[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




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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

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

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

                 RICHARD H. BAKER, Louisiana, Chairman

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

                              ----------                              
                                                                   Page
Hearing held on:
    June 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

                              ----------                              


                        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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