[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
COMMERCIAL INSURANCE MODERNIZATION
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE, AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
JUNE 21, 2006
__________
Printed for the use of the Committee on Financial Services
Serial No. 109-101
U.S. GOVERNMENT PRINTING OFFICE
31-530 PDF WASHINGTON : 2006
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair DARLENE HOOLEY, Oregon
RON PAUL, Texas JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio BRAD SHERMAN, California
JIM RYUN, Kansas GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio BARBARA LEE, California
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut JOSEPH CROWLEY, New York
VITO FOSSELLA, New York WM. LACY CLAY, Missouri
GARY G. MILLER, California STEVE ISRAEL, New York
PATRICK J. TIBERI, Ohio CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota JOE BACA, California
TOM FEENEY, Florida JIM MATHESON, Utah
JEB HENSARLING, Texas STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida DAVID SCOTT, Georgia
J. GRESHAM BARRETT, South Carolina ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida AL GREEN, Texas
RICK RENZI, Arizona EMANUEL CLEAVER, Missouri
JIM GERLACH, Pennsylvania MELISSA L. BEAN, Illinois
STEVAN PEARCE, New Mexico DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas GWEN MOORE, Wisconsin,
TOM PRICE, Georgia
MICHAEL G. FITZPATRICK, BERNARD SANDERS, Vermont
Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
JOHN CAMPBELL, California
Robert U. Foster, III, Staff Director
Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises
RICHARD H. BAKER, Louisiana, Chairman
JIM RYUN, Kansas, Vice Chair PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois MICHAEL E. CAPUANO, Massachusetts
EDWARD R. ROYCE, California HAROLD E. FORD, Jr., Tennessee
SUE W. KELLY, New York RUBEN HINOJOSA, Texas
ROBERT W. NEY, Ohio JOSEPH CROWLEY, New York
VITO FOSSELLA, New York, STEVE ISRAEL, New York
JUDY BIGGERT, Illinois WM. LACY CLAY, Missouri
GARY G. MILLER, California CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota JOE BACA, California
PATRICK J. TIBERI, Ohio JIM MATHESON, Utah
J. GRESHAM BARRETT, South Carolina STEPHEN F. LYNCH, Massachusetts
GINNY BROWN-WAITE, Florida BRAD MILLER, North Carolina
TOM FEENEY, Florida DAVID SCOTT, Georgia
JIM GERLACH, Pennsylvania NYDIA M. VELAZQUEZ, New York
KATHERINE HARRIS, Florida MELVIN L. WATT, North Carolina
JEB HENSARLING, Texas ARTUR DAVIS, Alabama
RICK RENZI, Arizona MELISSA L. BEAN, Illinois
GEOFF DAVIS, Kentucky DEBBIE WASSERMAN SCHULTZ, Florida
MICHAEL G. FITZPATRICK, BARNEY FRANK, Massachusetts
Pennsylvania
JOHN CAMPBELL, California
MICHAEL G. OXLEY, Ohio
C O N T E N T S
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Page
Hearing held on:
June 21, 2006................................................ 1
Appendix:
June 21, 2006................................................ 35
WITNESSES
Wednesday, June 21, 2006
Bouhan, Richard M., Executive Director, National Association of
Professional Surplus Lines Offices, Ltd........................ 24
Gates, David A., Senior Vice President and General Counsel/
Secretary, Generali USA Life Reassurance, on behalf of the
American Council of Life Insurers.............................. 23
Heinze, Bernd G., Esq., Executive Director, American Association
of Managing General Agents..................................... 12
Minkler, Tom, President, Clark-Mortenson Agency and Chairman,
Government Affairs Committee, Independent Insurance Agents and
Brokers of America............................................. 8
Nutter, Franklin W., President, Reinsurance Association of
America........................................................ 22
Ochenkowski, Janet, Senior Vice President, Risk Management for
Jones Lang LaSalle, on behalf of Risk and Insurance Management
Society........................................................ 14
Sinder, Scott A., Esq., The Scott Group, on behalf of the Council
of Insurance Agents and Brokers................................ 10
APPENDIX
Prepared statements:
Brown-Waite, Hon. Ginny...................................... 36
Kanjorski, Hon. Paul E....................................... 38
Bouhan, Richard M............................................ 40
Gates, David A............................................... 50
Heinze, Bernd G.............................................. 56
Minkler, Tom................................................. 61
Nutter, Franklin W........................................... 68
Ochenkowski, Janice.......................................... 76
Sinder, Scott A.............................................. 81
Additional Material Submitted for the Record
Written statement submitted by American Association of
Independent Claims Professionals (AAICP)................... 100
Hon. Ginny Brown-Waite:
Responses to questions submitted to AAMGA.................... 103
Responses to questions submitted to RAA...................... 107
COMMERCIAL INSURANCE MODERNIZATION
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Wednesday, June 21, 2006
U.S. House of Representatives,
Subcommittee on Capital Markets,
Insurance, and Government
Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:02 p.m., in
room 2128, Rayburn House Office Building, Hon. Richard H. Baker
[chairman of the subcommittee] presiding.
Present: Representatives Baker, Bachus, Royce, Kelly,
Kennedy, Tiberi, Brown-Waite, Feeney, Campbell, Kanjorski,
Moore, Capuano, and Miller of North Carolina.
Chairman Baker. I call this meeting of the Capital Markets
Subcommittee to order, and I welcome all of our witnesses and
participants today.
Just by way of advisory, Mr. Kanjorski and I were just
observing the likelihood of a significant series of votes
commencing around 2:30.
The staff will be visiting with those on the second panel
to see if we can figure out a way to facilitate moving ahead to
get all witnesses' testimony on the record.
Once we get into that lengthy consideration, we hate to
keep everybody waiting around, but at the same time, we don't
want to trouble you with preparation of the testimony and not
have it received.
They may be visiting with some of you in the next couple of
minutes to figure out how we can best manage this issue.
Today, the committee meets to discuss the need for reform
in the arena of insurance, and particularly, to discuss the
assets of H.R. 5637, now pending before the committee.
As is evident, the differing State regulatory structure
presents considerable impairment to the development of product
by not enabling competitive forces to work properly, resulting
in fewer offerings to consumers and, all too often, an
unnecessary increase in premiums.
Today, we focus really on a very narrow sector of the
problem, the non-admitted, or what is traditionally known as
the surplus lines.
These companies have become increasingly important since 9/
11, as well as the unfortunate catastrophes that have impacted
the Gulf States.
This is a commercial marketplace and generally viewed as
being very well-developed and sophisticated, without any State
price controls or requirements of mandatory coverage.
Given the sensitivity of the terrorism issue, the Port of
New Orleans, the oil and gas business offshore, our shipping
interests, the movement of hazardous materials, and the high
catastrophic impact of hurricanes, this is of unique and
considerable importance to the Members from my State.
Unfortunately, this last resort market is, in my opinion,
being hampered by burdensome and conflicting rules--State rules
on premium tax collection, broker licensing requirements, and
over-regulation of commercial purchasers.
Re-insurance is vital to our marketplace and enabling it to
function in a more efficient manner, I believe, is beneficial
to us all.
I specifically want to commend Mr. Moore and Ms. Brown-
Waite for their co-sponsoring, in a bipartisan way, H.R. 5637,
which I think is a very targeted remedy to a clearly identified
problem.
Establishing uniform tax treatment, creating a home State
deference, streamlining access to non-admitted markets, and
compelling States to recognize their own re-insurance
accreditation standards, are among its chief and important
goals.
In the coming months, it is my intention to take a closer
look at other areas of concern, such as agent and company
licensing, freedom in pricing, and speed to market issues.
There is much work to be done in all of those areas.
However, the surplus lines and re-insurance reform, I
think, are very important and a big first step, and I
appreciate all those who will be heard from today and their
contribution in moving the committee work forward.
Chairman Baker. Mr. Kanjorski?
Mr. Kanjorski. Mr. Chairman, we return this afternoon to a
topic that we have often discussed in recent years, the need
for insurance regulatory reform. This time, we will focus on
the issue of commercial insurance modernization.
As I have previously said, no matter what side one takes in
this long-standing debate on regulatory efficiency, it has
become increasingly clear to me that this is no longer a
question of whether or not we should reform insurance
regulation in the United States, instead, it has become a
question of how we should reform insurance regulation.
As you know, Mr. Chairman, we have begun to develop a
growing consensus in Congress about the need to improve
insurance regulation.
During our previous hearings on insurance reform, we have
also received extensive testimony from many witnesses
advocating the creation of an optional Federal charter, a
proposal that I believe merits our attention.
Furthermore, since our last hearing on insurance
regulation, some of our colleagues in the Senate have
introduced Senate Bill 2509, the National Insurance Act, to
create an optional Federal charter.
Rather than overlaying Federal mandates on top of State
regulations, an optional Federal charter would, in my view,
create a sensible, separate, and streamlined regulatory system.
In the future, Mr. Chairman, I hope we will take the time
to convene hearings on, and study the implications of, their
proposal.
Nevertheless, the focus of today's proceedings is H.R.
5637, the Non-Admitted and Re-Insurance Reform Act. Many
sophisticated participants in our insurance markets have
complained about problems in the regulation of surplus lines
and re-insurance, and H.R. 5637 seeks to address these
concerns.
Large commercial entities, major insurers, and re-insurance
companies all operate across State lines. They both want and
need greater regulatory efficiencies. As I have learned more
about these concerns about licensing, invoicing, and
documenting, I have become increasingly sympathetic about the
need to address them.
Before moving forward with consideration of this bill,
however, we need to hear from the National Association of
Insurance Commissioners (NAIC). Last year in testimony before
our panel, the president of the NAIC noted that Federal
legislation, ``may be needed at some point to resolve
conflicting State laws regulating multi-state transactions,''
involving surplus lines. She also observed that Federal
legislation was ``not needed'' in the area of re-insurance.
The development of good public policy requires the input of
all interested parties and constituencies. In this case, the
NAIC is one very interested party. Even if we ultimately decide
to disagree, we need to engage them in a constructive dialogue.
While H.R. 5637 is well-intentioned, I am also somewhat
concerned that proceeding with piecemeal reform legislation
like this bill could hamper future efforts to adopt more
comprehensive proposals like the optional Federal charter.
In the area of health insurance, the many Federal mandates
that we have imposed have made it more difficult to develop a
national consensus on far-reaching reform. We should not repeat
that mistake here. Nevertheless, I also recognize that we
should not allow the proverbial perfect to be the enemy of the
good.
In addition, I am concerned that this legislation does
little to establish a Federal expertise in the area of
insurance. At times, this lack of expertise has caused
difficulties for us.
For example, although many Members of Congress had concerns
about the insurance industry's ability to respond to the 2001
terrorist attacks, they had difficulty in immediately
identifying Federal experts to advise them in these matters.
The deficiency of Federal knowledge about the insurance
industry might have also impeded our efforts to adopt
expeditiously the terrorism re-insurance backstop law. As a
result, we may want to consider how we could improve H.R. 5637
to enhance the Federal Government's understanding of the
business of insurance.
In closing, Mr. Chairman, I commend you for continuing to
focus our committee on insurance regulation. These are
important discussions for us to have, and important matters for
us to resolve.
Chairman Baker. I thank the gentleman for his statement.
Ms. Brown-Waite?
Ms. Brown-Waite. Thank you very much. I certainly want to
thank you, Mr. Chairman, for holding this hearing today and
look forward to hearing from the witnesses who are on the
panels as well.
This subcommittee has been engaged in overall insurance
reform for several years, and in this endeavor, there are
dozens of issues that Congress must consider.
I have introduced H.R. 5637, the Non-Admitted and Re-
Insurance Reform Act, will provide solutions to two aspects of
that reform.
The bill does have bipartisan support. Today, the
regulation in 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 was to transport a
product, say parts for a space shuttle, to Houston, Texas, the
non-admitted insurance company they use must comply with the
regulations of at least five different States.
Oftentimes, these regulations will conflict, making it
impossible with today's complex situation out there, for one
company to comply with all of them.
This situation leaves policyholders and underinsured
individuals with little choice of providers.
Moreover, most of the companies that purchase insurance in
the non-admitted markets do so every day. These sophisticated
commercial entities have educated risk advisors on staff with a
thorough knowledge of the market and their risk exposure.
Yet, in most States, these companies are required to shop
around the admitted market and be denied several times for
coverage that they know they cannot get, so they should not
have to make those phone calls, and only then are they
permitted to shop in the surplus lines market.
This practice is needless and cumbersome, and only adds to
the cost to the policyholder.
On another front, in the re-insurance market, some State
regulators are taking it upon themselves to throw out
arbitration agreements between re-insurance providers and the
primary carriers. These are contractual agreements decided upon
by sophisticated parties on both sides of the transaction to
settle disputes without tying up courts.
If these agreements are valid in a State that is accredited
by 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 that 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, only need to comply with
the law of the policyholder's State in one transaction.
The bill also requires States within 3 years of passage to
participate in the National Association of Insurance
Commissioners' National Insurance Producers Database, and to
adopt regulations under NAIC's Non-Admitted Insurance Model
Act.
It also allows sophisticated commercial entities direct
access to the surplus lines market, as well as prohibiting
States from voiding established contractual arbitration
agreements between re-insurers and primary companies.
Obtaining insurance for unique or high risk products in the
non-admitted market already has its own obstacles, and a
quagmire of inefficient State rules certainly does not help.
With re-insurance rates at an alarming rate, companies
should be encouraged to stay out of the courts and follow their
own arbitration agreements.
I think that the bill provides some commonsense solutions
to the non-admitted and re-insurance market, and that it enjoys
bipartisan support.
I certainly thank the chairman for holding this hearing
today as well as the participants in the panel.
Chairman Baker. I thank the gentlelady for her statement.
Mr. Moore?
Mr. Moore. Thank you, Mr. Chairman. I would like to thank
Chairman Baker for holding today's hearing on commercial
insurance modernization, and look forward to hearing the
witnesses' testimony on the specific reforms included in H.R.
5637, the Non-Admitted and Re-Insurance Reform Act.
I would also like to welcome Dick Bouhan from the National
Association of Professional Surplus Lines Offices, which is
headquartered across the State line from my district in Kansas
City, Missouri, and also David Gates, general counsel of
Generali USA, also based in Kansas City, Missouri.
Congresswoman Ginny Brown-Waite and I introduced H.R. 5637
on Monday with strong bipartisan support, and strong support on
this committee; 14 of the 16 co-sponsors are members of the
Financial Services Committee, both Republicans and Democrats.
The bill that is under discussion today would significantly
improve the regulation of two specific areas in the commercial
insurance marketplace, namely, surplus lines and re-insurance
transactions.
This could sometimes, with directly conflicting State laws
in the surplus lines market, create unnecessary inefficiencies
and make it difficult, if not impossible in some cases, for
producers and others to comply with their legal duties.
In the case of State premium tax payments in particular,
the patchwork of 55 different laws in the areas of allocation
formulas, tax due dates, and competing tax authorities, make
little sense for the producers who place multi-state policies
and the businesses that are seeking multi-state coverage.
In most States, surplus lines premium taxes are levied at
the State level, but at least in one State, Kentucky, as Mr.
Sinder's testimony notes, those taxes are actually levied at
the city and county level as well, creating a situation in
which one State alone has several hundred different taxing
authorities.
In addition, 11 States and the District of Columbia have no
laws stipulating how or even whether surplus lines taxes should
be allocated to other States if there is a risk insured in
those States.
Testifying last year in front of the subcommittee on behalf
of NAIC, one insurance commissioner acknowledged the need for
reform of surplus lines regulation, specifically with regard to
the way premium tax allocation is handled.
According to Commissioner Diane Koken, ``Either Federal
legislation or another alternative such as interstate compact
may be needed at some point to resolve conflicting State laws
regulating multi-state 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 multi-state property risks to access surplus lines
coverage in their home States under a single policy subject to
a single set of requirements.''
It is important to note that H.R. 5637 does allow States to
enter into a compact to establish an universal allocation
formula for premium tax revenues and by limiting collection of
surplus lines premium tax revenues to the home State of an
insured business, this legislation has a built-in incentive for
States to finally create an efficient allocation method.
No State has an incentive under this bill to lose premium
tax revenue.
Additionally, H.R. 5637 includes necessary reforms in the
area of re-insurance. This legislation would prohibit the
extraterritorial application of State laws, and allow insurers
and re-insurers to resolve disputes pursuant to contractual
arbitration clauses. This reform is long overdue and is
necessary to restore regulatory certainty to the re-insurance
market.
Other members of the subcommittee, and possibly a few of
our witnesses, may want to discuss the broader issue of how
insurance is regulated in this country. I think that is a
reasonable and necessary discussion to have, and I know that
this is something the subcommittee and full committee have
examined, and will continue to examine, but for now, I look
forward to considering legislation that is narrowly focused on
addressing problems in two specific areas of the commercial
insurance marketplace.
I thank you, Mr. Chairman, and I look forward to hearing
from our witnesses today. Thank you.
Chairman Baker. I thank the gentleman. Mr. Royce?
Mr. Royce. Thank you, Chairman Baker. Thank you for holding
this hearing on commercial insurance modernization. It is very
timely. I certainly want to thank Congresswoman Ginny Brown-
Waite and Congressman Dennis Moore for introducing the Non-
Admitted and Re-Insurance Reform Act of 2006.
I must say that I'm very encouraged that this committee is
considering legislation to improve the regulatory environment
facing insurance consumers and underwriters, because I think
there is widespread agreement now that our Nation's insurance
regulatory system impedes the ability of insurance consumers to
have optimal coverage at the lowest possible cost.
I think if we go back to 1868, there was a misguided
Supreme Court ruling at that time that insurance was not
considered an article of commerce and therefore, not subject to
the interstate commerce clause, but subsequent to that, of
course, Paul v. Virginia was later overturned by a Supreme
Court decision where Congress decided to leave insurance
regulation solely in the hands of State legislators. We did
that through the passage of McCarrin-Ferguson back in 1945.
Today, I think it is clear to many on this committee that
the insurance marketplace is not only national in scope, but
frankly, global in nature. The legislation offered here by
Representatives Ginny Brown-Waite and Dennis Moore is prima
facia evidence that Congress needs to play a role to improve
efficiency in insurance regulation.
While I applaud the efforts of my colleagues to improve the
re-insurance sectors here, I also believe that Congress should
work to help all consumers of insurance. I believe individuals,
not just businesses, would greatly benefit from more
competition and choice among insurance providers.
In addition to considering this legislation, I hope that
this committee, and the Members here, will consider the
creation of an optional Federal charter for insurers.
I thank you again for your leadership on all of this, Mr.
Baker, and I yield back, Mr. Chairman.
Chairman Baker. I thank the gentleman. Mr. Capuano, did you
have a statement? Any member? Ms. Kelly?
Mrs. Kelly. Thank you, Mr. Chairman. I really appreciate
your holding this hearing. I appreciate your commitment to
modernizing America's insurance market to make the industry
more competitive and deliver better rates and customer service
to consumers.
I was happy to help write the original NARAB legislation in
1999 that became part of the Gramm-Leach-Bliley Act. NARAB
responded to the simple problem that insurance agents were
spending more time doing paperwork than meeting with their
clients.
Every State demanded different rules and regulations just
to do business. Some of those States required paper clips. Some
required staples. Some required pink paper. Some required
white.
It just wasn't working very well for the consumers, the
people who had an insurance agent who would move to a new home,
and that meant they would lose the services of a trusted
independent agent that they had worked with for years. Fifty
different States found 50 different ways to make money from the
agents who were trying to just take care of their customers,
and it really wasn't fair.
NARAB became law in 2001 when 29 States signed onto the
reciprocity between their agents. It has reduced but not
eliminated the burdens on our agents.
Four of the largest States have not implemented NARAB, and
some of the others have adopted requirements that erode
reciprocity and move away from the uniformity that was desired.
I believe that the time has come for this committee to re-
examine NARAB and see what can be done to fulfill that promise,
when we have all States but four being a part of NARAB, it is
time for us to take a look at what Congress can do to bring all
States together.
I appreciate the fact that you are holding this hearing and
I look forward to the comments of the witnesses on this issue.
Chairman Baker. I thank the gentlelady for her statement.
There being no further members with opening statements, I want
to welcome each of our witnesses to the hearing. As is the
usual practice, we request that you make your oral statement in
5 minutes or less. Your full written statement will be made
part of the record. We do appreciate your courtesy in
participating.
I am told that the votes are in the near term, and when we
do get to that point, I will proceed down to about 5 minutes
left, then recess. We will probably be gone about 20 minutes,
just to give you some idea of the state of play as best as we
know it.
It is my pleasure to welcome Mr. Tom Minkler, president,
Clark-Mortenson Agency, and chairman of the Government Affairs
Committee, Independent Insurance Agents and Brokers.
Please proceed, sir, at your own leisure.
STATEMENT OF TOM MINKLER, PRESIDENT, CLARK-MORTENSON AGENCY AND
CHAIRMAN, GOVERNMENT AFFAIRS COMMITTEE, INDEPENDENT INSURANCE
AGENTS AND BROKERS OF AMERICA
Mr. Minkler. Thank you and good afternoon, Chairman Baker,
Rranking Member Kanjorski, and members of the subcommittee.
My name is Tom Minkler and I am pleased to be here today on
behalf of the Independent Insurance Agents and Brokers of
America, and to provide my association's perspective on the
non-admitted insurer/re-insurer legislation that is the focus
of this hearing.
I am currently chairman of the IIABA Government Affairs
Committee. IIABA is the Nation's oldest and largest trade
organization of independent insurance agents and brokers. We
represent a nationwide network of more than 300,000 agents and
brokers and employees.
I am also president of the Clark Mortenson Agency, a New
Hampshire based independent insurance agency that offers a
broad array of insurance products to commercial and personal
consumers in New England and beyond.
Clark Mortenson writes $36 million of premium in eight
office locations in two States. I am licensed in 14 States, and
approximately 15 to 20 percent of my business is in the non-
admitted or what is called the surplus lines market.
Therefore, I am very familiar with the hodgepodge of
varying State requirements in this market that provide little
consumer benefit.
Non-admitted or surplus lines insurance provides coverage
for unique or hard-to-place commercial property and casualty
risks. By this, I mean coverage that is unavailable or
unaffordable in the traditional or admitted insurance market,
and is sold by insurers that are not admitted or licensed to do
business in the particular State where the policy is located.
This market is often described as a safety valve for the
traditional insurance market. It serves an essential purpose to
provide insurance to many larger commercial entities and is
quite substantial.
For example, gross premium volume generated by the total
surplus lines industry was approximately $33 billion in 2004.
I have submitted a more formal statement for the record
that lays out many of the problems with the current State-by-
State regulations of the surplus lines market and how it
negatively impacts consumers.
Today, I would like to give you some real world examples of
problems that I have experienced writing coverage for
commercial customers.
For example, a business client has locations in
Massachusetts, New Hampshire, and Vermont that require
insurance coverage through the surplus lines market; the
process to obtain the proper coverage would be very different,
even though the client's physical locations were within a 100
mile radius of each other.
In Massachusetts, we, the broker and the client, would have
to provide certified evidence that there were no companies
willing to provide coverage in the standard market, while in
New Hampshire and Vermont, there is no standard due diligence
step.
The filing process will be a manual process in two of those
States, with Vermont requiring two separate filings to two
different departments within that State. In New Hampshire, the
filing is online.
The actual tax rate is different for each State: New
Hampshire at 2 percent; Vermont at 3 percent; and Massachusetts
at 4 percent.
Additionally, two States require the individual broker,
myself, to be licensed, while in the third State, the
corporation is the licensed entity.
I have just described the scenario for a business owner
with locations in three States; imagine if they had locations
in 10, 20, or even 50 States.
This brings me to the legislation before us. The Non-
Admitted Insurance and Re-Insurance Reform Act solves many of
the problems that I have just discussed. The legislation
effectively streamlines surplus lines regulation while making
the insured's home State the source of regulation for
individual surplus lines transactions.
It also would streamline 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 marketplace.
It does not deprive any State with a connection to the risk
being insured from its share of premium taxes. What it does
allow is the broker to pay the taxes on a multi-state risk only
to the policyholder's home State and leaves it to the State to
work out the appropriate allocation.
IIABA supports the specific reforms included in this bill.
Most importantly, we strongly believe that the overall approach
taken by this bill is the right way to go.
This is evident by the strong bipartisan support and
consensus within the insurance industry. The legislation
preserves the State system insurance regulation while achieving
much needed uniformity rather than choosing more extreme
reforms such as the creation of a Federal regulator.
IIABA believes the best use of Federal legislative
authority is to help make the existing system more efficient
and uniform through a mix of national standards with State
enforcement and uniformity achieved through both incentives and
preemptive of certain State laws.
The SMART draft of 2 years ago would have tackled most
aspects of the insurance regulatory system all at once. In
contrast, this legislation would single out two areas, surplus
lines regulation and re-insurance supervision, where there is
general consensus for early action.
We strongly support the step-by-step approach to achieving
reform.
In conclusion, IIABA applauds the sponsors of this bill,
and we urge the subcommittee to promptly act on the Non-
Admitted Insurance and Re-Insurance Reform Act of 2006.
If there is one message that we would like to leave with
the subcommittee, it is that we believe this bill is an
excellent example of a pragmatic reform that utilizes targeted
Federal action to improve the State-based regulatory system.
IIABA is hopeful that H.R. 5637 will be an important first
step in a process that will result in additional reforms to
State insurance regulation, particularly regulation of producer
and insurance company licensing.
Thank you again for the opportunity to testify today.
[The prepared statement of Mr. Minkler can be found on page
61 of the appendix.]
Chairman Baker. Thank you for your participation.
Our next witness is Mr. Scott A. Sinder of The Scott Group,
appearing here today on behalf of the Council of Insurance
Agents & Brokers. Welcome, Mr. Sinder.
STATEMENT OF SCOTT A. SINDER, ESQ., THE SCOTT GROUP, ON BEHALF
OF THE COUNCIL OF INSURANCE AGENTS AND BROKERS
Mr. Sinder. Thank you, Mr. Chairman, Ranking Member
Kanjorski, and members of the subcommittee. Thank you for the
opportunity to testify today. Thank you, Congresswoman Brown-
Waite and Congressman Moore for introducing this legislation.
I am testifying today as the general counsel for the
Council of Insurance Agents & Brokers. The Council, as many of
you know, represents the Nation's top 1 percent of insurance
brokerage firms. There are only 250 members, but collectively,
they sell or place over 90 percent of all commercial insurance
that is sold in this country.
The Council has been seeking this type of reform for
decades. I want to emphasize one thing at the outset, and
picking up where Mr. Minkler left off, this bill is not a de-
regulation bill. This bill would simply consolidate regulation
so that any multi-state transaction is subject to one, and only
one, set of rules.
In the current environment, if you are a client who has
exposures in all 55 jurisdictions regulated in this country,
you are subject to 55 different sets of rules. As Congressman
Moore pointed out, in Kentucky, there are dozens more when you
add the county and municipality premium tax provisions.
The home State approach that is taken under this bill is
completely appropriate. It is appropriate for this reason. If
you think about surplus lines insurance, it is insurance that
is placed in a non-compulsory manner. No one is required to buy
it. The commercial insured's who do buy it buy it to protect
their treasury. They are not protecting a piece of property in
any given location. That piece of property is what secures
their entitlement to monies should the property be damaged.
There are many different ways that they can insure that
risk: they can self insure; they can create a captive; they can
buy insurance in the mini-market; or they can do so in the
surplus lines market.
What they are protecting is their corporate treasury. That
treasury is located in the State which is their principal place
of business. The regulator in that State, therefore, has the
greatest nexus to that consumer.
There are five basic areas of surplus lines regulation in
every State. The basics of these rules in all States are almost
the same. It is the details that vary in a way that makes it
very cumbersome.
On these charts on the right, for example, is a policy that
is for a national chain drug store retailer. It covers
exposures in 17 States. Each State requires that on the very
first page of the policy they put a disclosure notice.
The disclosure notice says that this policy is being sold
by a carrier that is not admitted in the State and they are not
protected by the guarantee fund of this State. They have to do
that 17 times for each and every State in which the policy
covers business.
They have to file premium tax statements in each and every
State where the policy covers an exposure. This is a set of the
premium tax filings for this client. This is for 16 States.
This client has 40 surplus lines policies. This is the
filing, the premium tax filing, for one of those policies in 17
States. The broker who placed this business, Aon, has to do
this 40 times for each of the surplus lines products covered in
this program.
In addition to premium tax payments, which you have heard a
lot about, the declination rules are when you are permitted to
access the marketplace; when you can go to the surplus lines
marketplace rather than place through an admitted insurer.
Every State has rules. All the rules basically say you are
permitted to do so when you can demonstrate that you cannot
place this risk in the admitted marketplace.
The problem is papering that. Some States require five
affidavits. Some States require three formal declinations in
letter form. Other States require you just to on your own
basis, of your own knowledge, make a determination of whether
or not it is available.
It is not satisfying the substance of the requirement that
is difficult; it is satisfying the procedural one. This carries
forward the carrier eligibility, broker licensing, and the
other filings, the administrative filings, that are required in
each State.
All of this legislation would do primarily--there are two
exceptions--is require that each of those transactions would be
subject just to that one single State of rules.
The two exceptions are these. One is the eligible carrier
provisions that are included in the bill. Those provisions
would set a national standard that would pick up on the NAIC's
model act and say that everyone would use the same basic
determination factors for determining whether or not a carrier
is eligible to receive that business in the surplus lines
marketplace.
Today, every State has a variant of these rules. To my
knowledge, there is almost no carrier that is approved in all
55 jurisdictions on the surplus lines list. One reason is that
most of these carriers are admitted carriers in at least one
State, which takes them out of the surplus lines marketplace in
that State and makes them ineligible to receive a surplus lines
placement for exposures insured in that State.
The bill would rectify that through the home State rule
provision. It also would establish a national standard picking
up on this NAIC rule so that everyone would apply the same
basic rules. Today, 32 States already have some variant of that
model in place.
The final exception is the automatic export exception,
which again would allow more sophisticated commercial consumers
to more immediately access the surplus lines marketplace
without complying with the declination rules.
Mr. Chairman and members of the committee, thank you for
the opportunity to testify today. Of course, I would be happy
to answer any questions you may have. Thank you.
[The prepared statement of Mr. Sinder can be found on page
81 of the appendix.]
Chairman Baker. Thank you very much, sir.
Our next witness is Mr. Bernd G. Heinze, executive director
of the American Association of Managing General Agents.
Welcome.
STATEMENT OF BERND G. HEINZE, ESQ., EXECUTIVE DIRECTOR,
AMERICAN ASSOCIATION OF MANAGING GENERAL AGENTS
Mr. Heinze. Thank you very much, Mr. Chairman, Ranking
Member Kanjorski, Mr. Moore, Ms. Brown-Waite, and members of
the subcommittee. First and foremost, Mr. Chairman, the
American Association of Managing General Agents would like to
commend you for your leadership of the subcommittee, and thank
the sponsors of H.R. 5637.
This is an absolutely vital and necessary modernization
reform effort that will keep the surplus lines industry where
it needs to be and move it forward with greater protections to
the consumers and those people who depend upon our marketplace
for security and protection.
We commend the efforts of this committee and are very
anxious to work with you and your staff members to move this
effort forward.
To let you know what we have done so far, this evening, we
will be sending a blast e-mail out to all of our members
encouraging them to support this legislation, and also to
advise their local elected representatives to send this
information on to their retail producers.
We have sent information on to the National Association of
Insurance Commissioners to advise the Producer Licensing and
Modernization Committee and the Surplus Lines Taskforce how
vital and important the Non-Admitted and Re-Insurance Reform
Act is to our industry.
We are also pleased to be working with Mr. Minkler, Mr.
Rusbuldt, Mr. Symington, and our colleagues at the Big I, Mr.
Bouhan and our colleagues at the National Association of
Professional Surplus Lines organizations in support of this
effort.
We have also sent information on to the Financial Services
Authority in London and all of our Lloyd's of London and market
members, the syndicate members and underwriters there, letting
them know how important this effort is, and we are also working
with NCOIL and the American Legislative Exchange Council to
encourage them, from a State aspect, to support this effort as
well.
We are very gratified to see bipartisan support of this
bill and hope that our continued efforts in conjunction with
those of our colleagues will help move this matter forward as
productively as we can.
Mr. Chairman, we live in very uncertain times, and the
American Association of Managing General Agents believes that
this bill provides pragmatic reform and modernization of the
surplus lines and re-insurance market to bring needed
uniformity and consistency of a State-based regulatory
framework while affording America's businesses and private
consumers protection and access to stable markets to protect
their risk exposures.
It will streamline compliance requirements while at the
same time enhance efficiencies and improve on processing
components in the overall insurance transaction.
Some of the key benefits and components are flexibility and
the ability to respond quickly and adapt to changing market
needs and those of our consumers and policyholders.
This bill will allow that to be enhanced and furthered in a
great degree of speed.
The AAMGA is the Nation's largest dedicated trade
association. Since 1926, we have been serving the surplus lines
and wholesale insurance distribution network. Our members write
in excess of $23.9 billion of premium each year in all 50
States. Roughly, that translates into approximately 72 percent
of all the surplus lines premium that is written in the United
States today.
We feel that we have a great degree of opportunity to work
with you, Mr. Chairman, to continue the focus to modernize
commercial insurance markets and thereby implement procedures
and regulations that will enhance uniformity and competition
while maintaining the State-based system of insurance
regulation and the surplus lines market's fundamental precept
of freedom from rate and form to benefit consumers and
businesses in the protection of their risk exposures.
There are certain fundamental aspects in everyday practice
and operation that this bill will help our members and the
surplus lines industry complete.
That would primarily be to enhance the speed to market of
new and needed insurance products and services.
Mr. Chairman, you mentioned the advent of the hurricanes
last year, the fires in California and Texas, all those things
as Ms. Brown-Waite mentioned with the space shuttle and
transactions that occur in the State of Florida, where the
admitted markets may not be as interested in coming into the
market right away with products and services.
The surplus lines market can afford great opportunities to
respond to those needs.
This bill will also stimulate open competition in the
creation of innovative risk products, specifically addressing
or manuscripted to the needs of the consumer, establish and
mandate an uniform simple tax allocation formula and system for
multi-state risks, making the payment of proportional tax more
equitable and efficient.
It will facilitate uniform and consistent compliance
requirements for surplus lines' agents and brokers now that the
insured's home State will have authority and regulatory
primacy, and will encourage individual initiatives towards
sustained growth to protect increased risk exposures.
Along with our independent claim professional members and
our colleagues at the American Association of Independent Claim
Professionals, who also see the need for strong reform efforts
to break down antiquated State barriers, we are very encouraged
by this legislation.
In conclusion, Mr. Chairman, I would just like to state
that we all know that insurance is the DNA of capitalism and
free market entrepreneurship. It provides the ability of
varying needs of security from risk and stimulates the growth
of business opportunities, provides incentives for research and
development that help create jobs and positive returns on
investment and equity.
For the public and the private consumer, H.R. 5637 will
afford continuity and recovery from fortuitous events based
upon terms and conditions of coverage, and will enhance the
surplus lines market overall.
Thank you again very much, Mr. Chairman, for giving us the
opportunity to testify today. We will also be very happy to
answer any questions you have and to continue our work with
your committee and staff as we move this legislation forward.
[The prepared statement of Mr. Heinze can be found on page
56 of the appendix.]
Chairman Baker. Thank you, sir. We appreciate that
willingness to be of assistance.
Ms. Ochenkowski, if I may suggest that the committee now
recess so that you do not have to rush through your statement.
We are down to just about 5 minutes on the vote. I expect we
would recess for about 20 minutes and them come back and pick
up where we have left off.
The committee stands in recess.
[Brief recess]
Chairman Baker. I would like to reconvene this meeting of
the subcommittee and express appreciation to all of our
participants. This will be the last break for the afternoon. I
am sure that members will trickle back in as we proceed.
In order to make the best use of time, I would like to go
ahead and call on Ms. Janice Ochenkowski, senior vice
president, Risk Management, Jones Lang LaSalle, appearing today
on behalf of the Risk and Insurance Management Society.
Welcome.
STATEMENT OF JANET OCHENKOWSKI, SENIOR VICE PRESIDENT, RISK
MANAGEMENT, JONES LANG LASALLE, ON BEHALF OF RISK AND INSURANCE
MANAGEMENT SOCIETY
Ms. Ochenkowski. My name is Janice Ochenkowski, and I am
the vice president of the Risk and Insurance Management
Society, known as RIMS, which is the country's largest
professional risk management association.
I am also the senior vice president and director of Global
Risk Management for Jones Lang LaSalle, which is a commercial
global real estate and financial services company located in
Chicago, Illinois.
I appreciate the opportunity to appear before you today on
behalf of RIMS to speak about the issue of modernization of
commercial insurance.
RIMS is in a very unique position to participate in this
hearing because we represent the commercial consumers of
insurance. Our members, roughly 4,000 companies, represent
corporations, public entities, and municipalities who buy
insurance.
We have a strong view on how the process should proceed,
and we support the modernization of commercial insurance in
this bill.
Operating on a global basis as the primary insurance buyer
for Jones Lang LaSalle, I see every day the numerous
inefficiencies in the current State-based system.
Commercial consumers should not have to deal with this
hobbled system. We should use the proposals within this bill to
address current inefficiencies.
I applaud the members of the subcommittee for presenting us
with this Act, which we believe is a meaningful blueprint for
reform of the surplus lines insurance.
RIMS believes that the Non-Admitted and Re-Insurance Reform
Act of 2006 is necessary to address the regulatory problems
that are causing disruptions in the surplus lines insurance
market.
My colleagues on the panel have discussed a number of them
with you already. However, I can explain from the purchaser's
perspective one additional aspect, the manner in which
applicable taxes are sent to the various States.
As previously noted, there are three different mechanisms.
In some States, the broker is able to calculate and transmit
taxes on my behalf. In other States, the broker is able to
calculate but may not transmit the taxes, and in a third
grouping of States, I must calculate and transmit the taxes.
The way the system works is that we collect premiums. My
company is a property manager and a licensed pension advisor.
Our responsibility is to purchase insurance on behalf of our
client properties, more than 400 buildings in over 30 States.
We collect the premium from each property, and because of
certain ERISA provisions, we are not able to co-mingle those
400 checks into a single account, but must send out 400 checks
to our insurance broker.
The broker separates the premium from the tax, pays those
taxes which it can, and returns to us the funds for those taxes
which we must pay ourselves, with a list of the States for
which we must do the calculations.
We then must issue a third set of checks in order to
transmit the payments to the States. This is the same money
that has gone back and forth 3 times before we can finally pay
our tax bill.
There has to be a better way to do this. We believe that
many States have also implemented the licensing rules that
discriminate against out-of-State agents and brokers, and
require our brokers to pay local brokers to stamp approval on
an already negotiated insurance program.
In RIMS' perspective, in the free, open, and transparent
market, risk managers will be able to negotiate the best rates,
best terms, and best conditions for the coverage needed by
their companies.
Currently, the surplus lines policy rates and forms are not
regulated by the States, and we think it is prudent to include
freedom from rate reform and regulation for surplus lines
policies in a Federal statute governing the commercial property
and casualty insurance, because we think it would promote a
more competitive marketplace.
Some States require that before an insurance buyer can
obtain insurance, a diligent search of authorized insurers must
be made. This slows the procurement process and at times adds
costs that are eventually passed on to purchasers. RIMS
believes that this process should be streamlined.
The Non-Admitted and Re-Insurance Reform Act of 2006
provides answers to problems commercial insurance buyers are
experiencing in obtaining surplus lines insurance by placing
the authority in the home State of the insured. We support this
and believe it will allow sophisticated commercial
policyholders to proceed with the purchase of insurance and
maintenance of the risks in an appropriate manner.
RIMS would also offer to provide the subcommittee with some
recommendations improving the exemption provision of this bill.
We strongly support the Non-Admitted and Re-Insurance Reform
Act of 2006, and look forward to working with your committee
and Congress on this important piece of legislation.
We thank you for your time, your interest, and your
leadership in this matter. Thank you.
[The prepared statement of Ms. Ochenkowski can be found on
page 76 of the appendix.]
Chairman Baker. Thank you very much.
Mr. Sinder, I would like to start, since you brought the
document trail there, there is an ad on television now where
the guys are all sitting around the table trying to figure out
how to save money, and somebody says what about all this and
what does it cost, millions.
Without giving product attribution, what does all that
cost? Is there a way to assign the duplicative regulatory
compliance, not in a dollar amount, but at some percentage of
costs allocable to all of that?
Mr. Sinder. I am going to divide it into several categories
of costs. There are raw administrative costs. There is paper.
Not to make light of it, but to do this 40 times for the 40
different policies is enormously expensive, as Ms. Ochenkowski
said.
Chairman Baker. Ochenkowski.
Mr. Sinder. Ochenkowski. I apologize.
Chairman Baker. Don't worry. I had to be coached a little
bit myself. I am not bragging or anything.
Mr. Sinder. I think you also lose your speed of access to
this marketplace, which means it is not as utilized as much as
it should be, and even when it is, I think it means that you
have lag time in getting the policies to the consumers who most
need them, so you lose what you are supposed to be getting in
terms of the insurance coverage.
I think you can sort of divide it into those two groups.
Chairman Baker. It would seem to me in a technology-driven
world, paper registration--I am a big advocate in the SEC world
of business reporting language, which is a technology based
reporting methodology for financial institutions and hopefully
for all public operating companies--to have that kind of mail
activity going on has to have a significant effect on the
bottom line of the companies that are required to file.
If it is possible to achieve some guesstimate of what that
relates to, it would be helpful for the committee to get its
hands on some substantive dollar figure or percentage that
might be out there in the industry to help us get ahold of it.
Mr. Sinder. Mr. Chairman, we can poll our surplus lines
placing brokers and get that information and submit it to you
after the hearing.
Chairman Baker. That would be terrific.
I might note that there have been some who suggest that we
should wait on the coalitions of State actions, compacts. I
have had various meetings with the NAIC over the years in
getting new timelines for reform.
This type of what appears to be generally agreed upon,
consulted with all stakeholders' type of approach, still has
not been done as a result of that State coalitional approach.
My point being if this works out and appears in operation
to be as successful as all of us hope, is not there some
legitimacy for--I will go back to an earlier proposal I had
called the SMART Act, which was trying to move product
approvals to the national level, keeping consumer protections
at the State level. It turned out to be the not-so-smart
approach.
Is this a test program for seeing how we can get a more
nationalized product approval system in place? All of the
arguments I have heard previously against the SMART Act would
seem to be applicable here.
What am I missing? What is so unique? Is it only that this
does not apply to mandatory coverage, or are there other
reasons why this is acceptable generally to stakeholders, where
a similar approach might not be acceptable in another
direction?
Mr. Sinder. Mr. Chairman, if I may. One difference between
this and some of the other provisions in the SMART Act, which
doesn't speak one way or the other about those provisions, is
you do not need any Federal standards here.
By virtue of the fact that you are really going to rely on
the home State regulator, you are not really affecting those
rules as they are in place, so it is very easy to effectuate
these provisions.
We have been supporters of the SMART Act and all of its
provisions. We remain supporters of them.
I think this is even easier to effectuate than many of the
other provisions.
Chairman Baker. If this is effectively implemented, does
that give comfort that the SMART Act provisions might be more
palatable going forward, or is it in any way related?
Mr. Minkler. Mr. Chairman, I would say from our position
that this is actually the beginning of the expansion of SMART,
even though it has taken two pieces of that. This is exactly
the model that we would look forward to in other areas, in
license reform, reciprocity from States, those types of things.
We think that this is the perfect solution and is the
perfect model for the other tenants of SMART.
Chairman Baker. Any counter opinion to that?
Mr. Heinze. No counter opinion, Mr. Chairman, but from our
perspective, we agree that breaking up into the various
increments that SMART had contained and going after matters
like this is the appropriate time. It is the right policy. It
is the right legislation to move this matter forward.
I once had a judge tell me in a very adversarial process
back in my lawyer days when we were contrasting each other with
briefs and motions, he said Mr. Heinze, I wonder how many more
trees must die so that this litigation may live. This is
absolutely unnecessary.
We need to afford the consumers, we need to afford this
industry, the opportunity to access the surplus lines market
easily, to afford protections of security, and to come into
where risk exposures now are either self-insured or not
insured, as well, as a result of this type of regulatory
morass, which we believe H.R. 5637 will help correct.
Chairman Baker. Thank you. I think our past actions up here
have been to go out and buy fertilizer to put on the trees. I
don't know how we can make it more complex.
Mr. Bachus, did you have questions?
Mr. Bachus. I would like the panel to elaborate about the
importance of re-insurance and non-admitted insurance,
particularly in light of 9/11 and the hurricanes that have hit
our coasts, and why this legislation is particularly critical
at this junction.
Ms. Ochenkowski. I can answer on behalf of the buyers of
insurance. Many of the larger, more complicated risks are risks
that the traditional standard insurance marketplace is not
willing to cover.
We must go to the surplus lines market in order to
adequately protect those risks. Being able to do so in an
efficient, economical way is in the best interest of us as
consumers, and it keeps the process moving in a smoother
fashion.
Mr. Sinder. As I understood the question in terms of the
surplus lines piece, I think it is vital for natural
catastrophe exposures and tree exposures, even for non-complex
commercial risks like homes, more and more on the Gulf Coast,
once you get above the flood program limits, the rest of the
coverage that is needed for homes is provided through the
surplus lines marketplace in many cases.
This bill, for a homeowner in Alabama, would have no direct
effect, because that policy placement would continue to be
regulated by the Alabama rules.
What the program really does do, what the bill would do in
the surplus lines marketplace is it would bolster the surplus
lines marketplace overall, and by making it stronger, you would
expand the capacity. That capacity would be available not just
for the very complex risks, as was discussed, but also for
others who need access for the more unusual type risk, like the
flood exposures.
Mr. Heinze. Mr. Bachus, Mr. Nutter from the Re-Insurance
Association of America is on the next panel after us, and I am
sure he will have some information for the subcommittee with
regard to re-insurance aspects from the surplus lines
initiative and from what our members see, this bill will
preclude the extraterritorial application of State laws to
preserve the certainty of re-insurance contracts which are so
vital now in this risk economy and environment that we live in.
We believe Mr. Nutter's comments will add additional
information for the record.
Mr. Bachus. I appreciate that. We had hearings back on June
4th, 11th, and 18th, of 2002. There was consensus then that we
needed this legislation. I think that in light of recent
events, it is even more critical.
I do see us getting to the point of where, without this
insurance, without this legislation, we will be denied coverage
just in the standard markets moving forward.
I think it is certainly beyond the critical point. I do
think, as you say, the States' willingness to assert
extraterritorial jurisdiction is really the essence of the
problem.
I would praise Chairman Baker and Congresswoman Ginny
Brown-Waite for bringing forth this legislation, which has
bipartisan support. I would think that the leadership would
give it a strong priority in moving it over to the Senate.
I have no further questions, unless there is anything that
you, as panelists, would like to tell us, other than your
testimony, something that has come to light.
Mr. Minkler. At the risk of being redundant with my
colleagues, I think that with this legislation and the issues
that you have addressed, not necessarily in the main insurance
level but in the secondary market, the surplus market, I think
the efficiencies that would be provided through this
legislation for the consumer to get to this marketplace and
expand this marketplace would serve all of us well, including
the consumers.
Mr. Bachus. All of these costs are passed on to the
consumer, ultimately. We are concerned because of rising rates,
and because of rising risks. It is in need of some relief.
Chairman Baker. I thank the gentleman for his comments. Ms.
Ginny Brown-Waite.
Ms. Brown-Waite. Thank you very much. As you can tell, we
all should be much thinner than we are because we have run from
one meeting to the next to vote.
I just have a question, and that is do those who write in
the non-admitted market tend to focus on a region or a type of
product or both?
Mr. Minkler. Speaking from the practitioner's standpoint,
the answer is yes to all the above. There are a variety of
appetites, if you will, at the carrier level, both
geographically, and for the class and type of risk involved.
There are some insurance companies that focus on certain
classes to the exclusion of others. To a great extent, there is
an appetite that goes across the board and across regions, too.
It is kind of a convoluted answer, but it is truly a mixed
bag, if you will.
Mr. Heinze. Ms. Brown-Waite, from the standpoint of the
agents and brokers, there are many who are writing in one
geographical area or in one State, but most are now multi-State
operations, where they do concentrate their operations by area
of specificity, by line of business.
For instance, there may be an agent or broker that
specializes in day care centers or nursing homes, or as you
mentioned before, the transportation of space products in
Florida, or homeowner risks that are prone to catastrophic
events along the shorelines of the United States.
There will be specialists in those areas. There is a niche
market which has developed in the surplus lines marketplace
that really, again, translates and underscores the need for
your wisdom of having introduced this Act to bring uniformity,
certainty, and consistency, so that all States can operate
under the same type of principles, and the consumer can obtain
the protection they need at the price they can afford, so that
competition can rein supreme in this entrepreneurial
environment.
Only in that way can we generate growth and development in
this market sector, and give investors the type of confidence
and comfort they need for their additional and continued
investments.
Chairman Baker. I thank the gentlelady. Mr. Moore?
Mr. Moore. As you all know, under the direction of NAIC,
the States have been trying to reform the commercial insurance
market for many years. So far, their efforts have not been
successful.
Will the States be able to make any meaningful regulatory
changes in the area of surplus lines and re-insurance
regulation without Federal legislation like the bill before us
today?
Any one of you, I would like to hear from you, please.
Mr. Sinder. Congressman, I believe the answer to that
question is absolutely not. The first surplus lines taskforce
of the NAIC started in the mid-1980's. They had models that
they have tried to enact across the States, but they have been
unsuccessful.
There have been proposals to do a tax compact. They have
been rejected as recently as the most recent NAIC meeting.
As you pointed out in your opening statement, even
Commissioner Koken, in her role as president of the NAIC,
expressed extreme doubt that they would be able to do it
without Federal guidance.
Mr. Moore. Thank you. Any other witnesses wish to make a
statement?
Mr. Minkler. Yes, Congressman. I would say that with the
passage of NARAB a few years ago that Congresswoman Kelly
mentioned before, we have seen incremental increases in
cooperation amongst the States, but we are nowhere near where
we need to be.
This is exactly the type of legislation model that we need
to move ahead with what the intent of NARAB was back then,
including and broadening in future legislation licensing and
that type of thing.
Mr. Moore. Thank you.
Ms. Ochenkowski. Representing the consumer, and from our
perspective, I do not believe that they would be able to get
together in order to present or to handle this issue in any
unified manner.
Mr. Moore. Thank you.
Mr. Heinze. Congressman, when Chairman Baker and Chairman
Oxley construed the SMART Act several years ago, one of their
opening statements was that this was not supposed to be Federal
preemption but Federal guidance.
While we have great confidence in the National Association
of Insurance Commissioners, and their leadership, and the
things they are working on with the surplus line agents and
brokers that we represent, this would be great additional
guidance for them to have a consistent place, a uniform
structure with which they could all operate, and I do not think
we would find much opposition from them either.
Mr. Moore. My thanks to all of the witnesses. Thank you,
Mr. Chairman.
Chairman Baker. Thank you, Mr. Moore.
Mr. Campbell?
Mr. Campbell. No questions.
Chairman Baker. Does any other member wish to be
recognized? If not, at this time--one other point of
clarification, just as to how the process works.
For an insured to access the surplus lines, I understand
they have to be denied coverage for whatever is sought three
times, and then can move to the surplus market, but if we do
not pass the bill now pending, there is still the right under
the current regime for a State commissioner to deny access to
the surplus line carrier.
Is that a correct characterization? My belief is that the
bill enables the surplus lines to respond to that capability
without having to rely on a jurisdictional approval.
Is that correct?
Mr. Sinder. It is absolutely true with respect to specific
carriers because of the eligibility rules. It is also true, I
believe, that some commissioners issue letter rulings that say
for certain types of insurance, they are going to deem it not
available, and for other types of insurance, they are going to
deem it available, so they can do exactly what you suggested.
Chairman Baker. In my case, where we have a Hurricane
Katrina effect and insurers withdraw, then there may be an
opportunity upon an appeal and a demonstration that there is no
alternative choice for a surplus lines' remedy in that case.
Mr. Sinder. The inanity of many of the States' rules is
that even in a jurisdiction like Louisiana, where you know that
coverage is not available, you still may have to demonstrate on
a policy-by-policy basis that you were not able to get it. For
each policy that you seek to place, you need to satisfy the
declination requirements.
Chairman Baker. Terrific. Thank you very much.
I want to express my appreciation to the panel for your
contribution, and we expect other members to have follow-up
questions, so we will keep the hearing record open for 30 days.
Thank you.
If I can ask our next panel to come forward when
convenient.
I want to welcome the members of this panel to our hearing.
As is always the case, we ask that you try to constrain your
oral presentation to 5 minutes. Your written testimony is part
of our official record. We welcome you here to the committee's
consideration.
Our first witness is Mr. Franklin W. Nutter, president, Re-
Insurance Association of America. Welcome, sir.
STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT, REINSURANCE
ASSOCIATION OF AMERICA
Mr. Nutter. Thank you very much, Mr. Chairman.
The Reinsurance Association is a national trade association
representing property and casualty organizations that
specialize in re-insurance.
I am pleased to testify today on H.R. 5637, legislation to
streamline the regulation of non-admitted insurance and re-
insurance.
The RAA supports the principles of this legislation. I
would like to highlight certain aspects of it that we think are
particularly important.
The RAA applauds Representatives Brown-Waite and Moore for
addressing a key improvement in the efficiency of regulation of
re-insurers, and that is the elimination of the
extraterritorial application of State laws.
As a result of our 50 State system of regulations,
significant differences have emerged among the States with
respect to re-insurance 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 the States from
pursuing varying and sometimes inconsistent regulatory
approaches to re-insurance. One of the best examples of this is
the extraterritorial application of State laws. Approximately
14 States in the re-insurance area apply their laws on an
extraterritorial basis, meaning that the State law not only
applies to insurers and re-insurers domiciled in the State, but
to all insurers licensed in that State.
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 re-insurers and the re-
insurance transactions of their domestic companies.
The Act simply preempts the extraterritorial application of
State law and articulates the type of laws that States cannot
apply on an extraterritorial basis.
Secondly, the RAA supports the principle set forth in Title
II, section 202, that provides that the State of domicile of a
re-insurer shall be solely responsible for regulating the
financial solvency of the re-insurer if the State is an NAIC
accredited State.
Allowing the State of domicile of the re-insurance company
to be the single regulator for solvency will help streamline
re-insurance regulation significantly and will add much value
to the value of the U.S. re-insurance license.
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 the details.
This legislation keeps re-insurance solvency regulation
intact. It does relieve the re-insurer from having to file
supplemental, and at times inconsistent, financial information
in as many as 50 States, yet provides all States with access to
financial information on the U.S.-licensed entity.
The third point that I would like to make is that the RAA
does support the principle set forth in section 202(b)(3) that
the credit requirements of the domicile of the re-insurer
should be exclusively applied to allow the ceding insurer to
take financial statement credit in all other States.
To achieve uniformity in the ceding companies financial
statement requires a single State's credit statutes to apply.
The NAIC's accreditation system and model credit for re-
insurance law seek to achieve this result.
This statutory provision will achieve the uniformity needed
by ceding companies and re-insurers.
The RAA supports this legislation, and stands ready to work
with the committee to see that this legislation does move
forward.
We believe that re-insurance regulatory reform will improve
the value of the U.S. re-insurance license and strengthen
financial regulation. Thank you very much.
[The prepared statement of Mr. Nutter can be found on page
68 of the appendix.]
Chairman Baker. Thank you, sir. Our next witness is Mr.
David Gates, senior vice president, general counsel and
secretary, Generali USA Life Reassurance, on behalf of the
American Council of Life Insurers. Welcome.
STATEMENT OF DAVID A. GATES, SENIOR VICE PRESIDENT AND GENERAL
COUNSEL/SECRETARY, GENERALI USA LIFE REASSURANCE, ON BEHALF OF
THE AMERICAN COUNCIL OF LIFE INSURERS
Mr. Gates. Thank you, Mr. Chairman. It is my pleasure to be
here this morning, and I would also like to thank Mr. Moore for
his welcome. I would point out that I live on the Kansas side
and he is my representative, so thank you.
Today, I am here to speak on behalf of H.R. 5637 as a
representative of the American Council of Life Insurers. In
that organization, I serve as the vice-chair of the Re-
Insurance Committee.
Additionally, as part of my background, I would point out
to you that for a number of years, I served as an insurance
regulator in the State of Nevada. I also served as a member of
the NAIC's Executive Committee, and I served as the president
of the NAIC in 1989.
I have experience on both sides of the lines on these
matters, and I hope to bring that to bear in this testimony.
First off, I would like to point out that the testimony
that we are delivering here today is not directed at the
individual regulators themselves who by and large try very hard
to do the best job they can.
Unfortunately, they are laboring in a system that at this
point is becoming increasingly unresponsive to a global
insurance industry with global capital flows and interrelations
that, at this time, they do not have the resources and
capabilities to administer.
A few points about life re-insurance, which you will find a
little bit different than some of the other forms of re-
insurance in the insurance marketplace.
First, re-insurance is a long term relationship. Our
contracts are measured in terms of decades. Additionally, this
is, as has been pointed out, a commercial transaction on a
business-to-business relationship, most often negotiated with
the actuaries of the life insurance company, negotiating on an
iterative basis with the actuaries of the re-insurance company.
It is hard to fathom a relationship that is more of a
commercially sophisticated transaction and negotiation than
that type of activity.
Additionally, the availability of re-insurance is becoming
increasingly vital to the life insurance industry in the United
States. Today, approximately 50 percent of the risk that is
assumed by life insurers is ceded into the re-insurance market.
As of the end of 2005, there are approximately $5.9
trillion of life re-insurance in force in the United States.
Turning to the issues of regulation and the need for
greater certainty and a more level playing field, which is an
absolute vital necessary, as has been pointed out by many of
the other witnesses this morning, the examples of some of the
issues that we are encountering at this point is a circumstance
where we have a re-insurance transaction that is engaged, that
has activities that are subject to both New York's and
California's jurisdiction.
We will have a circumstance where we will need a bank
issued letter of credit. We go and obtain a bank issued letter
of credit, but the form of the letter of credit that is
acceptable in the State of New York is rejected by the State of
California.
Additionally, we routinely find that we encounter what are
euphemistically called ``desk drawer rules'' in the insurance
industry. These are preferences on the part of the insurance
regulators, as opposed to statutes or regulations that are
supposed to be regulating our industry.
Additionally, in the life insurance arena, we find that the
regulatory environment that we operate in is falling
increasingly further and further behind those of other
financial services sectors.
For example, the 1985 series of statutes that deal with the
transfer of risk require a one-size-fits-all re-insurance
structure.
When I, as the re-insurer, go to negotiate with a ceding
company, I am unable to tailor my re-insurance to the
particular needs of that ceding company. I have a statutory
mandated re-insurance structure that I must use, and I cannot,
as I pointed out, tailor my offering to the needs of that
particular company.
The ACLI supports the efforts of this committee, and we
hope this initiative will move forward.
[The prepared statement of Mr. Gates can be found on page
50 of the appendix.]
Chairman Baker. I thank you, sir. I appreciate your
testimony and your contribution.
Our next witness is Mr. Richard M. Bouhan, executive
director, National Association of Professional Surplus Lines
Offices. Welcome, sir.
STATEMENT OF RICHARD M. BOUHAN, EXECUTIVE DIRECTOR, NATIONAL
ASSOCIATION OF PROFESSIONAL SURPLUS LINES OFFICES, LTD.
Mr. Bouhan. Thank you very much, Mr. Chairman. Chairman
Baker and members of the committee, particularly Congressman
Moore, thank you for the welcome. I, at least, was born in
Kansas. I live across the line, but I was born in the Jayhawker
State.
My name is Dick Bouhan, and I am the executive director and
general counsel of the National Association of Professional
Surplus Lines Offices, known as NAPSLO. I am pleased to be here
today to offer testimony on H.R. 5637, the Non-Admitted and Re-
Insurance Reform Act of 2006.
NAPSLO is a national trade association representing the
surplus lines industry and the wholesale insurance marketing
system. NAPSLO is the only association to represent both
surplus line companies and brokers, and in that context, we
represent the surplus lines marketplace.
NAPSLO, and its board of directors and over 800 members,
are encouraged by the initiative that the committee has
demonstrated, particularly the leadership of you, Chairman
Baker, and Representatives Ginny Brown-Waite and Dennis Moore,
by introducing this important and timely piece of legislation.
We are pleased to offer our unwavering support.
NAPSLO has been a proponent of State insurance based
regulation. Surplus lines is a product of the State-based
regulatory system. Unfortunately, the 50 State system has gone
askew, and is now fraught with inconsistency and problems.
Over the years, NAPSLO and other industry stakeholders have
worked with the NAIC to try to overcome the inefficiencies. It
is clear that the time has come for Congress to intervene
before these problems substantially undermine the ability of
the surplus lines market to function effectively.
Chief among NAPSLO's concerns is the inconsistent way in
which States manage their premium tax allocation remittance
requirements. The proper allocation and remittance of surplus
lines premium taxes to the States on multi-State risks has been
a growing problem for decades, as the number of multi-State
risks increases.
The failure of the States to establish a uniform and
consistent method of remitting these premium taxes has caused
confusion and complexity in the marketplace.
The genesis of this problem lies in the conflicting and
inconsistent State tax laws. NAPSLO is pleased that the
subcommittee has recognized the problems associated with the
premium tax allocation remittance system and has incorporated a
common sense solution into the bill.
This legislation creates an uniform system of premium tax
allocation and remittance and authorizes States to enter into a
compact as a means of harmonizing various State laws.
Let me clarify that the proposed system for tax allocation
remittance in no way changes the broker's obligation to remit
premium taxes to the proper State tax authority. Rather, it
brings clarity and certainty to a system that is fundamentally
flawed and in need of repair.
NAPSLO is also pleased that the bill creates a system of
home State deference for surplus lines insurance transactions.
Without home State deference, the surplus lines policy covering
exposures in multiple States would subject the broker to
multiple compliance requirements.
To illustrate my point, consider a broker who has a policy
with five exposures in five different States. This requires the
application of five separate laws and five different tax
filings. It also requires compliance with five different
diligent search standards and five different licensing
requirements, and also the provision of five different
warnings, as was demonstrated earlier in Mr. Sinder's
presentation.
Now, imagine how this problem would translate nationwide
with a policy with exposures in 50 States.
The bill mandates that no jurisdiction other than an
insured's home State may require a surplus lines broker to be
licensed in order to sell, solicit, or negotiate surplus lines
insurance.
NAPSLO is encouraged that this important concept has been
included in the bill.
Finally, NAPSLO is encouraged by the subcommittee's
determination that access to the surplus lines marketplace
should be streamlined for the sophisticated commercial
purchasers, as defined in the bill.
This legislation will provide more efficient access to the
surplus lines market for sophisticated buyers to meet their
unique insurance needs.
The bill also establishes safeguards by including
disclosure requirements that inform sophisticated buyers of the
nature of the transaction and secures their written permission
prior to any coverage placement in the surplus lines
marketplace.
This legislation is the right policy at the right time.
H.R. 5637 is the correct approach. Again, NAPSLO commends
Chairman Baker for his leadership, and for holding this
hearing, and thanks Representatives Brown-Waite and Moore for
introducing this important piece of legislation.
We look forward to working with the subcommittee as this
bill moves through the legislative process.
I thank you for your time and attention regarding this
complex and crucial segment of the insurance industry, and I
stand ready to answer any questions that you might have.
[The prepared statement of Mr. Bouhan can be found on page
40 of the appendix.]
Chairman Baker. Thank you, Mr. Bouhan.
I would like to start with Mr. Gates. In your testimony,
you made reference to a statutory constraint on your ability to
tailor a re-insurance product to a particular customer. Could
you elaborate for me that particular concern? I am not sure I
understand that.
Mr. Gates. I would be glad to. In 1985, under the guise of
an NAIC model law, there was a development of a regulation
called the risk transfer rule. In the risk transfer rule, it
specifies that when there is to be a life insurance
transaction--excuse me--a life re-insurance transaction
assuming risk from a life insurer, we have to do a specified
structure for that particular contract.
It tells me various types of language that I have to have
in the agreement. It tells me the risks that I have to transfer
in that agreement, and it effectively constrains my ability to
come into a particular company and do something specific to
their needs.
Chairman Baker. Regardless of what the customer wants?
Mr. Gates. Right. I will give you an example from our days
when my predecessor company actually wrote individual life
insurance. We were going into the marketplace. We wanted a
particular product that would have allowed us to transfer the
risk inherent in certain equity indexed annuities.
What we needed to transfer was the risk revolving around
the subject of the market fluctuations. We were able to go out
and find a company that specialized in that type of risk, a
company that had a hedging operation in its investment
operation, that was very excellent at doing those types of
things. We secured that re-insurance, but we could take no
credit for it on our financial statements because it was
outside the boundaries of what was allowed for under those
rules. We did it as prudent management of our company, but
again, because of the strictures of the laws, we were unable to
take credit for it.
Chairman Baker. We are going to need to get together with
lawyers and see if we cannot address that. That is just nuts.
There is no reason why a willing buyer and a willing seller
cannot get together on the terms of a deal without government
constraint standing in the middle, particularly when there is
no public policy purpose served by the constraint, or is there?
Mr. Bouhan. The regulators would say to you that there
needs to be some assurance that effectively all of the risk is
being transferred, but I believe that even today, the insurance
regulators recognize that a more discerning regulation, a more
flexible standard, can be and should be developed that allows
you to tailor the particulars of a transaction to--
Chairman Baker. But those regulators do not worry about any
other counterparty risk, and whatever rates you are charging
the insurer is not a subject of their review, and that is more
to the core of the consumer interest in that argument.
Mr. Bouhan. I would absolutely agree with you. Please don't
take my comments as anything more than an attempt to inform
you. I do not agree with their approach.
Chairman Baker. No. I took it only as instructional, not as
persuasive. Thank you.
Mr. Nutter, on the effect of the bill and specific to the
arena of terrorism re-insurance, is there any identifiable
benefit to the adoption of the proposed Act to enable the
market to function more efficiently?
The Administration, of course, has had grave concerns about
TRIA, its extension, wanting the market to function, and
unfortunately, at this point, market function has not been all
that significant.
Is this in your judgment an Act that will enhance capital
formation in that arena?
Mr. Nutter. It's an excellent question. Certainly,
individual companies look at the exposures they write,
particularly in the area of terrorism, and make some judgment
about their willingness to commit capital to write a risk that
many insurers and re-insurers would view as not insurable in
the traditional sense.
Indeed, TRIA has been a particularly valuable piece of
legislation to give insurers and re-insurers the opportunity to
work within the context of the retentions that the companies
have.
The efficiencies that are contained in this proposal, this
bill, will make it more appropriate for companies to commit
capital in the United States to a licensed entity. It would go
beyond my ability to say that companies are going to commit to
writing terrorism risk. I cannot say that. I could say that the
efficiencies associated with a single regulator and eliminating
the extraterritorial application of laws will indeed reduce the
cost and inefficiencies in the current State system of
regulation.
Chairman Baker. We, at least, are not going to make it any
worse. I think that is a safe conclusion.
Mr. Nutter. We can certainly make it better.
Chairman Baker. Thank you. Mr. Moore?
Mr. Moore. Mr. Bouhan, can you talk a little bit about the
work you have done with NAIC's surplus lines working group
regarding the establishment of non-admitted insurance model
laws?
I know that NAIC has tried over the years unsuccessfully to
try to resolve the inconsistencies that currently exist in
these States.
Mr. Bouhan. Let me first speak to the tax issue, which I
have been working with the NAIC on for four iterations of it,
probably over the last decade-and-a-half.
One was an effort to try to set up a clearinghouse
mechanism, electronic clearinghouse mechanism, and two other
efforts have been to try to set up a harmonization of the
underlying laws.
In all three instances, these have not been successful. The
most recent one is our proposal that NAPSLO put forth to the
NAIC to establish an interstate compact, and we have had that
out before the NAIC for over a year. There was a hearing, as
mentioned earlier, a hearing about this at the NAIC meeting
before the surplus lines taskforce about a week ago, and the
whole idea was sort of panned, I would say, by the surplus
lines staff, and I think ``panning'' might be a kind phrase.
We have just not been successful in getting them to try to
deal with this issue of harmonizing the laws, particularly for
the payment of taxes. You have heard ad nauseam about the
problems, and they are real problems. They just do not seem to
want to get together to address this problem.
The same way with the multiple State compliance. That is
another issue which is starting to raise its head because more
and more brokers are getting licenses on a non-resident basis
in more and more States, and now they are subject to the
multiple compliance in all these States, and the NAIC does not
seem to want to really address that issue at all. That was part
of our compact proposal, too.
It has been a very difficult time to get them to deal with
the problems. I think, in all fairness, it is 50 States trying
to come to a single conclusion and trying to harmonize
different laws with different policy ideas as they see them. It
becomes a very difficult problem to solve.
Mr. Moore. Thank you to the witnesses, and thank you, Mr.
Chairman.
Chairman Baker. I thank the gentleman. Mr. Bachus?
Mr. Bachus. Thank you, Mr. Chairman. Let me ask the panel
this. I get the sense--as members begin to learn about re-
insurance and these different issues, it becomes more and more
apparent to me that there is a big distinction between what we
are talking about here and the primary market, as far as the
State regulators.
State regulators, the justification there is protection of
the public. You may have a sophisticated or non-sophisticated
party.
With these issues we are dealing with, they are basically a
commercial contract between two highly sophisticated commercial
entities. I am not sure that I see the justification for the
States. Perhaps it is a solvency issue. You would think that
these large commercial entities have a lot at stake, and really
it is the entity that is going to suffer, not the public.
You are actually having the States intervene in what is a
very competitive market. You have the double taxation
problems--what is the justification for the States to regulate
say coverage or rates in a case of two commercial highly
sophisticated enterprises? I think the chairman also alluded to
that.
Mr. Nutter. Mr. Bachus, if I could respond in part, and
perhaps Mr. Gates would, as well. In the property casualty re-
insurance area, the States do regulate for solvency. They do
not regulate for purposes of rates and contract terms.
Because there is no consumer component of a contract
between an insurer and a re-insurer, there really is not a
reason to regulate in that area. That has worked just fine.
What we unfortunately see is another level of competition,
that is the States competing with each other to regulate for
solvency. What this legislation would really do is retain
solvency regulation, but bring it back to what the NAIC's
accreditation system is really all about, that is, having a
State of domicile regulate for purposes of solvency as well as
the basic transaction.
Mr. Bachus. You and Mr. Gates both mentioned a global
marketplace and the global nature of this whole business. Are
there competitive advantages for foreign re-insurers? I would
think domestic re-insurers with the 50 State regulatory scheme
in place, have a different approach than a foreign re-insurer.
What do they do, letters of credit? How do they function in
that market?
Mr. Nutter. The State system now, of credit for re-
insurance, does recognize companies that are licensed in the
United States as well as companies that are not licensed. Those
companies secure their transactions with security, letters of
credit, or funds withheld.
Let me give you a statistic to reinforce the point about
the global nature of this business and how it is reflected in
this legislation.
Mr. Bachus. I would think in that regard, it seems to me
that a domestic license is being de-valued by this whole
environment.
Mr. Nutter. An excellent point, and that is what the
statistic is about. The property casualty re-insurance market
has actually been a dynamic area of capital formation since the
early 1990's. After Hurricane Andrew--I do not remember the
exact number--six to eight new re-insurers were formed with
capital in the $10- to $12 billion range.
After the events of 2001, another five or six new re-
insurers, new capital, were formed. Again in 2005, another
series of new re-insurers were formed. Not one of them was
domiciled in the United States--not one of them.
One of the reasons that they do not domicile here is this
competitive and cumbersome nature of regulation between the
States. When investors can go to a country that has a single
regulator for solvency and a single set of rules applicable to
the re-insurance transaction, and, pursuant to the State
system, provide capacity into the United States. This is to be
encouraged.
Your instincts are right, that the current State regulatory
system indeed is a deterrent, if you will, to forming a license
in the United States. Licensing should be encouraged, in our
view.
Mr. Bachus. I would certainly think that the legislation
that Ms. Brown-Waite and Mr. Moore are offering us would at
least encourage domestic re-insurance companies to form.
I can also see domiciled overseas, you would avoid the tax
environment that you have here, where there is so much
uncertainty or double taxation. Is that true?
Mr. Nutter. I am sure that it is a consideration as
companies look at where to domicile, but the companies that do
business from overseas are also subject to excise taxes here as
well.
Mr. Bachus. They are not escaping that.
Mr. Gates. If I may, one thing to point out in your
comments about the multiplicity of jurisdictions, we are
engaged in a circumstance right now where the State of
California is in the process of attempting to adopt a very,
very expansive view of how it should regulate, regardless of
the domicile of a particular insurer or re-insurer, the
financial circumstances of any company that happens to have a
California license.
Our company has a California license. We have clients who
operate in California. Our parent company, because we are
foreign owned, provides support to us because of the large
amount of money that is involved in the nature of the life re-
insurance that we are providing.
The circumstances require me to go to the State of Missouri
and get approval of those transactions with an affiliate, and
we do that routinely, but under the new California rules, I
would have to also get approval from the State of California of
those very same transactions that have been passed upon by my
domiciliary regulator.
I think everyone understands the difficulty when you try
to--when you have two masters, it is very, very difficult to
appease them both.
Chairman Baker. The gentleman yields back. Mr. Kanjorski?
Mr. Kanjorski. Thank you, Mr. Chairman. There is a
provision in the bill that allows the creation of a compact for
distribution of revenue. Since the bill goes into effect
immediately without the compacts being entered into, the
compacts would come after the fact.
As I understand the logic of the bill, the collector would
be the State of the corporate entity where they are living.
Let's take Wal-Mart. Suddenly, the State of Arkansas would get
a tremendous windfall in revenue.
What would incentivize them to enter into a compact to
share that with other States?
Mr. Bouhan. Because there are exposures that Arkansas would
have that are from other large national corporations that are
domiciled in say New York, Missouri, or California, for which
they would get their fair share of the revenue, too.
Mr. Kanjorski. Their fair share would only be out there if
they had some relationship with that transaction. Arkansas only
has one company, Wal-Mart. Why would they want to share the
proceeds? I'm being facetious, of course.
Mr. Bouhan. It's reciprocal in that sense is the idea.
Mr. Kanjorski. There was that famous television program or
movie, ``Follow the Money.'' If I were a State that had the
obligation or had the right to enter into a compact and I were
a net winner in distribution, why would I want to enter into a
compact ever with anybody to share the additional proceeds?
Mr. Bouhan. I understand what you are saying.
Mr. Kanjorski. Don't we have to work something out there
now with the legislation to provide for the distribution of
revenue instead of throwing it out there into the ether and
allowing compacts to be formed when they may never ultimately
be formed?
Mr. Bouhan. The idea of the compact was to provide a
jurisdictional basis to form more or less a clearinghouse so
this money could be collected and then distributed based upon a
common allocation system.
Mr. Kanjorski. I understand, but what I am saying to you is
if I'm Arkansas, and I am getting 10 to 20 times the revenue,
what is my incentive?
Mr. Bouhan. If they get all the Wal-Mart money, and they
get nothing else from any other State, then they are not going
to have too much of an incentive.
Mr. Kanjorski. So, there are going to be winners and losers
here.
Mr. Bouhan. Yes, there will be.
Mr. Kanjorski. 25 of the States will be losers and 25 of--
Mr. Bouhan. Right now in the system, it is so opaque, it is
so confusing, that there is no certainty or clarity as to what
to do.
Mr. Kanjorski. They may not be distributed correctly now.
Mr. Bouhan. There are going to be winners and losers, but I
do not know if you are going to know who they are necessarily.
Mr. Kanjorski. It sounds like a great class action, doesn't
it?
Mr. Bouhan. I beg your pardon?
Mr. Kanjorski. It sounds like a great class action for a
lawyer to straighten that out.
Mr. Bouhan. Yes, it does.
Chairman Baker. I've got a bill on that, too.
Mr. Bouhan. Those words--``simplifies tax''--have crossed
my ears before.
Mr. Kanjorski. All I am raising the question on this issue
for is there are a lot of compelling reasons why the
legislation would accomplish a lot of positive events that I
could sympathize with, but in some of these areas, particularly
revenue, I think it is something important to pay attention to
and get it done now, and have it in the base bill so we do not
just allow--I come from the State of Pennsylvania, and we built
Interstate 80 across Pennsylvania and had to cross about 70 or
80 miles of New Jersey in order to get to New York.
If my recollection is correct, although it is a little
foggy with age now, it took New Jersey about 25 years to close
down route 46 because 46 has business properties on it, and
they did not want to take the traffic away in order to open up
I-80.
There was little incentive to force them to do that. It
took a whole generation for them to come on board.
Mr. Bouhan. We presented the compact idea to the NAIC in
the last 2 years, after numerous efforts to try to deal with
this issue. Often, when we would talk to the NAIC people about
why they weren't willing to get together, why they weren't
willing to try to move to solve the problem, the insurance
regulators that represent the NAIC would tell us that well, you
see, we can deal with insurance matters, but we really cannot
deal with tax and revenue matters. This is a whole different
set of committees and our legislature. We have to go through
the Governor's Office on occasion. They came up with many
problems.
We thought maybe if we could come up with the compact idea,
that would allow the compact to circumvent just the insurance
laws themselves. That was one of the reasons we were trying to
present the compact.
Mr. Kanjorski. I understand that. I have to tell you, if I
were a big winner, it would take me an awful lot of time before
I would join a compact to take revenue away from my State. I'm
just suggesting that I think that is an important issue that we
would have to resolve now.
Do you have outlines as to how we could equitably do that
distribution? Has someone worked on that particular issue,
outside of just giving the authority to create a compact, that
we actually create how the structure would work that we could
incorporate into the legislation?
Mr. Bouhan. There was a few years ago a proposal called
NITCH, which is non-admitted insurance information tax
clearinghouse. It was an electronic clearinghouse idea in which
the brokers would submit the information and the taxes and it
would be in effect distributed to the various States in that
way.
That never really got off the ground too far, but it was a
clearinghouse idea. There was some information there and some
studies that were done to try to look at how this would be
accomplished in that NITCH study. That was about 1996, which I
can pull out of my files somewhere and take a look at.
The problem with the NITCH project was at the end of the
day, it still never harmonized the laws between the States. It
never came up with the standard allocation system. We do not
have a standard allocation system now.
If I am a broker in Missouri, and I have exposures in five
States, and the five States have different allocation systems,
I do not know which allocation system to use. They may be
different. In fact, often they are different between the
States. Some may be based on square footage. Some base it on
revenues of the plant. We do not know which one to use. The
whole system is confusing.
Also, the companies submit information to the regulators as
to the amount of premium they write in each State. They
allocate at the company level the surplus lines premium to the
State based upon the exposures in those States.
The brokers have to do it, too. They do it separately. They
use different systems because there is no standard system.
Mr. Kanjorski. Can we establish in the Act the State with
the best and most equitable practices and adopt that as the
standard?
Mr. Bouhan. Yes.
Mr. Kanjorski. Why don't you take the time to analyze which
State would be the best? If you remember in the progressive era
with the standardization of agricultural products, the 50
States could not agree, and ultimately they agreed to use the
Pennsylvania standard. If you were approved by the Pennsylvania
Department of Agriculture, you were deemed approved nationwide.
It worked very successfully for 100 years.
There has to be one State that has been sophisticated in
this that we could perhaps place in the legislation.
Thank you, Mr. Chairman.
Chairman Baker. Gentlemen, I want to express appreciation
to you on behalf of the committee for your participation. It
has been very helpful.
As we move forward, we certainly want to continue receipt
of your perspectives and recommendations on how we can perfect
the pending proposal.
Obviously, there is a critical need. I am just delighted to
participate in an insurance hearing where everybody seems to be
agreeing. This is a rarity and I am enjoying every minute of
it. with that, our meeting stands adjourned.
[Whereupon, at 4:03 p.m., the subcommittee was adjourned.]
A P P E N D I X
June 21, 2006
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