Health Insurance Portability Model Act, one State; Health 
Information Privacy Model Act, zero States; Health Care 
Professional Credentialing Verification Model Act, one State; 
Quality Assessment and Improvement Model Act, two States. This 
is boring.
    It is numerous numbers of model acts which have less than 
10 States who have, as of the date of preparation, January 
2005, have moved. These items have not been on the public 
docket for a matter of weeks, months, literally years, in some 
cases for more than a decade. We have had commissioners 
repetitively saying, ``You know, about 3 years is what we 
need.'' And I think I heard a 3-year statement today.
    The 3 years clock has worn out. We have wound it too many 
times. We are going to have to take some action.
    Now, why do I think this is so vitally important? When you 
look at the fees and assessments made by States through the 
regulatory process on companies and you look at the disposition 
of those revenues in relation to consumer protections, about 8 
percent of the fees collected go to regulatory purposes.
    Now, if I had to ascribe any single thing that affected the 
cost of providing insurance to consumers at a more competitive 
price, I would start looking at State governments' role. And, 
believe me, coming from Louisiana with our history in insurance 
regulation, I am an expert on that kind of stuff.
    You know, who is looking at that rate review process and 
determining whether or not the fees and assessments are really 
adequate and necessary for consumer adequacy?
    Then you look to the NAIC itself, it is an unusual 
organization in that the bulk of members or majority are 
appointed, they do not have enforcement authority, they cannot 
go to the legislature and say, ``Do this or else.'' In fact, 
given the history of the model act considerations, there is no 
downside consequence to a legislature ignoring a well-
intentioned commissioner from following their studied 
recommendation.
    But then to make it even more specific, today, in your 
outlining of goals and assessing the progress made and 
identifying things you think are moving in the right direction, 
the statement was made that uniformity is not the goal. Well, 
that is a deep policy difference that we have. Uniformity is 
the goal.
    Secondly, with regard to price preemption, I know that is 
volatile. I know that members have extreme concerns, but I also 
understood you to say that flex band has some concerns for you 
and that the current prior review process may be the way to 
stay.
    This all leads me to conclude that we need to have a 
centrist bill boiled down to the core principles we started 
with 2 years ago, put before the committee and let members make 
a decision whether or not adopting a proposal that provides the 
standards established by the SMART Act with some sort of price 
relief, subject to the protections that those who have raised 
issues in the hearing today are guaranteed those protections 
are in place, centered around the real-life practical 
experience of those States who have moved generally in that 
direction. Louisiana has a flex band. I mean if we can do it, 
anybody can do it.
    And so I think that there is ample opportunity for us to 
work. I am making this long diatribe simply to announce that 
going forward the NAIC and everybody should have, who have 
interest, a copy of the draft. We want to hear comments and 
assuming Chairman Oxley gives his consent and I get a committee 
slot to do it, we are going to come back and put a proposal on 
the floor. So start those cards and letters to your 
congressmen.
    Get everybody ginned up, we are coming, and I hope this is 
not a surprise to anybody, but I also hope that you understand 
that this, as some have indicated on the Democrat side, that 
this is driven by deep-held policy convictions, not for any 
particular interest other than to have a market that functions 
and provides consumers with products at a reasonable price.
    And I certainly do not wish to put you in any untenable 
position, Ms. Koken, but it would be rude of me not to offer 
you the chance to make any comment that you would choose to 
make if you choose to.
    Ms. Koken. Well, I thank you for that and would also thank 
you for the opportunity to appear here today and to be engaged 
in this dialogue, because we do recognize the importance of it.
    I think that I would only want to clarify that I was not 
suggesting that the State insurance regulators are in support 
of a prior approval system. Certainly, in many States, they 
have gone to a flex band but in many other States they have 
gone to file and use. And I am not here to say that flex band 
or file and use or use and file is preferable under any 
circumstance but to say that the balancing that occurs to 
determine what is best for the consumer. So that we think is a 
State issue.
    But, certainly, we appreciate that it is critical that 
there be greater uniformity that occurs in the marketplace, and 
our compact and SERF initiatives and NAPR and the whole list 
are evidence of that. We recognize that in some situations the 
goal is not for absolute uniformity, uniformity of process, 
but, certainly, throughout the whole process our goal is to 
balance the business efficiency with the interests of the 
consumer, and I certainly appreciate that that is also your 
goal and that we share the same common vision of trying to get 
to a better solution, and we continue to want to be engaged, as 
you revise and come out perhaps with a new draft of the bill.
    Chairman Baker. I thank you for your courtesy.
    Mr. Scott, did you have any further comments?
    Mr. Scott. Very briefly, Mr. Chairman. I just want to again 
extend my bipartisanship support to you and again to commend 
you for your consideration of the concerns that have been 
raised on the Democratic side, particularly in the area of 
preemption, in the area of consumer protections and the points 
that I raised, of course, on the discrimination to make sure 
that we have a strong bill going forward that has the utmost 
end consumer protections.
    But, again, I commend you for agreeing to hear those 
concerns and to move forward with the bill, and I look forward 
to working with you as we iron these things out.
    Chairman Baker. I thank the gentleman for his kind 
statement.
    If there is no further statement by members, I duly 
appreciate each of your participation here today. It has been I 
think a constructive and very helpful meeting.
    Our meeting stands adjourned.
    [Whereupon, at 1:12 p.m., the subcommittee was adjourned.]


                            A P P E N D I X



                             June 16, 2005

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