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


 
                  NONADMITTED AND REINSURANCE REFORM 
                              ACT OF 2006

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                                   ON

                               H.R. 5637

                               __________

                           SEPTEMBER 19, 2006

                               __________

                           Serial No. 109-143

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov


                                 ______

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                       COMMITTEE ON THE JUDICIARY

            F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
ELTON GALLEGLY, California           JERROLD NADLER, New York
BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California        ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee        SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah                   MAXINE WATERS, California
SPENCER BACHUS, Alabama              MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina           WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana          ROBERT WEXLER, Florida
MARK GREEN, Wisconsin                ANTHONY D. WEINER, New York
RIC KELLER, Florida                  ADAM B. SCHIFF, California
DARRELL ISSA, California             LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona                  CHRIS VAN HOLLEN, Maryland
MIKE PENCE, Indiana                  DEBBIE WASSERMAN SCHULTZ, Florida
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas

             Philip G. Kiko, Chief of Staff-General Counsel
               Perry H. Apelbaum, Minority Chief Counsel
                                 ------                                

           Subcommittee on Commercial and Administrative Law

                      CHRIS CANNON, Utah Chairman

HOWARD COBLE, North Carolina         MELVIN L. WATT, North Carolina
TRENT FRANKS, Arizona                WILLIAM D. DELAHUNT, Massachusetts
STEVE CHABOT, Ohio                   CHRIS VAN HOLLEN, Maryland
MARK GREEN, Wisconsin                JERROLD NADLER, New York
J. RANDY FORBES, Virginia            DEBBIE WASSERMAN SCHULTZ, Florida
LOUIE GOHMERT, Texas

                  Raymond V. Smietanka, Chief Counsel

                        Susan A. Jensen, Counsel

                        Brenda Hankins, Counsel

                   Mike Lenn, Full Committee Counsel

                   Stephanie Moore, Minority Counsel


                            C O N T E N T S

                              ----------                              

                           SEPTEMBER 19, 2006

                           OPENING STATEMENT

                                                                   Page
The Honorable Chris Cannon, a Representative in Congress from the 
  State of Utah, and Chairman, Subcommittee on Commercial and 
  Administrative Law.............................................     1
The Honorable Debbie Wasserman Schultz, a Representative in 
  Congress from the State of Florida, and Member, Subcommittee on 
  Commercial and Administrative Law..............................     4

                               WITNESSES

Scott A. Sinder, Esquire, Counsel, Council of Insurance Agents 
  and Brokers
  Oral Testimony.................................................     7
  Prepared Statement.............................................     9
Tracey Laws, Esquire, Senior Vice President and General Counsel, 
  Reinsurance Association of America
  Oral Testimony.................................................    15
  Prepared Statement.............................................    17
Mr. Travis Plunkett, Legislative Director, Consumer Federation of 
  America
  Oral Testimony.................................................    20
  Prepared Statement.............................................    22
Mr. Alex Soto, President, Independent Insurance Agents & Brokers 
  of America
  Oral Testimony.................................................    29
  Prepared Statement.............................................    30

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Prepared Statement of the Honorable Chris Cannon, a 
  Representative in Congress from the State of Utah, and 
  Chairman, Subcommittee on Commercial and Administrative Law....     2
Prepared Statement of the Honorable Ginny Brown-Waite, a 
  Representative in Congress from the State of Florida...........     3


             NONADMITTED AND REINSURANCE REFORM ACT OF 2006

                              ----------                              


                      TUESDAY, SEPTEMBER 19, 2006

                  House of Representatives,
                         Subcommittee on Commercial
                            and Administrative Law,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:05 a.m., in 
Room 2141, Rayburn House Office Building, the Honorable Chris 
Cannon (Chairman of the Subcommittee) presiding.
    Mr. Cannon. Good morning. This hearing of the Subcommittee 
on Commercial and Administrative Law will now come to order. We 
are here today to consider H.R. 5637, the ``Nonadmitted and 
Reinsurance Reform Act of 2006.''
    Insurance is a highly regulated industry, but unlike 
banking and securities, insurance is regulated mainly at the 
State level. The Supreme Court ruled that Congress has the 
power to regulate insurance, but in 1945 this power was 
delegated to the States in the McCarren-Furguson Act and 
specifically reaffirmed in the 1999 Gramm-Leach-Bliley Act.
    Every State requires licenses for insurance companies and 
regulates both the conduct and the details of the products sold 
within the State. This regulation is seen as important for 
consumer protection, but also creates barriers to entry in the 
insurance market and can reduce the supply of insurance that is 
available. Some argue that uniformity in insurance regulation 
is desirable, unlike the significant variation in current State 
regulations.
    H.R. 5637 addresses two areas of the insurance industry. 
The first is nonadmitted insurers. There are certain times when 
it is not possible for the citizens of one State to find 
licensed insurers to cover his or her unique risks. In 
situations where consumers are unable to find insurance from 
licensed insurers within their State, States do not require 
that the consumers go without insurance. Instead, States allow 
nonlicensed insurers, known as nonadmitted or surplus line 
insurers, to provide insurance. The vast majority of 
nonadmitted insurance policies are sold to sophisticated 
businesses and cover specialized risks such as terrorism, 
catastrophic losses, hazardous materials, natural disasters and 
environmental or pollution risks.
    Although these insurers do not have a regular State 
license, they are not unregulated. The sale of insurance is 
still regulated and taxed by the States through requirements 
placed on the brokers facilitating the insurance transactions. 
States collect premium taxes for nonadmitted insurance 
placements, but the tax allocation and remittance formulas and 
procedures vary significantly from State to State, and are 
often in direct conflict. When a nonadmitted policy involves 
multistate risk, it can be difficult to determine how much tax 
is owed to each State, and as a result, multiple taxation or 
noncompliance may occur.
    The second area of the insurance industry that H.R. 5637 
addresses is reinsurance. Reinsurance is insurance for 
insurance companies. When an insurance company has written a 
policy covering a large risk, it will insure part of its risk 
through other insurers thereby transferring a portion of its 
risk. Reinsurance allows an insurer the ability to increase its 
capacity and underwrite more coverage, performing an essential 
role in the insurance marketplace by limiting insurers' 
liability exposure, adding insurance capacity, and protecting 
against large, unexpected losses.
    H.R. 5637 was written to affect a narrow area of insurance 
reform. It is aimed at addressing inconsistencies of State 
regulation in the surplus lines insurance market and 
streamlining its procedure. It creates a uniform system for 
nonadmitted insurance premium tax payments by making the taxing 
authority the home State of the policyholder. Further, it 
encourages States to develop a procedural mechanism for uniform 
tax allocation through an interstate compact or other method, 
and establishes regulatory deference for home insurers as 
developed and promulgated by the National Association of 
Insurance Commissioners in the Nonadmitted Insurance Model Act.
    The bill also applies a single State regulation for 
financial solvency and credit reinsurance of reinsurers. 
Determinations of tax credits for reinsurance will be 
controlled by the home State of the insurer purchasing the 
reinsurance. The regulations of the home State of the reinsurer 
will control in determinations of solvency of the reinsurer 
provided such State is NAIC-accredited or has financial 
solvency requirements substantially similar to the requirements 
necessary for NAIC accreditation.
    I look forward to learning more about H.R. 5637 and to hear 
the testimony of our panel.
    Without objection, the Chair will be authorized to declare 
recess of the hearing at any point. Hearing none, so ordered.
    [The prepared statement of Mr. Cannon follows:]

 Prepared Statement of the Honorable Chris Cannon, a Representative in 
    Congress from the State of Utah, and Chairman, Subcommittee on 
                   Commercial and Administrative Law

    Good morning, this hearing of the Subcommittee on Commercial and 
Administrative Law will now come to order.
    We are here today to consider H.R. 5637, the Nonadmitted and 
Reinsurance Reform Act of 2006. This bill deals with two different 
areas of the insurance industry. The first are is nonadmitted insurers.
    Insurance is a highly regulated industry. Unlike banking and 
securities, though, Congress, under the McCarren-Furguson Act, has 
granted the States the ability to regulate insurance. Every State 
requires licenses for insurance companies and regulates both the 
company conduct and the details of the products sold within the state. 
This regulation is seen as important for consumer protection, but also 
creates barriers to entry in the insurance market, and can reduce the 
supply of insurance that is available.
    There are certain times when it is not possible to find licensed 
insurers to cover unique or hard to place risks. In these situations 
where consumers are unable to find insurance from licensed insurers, 
States do not require that the consumers simply go without insurance. 
Instead, States allow non-licensed insurers, known as nonadmitted or 
surplus line insurers, to provide insurance in this circumstance. The 
vast majority of nonadmitted insurance polices are sold to 
sophisticated businesses and cover specialized risks, such as extreme 
catastrophic coverage and terrorism, hazardous materials, natural 
disasters, and environmental or pollution risks.
    Although these insurers do not have a regular state license, they 
are not unregulated. The sale of insurance is still regulated and taxed 
by the States through requirements placed on the brokers facilitating 
the insurance transactions. States collect premium taxes for 
nonadmitted insurance placements, but the tax allocation and remittance 
formulas and procedures vary significantly from State to State and are 
often in direct conflict.
    When a nonadmitted policy involves multi-state risk, it can be 
extremely difficult to determine how much tax is owed to each State 
and, as a result, multiple taxation or noncompliance often results.
    The second area of the insurance industry that H.R 5637 addresses 
is reinsurance. Reinsurance is insurance for insurance companies. When 
an insurance company has written a policy covering a large risk, it 
will insure part of its risk through other insurers thereby 
transferring a portion of its risk exposure to a reinsurer. Reinsurance 
allows an insurer the ability to increase its capacity and underwrite 
more coverage, performing an essential role in the insurance 
marketplace by limiting insurers' liability exposure on large risks, 
adding insurance capacity, and protecting against large unexpected 
catastrophes.
    H.R. 5637 was written to affect a narrow area of insurance reform. 
It is aimed at addressing inconsistencies of state regulation in the 
surplus lines insurance market and streamlining its procedure. It 
creates a uniform system for nonadmitted insurance premium tax payments 
by making the taxing authority the home State of the policyholder. 
Further, it encourages States to develop a procedural mechanism for 
uniform tax allocation (through an interstate compact or other method), 
and establishes regulatory deference for home insurers as developed and 
promulgated by the National Association of Insurance Commissioners 
(NAIC) in the Nonadmitted Insurance Model Act.
    The bill applies a single State regulation for financial solvency 
and credit reinsurance of reinsurers. Determinations of tax credits for 
reinsurance will be controlled by the home State of the insurer 
purchasing the reinsurance. The regulations of the home State of the 
reinsurer will control in determinations of solvency of the reinsurer 
provided such State is NAIC-accredited or has financial solvency 
requirements substantially similar to the requirements necessary for 
NAIC accreditation.
    I look forward to learning more about the insurance industry and 
H.R. 5637, and to hear the testimony of our panel.

    Mr. Cannon. I ask unanimous consent to enter into the 
record a statement by the sponsor of H.R. 5637, the 
representative from Florida, Ms. Brown-Waite, and that Members 
have 5 legislative days to submit written statements into the 
record. Without objection, so ordered.
    [The prepared statement of Ms. Brown-Waite follows:]

Prepared Statement of the Honorable Ginny Brown-Waite, a Representative 
                 in Congress from the State of Florida

    Thank you Mr. Chairman for holding this hearing today.
    And I want to thank the witnesses for being here today as well.
    The House of Representatives has been engaged in overall insurance 
reform for several years, and in this endeavor, there are dozens of 
issues the Congress must consider. I have introduced H.R. 5637, the 
Nonadmitted and Reinsurance Reform Act that will provide solutions to 
two aspects of that reform.
    Today, the regulation of the surplus lines market is fragmented and 
cumbersome. Insurers and brokers who want to provide insurance across 
state lines are subject to a myriad of different state tax and 
licensing requirements. For instance, if a company in Florida wants to 
transport a product, say parts for the space shuttle, to Houston, TX, 
the non-admitted insurance company they use must comply with the 
regulations of at least five different states. Often times, these 
regulations will conflict, making it impossible for one company to 
comply with all of them. This situation leaves policyholders 
underinsured and with little choice in providers.
    Moreover, most of the policyholders that purchase insurance in the 
nonadmitted market do so everyday. These ``sophisticated'' commercial 
entities have educated risk advisors on staff with a thorough 
understanding of the market and their risk exposure. Yet in most 
states, these companies are required to shop around the admitted market 
and be denied for coverage they know they cannot get before they are 
permitted to shop in the surplus lines market. This practice is 
needless and cumbersome, and only adds to the cost for the 
policyholder.
    On another front, in the reinsurance market some state regulators 
are taking it upon themselves to throw out arbitration agreements 
between reinsurance providers and primary carriers. These are 
contractual agreements decided upon by sophisticated parties on both 
sides of the transaction to settle disputes without tying up the 
courts. If these agreements are valid in a state that is accredited by 
the NAIC, they should be valid in all accredited states.
    Accordingly, H.R. 5637:

          Specifies that only the tax policies and licensing 
        regulations of the state in which the policyholder is domiciled 
        govern the transaction. States may still enter into tax 
        allocation and remittance agreements with other states, but 
        this bill specifies which law will take precedence, thus taking 
        the guesswork out of the process. Insurance providers therefore 
        need only comply with those of the policyholders' state in one 
        transaction.

          Requires states within two years of bill passage to 
        participate in the National Association of Insurance 
        Commissioners' national insurance producer database and adopt 
        regulations under NAIC's Nonadmitted Insurance Model Act.

          Allows sophisticated commercial entities direct 
        access to the surplus lines market.

          Prohibits states from voiding established, 
        contractual arbitration agreements between reinsurers and 
        primary companies.

    Obtaining insurance for unique or high-risk products in the 
nonadmitted market already has its own obstacles. Adding a quagmire of 
inefficient state rules does not help. And with reinsurance rates 
rising at an alarming rate, companies should be encouraged to stay out 
of the courts and follow their own arbitration agreements.
    My bill provides commonsense solutions to the nonadmitted and 
reinsurance market, and I thank the Chairman for holding this hearing 
on it today.

    Mr. Cannon. I now yield to Ms. Wasserman Schultz, who is 
sitting in for Mr. Watt today, for an opening statement.
    Ms. Wasserman Schultz. Thank you. Thank you, Mr. Chairman, 
for convening today's hearing.
    And I especially want to thank Ranking Member Watt in 
absentia. It's not all that often that a freshman gets to sit 
in this chair, so I think I'll hold onto it for a little bit 
and glory in it.
    I also want to welcome all of our panelists and extend a 
special welcome to my good friend, Alex Soto, current President 
of the ``Big I,'' otherwise known as the Independent Insurers & 
Brokers of America, but it's actually known as the ``Big I.'' 
and Alex hails from Miami, and he has been a good friend to me 
over the years. We have worked together on many, many issues, 
not always on the same side, but on many, many issues; and he 
is a tremendous advocate for his industry.
    The problem that we're here to talk about today is not only 
endemic to Florida, though, in spite of the fact that this is a 
bill that's sponsored by a Member from Florida, this is a 
problem that is really extremely broad based nationwide. The 
economic resonance from disasters like Hurricanes Katrina, Rita 
and Wilma, has left an indelible fingerprint on our Nation, and 
our country now faces a crisis in its insurance markets the 
likes of which we have not witnessed before. And it's not only 
price, but availability.
    Recent catastrophes have reshaped our Nation's personal and 
commercial insurance markets, making it even more difficult for 
affected regions to recover. Market perception of exponential 
increases in the risk affiliated with catastrophic events has 
resulted in precipitous declines in insurance coverage 
availability at astronomical cost to policyholders.
    In addition to my role on this Committee, I serve on the 
House Financial Services Committee, as well, and we have held a 
number of hearings on this matter and are considering how best 
to resolve this problem. I believe an essential component for 
that solution, Mr. Chairman, is the establishment of a national 
catastrophe fund. To that end, I've introduced legislation H.R. 
5891, the Catastrophic Disaster Risk and Insurance Commission 
Act of 2006, which would bring together a few stakeholders to 
develop a comprehensive solution to this national problem.
    The only way we were able to establish a State catastrophe 
fund in Florida following Hurricane Andrew, Mr. Chairman, was 
when we brought the stakeholders to the table, had a technical 
advisory panel and advised a statewide task force that was 
chaired and the members of which were our university 
presidents; and they made recommendations to the Florida 
legislature, and ultimately we were able to come to agreement 
on that issue.
    While the bill before us today is only a small piece of the 
puzzle, it is an essential first step, which eliminates market 
inefficiencies and reduces duplicative and costly filing 
burdens. I encourage my colleagues here today to move this 
legislation forward.
    The surplus lines market serves as a safety valve for the 
traditional market. In my home State of Florida both 
individuals and commercial entities are seeing astronomical 
increases, and I am talking on the order of thousands of 
percent increases in their insurance premiums. Under the 
existing system of insurance regulation, surplus lines serve an 
extraordinarily valuable purpose to hedge against some of these 
natural disaster risks. Don't get me wrong, they're not 
perfect, but in some instances it is the only way commercial 
firms and individuals can get adequate coverage for wind 
exposure.
    As a original cosponsor of this legislation, I am proud of 
the Financial Services Committee's concerted effort to ensure 
that concerns from both sides of the aisle were incorporated 
into the bill before it was reported unanimously. In its 
current form, the legislation includes a number of provisions 
inserted at the behest of Financial Services Ranking Member 
Barney Frank and Subcommittee Ranking Member Paul Kanjorski; 
and these include, Mr. Chairman, provisions to address concerns 
raised by the NAIC, the National Association of Insurance 
Commissioners, adjustments to the allocation of premium taxes 
amongst the States, a clarification to underscore that the bill 
does not preempt State laws restricting the placement of 
worker's compensation coverage with a nonadmitted insurer, as 
well as a handful of technical corrections.
    The second title on reinsurance was revised to ensure that 
the State with the greatest interest in protecting the 
consumer, in this case the primary insurer, makes the 
appropriate decisions. The definition of a reinsurer was also 
changed to ensure that the domiciliary oversight does not 
unfairly advantage their primary insurance business.
    And I think it's important to reiterate that this bill only 
applies to sophisticated insurance lenders, not individuals. 
The Risk and Insurance Management Society, or RIMS, which 
represent commercial policyholders fully supports the 
legislation.
    I encourage my colleagues to support this bill because it 
reduces economic inefficiencies and would eliminate hundreds of 
billions of dollars in administrative costs. These costs are 
currently passed on to consumers. Surplus lines ensure that 
companies that otherwise could not get insurance are able to 
obtain it, meaning they can also stay in business, provide jobs 
and serve communities.
    Thank you. I yield the balance of my time.
    Mr. Cannon. Thank you.
    Please note Mr. Bachus may join us; he is a co-sponsor of 
the bill, and I mention it just because he is not a Member of 
the Subcommittee, although he's a Member of the Judiciary 
Committee; and we have arcane rules, and that requires that if 
he--requires that if he asks questions, he has to have time 
yielded to him, which we will make sure happens. I just want 
you to understand in advance.
    Our first witness is Mr. Scott Sinder, who is a member of 
the Washington, D.C., law and government relations firm, The 
Scott Group, and since 1999 has served as the outside General 
Counsel for the Council of Insurance Agents & Brokers. Mr. 
Sinder has represented the CIAB on a range of issues in Federal 
courts, regulatory agencies, State legislatures and before 
Congress.
    Well, we have The Scott Group.
    Mr. Sinder received his J.D. from the University of 
Michigan Law School and his Master's in public policy from the 
University of Michigan Institute of Public Policy Studies.
    Our second witness is Ms. Tracey Laws, the Senior Vice 
President and General Counsel for the Reinsurance Association 
of America. Ms. Laws is responsible for establishing and 
advocating the RAA's public policy positions. Prior to coming 
to the RAA, Ms. Laws was a partner in the law firm of 
Chadbourne & Parke, concentrating on reinsurance matters.
    She is a member of the AIDA Reinsurance & Insurance 
Arbitration Society law committee and the ABA's TIPS Federal 
Involvement in Insurance Regulation Modernization task force. 
Ms. Laws received her undergraduate degree from the College of 
William and Mary and her law degree from the University of 
Virginia.
    Mr. Travis Plunkett is our third witness. He is the 
Legislative Director for the Consumer Federation of America. 
Mr. Plunkett's focus is primarily on financial services issues, 
including credit reporting, bankruptcy, credit counseling, 
consumer privacy and insurance.
    Prior to the CFA, Mr. Plunkett served as the New York State 
Legislative Representative for the American Association of 
Retired Persons and the Associate Legislative Director of the 
New York Public Interest Research Group. He received his 
bachelor's degree from the University of Denver. Fellow 
Westerner. Welcome, Mr. Plunkett.
    Our final witness is Mr. Alex Soto, President of the 
Independent Insurance Agents & Brokers of America. Mr. Soto is 
also the President of InSource, Inc. of Miami, Florida. Mr. 
Soto has held numerous positions at the IIABA prior to becoming 
President, including Vice President, and the Chairman of the 
Communications Committee Branding task force.
    Mr. Soto has served as the Chairman and State National 
Director of the Florida Association of Insurance Agents and the 
Vice Chairman of the Florida Residential Property and Casualty 
Joint Underwriting Association. He has also served as a member 
of the Governor's Commission on the Florida insurance crisis 
and the insurance fraud task force.
    Mr. Soto earned a bachelor's degree in international 
affairs from Florida State University.
    Thank you for being here. I extend to each of you my 
appreciation for your willingness to participate in the 
hearing. We look forward to your expert testimony on this 
important issue.
    Because your written statements will be included in the 
record, I request that you limit your time to 5 minutes. You 
will note that you have a clock, the timer in front of you goes 
from green when--until you have 1 minute left; then it goes to 
yellow and then it turns red.
    I don't want you to cut off your statement because we're 
actually not overwhelmed with Members here, but if you can just 
recognize that that time, 5-minute time frame, is helpful to 
us, we'd appreciate that, and I may tap the gavel. And 
certainly we will have a 5-minute questioning period for 
Members of the Committee, as well, and I will tap a pencil or 
gavel just to remind people the time is up and we will 
certainly accommodate further rounds of questioning if Members 
would like to do that.
    Pursuant to the directive of the Chairman of the Judiciary 
Committee, I ask the witnesses to please stand and raise your 
right hand to take the oath.
    [Witnesses sworn.]
    Mr. Cannon. Let the record reflect that each of the 
witnesses answered in the affirmative. You may be seated.
    And, Mr. Sinder, we'd be pleased to hear your testimony 
now.

  TESTIMONY OF SCOTT A. SINDER, ESQUIRE, COUNCIL, COUNCIL OF 
                   INSURANCE AGENTS & BROKERS

    Mr. Sinder. Thank you, Mr. Chairman. Thank you both for 
holding this hearing today and for affording me the opportunity 
to testify today. And I'd also like to thank Representative 
Wasserman Schultz, both for serving as the Ranking Member today 
and for being an original sponsor of what we believe is an 
incredibly important piece of legislation.
    My comments will focus strictly on title I of the 
nonadmitted insurance portion of the legislation.
    I am testifying today on behalf of the Council of Insurance 
Agents & Brokers. The council represents the top 1 percent of 
insurance agencies and brokerage firms of the United States, 
who collectively place over 90 percent of all commercial 
property and casualty insurance in this country which last year 
exceeded over $200 billion in placements. We are testifying in 
support of this legislation because it would clean up a very 
important area of cumbersome regulatory oversight.
    The bill--title I of the bill does not deregulate the 
regulation of nonadmitted insurance; it simply imposes a 
coherent rule that says that only one set of rules will govern 
any single transaction, and that set of rules would be the home 
State where the policyholder is based, where the company has 
its corporate headquarters.
    Nonadmitted insurance, as you noted in your introductory 
remarks, Mr. Chairman, is insurance that's purchased primarily 
by companies for noncompulsory coverages. It's only in areas 
where the State does not require companies or individuals to 
have insurance coverage. So, for example, worker's 
compensation, which is an area where States require coverage, 
is not eligible for primary surplus lines coverage. And the 
primary insurance covers the corporate treasury, doesn't cover 
the property; the property is just the trigger on when a claim 
will be paid out.
    But the real beneficiary of that is not a consumer, is not 
a claimant; it's the company itself and its corporate treasury, 
which otherwise would be solely responsible for covering that 
loss.
    There are five primary areas of surplus lines regulation 
among the States: the premium tax regulation; there is access 
to the market, when are you able as a consumer, as a corporate 
consumer, to access the surplus lines coverage; with what 
carriers you may seek to place the surplus lines coverage; 
licensing requirements; and there are other filing and 
disclosure requirements. Essentially, all 55 U.S. jurisdictions 
have a common set of areas in which they regulate, and they all 
regulate in these five areas.
    The rules themselves in a substantive basis also do not 
differ in any substantive way. The difference is in the 
details, and let me give you an example. There is a disclosure 
that most States require you to give that says that this 
insurance is being placed with a nonadmitted carrier and that 
coverage is not therefore placed in the guaranty fund, and 
insured by the guaranty fund at the State.
    Almost every State has the identical disclosure. Almost 
every State requires you to separately provide that disclosure 
on the very first page of the policy. Well, if you're placing a 
coverage that covers risks in 55 States, that requires 55 
disclosures. It's impossible to place all of those on the first 
page unless that page is very, very long. And the House 
Financial Services Committee, when we testified, I had a stack 
of documents next to me that was this high that represented the 
tax filings for each of the States in which there was a risk 
that was insured, that was covered by that one single policy.
    These are incredibly onerous burdens. It's not a burden to 
pay the tax, it's not a burden to give the disclosure, it's a 
burden to make the filings 55 times, to give 55 disclosures.
    The underlying intent of the legislation and what it 
actually does is, it dictates that only a single set of rules 
apply and that single set of rules are the rules of the State 
in which the policyholder maintains its principal place of 
business. There are some other provisions there intended to 
assist the States in disseminating the premium tax revenue so 
that it encourages the States, for example, to adopt an 
interstate compact so that after the policyholder pays through 
the broker their premium tax to the policyholder State of 
residence. The States would then, behind that, share that 
premium tax revenue as they deem appropriate. But it would 
place the burden of making that final calculation and putting 
that mechanism in place on the States and not on the brokers of 
the policyholders.
    By doing these things you will remove incredible 
administrative burdens that apply when you try to access the 
surplus lines market, and in doing so, you will enable brokers 
and commercial policyholders to try to bridge the gap in the 
areas in which you have the greatest efficiencies and coverage 
right now, and those are the areas of catastrophic exposures 
that Representative Wasserman Schultz noted in her introductory 
comments.
    Even the National Association of Insurance Commissioners, 
in their testimony before the House Financial Services 
Committee in June of 2005, noted that this was an area in which 
Federal involvement was necessary and welcome. Commissioner 
Diane Koken, who at the time was the President of the NAIC and 
was the Commissioner from the State of Pennsylvania, 
Commonwealth of Pennsylvania noted as follows, and I am quoting 
her testimony:
    ``Federal legislation may be needed at some point to 
resolve conflicting State laws regulating multistate 
transactions. The area where this will most likely be necessary 
is surplus lines premium tax allocation. Federal legislation 
might also be one option to consider to enable multistate 
property risks to access surplus lines coverage in their home 
States under a single policy, subject to a single set of 
requirements.''
    That's exactly what title I does. It allows multistate 
placements to be governed by a single set of rules. Those in 
the policyholder's own State, it doesn't deregulate in any way. 
Business insurance is also noted that this is exactly the types 
of reforms that the Congress should be seeking to implement to 
help moderize and rationalize State insurance regulation and 
all of the stakeholders in this debate, the surplus lines 
cares, the brokers, and even the customers, as you noted, 
through RIMS, are very much supportive of title I of the 
legislation.
    With that, Mr. Chairman, I would be happy to answer your 
questions at the conclusion of others' remarks.
    Mr. Cannon. Thank you, Mr. Sinder. I note that the green 
light is still on. That is a rare occurrence in this business.
    Mr. Sinder. Mr. Chairman, the clock started late, and I 
didn't feel it was appropriate for me to take advantage of 
that.
    Mr. Cannon. We'll still give you credit.
    Mr. Sinder. Thank you, sir.
    [The prepared statement of Mr. Sinder follows:]

                 Prepared Statement of Scott A. Sinder

    Good morning, Chairman Cannon, Ranking Member Watt and members of 
the Subcommittee. Thank you for the opportunity to testify before you 
today on behalf of the Council of Insurance Agents and Brokers (The 
Council) and thanks to Representative Wasserman-Schultz for being an 
original sponsor of the Nonadmitted and Reinsurance Reform Act of 2006 
(the Reform Act). This Act was approved unanimously and on a bipartisan 
basis by the House Financial Services Committee in July. We greatly 
appreciate the Judiciary Committee's review of its provisions, and hope 
that you will agree that it is a balanced and important reform, worthy 
of enactment by the House this year. Commercial insurance regulatory 
modernization is essential if we are to have a dynamic commercial 
insurance marketplace that addresses the needs of commercial insureds 
for the 21st century. The Council believes the proposed legislation 
constitutes a significant step toward that end and supports it 
wholeheartedly. We were greatly encouraged by the adoption of the 
legislation by the House Financial Services Committee, and look forward 
to working with you as you consider the proposal.
    The Council represents the nation's largest, most productive and 
most profitable commercial property and casualty insurance agencies and 
brokerage firms. Council members specialize in a wide range of 
insurance products and risk management services for business, industry, 
government, and the public. Operating both nationally and 
internationally, Council members conduct business in more than 3,000 
locations, employ more than 120,000 people, and annually place more 
than 80 percent--well over $90 billion--of all U.S. insurance products 
and services protecting business, industry, government and the public 
at-large, and they administer billions of dollars in employee benefits. 
Since 1913, The Council has worked in the best interests of its 
members, securing innovative solutions and creating new market 
opportunities at home and abroad.
    My testimony today will focus on insurance sold by non-admitted 
insurance carriers, which encompasses ``surplus lines'' products placed 
through brokers and ``independently procured insurance'' in which the 
coverage is purchased directly by the insured without the aid of a 
broker. I will explain what these types of insurance are, describing 
the Byzantine State regulatory requirements that currently burden the 
surplus lines marketplace, and I will explain that the Reform Act will 
address those issues primarily by dictating that only an insured's home 
State's laws apply to such a placement, hugely benefiting surplus lines 
consumers, the insurance industry and the insurance marketplace as a 
whole, without sacrificing one iota of consumer protection.

                              INTRODUCTION

    The members of the Council commend you for holding this hearing and 
considering this important legislation. Broad-based insurance 
regulatory reform is critical for the long-term health of the industry 
and for maintaining a strong, vibrant insurance sector for the benefit 
of policyholders. Surplus lines and reinsurance are essential elements 
of the insurance marketplace and we support efforts to initiate 
insurance regulatory modernization by focusing on these areas.
    Although the State insurance regulators, through the National 
Association of Insurance Commissioners (NAIC), have attempted to 
institute regulatory reforms in surplus lines and other areas of 
insurance without federal involvement, the reality is that today's 
marketplace demands far more dramatic action than the States alone are 
able to provide. The pace of financial services convergence and 
globalization are far outstripping the pace of reform efforts by State 
regulators and legislatures. Competition and efficiency in the 
insurance industry lags behind other financial services sectors due to 
the regulatory inefficiencies and inconsistencies in the State 
insurance regulatory system, inefficiencies and inconsistencies that 
must be addressed if the insurance sector is going to be able to keep 
up with the pace of change in the rapidly-evolving global marketplace 
and thereby expand the insurance marketplace for the benefit of 
insurers, producers and consumers.
    The Council regards itself as a pioneer within our industry with 
respect to regulatory modernization, though reform is a frustratingly 
long process. We formed our first internal committee to address the 
problems of interstate insurance producer licensing more than 60 years 
ago. Our efforts were finally rewarded, thanks to the leadership of 
this committee, with the enactment of the NARAB provisions of the 
Gramm-Leach-Bliley Act a few years ago--a first step on the road to 
insurance regulatory reform. The Reform Act is the next step on the 
road to modernization.
    I want to emphasize at the outset that we are not advocating de-
regulation of the non admitted insurance marketplace or any sort of 
reduction in consumer protections. What we are advocating--as we did 
with NARAB and producer licensing reform--is streamlining the current 
burdensome system of regulation, thereby doing away with the 
overlapping, conflicting rules that inhibit the non admitted 
marketplace and harm consumers. We believe that consolidating 
regulatory oversight into a single State--the insured's home State--
makes eminent good sense, as opposed to the current system in which 55 
jurisdictions, some with only remote connections to the transaction, 
dictate how--and whether--a transaction is completed. The long-term 
effects of such reform on the marketplace will ultimately benefit the 
consumer. Easing regulatory burdens--without sacrificing protections--
will increase surplus lines insurers' capacity and improve availability 
of coverage for hard to insure risks such as national catastrophes and 
terrorism.

     I. ``NON ADMITTED'' INSURANCE PROVIDES AN ALTERNATIVE TO THE 
 TRADITIONAL INSURANCE MARKETPLACE BUT CURRENT REGULATORY REQUIREMENTS 
  ARE PREVENTING THIS MARKETPLACE FROM FULLY REALIZING ITS POTENTIAL.

    Non admitted insurance provides coverage for unique, unusual or 
very large risks for which insurance is unavailable in the admitted 
market. A surplus lines product is an insurance product sold by an 
insurance company that is not admitted to do business in the State in 
which the risk insured under the policy is located. In essence, the 
insured goes to wherever the insurance company is located to purchase 
the coverage. The insurer may be in another State, or it may be in the 
United Kingdom, Bermuda or elsewhere. Potential insureds can procure 
this insurance directly, but they generally do so through their 
insurance brokers. In short, ``surplus lines'' are: (1) insurance 
products sold by insurance carriers that are not admitted (or licensed) 
to do business in a State, (2) to sophisticated commercial 
policyholders located in that State, (3) for insurance coverages that 
are not available from insurers admitted (or licensed) to do business 
in that State.
    Although surplus lines is considered to be ``unregulated,'' in 
reality the surplus lines marketplace is subject to extensive State 
statutory and regulatory requirements that impede the effectiveness of 
the market and increase costs to surplus lines consumers. As described 
more fully below, updating these regulations and laws and encouraging 
use of alternative insurance markets would help to increase options and 
decrease costs for insurance consumers.
    Surplus lines insurance is universally recognized as an important 
component of the commercial property and casualty insurance marketplace 
in all States, and commercial property and casualty business is done 
increasingly through the surplus lines marketplace. Surplus lines 
products tend to be more efficient and a better fit for commercial 
coverages because they can be tailored to the specific risk profiles of 
insured with specialized needs. This is particularly true during hard 
markets, like the one we have experienced for the last several years, 
in which high premium rates for property and casualty insurance posed 
serious problems for many mid-sized and larger commercial firms. Hard 
markets cause availability to decrease and the cost of coverage to 
increase. During these periods, insureds--notably sophisticated 
commercial insureds--are increasingly drawn to the appeal of 
alternatives to the traditional, regulated marketplace to expand their 
coverage options and hold down costs. Surplus lines insurance is just 
such an alternative.
    Although the purchase of surplus lines insurance is perfectly legal 
in all States, the regulatory structure governing such coverage is a 
morass. When surplus lines activity is limited to a single State, 
regulatory issues are minimal. When activity encompasses multiple 
States, however, full regulatory compliance is difficult, if not 
impossible. And I should note that multi-State surplus lines policies 
are the norm rather than the exception because surplus lines coverage 
is uniquely able to address the needs of insureds seeking coverage in 
more than one State. Thus, the difficulty of complying with the 
inconsistent, sometimes conflicting requirements of multiple State laws 
is a real problem. Simply keeping track of all the requirements can be 
a Herculean task. For example: Maryland and the District of Columbia 
require a monthly ``declaration'' of surplus lines business placed, but 
only require payment of premium taxes on a semi-annual basis; Virginia, 
in contrast, requires that a declaration be filed and taxes be paid 
quarterly; New Jersey has 36 pages of instructions for surplus lines 
filings, including a page discussing how to number the filings and a 
warning not to file a page out of sequence because that would cause a 
rejection of the filing and could result in a late filing.
    As a general matter, State surplus lines regulation falls into five 
categories: (1) taxation; (2) declinations; (3) insurer eligibility; 
(4) regulatory filings; and (5) producer licensing and related issues.

    1. Taxes: States have inconsistent and sometimes conflicting 
approaches regarding the allocation of premium taxes, which can lead to 
double taxation and confusion when a surplus lines policy involves 
multi-State risks.

          Single situs approach--100% of the premium tax is 
        paid to the insured's State of domicile or headquarters State. 
        This approach is imposed by some States regardless of what 
        percentage of the premium is associated with risks insured in 
        the State. Virginia, for example, utilizes this rule.

          Multi-State approach--Premium tax is paid to multiple 
        States utilizing some method of allocation and apportionment 
        based upon the location of the risk(s). Because there is no 
        coordination among the States on allocation and apportionment, 
        determination of the amount of tax owed to each State is left 
        to brokers and insureds. If a policy covers property insured in 
        a single situs State and in an apportionment State, double 
        taxation also is unavoidable. A majority of the States utilize 
        this basic rule but the manner in which it is implemented 
        (including the allocation formula) can vary wildly.

          No clear requirement--Nearly a dozen States that 
        impose surplus lines premium taxes do not have statutory or 
        regulatory provisions indicating the State's tax allocation 
        method, leaving it up to the insured and the insured's broker 
        to determine how to comply with the State law. In such States, 
        determination as to whether any tax should be paid and whether 
        the allocation of any such tax is permissible and appropriate 
        is often based on informal guidance from State insurance 
        department staff.

    In addition to the near-impossibility of determining the correct 
allocation for surplus lines premium tax in a way that does not risk 
paying too much or too little tax, the differences among the States 
with respect to tax rates, tax exemptions, taxing authorities, and the 
timing of tax payments impose huge burdens on surplus lines brokers 
(who are responsible for paying the taxes if they are involved in the 
placement) and on commercial consumers, who must navigate these 
requirements on their own for placements that do not involve a broker 
and who ultimately bear the costs of not only the tax but the 
administrative costs of compliance in any event.
    For example, State surplus lines premium tax rates range from about 
1% to about 6%. In one State, Kentucky, surplus lines taxes are levied 
not at the State level but at the municipality level. Aon, a member of 
the Council, reports that in order to properly rate taxes in Kentucky, 
they have to access electronic maps to determine the city and county in 
which a risk is located. There are hundreds of cities and counties in 
the State. Some counties charge a tax in lieu of the city tax, some 
charge it in addition to the city tax, some charge the difference 
between the city and county taxes, and some do not charge a city or 
county tax.
    The due dates for premium taxes vary even more widely across the 
States. Surplus lines premium taxes are due:

          annually on a date certain in some States; the dates 
        vary from State to State, but include: January 1, January 31, 
        February 15, March 1, March 15, April 1 and April 16;

          semi-annually in some States; again the dates vary, 
        but include: February 1 and August 1, February 15 and August 
        15, and March 1 and September 1;

          quarterly in some States (generally coinciding with 
        the standard fiscal quarters);

          monthly in some States; and

          60 days after the transaction in some States.

    The States also differ with respect to what is subject to the tax, 
what is exempt from the tax, whether governmental entities are taxed, 
and whether brokers' fees are taxed as part of or separately from the 
premium tax (if they are taxed at all). As you can see, determining the 
proper surplus lines tax payment for the placement of a multi-State 
policy is a daunting task.
    2. Declinations: Most States require that an attempt be made to 
place coverage with an admitted insurer before turning to the surplus 
lines market. Some States specifically require that one or more 
licensed insurers decline coverage of a risk before the risk can be 
placed in the surplus lines market. If it is determined that a portion 
of the risk is available in the admitted market, many States require 
that the admitted market be used for that portion of the risk.
    State declination requirements are inconsistent and conflicting, 
however, and the methods of proving declinations vary tremendously--
from specific requirements of signed affidavits to vague demonstrations 
of ``diligent efforts.'' For example, Ohio requires 5 declinations, but 
does not require the filing of proof of the declinations. New Mexico 
requires 4 declinations and submission to the insurance department of a 
signed, sworn affidavit. Hawaii does not require declinations but 
prohibits placement of coverage in the surplus lines market if coverage 
is available in the admitted market. Further, Hawaii does not require 
filing of diligent search results, but requires brokers to make such 
information available to inspection without notice by the State 
insurance regulator. In California, prima facie evidence of a diligent 
search is established if the affidavit States that three admitted 
insurers that write the particular line of insurance declined the risk. 
In Alabama, the requirement is much more vague. The broker is required 
only to demonstrate ``a diligent effort'' but no guidance is provided 
suggesting what constitutes such an effort. In Connecticut, the broker 
must prove that only the excess over the amount procurable from 
authorized insurers was placed in the surplus lines market.
    3. Insurer Eligibility: Most States require that a surplus lines 
insurer be deemed ``eligible'' by meeting certain financial criteria or 
having been designated as ``eligible'' on a State-maintained list. 
Although a majority of the States maintain eligibility lists (also 
called ``white lists''), in many of the remaining States the surplus 
lines broker is held responsible for determining if the non-admitted 
insurer meets the State's eligibility criteria. In addition, although 
the NAIC maintains a list of eligible alien (non-U.S.) surplus lines 
insurers that is referenced by four States, this does not seem to have 
any bearing on the uniformity of the eligible lists in the remaining 
States. As one would expect, as a result of differing eligibility 
criteria from State to State--and changes in individual States from 
year to year--the insurers eligible to provide surplus lines coverage 
varies from State to State. This can make it exceedingly difficult to 
locate a surplus lines insurer that is ``eligible'' in all States in 
which placement of a multi-State policy is sought.
    The flip side of insurer eligibility is also an issue: that is, 
when multi-State surplus lines coverage is placed with an insurer that 
is an admitted (not surplus lines) insurer licensed in one of the 
States in which part of the risk is located. This is problematic 
because surplus lines insurance cannot be placed with a licensed 
insurer. In these situations, more than one policy will have to be 
used, or the insured will have to use a different surplus lines 
carrier--one that is not admitted, but ``eligible'' in all States in 
which the covered risks are located.
    4. Filings: Most States require one or more filings to be made with 
the State insurance department in connection with surplus lines 
placements. These may include filings of surplus lines insurer annual 
statements, filings regarding diligent searches/declinations, filings 
detailing surplus lines transactions, and filings of actual policies 
and other informational materials. Some States that do not require the 
filing of supporting documentation require brokers to maintain such 
information and make it available for inspection by the regulator.
    Like other surplus lines requirements, State filing rules vary 
widely. Some States require signed, sworn affidavits detailing diligent 
search compliance; some require such affidavits to be on legal sized 
paper, others do not; some States require electronic filings, others 
require paper; some States have specific forms that must be used, 
others do not; some States require the filing of supporting 
documentation, some do not--although some of those States place the 
burden on the broker, who is required to store the information in case 
regulatory inspection is required. In addition, although most filings 
are required to be submitted to the State insurance regulator, in at 
least one State, Kentucky, municipalities also require submission of 
surplus lines materials. There are hundreds of cities and counties in 
the State and each requires a separate quarterly and annual report by 
the licensee. As with the tax situation, this creates a terrible burden 
on surplus lines insurers and brokers, and unnecessarily increases 
consumer costs.
    Depending on the State in question, filings can be required 
annually, quarterly, monthly or a combination thereof. For example, 
several States require the filing of surplus lines information in the 
month following the transaction in question: Colorado requires such 
filings by the 15th of the month; and the District of Columbia by the 
10th. Other States peg the filing date to the date of the transaction 
or the effective date of the policy: Florida requires filing within 21 
days of a transaction; Idaho within 30 days; Kansas within 120 days; 
Missouri requires filing within 30 days from the policy effective date 
and New York 15 days from the effective date; Illinois and Michigan 
require semi-annual filings of surplus lines transactions. Although 
Illinois does not require filing of affidavits, carriers must maintain 
records of at least three declinations from admitted companies for each 
risk placed in the surplus lines market. Some States have different 
deadlines for different filings. Louisiana, for example, requires 
quarterly filings of reports of all surplus lines business transacted, 
and ``diligent search'' affidavits within 30 days of policy placement. 
North Dakota, in contrast, requires a single annual filing of all 
surplus lines transactions, and allows 60 days for the filing of 
``diligent search'' affidavits.
    In addition, some States treat ``incidental exposures''--generally 
relatively small surplus lines coverages--differently from more 
substantial coverages with respect to filing requirements. States have 
differing definitions of what constitutes incidental exposures and who 
has to make required filings for such an exposure: some States require 
the broker to make the filings; others the insured; and some require no 
filings at all for incidental exposures.
    5. Producer Licensing and Related Issues: In addition to the 
substantial issues outlined above, there are other vexing regulatory 
issues facing the surplus lines marketplace:

          Producer Licensing: All States require resident and 
        non-resident surplus lines producers to be licensed, and all 
        States have reciprocal processes in place for non-resident 
        licensure. Nevertheless, there remain significant differences 
        among some States with respect to producer licensing that can 
        delay the licensure process, particularly for non-residents. 
        For example, most States require that an individual applying 
        for a surplus lines broker license be a licensed property and 
        casualty producer. The States vary, however, as to how long the 
        applicant must have held the underlying producer license. In 
        addition, some, but not all, States exempt from licensure 
        producers placing multi-State coverage where part of the risk 
        is located in the insured's home State. In States without such 
        an exemption, the laws require a producer to be licensed even 
        for such incidental risks.

          Sophisticated Commercial Policyholders: Some States 
        exempt ``industrial insureds'' from the diligent search, 
        disclosure, and/or filing requirements. The definition varies 
        among the States, but generally industrial insureds are 
        analogous to the concept of sophisticated commercial insureds. 
        They are required to have a full time risk manager, minimum 
        premium requirements for selected lines of coverage, and a 
        minimum number of employees. If an insured meets a State's 
        criteria, the insured's surplus lines transaction is exempt 
        from the surplus lines requirements, as provided for by the 
        State.

          Automatic Export: A number of States allow certain 
        risks to be placed directly in the surplus lines market. This 
        is called ``automatic export'' because no diligent search is 
        required before the risk is exported from the admitted market 
        to the surplus lines market. As with every other surplus lines 
        requirement, however, the States are not uniform in their 
        designation of the risks eligible for automatic export.

          Courtesy Filings: A courtesy filing is the payment of 
        surplus lines tax in a State by a surplus lines broker who was 
        not involved in the original procurement of the policy. 
        Courtesy filings are helpful when a broker places a multi-State 
        filing that covers an incidental risk in a State in which the 
        broker is not licensed. The problem is that most States either 
        prohibit courtesy filings or are silent as to whether they will 
        be accepted. This uncertainty essentially requires surplus 
        lines producers to be licensed even in States where they would 
        otherwise be exempt.

    II. CONGRESSIONAL ACTION IS NEEDED TO ADDRESS THE UNNECESSARILY 
BURDENSOME AND OVERLAPPING STATE REGULATORY REQUIREMENTS IMPOSED ON THE 
SURPLUS LINES MARKETPLACE. THE REFORM ACT ACHIEVES THAT GOAL WITHOUT IN 
 ANY WAY DIMINISHING CONSUMER PROTECTIONS OR REGULATORY EFFECTIVENESS.

    The current surplus lines regulatory structure is not working. The 
overlapping, redundant, sometimes inconsistent State regulatory 
requirements described above fail to recognize current market 
realities--the great majority of surplus lines policies are placed on a 
multi-State basis and purchased by sophisticated commercial insureds 
who have unique risks that are not readily covered in the admitted 
market. The regulatory roadblocks erected by some States do nothing to 
improve the availability or affordability of insurance, nor do they 
protect surplus lines consumers. Indeed, we believe the current system 
causes significant disruptions in the surplus lines marketplace and 
increases costs for consumers.
    The proposed Reform Act would fix the system. The legislation would 
streamline regulation and ease regulatory burdens, but without 
sacrificing consumer protections or a financially sound surplus lines 
marketplace, which is the most important consumer protection of all. 
The proposed legislation would provide an effective resolution to the 
current regulatory morass by focusing on the home State of the insured: 
all premium taxes would be payable to the insured's home State and 
surplus lines insurance transactions would be governed by the rules of 
the insured's home State.
    This home State focus accomplishes several things:

          Home State regulation ensures that the insured is 
        protected by the laws of its home State and the regulator with 
        the greatest interest in its welfare. It is common sense to 
        assume that a regulator will spend more time and effort on the 
        needs of in-State constituents rather than non-residents with 
        little or no stake in the State or its economy.

          Home State regulation is logical because the risks 
        covered in the non-admitted market are generally commercial 
        lines and are not compulsory. We are not talking about auto or 
        homeowners or individual life coverage. These are unique risks 
        that the insured is not required to protect with insurance but 
        chooses to do so to protect the corporate treasury. The 
        corporate treasury, in turn, is not located in the multiple 
        States where the insured has risks, but in the State in which 
        the insured itself is located--generally its state of domicile.

          Home State regulation completely does away with the 
        inconsistent, redundant, burdensome obligations that the 
        current system imposes in connection with multi-State 
        placements. All the regulatory issues described above--taxes, 
        filings, diligent searches, insurer eligibility requirements, 
        producer licensing and more--will be governed by the rules of a 
        single State rather than being subject to multiple State rules.

    On one level, the effect of this change is significant--it will 
eliminate mountains of red-tape and administrative costs, ultimately 
saving consumers time and money, and expanding the availability of 
coverage for unusual or extreme risks such as natural catastrophes and 
terrorism. On another level, however, the change will be minimal. The 
Reform Act does not alter the basic elements of State surplus lines 
regulation. Indeed, all of the substantive provisions in the proposed 
legislation can be found in current State laws and regulations. The 
beauty of the proposal is that it enables surplus lines producers to 
look to a single standard in a single State for each transaction. 
Although the standard may differ from transaction to transaction 
depending upon the home State of the insured, each individual 
transaction will have a single standard, rather than being subject to 
the standards of 55 different jurisdictions. Clearly, this will make 
multi-State compliance significantly less daunting.
    The Reform Act would fix the current tax allocation problems by 
establishing a clear requirement that all surplus lines premium taxes 
be paid to the insured's home State. Surplus lines producers would pay 
the full amount of premium tax owed on an insurance transaction to the 
insured's home State. In addition to the tax, the home State could 
require the filing of an allocation report denoting the location of the 
covered risks. The States are then free to allocate the premium tax 
among themselves as they so determine. The contrast in approaches--from 
the convoluted, burdensome approach of the States to the simple 
straightforward approach in the Reform Act could hardly be greater.
    Finally, the exemption for sophisticated commercial policyholders 
is a victory for common sense. The State regulators, in many of their 
model rules and regulations, recognize that streamlined processes make 
sense for sophisticated commercial policyholders, who have a greater 
understanding of their needs and the insurance marketplace than 
individual consumers. In addition, sophisticated commercial 
policyholders are more likely to have unique or large risks for which 
surplus lines coverage is necessary. For these reasons, it only makes 
sense to allow such policyholders to access the surplus lines market 
without jumping through all the regulatory hoops that are currently 
imposed by some States.
    The need for surplus lines regulatory reform is widely agreed upon 
by all stakeholder, and the Reform Act enjoys broad-based support from 
consumers (RIMS???), the insurance industry, and many Members of 
Congress, as evidenced by the House Financial Services Committee's 
unanimous passage of the bill in July. The bill has seen no opposition. 
Indeed, the State insurance regulators have worked with congressional 
staff to address technical issues, but did not object substantively to 
the proposal.

                               CONCLUSION

    In closing, I would once again like to thank you for taking on this 
important, if unglamorous, issue. As my testimony has demonstrated, 
reform of the surplus lines insurance regulatory system is badly needed 
to maintain a competitive marketplace and, more importantly, to enable 
insurers and producers to provide insurance consumers with the 
coverages they need to protect themselves and their businesses from the 
risks inherent in today's world. The passage of the Act was unanimous 
and bipartisan in the House Financial Services Committee, and we look 
forward to House passage very soon. As I said at the outset, the Reform 
Act will get the job done and the Council looks forward to working with 
you to get it enacted into law.

    Mr. Cannon. Ms. Laws.

 TESTIMONY OF TRACEY LAWS, ESQUIRE, SENIOR VICE PRESIDENT AND 
      GENERAL COUNSEL, REINSURANCE ASSOCIATION OF AMERICA

    Ms. Laws. Good morning. I am pleased to testify today on 
behalf of the RAA in support of H.R. 5637. My testimony will 
highlight the key provisions of the legislation that help to 
modernize and make reinsurance regulation more efficient, but 
first I will briefly discuss the role that reinsurance plays in 
the marketplace and how reinsurance is currently regulated.
    Reinsurance is a transaction, as you noted, by which the 
reinsurer indemnifies, for a premium, the insurer for all or 
part of the loss that the insurer may sustain under an 
insurance policy. Described as ``insurance for insurance 
companies,'' reinsurance provides reimbursement for the insurer 
for losses that are covered by a reinsurance agreement.
    Reinsurance agreements are between sophisticated parties. 
There is no consumer element to the reinsurance transaction. 
Reinsurance is very much a global business; encouraging the 
participation of reinsurers worldwide is essential to providing 
much-needed capacity in the United States.
    The global reinsurance industry has significantly responded 
to virtually every major U.S. catastrophe over the past 
century. By way of example, it is expected that 60 percent of 
the losses from the 2005 hurricanes will be borne by reinsurers 
worldwide.
    Reinsurance and U.S.-based reinsurers are regulated by the 
States. The States utilize two methods of regulation, direct 
and indirect. Direct regulation is imposed on reinsurers that 
ought to be licensed in a U.S. State. Reinsurers that are 
licensed in at least one State are subject to the full spectrum 
of laws and regulations to which a primary insurer is subject, 
including regulation for financial reporting and solvency.
    The exception to this general rule is rates and contracts. 
Because reinsurance transactions involve sophisticated parties, 
there is no regulation of rates or, for the most part, the 
reinsurance agreement.
    There is also indirect regulation of the transactions where 
a State's credit for reinsurance laws. Credit for reinsurance 
is the cornerstone of reinsurance regulation. If an insurer 
complies with its domiciliary State's credit for reinsurance 
laws, it may reflect the effect of the reinsurance transaction 
as an asset or as a reduction in its liabilities on its balance 
sheet.
    H.R. 5637 helps to modernize reinsurance regulation in 
several ways. First, section 201 eliminates the extra 
territorial application of State laws. As a result of the 
current 50-State system, significant differences have emerged 
among the States with respect to reinsurance regulatory 
requirements.
    The NAIC and State regulators are to be applauded for their 
efforts toward greater uniformity by the adoption of model laws 
and regulations and the creation of a system of accreditation 
for States to meet minimum standards of regulation. 
Unfortunately, this has not prevented certain States from 
pursuing varying and sometimes inconsistent regulatory 
approaches to reinsurance. This has resulted in approximately 
14 States applying the laws on an extraterritorial basis. This 
means that these States apply their laws to not only insurers 
that are some domiciled in their State, but also to insurers 
that are domiciled elsewhere but licensed in that State. This 
is the case even if the reinsurance contract at issue does not 
cover any risks associated with that State.
    Because reinsurance contracts are not written on a State-
by-State basis and typically cover risks across many States, it 
is inefficient and unnecessary to require the contracting 
parties to meet the requirements of multiple jurisdictions for 
a single reinsurance transaction. Accordingly, the RAA strongly 
supports section 201 which preempts the extraterritorial 
application of State law and makes clear the types of laws that 
States cannot apply on an extraterritorial basis, including 
laws involving critical elements of the reinsurance agreement.
    Second, section 201 also streamlines the requirements 
pursuant to which an insurer may take credit for reinsurance. 
Currently, some States refuse to accept the credit for 
reinsurance determinations of an insurer's domiciliary 
regulator, causing the insurer's financial statement to vary 
from State to State. The act addresses this problem by 
requiring that no other State may deny credit for reinsurance 
that is recognized by the insurer's domiciliary regulator.
    Third, section 202 provides that the reinsurer's State of 
domicile shall be solely responsible for regulating the 
reinsurer's solvency so long as the domiciliary State is an 
NAIC-accredited State or a State that has solvency regulations 
substantially similar to the requirements necessary for NAIC 
accreditation. This provision keeps strong insurance regulation 
intact, but eliminates duplicative regulation. The home State 
regulator will still be subject to the stringent NAIC 
accreditation standards, thereby protecting against a race to 
the bottom. The fundamental elements of reinsurance solvency 
regulation that are required by all States will remain in 
place.
    Finally, H.R. 5637 ensures that all States have access to 
financial information of a U.S.-licensed reinsurer, but it 
relieves the reinsurer from filing supplemental and, at times, 
inconsistent financial information with various States. 
Redundant and burdensome regulation may affect where the 
reinsurance market chooses to deploy its capital and may 
increase the transaction costs for insurers and, ultimately, 
consumers.
    The RAA applauds and supports the principles set forth in 
this act, which serve to streamline reinsurance regulation. 
Thank you.
    Mr. Cannon. Thank you, Ms. Laws.
    [The prepared statement of Ms. Laws follows:]

                   Prepared Statement of Tracey Laws

    My name is Tracey Laws and I am Senior Vice President and General 
Counsel of the Reinsurance Association of America. It is an honor to 
appear before you on behalf of the RAA. The RAA is a national trade 
association representing property and casualty organizations that 
specialize in reinsurance. The RAA membership is diverse, including 
U.S. companies and U.S. subsidiaries of foreign companies. Together, 
RAA members underwrite nearly 2/3 of the gross reinsurance coverage 
provided by U.S. property and casualty reinsurers and affiliates.
    I am pleased to testify today on ``H.R. 5637, legislation to 
streamline the regulation of nonadmitted insurance and reinsurance.'' 
The RAA supports the principles set forth in the legislation and will 
highlight the key provisions that will help modernize and make 
reinsurance regulation more efficient. My testimony will address: 1) 
the reinsurance role in the marketplace, 2) U.S. reinsurance 
regulation, 3) the extra-territorial application of state law 
provision, 4) the solvency regulation provision and 5) the credit for 
reinsurance provision.

                  REINSURANCE ROLE IN THE MARKETPLACE:

    Reinsurance is a transaction by which one insurance company 
indemnifies, for a premium, another insurance company against all or 
part of the loss that it may sustain under its policies of insurance. 
The insurance company purchasing the reinsurance is known as the ceding 
insurer; the company selling reinsurance is known as the assuming 
insurer, or, more simply, the reinsurer. Described as insurance for 
insurance companies, reinsurance provides reimbursement to the ceding 
insurer for losses covered in the reinsurance agreement. Reinsurance is 
a contract between sophisticated parties; there is no consumer element 
to the reinsurance transaction. The fundamental objective of insurance, 
to spread risk so that no single entity finds itself saddled with a 
financial burden beyond its ability to pay, is enhanced by reinsurance.
    Reinsurance is a key component of the insurance marketplace, 
reducing volatility experienced by insurers, and improving insurers' 
financial performance and security. It is widely recognized that 
reinsurance performs at least four primary functions in the 
marketplace: to limit liability on specific risks; to stabilize loss 
experience; to protect against catastrophes; and to increase insurance 
capacity. Although considerably smaller than the U.S. insurance 
industry in premiums and capital, the global reinsurance industry has 
significantly responded to virtually every major U.S. catastrophe over 
the past century. For natural disasters typically one-third to one-half 
of the insured losses are passed on to reinsurers; in the events of 
September 11, 2001, two-thirds of the losses were absorbed by the 
global reinsurance industry.

            U.S. REINSURANCE REGULATION--DIRECT AND INDIRECT

    Like insurance, reinsurance and U.S. based reinsurers are regulated 
by the states not the Federal government. U.S. states employ two 
methods of reinsurance regulation, both direct and indirect regulation.
    Direct regulation is imposed on those reinsurers that opt to be 
licensed in the U.S. Reinsurers licensed in at least one U.S. 
jurisdiction are subject to the full spectrum of laws and regulations 
to which a primary insurer is subject, including regulation for 
financial reporting and solvency. The exceptions to this general rule 
are rates and contracts. Because reinsurance is conducted between 
sophisticated parties of essentially equal bargaining power, regulators 
do not impose regulatory requirements relating to the rates that can be 
charged for reinsurance or, for the most part, the forms that can be 
used to evidence the contractual terms.
    Recognizing that an insurance marketplace as large as that found in 
the U.S. is in need of a substantial amount of reinsurance capacity, 
U.S. regulators permit both U.S. and non-U.S. reinsurers to assume 
business on risks located in the U.S.
    The states have developed a system of indirect regulation where the 
reinsurance transaction is regulated through the credit for reinsurance 
mechanism. Credit for reinsurance is the financial statement accounting 
effect given to a ceding insurer if cessions are ceded in accordance 
with prescribed state criteria. If the criteria are met, the ceding 
insurer may record as an asset or a reduction in insurance liabilities 
for the effect of the reinsurance transaction. The fundamental concept 
underlying the U.S. regulatory view is that a reinsurer must either be 
licensed in a U.S. state and subject to a full spectrum of reinsurance 
regulation or, in lieu of regulation, provide security to ensure the 
payment of the reinsurer's obligations to ceding insurers. Credit for 
reinsurance is the cornerstone of reinsurance regulation.

                  EXTRATERRITORIAL APPLICATION OF LAW

    The RAA applauds Representatives Brown-Waite and Moore for 
addressing a key improvement in the efficiency of regulation of 
reinsurers: the elimination of the extraterritorial application of 
state laws. As a result of our 50-state system of regulation, 
significant differences have emerged among the states with respect to 
reinsurance regulatory requirements. The NAIC and state regulators are 
to be applauded for their efforts toward greater uniformity in the 
adoption of model laws and regulations and the creation of a system of 
accreditation for states to meet minimum standards for regulation. 
Unfortunately, this has not prevented states from pursuing varying and 
sometimes inconsistent regulatory approaches to reinsurance. One of the 
best examples of this phenomenon is the extraterritorial application of 
state laws.
    Approximately 14 states apply their laws on an extraterritorial 
basis, meaning that the state law not only applies to insurers 
domiciled in that state but to insurers domiciled in other states if 
the extraterritorial state has granted a license to the insurer. For 
example, if a reinsurer domiciled in Ohio were entering into a contract 
with an insurance company domiciled in Massachusetts and either or both 
were licensed in other states, the reinsurer and insurer would abide by 
the Ohio and Massachusetts reinsurance requirements, but also to the 
reinsurance requirements of all other states that apply their laws on 
an extraterritorial basis. This is the case even if the contract 
between the reinsurer and ceding insurer does not have any risks 
associated with that particular state. Because reinsurance contracts 
are customarily written on a multi-state basis, it is inefficient and 
unnecessary to require the contracting parties to meet the legal 
regulatory and peculiarities of multiple jurisdictions for a single 
reinsurance transaction.
    The RAA strongly supports the principle set forth in Title II, 
Section 201 that addresses these inefficiencies. This provision retains 
the ability of state insurance regulators to regulate their domestic 
insurers and reinsurers and the reinsurance transactions of their 
domestic insurance companies. The Act simply preempts the 
extraterritorial application of state law and articulates the types of 
laws that states cannot apply on an extraterritorial basis, including 
critical elements of the reinsurance transaction, such as dispute 
resolution, governing law and requiring specific contract provisions. 
This provision will remove the burdensome and redundant requirements on 
the reinsurance transaction and will greatly improve efficiency.

                         CREDIT FOR REINSURANCE

    Section 201 of the Act also assists in streamlining the 
requirements pursuant to which a ceding insurer may take credit for 
reinsurance on its financial statements. The NAIC'S accreditation 
system and model credit for reinsurance law seek to achieve uniformity 
in the ceding insurer's financial statement. However, some states 
refuse to accept the ceding insurer's domiciliary regulator's findings, 
causing a ceding insurer's financial statement to vary from state to 
state. The Act addresses this problem by requiring that no other state 
may deny credit for reinsurance recognized by the ceding insurer's 
domiciliary regulator.

                    REINSURANCE SOLVENCY REGULATION

    The RAA supports the principles set forth in Title II, Section 202 
that provide that the state of domicile of a reinsurer shall be solely 
responsible for regulating the financial solvency of the reinsurer if 
the state is an NAIC accredited state or a state that has financial 
solvency regulations substantially similar to the requirements 
necessary for NAIC accreditation. The financial integrity and solvency 
of a reinsurer is a key factor in determining whether a ceding insurer 
should receive credit for reinsurance on its' financial statement. 
Redundant and burdensome solvency regulation may affect where the 
reinsurance market deploys its capital and increase the transaction 
costs for insurers, and ultimately consumers. The Act eliminates 
duplicative solvency regulation of reinsurers by placing sole 
responsibility for solvency regulation on the reinsurers home state 
regulator. The Act protects against a ``race to the bottom'' for 
solvency regulation by requiring that the home state meet the 
accreditation standards set out by the NAIC.
    Reinsurance is a global marketplace. Allowing the state of domicile 
of the reinsurance company to be the single regulator for solvency will 
help streamline reinsurance regulation significantly and will add to 
the value of a U.S. license. The home state of the reinsurer will still 
be subject to the stringent NAIC accreditation standards for solvency 
regulation. Because the NAIC requires that accreditation laws be 
``substantially similar,'' all accredited states have the same basic 
solvency protections and laws in place even if they may differ in some 
of the details.
    The elements of reinsurance solvency regulation that all states 
require will stay in place under the proposed legislation and include: 
conservative statutory accounting rules, minimum reserve standards, 
annual actuarial opinion requirements, detailed financial reporting on 
the annual statement and quarterly statement blanks, annual certified 
public accounting audit reports, minimum capital requirements per the 
NAIC risk-based capital formula, state investment laws that provide 
minimum diversification and limits on investments, holding company laws 
for extraordinary dividends and intergroup transactions, and many other 
model laws that are required for accreditation. The NAIC accreditation 
system will still require the home state regulator to demonstrate that 
the state effectively enforces its solvency regulation standards. This 
includes how well the state regulator performs desk audits and 
examinations, whether they take timely action when needed and whether 
they have qualified staff and other review requirements.
    Strong reinsurance solvency regulation is critical to the health of 
the insurance marketplace. This legislation keeps reinsurance solvency 
regulation intact. It does relieve the reinsurer from having to file 
supplemental and at times inconsistent financial information in as many 
as 50 states. Yet, it provides all states with access to financial 
information on a U.S. licensed reinsurer. This streamlined regulation 
will allow U.S. reinsurers to compete more effectively without 
compromising solvency regulation.

    Mr. Cannon. Mr. Plunkett, you're recognized for 5 minutes.

 TESTIMONY OF TRAVIS PLUNKETT, LEGISLATIVE DIRECTOR, CONSUMER 
                     FEDERATION OF AMERICA

    Mr. Plunkett. Good morning, Chairman Cannon and 
Representative Wasserman Schultz. My name is Travis Plunkett, 
and I am the Legislative Director of the Consumer Federation of 
America. I applaud you for holding this hearing today.
    CFA is very concerned about the effect of the Nonadmitted 
and Reinsurance Reform Act of 2006 on the insurance market and 
consumers. In an effort to make regulation of nonadmitted 
insurance lines and reinsurance more uniform, a goal that CFA 
supports if responsible regulation is not sacrificed, the bill 
would establish a feeble and complex oversight regime. It will 
likely provoke States to compete against each other to weaken 
oversight in some cases. It would also leave consumers who have 
been harmed by insured companies vulnerable in the event of a 
company's insolvency.
    In addition, there are some vague, contradictory and 
incomplete requirements in the bill that do raise legal and, as 
I just mentioned, policy questions. I'll touch on four specific 
concerns.
    First, contrary to the stated intent of legislation, 
section 107 appears to open the door to the increased sale of 
poorly regulated, nonadmitted personal lines of insurance like 
auto insurance to individual consumers, not just commercial 
insurance sold to sophisticated corporations.
    Moreover, the bill does not appear to exclude nonadmitted 
personal lines of insurance from its provisions. If this bill 
fosters a sharp growth in underregulated nonadmitted insurance, 
it could seriously harm consumers who buy this insurance.
    Second, great regulatory confusion and ineptitude would 
likely result when the State of domicile for an insured party 
regulates all parts of that entity's insurance transaction. For 
example, Michigan regulators overseeing General Motors' 
insurance transactions probably know very little about dealing 
with earthquake risk in California or hurricane risk in Florida 
in pricing insurance policies or in handling claims resulting 
from such weather events if GM's cars are damaged.
    Moreover, since Michigan is a no-fault State for auto 
insurance regulators, they would likely know very little about 
how tort laws in other States and how pricing and claims should 
be handled. How can 50 regulators each become experts in the 
laws of 50 States? This is regulatory supercomplexity, not 
simplification.
    Third, the bill is based--and this is a significant concern 
for us--it's based on an incorrect assumption that the domicile 
State of an insured party or a reinsurance company will provide 
adequate oversight; and there are a number of ways that the 
bill handcuffs States that would have a legitimate interest in 
regulating both.
    For example, if residents have been harmed by clearly 
abusive insurance practices. Suppose a nonadmitted insurer for 
a company like GM acts in bad faith and refuses to pay 
legitimate claims regarding unsafe automobiles that harm 
drivers in other States. These States would have no ability to 
investigate or sanction that insurance company, while the State 
of Michigan, with limited resources and very little in-State 
impact, would have much less of an incentive to get to the 
bottom of the problem.
    Moreover, a home-State regulator--this is the downside to 
home-State regulation. A home-State regulator has the greatest 
interest in pleasing a large insured party, or in the case of 
reinsurance, a large insurance company and employer based in 
that State. This could lead the regulator to lower insurance 
standards that protect residents and consumers who use that 
company's products and services across the country.
    The bill also specifically prohibits States from requiring 
that insurers seek coverage from admitted carriers before 
turning to nonadmitted insurers. It is not in the public 
interest to foster the growth of a segment of the market that 
does not have to meet State standards unless admitted insurance 
is truly not available.
    For example, guaranty associations in all States do not 
cover claims for surplus lines insurers from other States when 
an insurer or insured entity becomes insolvent. This may be a 
minor problem for the defunct policyholder and defunct insurer, 
but it's certainly a major problem for the people that the 
policyholder may have injured who are left without guaranty 
association protection.
    Final concern--and I mention this in greater depth in our 
testimony--there's another incorrect assumption; and the 
investigations by New York Attorney General Eliot Spitzer show 
this to be true. Large sophisticated corporations were 
victimized by insurers and brokers through bid-rigging, 
kickbacks, hidden commissions and blatant conflicts of 
interests. So it's simply not true that large, sophisticated 
consumers don't need some of the protections that this law 
would do away with.
    In closing, let me say this: It's very clear that the 
drafters of this proposal have not thoroughly considered the 
harmful effects the bill could have on the insurance market, 
those who buy products or services from companies that purchase 
surplus lines or reinsurance, or even on State revenues, not to 
mention certain legal concerns. The bill should require the 
execution of a thorough GAO study on all of these issues as 
opposed to the incomplete study mandated in section 106 before 
any of these provisions are enacted.
    Thank you very much.
    Mr. Cannon. Thank you, Mr. Plunkett.
    [The prepared statement of Mr. Plunkett follows:]

                 Prepared Statement of Travis Plunkett



    Mr. Cannon. Mr. Soto.

TESTIMONY OF ALEX SOTO, PRESIDENT, INDEPENDENT INSURANCE AGENTS 
                      & BROKERS OF AMERICA

    Mr. Soto. Thank you. Good morning, Chairman Cannon, and 
good morning, Congresswoman Wasserman Schultz. It's nice to see 
you again.
    Indeed, my name is Alex Soto, and I am the President of the 
Independent Insurance Agents & Brokers of America. We are the 
largest and the oldest trade organization representing 
independent agents. We have over 300,000 agents, brokers and 
their employees in every State of the Nation, in every big city 
and every small town; and what makes us unique is, as 
independent agents, we are not employees of any single company, 
but rather we represent multiple companies, and through that 
methodology, we try to do the very best for our clients in 
selecting coverage for them.
    How I earn my living is as an independent agent in south 
Florida. I am President of InSource Inc., which is indeed one 
of the largest privately held insurance agencies in south 
Florida. We have our main office in Miami, and we have an 
office in Broward County.
    What we do is, we sell a broad array of insurance products 
to individuals, as well as commercial clients. And we transact 
business primarily in the State of Florida, but we also 
transact business--when our clients have locations in other 
States, we transact business in other States. And consequently, 
we do have a great deal of out-of-State licenses.
    I personally hold licenses, nonresident licenses, in about 
10 to 15 States and, collectively, the agents in my office hold 
more than 25 licenses. One of my partners has a surplus lines 
license, which allows us to provide coverage for unique and 
hard-to-place risk, predominantly in commercial lines. 
Congresswoman Wasserman Schultz was correct that, 
unfortunately, we are having to use this mechanism more in the 
State of Florida because of the crisis that we have in 
windstorm property coverage.
    We also work very closely with a number of surplus lines 
brokers in order to expand and broaden our market access and 
better serve our clients--which is what we are all about.
    The challenges of the current State-by-State system has 
already been mentioned. Each State regulation is different. 
Surplus lines licenses must be held in every State that you do 
business. Some States require--some States require due 
diligence steps, and other States do not. Some States require a 
paper trail; others, you can apply to them electronically. The 
surplus lines taxes vary from State to State and the allocation 
methodology, and the interpretation by them is quite confusing.
    All of these spell out inefficiency, more cost and less 
time that we can take to serve our clients and advise them as 
to what they should secure in terms of coverage. The 
legislation before us solves many of the problems. Thus, our 
trade association, the ``Big I,'' support H.R. 5637.
    The legislation would make the insured home State, as was 
mentioned before, to be the source of regulation. For 
sophisticated consumers it waives the requirement of due 
diligence: The payment of taxes to one location, and then, by 
compact, the different States organize themselves to divvy that 
up.
    So we support the specific reforms of this bill RIMS 
supported, that are the users of this methodology 
predominantly. We also, more importantly, support the approach 
that the bill takes, which is basically legislation to preserve 
the State system of insurance regulation.
    I happen to believe that regulation closer to home is the 
best regulation. The best role of the Federal Government, in 
our opinion, is pragmatic, pragmatic reform that utilizes 
targeted Federal action to improve State regulation.
    It is our hope that the next step that is taken by the 
Congress is modernization and reformation of the producer and 
insurance company licensing.
    Thank you, Mr. Chairman.
    Mr. Cannon. Thank you Mr. Soto.
    [The prepared statement of Mr. Soto follows:]

                    Prepared Statement of Alex Soto

    Good morning Chairman Cannon, Ranking Member Watt, and Members of 
the Subcommittee. My name is Alex Soto, and I am pleased to be here 
today on behalf of the Independent Insurance Agents & Brokers of 
America (IIABA) and to provide my association's perspective on the 
surplus lines/reinsurance legislation that is the focus of this 
hearing. I am the current President of IIABA, and I am also President 
of InSource, which is a company that was formed from a merger of three 
of Miami's oldest insurance agencies. Through our practice specialties, 
InSource has had and continues to have a long-term and total commitment 
to our South Florida community.
    IIABA is the nation's oldest and largest trade association of 
independent insurance agents and brokers, and we represent a nationwide 
network of more than 300,000 agents, brokers, and employees. IIABA 
represents independent insurance agents and brokers who present 
consumers with a choice of policy options from a variety of different 
insurance companies. These small, medium, and large businesses offer 
all lines of insurance--property, casualty, life, health, employee 
benefit plans, and retirement products.

             IIABA COMMENDS H.R. 5637 AS THE RIGHT APPROACH

    Chairman Cannon and Ranking Member Watt, I want to thank you for 
your attention to this matter, which is important to members of the 
IIABA. I also want to commend the House Financial Services Committee 
for passing this legislation through a bipartisan voice vote. Special 
recognition should be extended to Congresswoman Ginny Brown-Waite of 
Florida, Congressman Dennis Moore of Kansas, and Capital Markets 
Subcommittee Chairman Richard Baker who drafted this legislation. We 
believe that overall the bill is the right approach to modernize 
insurance regulation, and we are happy to support it. We look forward 
to working with this Subcommittee and Committee during your review of 
the legislation.
    In particular, this legislation preserves the state system of 
insurance regulation while achieving much-needed uniformity. Virtually 
every sector--insurers, producers, consumers and even regulators 
themselves--has voiced significant concerns with the inefficient 
patchwork of different laws and regulations that characterize the 
current regulatory system. Although we also believe that the current 
state-based insurance regulatory system is in need of greater 
efficiency and uniformity, IIABA opposes constructing a completely new 
regulatory scheme at the federal level through mandatory or optional 
federal regulation. A new, federal insurance regulatory system would 
dismantle the inherent strengths of state regulation, namely diversity, 
geographical uniqueness, innovation and responsiveness to consumers.
    IIABA believes the best use of federal legislative authority is to 
help make the existing state system more efficient and uniform through 
a mix of national standards with state enforcement and uniformity 
achieved through both incentives and preemption of certain state laws. 
This approach offers the best solution because it will promote more 
uniform standards and streamlined procedures from state to state; 
protect consumers and enhance marketplace responsiveness; and emphasize 
that oversight can best be met by improving the state-based system. The 
result for all stakeholders would be a more efficient, modern and 
workable system of state regulation.
    The Nonadmitted and Reinsurance Reform Act of 2006 singles out two 
areas--surplus lines regulation and reinsurance supervision--where 
there is general consensus for early action. We support this step-by-
step approach to achieve reform. While IIABA is eager also to have 
Congress address the need for uniformity and streamlining in producer 
licensing as well as other reform areas, we strongly support the 
general approach taken in H.R. 5637.

      ROLE OF AGENTS & BROKERS IN THE NONADMITTED INSURANCE MARKET

    Nonadmitted, or surplus lines, insurance provides coverage for 
unique or hard to place property and casualty risks when unavailable or 
unaffordable in the traditional, licensed or ``admitted'' insurance 
market. The role of independent insurance agents and brokers in the 
nonadmitted market is just as important as their role in the overall 
insurance market. Independent insurance agents and brokers invest 
substantial effort to identify policyholders' wants and needs; 
understand the complex terms of policies available; assess the products 
available and present choices to the consumer about coverage, price, 
service, and financial strength of carriers; and remain available to 
assist with any questions and changes as needed.
    IIABA believes that continued state supervision of this market is 
necessary to ensure that the nonadmitted marketplace continues to 
function as the ``safety-valve'' for the overall insurance market for 
hard-to-place risks. Nevertheless, the current state-based regulatory 
scheme is burdened by inefficiencies that disrupt the non-admitted 
marketplace with respect to the allocation and remittance of premium 
taxes, licensing of nonresident surplus lines brokers, and duplicative 
regulation of the nonadmitted market generally.

      NEED FOR UNIFORMITY IN PREMIUM TAX ALLOCATION AND REMITTANCE

    Premium tax allocation and remittance schedules vary significantly 
from state to state. Surplus lines brokers are responsible for 
determining which state's allocation formula governs a transaction 
involving a multi-state surplus lines risk. State surplus lines laws 
require that a licensed surplus lines agent or broker placing coverage 
remit taxes to the state on the portion of premium allocated to that 
state. State laws do not, however, contain mechanisms for the 
remittance of premium taxes to other states. Moreover, nonresident 
surplus lines agents and brokers have no guidance on which state 
surplus lines laws govern multi-state surplus lines transactions. As a 
result of the lack of a universally applicable allocation formula for 
multi-state risks and sufficient guidance on which state's laws govern 
a multi-state surplus lines transaction, surplus lines agents and 
brokers attempting to comply with lawful requirements of the various 
states often are caught between conflicting rules and claims on premium 
tax revenues. The confusion and conflicts result in inefficiencies and 
expenses which ultimately affect policyholders in addition to the 
producing agents and brokers.
    IIABA supports the Nonadmitted Insurance and Reinsurance Reform Act 
of 2006 because it eliminates this confusion. Under the bill, a surplus 
licenses licensee (the broker accessing the nonadmitted market) need 
only remit premium taxes to the home state of the insured, and if 
requested, a report of the location and insured values of properties 
and risks by states covered under the policy being placed. The states 
then determine how the taxes will be allocated, either by compact or by 
other procedures developed by the states, and in each case using the 
allocation information provided by the surplus lines broker.

             FIRST STEP IN UNIFORMITY IN PRODUCER LICENSING

    Surplus lines agents and brokers engaging in transactions that 
involve multi-state risks currently must obtain and maintain general 
agent or broker licenses and surplus lines licenses in many if not 
every jurisdiction in which the exposures are located. Some states 
require that these agents and brokers obtain and maintain corporate 
licenses as well. This means that a surplus lines broker or agent could 
potentially be required to obtain and maintain up to 100 separate 
licenses in order to handle a single multi-state surplus lines 
transaction. Moreover, each state has different licensing requirements 
and renewal schedules. These duplicative licensing requirements cause 
administrative burdens which impede the ability of agents and brokers 
to effectively and efficiently service their customers' policies. 
Perhaps most importantly, these onerous licensing requirements create 
expenses which ultimately impact policyholders. The Nonadmitted 
Insurance and Reinsurance Reform Act alleviates the burdens of 
duplicative licensing requirements by relying on the insured's home 
state for licensing and encouraging states to participate in a national 
insurance producer database without diminishing the quality and 
expertise of the surplus lines insurance distribution channel.

                 UNIFORMITY IN SURPLUS LINES REGULATION

    Surplus lines agents and brokers must typically comply with the 
laws and regulations of multiple states with respect to coverage for 
multi-state risks. As a result of the lack of sufficient guidance on 
which state law governs a multi-state surplus lines placement, agents 
and brokers who have obtained nonresident surplus lines licenses find 
themselves attempting to comply with the surplus lines laws of every 
applicable state. These agents and brokers are subject to multiple tax 
filings, multiple diligent search requirements (which vary from state 
to state), multiple regulatory filings, and multiple information 
notices on the declarations page or policy, among other duplicative 
regulatory requirements.
    The Nonadmitted Insurance and Reinsurance Reform Act effectively 
streamlines surplus lines regulation by making the insured's home state 
the source of regulation for individual surplus lines transactions. In 
addition, the Act streamlines access to the surplus lines market by 
waiving state due diligence requirements for the sophisticated 
commercial entities that constitute a significant portion of 
policyholders in this market.
    The bill also has a second title that would, in much the same way 
as the nonadmitted insurance title, seek to reduce overlapping, 
multiple-state regulation of both reinsurer financial condition and 
credit-for-reinsurance on the balance sheets of ceding insurers. While, 
IIABA is less directly concerned with this title, except to the extent 
some of our members serve as brokers of outward reinsurance programs, 
we nevertheless note and applaud that this reinsurance title also seeks 
to retain and improve state regulation rather than create a federal 
regulator.

                               CONCLUSION

    The IIABA supports the Nonadmitted and Reinsurance Reform Act of 
2006. We appreciate the interest of this Committee in this issue and 
applaud the bipartisan actions of the House Financial Services in 
passage of the legislation. We urge this Subcommittee and Committee 
also to promptly act on this bill. IIABA believes that this legislation 
is an excellent example of a pragmatic reform approach that utilizes 
targeted, federal tools to improve the state-based regulatory system. 
We are also hopeful that this approach will be used in the near future 
to facilitate additional reforms in the state-based system of insurance 
regulation. Thank you again for the opportunity to testify.

    Mr. Cannon. We're going to go to the Ranking Member to 
begin the questioning.
    Ms. Wasserman Schultz.
    Ms. Wasserman Schultz. Thank you, Mr. Chairman.
    Mr. Soto, thank you very much for joining us. And I am 
particularly pleased that the ``Big I'' is currently chaired by 
a Floridian.
    You mention that you prefer regulation closer to home, and 
if you would, expand on that.
    Mr. Soto. Sure.
    Ms. Wasserman Schultz. That would be helpful.
    Mr. Soto. Well, my experience over the years has been that, 
indeed, regulation closer to home will be more nimble and 
better to react. Let me give you a couple of examples.
    After Hurricane Andrew, a few insurance companies started 
nonrenewing and canceling policies of affected policyholders. 
We got ahold of our insurance commissioner, and he, within 24 
hours, put a stop to that and basically said, until a home is 
repaired or you're fully compensated, you cannot nonrenew.
    Where am I going to go with a home with no roof to try to 
place the insurance? Try to imagine with a Federal regulator, 
how long it would take to react would be absolutely awful.
    We're having a serious property crisis right now in 
Florida, and our cabinet, our governor, organized themselves to 
create a residual market. Within 4 weeks we've gone from not 
having it to now we're beginning to get it.
    The last comment I would make, in 1983 to '85, I was part 
of a group that came up to Washington with a goal of reforming 
flood insurance; and we quickly realized that the reform that 
they were looking for was just administrative reform because 
the thought process was that it would take an act of Congress 
to make any significant changes.
    We recommended that--there is a huge gap in the Federal 
flood program, and that is the lack of business interruption 
and additional living expense. Nothing was enacted. Twenty-five 
years later we're finding the Katrina victims, many of them are 
going out of business because they have no business 
interruption or no additional living expenses.
    So I think local regulation is better for my clients and 
for the people that I represent.
    Ms. Wasserman Schultz. Thank you. And since we're here, can 
you talk about what other steps you think need to be taken in 
addition to this? This will take us a few steps down the road, 
but what else could----
    Mr. Soto. Well, this I think will expand the marketplace. 
It's not a magic pill for the problems that the coastal areas 
have, but anything that expands the marketplace a little bit is 
good. When insurance companies compete for my clients' 
business, the client wins, coverage is better and premiums go 
down.
    I happen to support what you mentioned earlier, the bill 
which is what we need ultimately, a Federal reinsurance 
program. Natural disasters are a national phenomenon, and we 
need to address that in order to shore up our coastal problem; 
and we have two ways to do it. Air Force One gets up in the 
air, and we start shoving FEMA money out the back; or we do it 
front end, logically, systemically, and people pay actuarially 
sound premiums for that.
    Ms. Wasserman Schultz. Mr. Chairman, I have just a couple 
more questions.
    But, you know, I am someone who has prided myself, in 14 
years in public office, on being somewhat of a consumer 
champion. And, you know, Mr. Plunkett has raised some concerns; 
and I am wondering if you could address those concerns. Because 
my understanding is that RIMS, which is the organization that 
essentially is the consumer representative of the companies 
that are interested in this type of insurance, is supportive of 
this legislation.
    So if you could address some of the things that--items you 
have raised; and anyone else who wants to address those, as 
well.
    Mr. Soto. To a great extent, he's right, that there could 
be some situations where there is some abuse. I don't believe 
that you ought to take an entire system and stop the 
reformation of a system because there are going to be a few 
pockets of possible abuse.
    The fact of the matter is that the ratio between commercial 
lines and personal lines on a national basis is about 33-to-1. 
In other words, it's a $33 billion industry of which $1 billion 
is personal lines.
    So while he's right, you ought not to legislate on the 
basis of the exception being the cure.
    Mr. Sinder. With all due respect to someone whom I very 
much respect, I do not think he's right, and I'd like to 
address it specifically.
    Basically, there are two things that are interwoven in the 
critiques that were made. One is that the alternative to the 
nonadmitted marketplace is the admitted marketplace. Well, 
that's not so. As you are seeing in Florida with the 
catastrophic risk, the alternative to the nonadmitted 
marketplace is no coverage at all. So I think you have to 
return to the idea, this is not compulsory coverage, you don't 
have to have it. So what you are insuring is the corporate 
treasury which, with all due respect, allows the corporation to 
continue to do business and employ people and serve the public 
in its own way.
    The other great confusion that is interwoven in the 
critiques is the idea that, somehow, if you identify the 
particular State that's going to be charged with the 
regulation, you are going to interfere with the rate-and-form 
regulation of the policy whether or not the torts are covered, 
because they're different from one State to the other, whether 
or not the Michigan regulator is adequate to evaluate 
earthquake exposure or hurricane exposure.
    Well, the fallacy there is there is no rate-and-form 
regulation in the nonadmitted marketplace. The only regulation 
of the nonadmitted market--and there's no claim regulation 
either in terms of the carriers making payments.
    There is no regulation of the carrier at all in the 
nonadmitted marketplace; the regulation is of the broker. It 
governs when they can access the market, whether they're 
licensed to access the market, with whom they can place 
coverage by different criteria, or white lists, that are 
established by the National Association of Insurance 
Commissioners; and then, most importantly for many States, how 
they get their piece in terms of the premium tax payment.
    There is no regulation of the policy itself or the claims 
payment process. And so those critiques may be very fair in 
another context; they are not fair with respect to the 
nonadmitted insurance piece covered by title I.
    Ms. Laws. Representative Wasserman Schultz, could I also 
respond?
    Mr. Cannon. The gentlelady's time has expired, but if you 
would like to respond, I think Mr. Plunkett would also like to 
respond. So we'll have you respond and then he may respond.
    Ms. Laws. I'll be brief.
    One of Mr. Plunkett's assumptions, he questioned the 
assumption as to whether the domiciliary regulator had the 
incentive to provide adequate oversight to the reinsurance 
transaction, and he questioned the impact on the consumer.
    First of all, I would reiterate that there is no consumer 
aspect to the actual reinsurance transaction itself. But more 
importantly, I would say that the States have absolutely no 
incentive in not regulating the financial solvency of a 
reinsurer, which can have adverse impacts on the insurer and 
consumer ultimately. Every State regulator has every incentive 
to make sure that those insurers are going to be financially 
solvent, as demonstrated by the fact that reinsurers are paying 
such large parts of the catastrophe losses.
    Thank you.
    Mr. Plunkett. Well, it's a long list here.
    Let's start with what Mr. Soto had to say. $1 billion in 
personal lines; it's just under, he's correct. Our concern is 
that given the intent of the legislation that that number would 
grow significantly.
    I mean, it's one issue if a sophisticated corporation is 
buying commercial insurance; it's another issue if the 
nonadmitted market for personal lines grows. Why not just 
exclude personal lines? Why not make it very clear in the 
legislation that it's not covered?
    The next item, I'm not saying that in all cases the 
alternative to the nonadmitted market is the admitted market. 
We know that in some cases we're talking--in many cases we're 
talking about unusual risks that have to be covered, or risks 
that are not available in the admitted market, but this bill 
forbids States from requiring brokers to do what they have to 
do now, which is to do a search of the admitted market before 
placing somebody with nonadmitted insurance. So we're very 
concerned that nonadmitted lines could grow significantly, and 
especially concerned about the impact on personal lines.
    I disagree that there's no consumer impact when it comes to 
regulation of reinsurance. If one State--entities in that State 
say that the domicile State is 1 percent of the reinsurance 
coverage and in another State it is 75 percent, but that State 
is not the domiciled State, why not allow that State, in some 
circumstances, some regulatory authority here?
    Thank you very much.
    Mr. Cannon. Thank you.
    Mr. Sinder, it looked like you had wanted to respond there.
    Mr. Sinder. To the point about access to the market, the 
legislation requires that you're governed there by the home 
State of the company, and there their rules govern. And every 
State says you have to evaluate whether or not the coverage is 
available in the marketplace. That rule would continue; the 
difference is the documentation of the availability.
    Right now, some States say you need five affidavits; other 
States say you need to document your own file your own way; 
other States say you need three letters for carriers. That gets 
to be a pretty thick file for single placement for multistate 
exposure.
    So it's not that the rule goes away. It's just that it gets 
reduced to whatever the requirement is in the insured's home 
State.
    Mr. Cannon. Thank you, Mr. Sinder.
    Let me explain why we're here. This is the Subcommittee on 
Administrative and Commercial Law, and we oversee interstate 
transactions, regulations that interfere with commerce and also 
interstate compacts. So NAIC is a compact that we--that we 
oversee. And what I'm hearing here is there is clearly a bunch 
of activity by the individual States that affects the 
smoothness with which commerce should happen.
    But I'm intrigued by the discussion that we're having here, 
and we've been talking about this--Mr. Plunkett initially 
talked about auto insurance where--I suspect there are not many 
States that don't have a lot of auto insurance policies.
    Another area that is a little different is in health 
savings accounts, where many States don't have much in the way 
of offerings. I think Utah has two or three health savings 
accounts; those are recent and they're not of very general 
applicability.
    Is it possible in an area of--consumer area, as opposed to 
a sophisticated business that we might move into insurance 
health savings accounts or other kinds of personal insurance 
with nonadmitted insurers if this blows past, Mr. Sinder?
    Mr. Sinder. Right now the nonadmitted insurance marketplace 
is a property and casualty insurance marketplace, not a 
benefits insurance marketplace. So this legislation would have 
no direct effect on things like health savings accounts, which 
are really securities products that are tied to the 
availability of--if you purchase a certain type of health 
coverage.
    On the auto, in most States, maintenance of auto insurance 
is compulsory, and so you have to have the auto insurance in 
order to maintain either an individual or a commercial license. 
When insurance is compulsory, it's not just that you're 
required to maintain insurance; you're also required to 
maintain insurance from an admitted carrier regulated by that 
State. So if you are, for example, General Motors and you have 
drivers in all the States, each of those States requires you to 
maintain insurance coverage for those drivers with carriers 
admitted in those States. So it really isn't a type of coverage 
that's amenable to a surplus lines product that's only for 
noncompulsory insurance.
    Now, to the extent for those same drivers or for your 
driver pool, you would like to purchase some top-end coverage, 
that very well may be a product that's amenable to surplus 
lines coverage, and it could be purchased in that marketplace. 
But, again, it's something you are purchasing as extra 
protection, not coverage that's required by the State.
    Mr. Cannon. Mr. Plunkett, you were concerned that the one 
billion of the 33 billion could grow dramatically. What areas 
would that grow in?
    Mr. Plunkett. Excuse me. Currently, we have nonadmitted 
lines for personal insurance sold in any area you can think of. 
I mention auto insurance and property coverage for brush fires 
out West. It tracks normal personal lines in many ways, so 
we're concerned on property casualty insurance, as was 
mentioned, about the growth of these personal lines of 
nonadmitted insurance.
    Mr. Cannon. Mr. Sinder.
    Mr. Sinder. Mr. Chairman, it's true that you can purchase 
auto insurance in the nonadmitted marketplace, but not for your 
collision coverage and not for your basic, required auto 
insurance coverage. What you purchase it for is, if you have a 
very specialized automobile, a classic antique car that your 
normal admitted carriers won't cover the collision on the auto 
itself, so you purchase a slice of coverage. And you may do it 
through the nonadmitted marketplace, but it if you are a 
consumer, you are an individual, the State in which you reside, 
they regulate that transaction. And so you still have all the 
normal regulatory rules applied; it's just that for certain 
slices of noncompulsory insurance, you may indeed access that 
nonadmitted marketplace.
    But the other thing I would like to point out is the brush 
fire example. The reason you may need to do so for that type of 
exposure is because you can't get that coverage in the admitted 
marketplace, so this marketplace really fills a gap. I don't 
believe that for most consumers who reside in a single State, 
this will have any effect at all on the way in which their 
insurance transactions are regulated.
    Mr. Cannon. I don't know if any of you can actually answer 
this question clearly, but we may guess: What effect is this 
legislation going to have on NAIC as an institution and on 
individual commissioners or individual States if it's passed? I 
take it there would be a significant amount of work to put it 
in place, but I suspect there would actually be less work and 
more clarity on revenues, at least for those States.
    Mr. Sinder. Yes. I think that at the front end there is 
some work to put a compact together to effectuate the tax-
sharing provisions, and the NAIC has already begun that process 
at their last meeting. This has kind of reinvigorated their 
efforts on this. They had been making efforts to do a surplus 
lines compact for over 20 years and those efforts had stalled, 
so this has reinvigorated those. But once the compact is in 
place, the bulk of the surplus lines transactions are for 
single-State placements.
    This legislation has absolutely no effect on the regulatory 
control or efforts related to those placements. The place where 
it will--you will see some savings is, you won't see for the 
multistate transactions the duplicative filings from State to 
State, so there should be some administrative savings for all 
insurance departments.
    Mr. Cannon. Will there be a shift of revenues to States 
that have more corporations based in those States and away from 
States where you have branch offices? And will that be 
significant? You, Mr. Sinder or anyone else.
    Mr. Sinder. Well, the CBO did a study on this and they 
predicted a small amount of tax shifting. It's an incredibly 
difficult calculation to make.
    Mr. Cannon. Is that Federal tax by the CBO or is that 
intrastate?
    Mr. Sinder. They evaluated both. They saw some intrastate 
tax shifting. But there's a couple points here. First of all, 
the expectation is that the overall tax revenue to the States 
will actually increase because there is a sense that there is 
some--it's difficult to comply with the rules, so some don't--
no members of the council, of course, but others who may be out 
there who are playing in this area.
    Mr. Cannon. And you may just not know.
    Mr. Sinder. No one has told me. That's definitely true. I'm 
sorry, I lost my train of thought.
    Mr. Cannon. No members are not paying, so there should be 
net--with the noncompliance removed, there should be a net 
benefit or a net gain.
    Mr. Sinder. There should be a net benefit. But initially 
some thought that the large States would be beneficiaries of 
this. But at the House Financial Services hearings there was 
concern that some small States where you have--large 
corporations that reside would actually be the big 
beneficiaries because they wouldn't pay the tax based on their 
nationwide exposure.
    The truth of the matter is that once the compact is in 
place, it should be a much fairer, more efficient tax-sharing 
mechanism, and in the interim it's very difficult to predict 
the tax impact because some companies that are large--and the 
example used at the House Financial Services Committee was Wal-
Mart--they may be in the surplus lines marketplace, but they 
may self-insure for the bulk of these risks, as well; and by 
removing the regulatory impediments, what you may do is shift 
them back to using more traditional, nonadmitted carriers to 
satisfy the risk exposure.
    Mr. Cannon. Thank you. I've gone over my time here, but so 
did the Ranking Member slightly. So let me just wrap up by 
saying, it makes an enormous amount of sense, Mr. Soto, as you 
suggested, to have regulation at the lowest level. As you point 
out, can you imagine FEMA responding the way the--the way the 
Florida commissioner of insurance responded? It is beyond 
conception.
    That's why I think this is really a cool Committee, and we 
welcome Ms. Wasserman Schultz, however temporarily, to the 
Ranking Member's seat.
    Do you have other questions?
    We would like to thank the panelists for being here today. 
I think it has been very informative, and we look forward to 
helping move this legislation forward. Thank you very much.
    [Whereupon, at 11 a.m., the Subcommittee was adjourned.]

                                 
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