[Senate Hearing 109-1064]
[From the U.S. Government Publishing Office]
S. Hrg. 109-1064
INSURANCE REGULATION REFORM
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
ON
EXAMINING THE REGULATION OF INSURANCE AND THE INSURANCE INDUSTRY
__________
JULY 11, 2006
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
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senate05sh.html
----------
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida
Kathleen L. Casey, Staff Director and Counsel
Steven B. Harris, Democratic Staff Director and Chief Counsel
Andrew Olmem, Counsel
Jim Johnson, Counsel
Stephen R. Kroll, Democratic Special Counsel
Dean V. Shahinian, Democratic Counsel
Lynsey Graham Rea, Democratic Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
C O N T E N T S
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TUESDAY, JULY 11, 2006
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Johnson.............................................. 2
Senator Reed................................................. 3
Senator Sununu............................................... 4
Senator Bunning.............................................. 5
Senator Sarbanes............................................. 6
Senator Carper............................................... 30
Senator Menendez............................................. 33
WITNESSES
Alessandro Iuppa, Maine Superintendant of Insurance, and
President,
National Association of Insurance Commissioners................ 6
Prepared statement........................................... 49
John D. Johns, Chairman, President, and CEO, Protective Life
Corporation.................................................... 8
Prepared statement........................................... 70
Thomas Minkler, President, Clark-Mortenson Agency, Inc........... 10
Prepared statement........................................... 76
Joseph J. Beneducci, President and COO, Fireman's Fund Insurance
Company........................................................ 13
Prepared statement........................................... 83
Jaxon White, Chairman, President, and CEO, Medmarc Insurance
Group.......................................................... 14
Prepared statement........................................... 88
Alan F. Liebowitz, President, Old Mutual (Bermuda) Ltd........... 38
Prepared statement........................................... 93
Robert A. Wadsworth, Chairman and CEO, Preferred Mutual Insurance
Company........................................................ 39
Prepared statement........................................... 98
Travis Plunkett, Legislative Director, Consumer Federation of
America........................................................ 41
Prepared statement........................................... 104
Robert M. Hardy, Jr., Vice President and General Counsel,
Investors Heritage Life Insurance Company...................... 43
Prepared statement........................................... 135
Scott A. Sinder, Member, The Scott Group......................... 45
Prepared statement........................................... 138
(iii)
INSURANCE REGULATION REFORM
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TUESDAY, JULY 11, 2006
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:08 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Richard C. Shelby (Chairman of
the Committee) presiding.
OPENING STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. The Committee will come to order.
Today's hearing will inaugurate a series of hearings that
the Committee will hold this year on insurance regulation. The
purpose of these hearings is to continue the Committee's
historical oversight of the insurance industry and, in
particular, to determine how insurance regulations can be
strengthened and perhaps modernized. Although the McCarren-
Ferguson Act delegated primary responsibility for insurance
regulation to the States, the health of the U.S. insurance
market is a national concern. The American economy depends on
the existence of a dynamic and robust insurance market, as
insurance protects American businesses and consumers from
financial loss and empowers them to plan for their financial
futures.
Because of the security provided by insurance, American
entrepreneurs have better positions to take the financial risk
necessary to create new businesses and, of course, jobs.
Without widespread availability of insurance at reasonable
rates, the American economy would unquestionably be less
entrepreneurial, less productive, and less competitive.
Insurance products also play a central role in the
retirement plans of millions of Americans and provide
invaluable assistance to many following life's most tragic
moments, such as the death of a spouse or a parent. Private
insurance is our Nation's first line of defense in protecting
Americans from financial distress.
Yet, in order for the U.S. insurance market to work for
American consumers today and in the future, it is essential
that insurance regulation keep pace with the changes in the
marketplace and technological development. How insurance is
regulated has a direct impact on whether the U.S. insurance
market has the capacity and ability to pay claims, the
flexibility to develop new products in response to changing
consumer demand, and the strength to insure Americans at
reasonable rates. Making sure that U.S. insurance regulation is
the world's most advanced and up-to-date, therefore, has real
world consequences for American consumers.
My hope for today's hearing is twofold. First and foremost,
I think that it is important that this Committee thoroughly
understand the most pressing regulatory insurance reform
issues. No system of regulation is perfect, but we can only
begin to make the needed improvements once we understand the
problems and the issues that are at stake.
Second, I am interested in learning about all of the
potential options for the modernization of the insurance
regulations. Insurance is too important to too many Americans
for us not to examine all of our options for modernizing our
system of insurance regulation.
And I am pleased that two members from this Committee,
Senator Sununu and Senator Johnson have already been working on
ways to modernize insurance regulation. I commend them for
their innovative work and their willingness to tackle such a
daunting task as insurance regulation reform. I look forward to
learning more about their proposals and also learning more form
other witnesses.
I want, in advance, to thank all of the witnesses for being
here today and, at this time, Senator Johnson. I believe you
were here first.
STATEMENT OF SENATOR JOHNSON
Senator Johnson. Thank you, Chairman Shelby, and also I
appreciate the concern expressed by ranking member Sarbanes and
his staff. Both of your staffs have been very helpful.
I want to thank you for holding what I hope is the first in
a series of hearings on the very important issue, an urgent
issue, of regulatory reform of the insurance industry. The last
time this Committee held a hearing on this issue was back in
2004. And it is safe to say, frankly, that very little progress
has been made in this area on either the State or the Federal
level since that time.
There is a widespread consensus that the status quo is
unacceptable. The question now is, what should be done to
change that? As you know, Senator Sununu and I have come up
with what we believe is a reasonable solution and what I truly
believe is the right approach, an optional Federal insurance
charter.
I have heard many arguments both for and against the
regulation of insurance, and I have to say that I, at this
point, am not convinced that all 50 States will ever be able to
come together on what we all agree is desperately needed, and
that is uniform standards.
But this is not a simple issue, and therefore there is no
simple solution. Nonetheless, insurance companies both small
and large, agents and brokers, and, most importantly,
consumers, should all have the benefit of a system of
regulation that fosters competition, while allowing the
greatest protections and the greatest choices.
None of those ideals should be hindered or diminished by
regulatory reform efforts, rather they must be enhanced.
Consumers should have the benefit of knowledgeable and
responsible agents and brokers who represent well-regulated and
financially sound companies.
Insurance companies, whether they are local, regional,
national, or global, must be able to grow to compete and offer
innovation products and services. There is no reason why this
country's insurance industry, its agents, brokers, and
consumers they serve, should be hamstrung by a system of
regulation that I have heard described as redundant,
inefficient, burdensome, complicated, duplicative, costly,
dysfunctional, anachronistic, balkanized, contradictory,
deficient, and counterproductive.
Now, maybe somebody can think of some more descriptions
than that, but that is just a handful of what was shared with
me over the years, despite the fact that, obviously, we have
many very able State regulators and very many States that have
tried hard to do a good job.
Congress called for State reform of insurance regulation in
Gramm-Leach-Blilely. The message we are willing to send now is,
if you cannot do it, we will do it for you.
I want to thank each of the witnesses that have taken the
time to appear before us today to help the Committee better
understand the current system, or lack of system, of insurance
regulation. I look forward to hearing your recommendations for
meaningful and effective reform.
And it is my hope that at the conclusion of today's
hearing, we will leave armed with a good sense of the right
approach to addressing, and addressing in a prompt fashion,
this critically important issue.
Thank you, Mr. Chairman.
Senator Shelby. Senator Hagel.
Senator Hagel. No statement. I look forward to the
witnesses. Chairman, thank you.
Senator Shelby. Senator Reed.
STATEMENT OF SENATOR REED
Senator Reed. Well, thank you very much, Mr. Chairman. I
think this is a very timely and important hearing. The
insurance regulation system in the United States faces
challenges and we need to, I think, examine it at this point.
If we look at a global economy as well as the emerging products
and emerging technologies, insurance companies comprise a
significant sector of our economy. Over 1,000 life and health
insurance companies, and over 2,000 property and casualty
insurance companies generate $540 billion and $430 billion in
premiums, respectively.
Insurance companies, unlike banks and other financial
institutions have been regulated by the States for the past 150
years, and although a number of changes in the regulatory
system have been proposed at the Federal level, the system has
remained largely untouched. Gramm-Leach-Blilely further
clarified the State's authority to regulate insurance
companies.
The decentralized nature of insurance regulation has
prompted calls for a revision of the current system to make it
more uniform and efficient.
However, there is a widespread disagreement as to what
approach should be taken to achieve this efficiency and this
uniformity. The proposal to transfer State regulatory functions
to the Federal Government will likely bring about a healthy
debate. We are beginning that debate today. With that said, I
think we must continue to insist upon strong consumer
protections as part of any changes to our regulatory structure.
Modernizing our regulatory structure should not be an
excuse to undermine consumer protections. This is, obviously, a
complicated and important issue. I look forward to this hearing
and future hearings as we examine the impact of the current
system of regulation on the insurance industry.
Thank you, Mr. Chairman.
Senator Shelby. Senator Sununu.
STATEMENT OF SENATOR SUNUNU
Senator Sununu. Thank you, Mr. Chairman. I certainly want
to commend you on convening yet another quiet hearing on a
dull, sobering issue, like insurance regulation.
Senator Shelby. It will be quiet.
Senator Sununu. I hope the fire marshals are not in the
facility. It is especially nice, though, to see that we have
got a number of colleagues here to talk about. And to listen to
our witnesses about a very interesting, somewhat complex
subject described in, I think, effective detail by you, Mr.
Chairman, by Senator Johnson, and Senator Reed. And that is,
how best to insure efficient regulation of the insurance
markets.
You detailed the key issues, here. We have an industry that
is certainly national and is increasingly global in its scope
and reach, but we have a regulatory system that is still highly
fragmented and, indeed, local.
It is but one small example, but I think it is worth
mentioning, that when you have regulators that stipulate
whether or not paper clips or staples are allowed in filings,
then I think it is fair to ask the question whether that is a
system that really serves its constituents, clients, and
consumers well.
It is a fragmented system, and as a result it is fair to
say that it is a costly system. It is costly to underwriters,
but ultimately, the burdens and costs of such a system are
borne by consumers. Borne by consumers not just in higher
prices, but borne by consumers because they suffer the results
of less innovation, less product development, slower product
introduction in the marketplace.
Senator Johnson and I worked for a long time on this
legislation. And, fortunately, we got it perfect.
[Laughter.]
Senator Sununu. We do think that it is a better system. We
do feel that it is a better approach. We do think it is the
right approach, overall, but we also recognize that, perhaps
most important, it is a framework for this debate. Something
substantive and specific that people can look at, reflect on,
critique, and work to improve.
There is a recognition, Senator Reed pointed out, that
national regulation is required at this stage. Legislative
proposals have been circulated in the House. And I think that
underscores the understanding, a broad consensus, that some
action is necessary. And this is not necessarily a new
realization. As I have quoted here before, and will do so
again, in 1871, George Miller, who was, at the time, insurance
commissioner of New York, noted, clearly and unequivocally,
that the State insurance commissioners are now fully prepared
to go before their various legislative committees with
recommendations for a system of insurance law which shall be
the same in all States. Not reciprocal, but identical. Not
retaliatory, but uniform.
This is a recognition by the commissioners themselves 135
years ago that we needed a national system of uniformity. And
that was well before we had communications infrastructure, the
information technology infrastructure, the national markets and
the global markets that we all have come to understand very
well, today.
So, I think it is high time that we had a discussion that
centered around a specific proposal, and I look forward to the
witnesses' testimony.
Thank you, Mr. Chairman.
Senator Shelby. Senator Bunning.
STATEMENT OF SENATOR BUNNING
Senator Bunning. Thank you, Mr. Chairman.
For the most part, Congress and the Federal Government have
left the regulation of life, and property, and casualty
insurance alone. In fact, Congress explicitly granted the
States regulatory responsibility of those insurance products,
and that system has worked for many years.
Today's hearing is an important first step in considering
whether the creation of a new Federal regulatory system will
improve this sector for both insurers and the insured or simply
add more bureaucratic mess.
Congress regulates many parts of the economy, with the
financial industry being one of the most heavily regulated
sectors. Over 69 years have passed since the Supreme Court
ruled that Congress has the power to regulate insurance. And
there is still no Federal insurance regulator.
This speaks volumes. We need to move with extreme caution
when talking about reversing the entire history of insurance
regulation in this country. There should be a high hurdle for
expanding the Federal bureaucracy and imposing new regulations.
Once involved in a new area of regulations, Congress has
the tendency to create monsters of bureaucracies that only grow
and never go away. Before we go down that road, there must be
clear evidence that the current system is broken and that there
are no better alternatives.
So far, I have not seen that evidence. Certainly, greater
cooperation between the States would be very beneficial.
Licensing and product approval are areas where States could
improve coordination. In today's modern and mobile society,
some cross-border restrictions simply do not make sense.
Some efforts are underway to address these problems. Time
will tell what kind of differences they make. Perhaps there are
things Congress can do to make a difference. I just hope that
we do not rush to judgment and do something that everyone will
regret.
I look forward to hearing from our witnesses. Thank you,
Mr. Chairman.
Senator Shelby. Senator Crapo, do you have a statement?
Senator Crapo. No opening statement, Mr. Chairman.
Senator Shelby. Senator Sarbanes, do you have an opening
statement?
STATEMENT OF SENATOR SARBANES
Senator Sarbanes. Well, thank you very much, Mr. Chairman.
I will just summarize very quickly, because I know we have
a number of distinguished witnesses this morning. This is, of
course, an important part of the jurisdiction of this
Committee, and I want to commend the Chairman for examining
this issue, which has been raised by a number of people.
I do want to make the observation that the issue of a
Federal charter raises a number of far-reaching questions. We
have traditionally left insurance regulation essentially to the
State Governments. This would, in effect, encompass a major
shift in that attitude. And some of the proposals that have
been put forward carry with them very strong preemption
provisions.
It is also an optional move, so those to be regulated would
be able to choose their regulator, which raises some
interesting hypothetical possibilities.
So, Mr. Chairman, I know we have an extended list of
witnesses today, and I think you planned other hearings, as
well----
Senator Shelby. We did.
Senator Sarbanes. ----on this subject, as I understand it.
And I think that is the way to approach this issue. I think it
has to be examined very thoroughly, very carefully, and with an
understanding and an appreciation that we are raising the
question of fundamentally altering the regulatory landscape. I
am not pre-judging that, but I do think that it is a matter of
some import and consequence, and we need to keep that in mind.
Thank you very much.
Senator Shelby. Thank you, Senator Sarbanes.
The witnesses on the first panel are the Honorable
Alessandro Iuppa, president of the National Association of
Insurance Commissioners, and Maine Superintendent of Insurance.
Mr. John D. Johns, president and CEO of the Protective Life
Corporation.
Mr. Thomas Minkler, president of Clark-Mortenson Agency,
Inc.
Mr. Joseph Beneducci, president and COO, Fireman's Fund.
And Mr. Jaxon White, president and CEO, Medmarc Insurance
Group.
I will introduce the second panel later.
We will start with you, Mr. Iuppa. I hope I got your name
right; is that right?
STATEMENT OF ALESSANDRO IUPPA,
MAINE SUPERINTENDENT OF INSURANCE, AND PRESIDENT, NATIONAL
ASSOCIATION OF INSURANCE COMMISSIONERS
Mr. Iuppa. That was very close. I will answer to anything,
close, that is. But thank you very much.
Chairman Shelby, Senator Sarbanes, and members of the
Committee, thank you for inviting me to testify before the
Committee on insurance regulation reform. As you heard, my name
is Alessandro Iuppa. I am the Superintendent of Insurance for
the State of Maine, and I currently serve as president for the
National Association of Insurance Commissioners, otherwise
known as the NAIC.
I am pleased to be here on behalf of the NAIC and its
members to share with the Senate Banking Committee the status
of the State system of insurance supervision.
Today, I would like to make three basic points. First,
State insurance officials strongly believe that a coordinated
national system of State-based insurance supervision has met,
and will continue to meet, the needs of the modern financial
marketplace, while effectively protecting individual and
commercial policyholders.
State insurance supervision is dynamic, and State officials
work continuously to retool and upgrade supervision to keep
pace with the evolving business of insurance that we oversee.
A perfect example of our success is the interstate compact
for life insurance and other asset preservation insurance
products. Twenty-seven States have joined the compact in just
27 months, with more on the way. And we plan for this State-
based national system, with its single point of entry and
national review standards to be fully operational in early
2007.
The interstate compact, though, is but one example. NAIC
members have modernized the State system across the regulatory
spectrum to implement multi-State platforms and uniform
applications. We have leveraged technology and enhanced
operational efficiency, while preserving the benefits of local
protection, which is the real strength of the State system.
Second, your consideration of this issue must begin with
the understanding that insurance is a unique and complex
product that is fundamentally different from other financial
services, such as banking and securities. Consequently, the
State-based system has evolved over the years to address these
fundamental differences.
Unlike banking products, which provide individuals up-front
credit to obtain a mortgage or to make purchases, or
securities, which offer investors a share of a tangible asset,
insurance products require policyholders to pay premiums in
exchange for a legal promise, rooted in contractual and torte
laws of each State.
It is a financial guarantee to pay benefits, often years
into the future, in the event of an unexpected or unavoidable
loss that can cripple the lives of individuals, families, and
businesses.
In doing so, insurance products inevitably touch a host of
important and often difficult issues that generally are
governed at a State level. State officials are best positioned
to respond quickly and to fashion remedies that are responsive
to local conditions.
We are directly accountable to consumers who live in our
communities and we can more effectively monitor claims
handling, underwriting, pricing, and marketing practices.
Third, despite State's long history of success protecting
consumers and modernizing insurance supervision, some propose
to radically restructure the current system by installing a new
Federal insurance regulator, developing a new Federal
bureaucracy from scratch, and allowing insurance companies to
opt out of comprehensive State oversight and policyholder
protection.
Risk and insurance touch the lives of every citizen and the
fortunes of every business, and the Nation's insurance
officials welcome Congressional interest in these issues.
However, a bifurcated regulatory regime, with redundant and
overlapping responsibilities will result in policyholder
confusion, market uncertainty, and other unintended
consequences that will harm individuals, families, and
businesses, that rely on our insurance for financial protection
against the risks of everyday life.
For these reasons, the Senate Banking Committee and
Congress should reject the notion of a Federal insurance
regime. The system of State insurance supervision in the United
States has worked well for more than 135 years. State
regulators understand that protecting America's insurance
consumers is our first responsibility.
We also understand that commercial insurance markets have
changed, that modernization is needed to facilitate more
streamlined, harmonized, and efficient regulatory compliance
for insurers and producers.
The NAIC and its members will continue to share our
expertise with Congress, and we respectfully ask that Congress
and the insurance industry market participants work with us to
further fully implement the specific improvements set forth in
our modernization plan.
As our progress to date shows, a modern State-based system
is the best, most practical way to achieve the necessary
changes quickly, in a manner that preserves and enhances State
protections that consumers demand. The Nation's insurance
consumers require a financially sound and secure marketplace
that offers a variety of products and services. They now have
this through an effective and responsive State regulatory
system.
When our record of success is measured against the
uncertainty of changing a State-based system that works well,
at no cost to the Federal Government, State insurance officials
believe that Congress will agree that supervising insurance is
best left to home State officials who have the expertise,
resources, and experience to protect consumers in the
communities where they live.
Thank you for the opportunity to speak with you today, and
I look forward to your questions.
Senator Shelby. Mr. Johns.
STATEMENT OF JOHN D. JOHNS,
CHAIRMAN, PRESIDENT, AND CEO,
PROTECTIVE LIFE CORPORATION
Mr. Johns. Thank you, Mr. Chairman, and Members of the
Committee. I very much appreciate the opportunity to provide
you and Members of the Committee----
Senator Shelby. Can you bring the mic a little closer.
Mr. Johns. Is that better? Can you hear me? Thank you.
I really appreciate the opportunity to be with you today on
behalf of the American Council of Life Insurers, which is the
primary trade association for the life insurance industry, to
express our perspective on the pressing need for Congress to
comprehensively modernize our system of insurance regulation.
This issue is at the very top of our list or priorities
that is set forth each year by a board of directors, of which I
am a member. As the principle trade association for life
insurance companies, the ACLI's 377 member companies represent
91 percent of life insurance premiums paid each year in the
United States. Ninety percent of the annuity considerations,
and 91 percent of the industry's overall assets.
Of those 377 members, 150 are small companies with assets
of $2 billion or less. I would characterize our company,
Protective Life, as a mid-sized company. We have about $30
billion in assets, which makes us a mid-size player in the
United States life insurance industry.
But both large and small life insurance companies see
regulatory modernization as something that must be accomplished
in the near term if the life insurance industry is going to
preserve its ability to provide consumers with the best
products and services we can in order to provide the very
essential products that we do provide to the American people.
We protect people against the catastrophe of dying too
soon. We help them deal with all of the complexities of living
too long and outliving your savings. We are a key part of the
American financial services industry.
What is at stake here is all the more important given the
fact that we have some 76 million baby boomers nearing
retirement. With their life expectancies increasing, and the
use of defined benefit pension plans decreasing, these American
citizens will have to depend increasingly on the products and
services that only life insurance companies can provide,
products that guarantee lifetime income, long-term care, and
lifetime financial security.
On one fundamental point, there seems to be general
agreement, and Superintendent Iubba and I would, I think, agree
with this, and that is that the insurance regulatory system has
just not kept pace as the industry has evolved and become much
more national in scope--even international in scope. And that
substantial change to the current system is required.
Views differ, however, on how this situation should be
addressed. The State regulators--and again, I want to be clear.
We are not here to complain about State regulators. We have
great respect for those who are our regulators. They do a good
job. They work hard. Their intentions are very good.
But the problem is the framework that we are all operating
under, the fragmented, 51 jurisdiction framework that we are
operating. But the State regulators suggest that, while there
are indeed problems, the appropriate solutions may all be found
within the existing State-based system. And what is really
needed at this juncture is simply more time for the States to
act.
Others would suggest that the Federal Government should
help move the remedial process along by enacting minimum
standards that the States can then enforce. Let me briefly
address these two approaches and perhaps suggest what we see as
some issues, there.
We believe that State regulation will always be an integral
part of the insurance regulatory landscape. That is why the
ACLI and the life insurance industry remain firmly committed to
working with the States to improve it.
That said, and notwithstanding the very good work that
States have done advancing interstate compact for life
insurance product approvals. The overall progress on regulatory
modernization has been slow, and there is no realistic
expectation that the many, many aspects of the State system
that needs substantial improvement will be addressed in the
foreseeable future.
That is why we strongly support the comprehensive approach
to improving insurance regulation reflected in the legislation
that Senators Sununu and Johnson have proposed. Having an
optional Federal charter operating alongside a gradually
improving State system of regulation seems to us to be the
right way to go. And it parallels the successful dual
chartering mechanism we see in the commercial banking sector.
We do not believe Federal minimum standards are the answer,
either, as, by their very nature, they do not provide the
uniformity our industry so desperately needs. Minimum standards
establish only a baseline that the States would be free to add
to as they see fit. In time, State-to-State differences in
regulation would again be as prevalent as they are today and
regulatory efficiency would be lost.
Again, we see the single uniform set of laws and
regulations that would be established by Senate Bill 2509
holding out the best promise of achieving the level of
regulatory efficiency that will truly benefit insurance
companies, insurance agents, and, most importantly, insurance
consumers.
Mr. Chairman, the ACLI member companies, both large and
small, have carefully studied the issue of regulatory reform,
and have concluded that Senate Bill 2509 is conceptually the
best framework, the best approach to implement this much needed
initiative.
The legislation establishes a Federal option in a prudent
and appropriate manner by providing strong solvency oversight
and consumer protections. It does not presume to reinvent the
wheel, but instead draws heavily on the best existing State
insurance laws and regulations and weaves them into a single,
strong, and uniform system of national regulation. And,
importantly, it leaves intact our State-based system of
insurance regulation for those insurers wishing to remain
regulated at the State level.
In sum, the bill provides a regulatory structure that best
addresses the challenges of a highly mobile society. It would
help ensure that insurance consumers remained accessed to the
same coverage and protection, regardless of where they bought
their policy or where they currently live.
Mr. Chairman, I again want to thank you for holding this
hearing on this important issue, and sincerely thank Senators
Sununu and Johnson for taking the initiative on insurance
regulatory reform reflected in this bill. Thank you very much.
Senator Shelby. Mr. Minkler.
STATEMENT OF THOMAS MINKLER,
PRESIDENT, CLARK-MORTENSON AGENCY, INC.
Mr. Minkler. Thank you and good morning, Chairman Shelby
and Ranking Member Sarbanes and the rest of the Members of the
Committee.
My name is Tom Minkler, and I am pleased to be here on
behalf of the Independent Insurance Agents and Brokers of
America, also known as the Big I, and its 300,000 members to
provide our association's perspective on insurance regulatory
reform. I am currently Chairman of the IIABA Government Affairs
Committee, and I am also president of the Clark-Mortenson
Agency, a New Hampshire-based independent agency that offers a
broad array of insurance products to consumers and commercial
clients in New England and beyond.
I would like to begin by thanking Senator Shelby for
holding this hearing on an area of critical importance to our
Nation's consumers, how insurance is regulated. Unlike most
other financial products, the purchaser of an insurance policy
will not be able to fully determine the value of the product
purchased until after claim is presented--when it is too late
to decide that a different insurer or a different product might
have been a better choice.
Because insurance is based on this promise, the consumer
issues are much greater than in other financial sectors. It is
clear that there are inefficiencies existing today with
insurance regulation, and there is little doubt that the
current State-based regulatory system should be reformed and
modernized.
At the same time however, the current system does have
great strengths, particularly when it comes to protecting
consumers and facilitating local insurance markets. State
insurance regulators have worked hard to make sure the
insurance consumers, both individuals and businesses, receive
the insurance coverage they need, and that any claims they may
experience are properly paid.
State insurance regulation also gets high marks for the
financial solvency regulation of insurance companies. These,
and other aspects of the State-based system are working well.
Despite its many benefits, State insurance regulation is
not without its share of problems. The shortcomings of State
regulation fall into two primary categories. It simply takes
too long to get a new insurance product to market, and there is
unnecessary duplication in the licensing and post-licensure
auditing process, particularly in regards to agent and broker
licensing.
While there is agreement that State regulation needs to be
fixed, there is disagreement about the most appropriate way.
There are three basic approaches. First, an ad hoc reform
on a State-by-State basis. Second, the unprecedented
establishment of a full-blown Federal regulation. And third, a
pragmatic middle ground legislation to establish Federal
standards.
The Big I is strongly opposed to OFC legislation, like S.
2509, the National Insurance Act. And in my written statement,
I have laid out a detailed critique of the bill.
In the interest of time, I would like now to mention a few
of those concerns. First, local insurance regulation works
better for consumers, and a State-based system ensures a level
of responsiveness to both the consumers and the agents who
represent them. That could be matched at the Federal level by a
distant Federal regulator in Washington, DC.
Second, the dual State-Federal system established by the
NIA would be very confusing to consumers who may have some
insurance products regulated at the State level, and others at
the Federal level.
Third, the NIA would lead to additional regulatory burdens
on agents, brokers, and, potentially, additional licensing
requirements, and agents and brokers would have to become
experts in both systems.
Fourth, by eliminating or drastically limiting regulatory
review of policy language for the small, commercial, and
personal lines markets, the NIA would leave consumers
unprotected.
Fifth, bifurcating solvency regulations from the State
guarantee funds could have disastrous implications for
consumers.
And sixth, the NIA could potentially leave hard to insure
risks with State insurers and cause a negative impact on State
residual markets.
IIABA believes the best alternative for addressing the
current deficiencies in the State-based regulatory system is a
pragmatic middle ground. By using targeted and limited Federal
legislation to overcome the structural impediments to reform at
the State level, instead of a one-size-fits-all approach, we
can improve rather than replace the current State-based system,
and, in the process, promote a more efficient and effective
regulatory framework.
There are only a handful of regulatory areas where
uniformity and consistency are imperative, and Congress has the
ability to address each of those core issues on a national
basis. This is why IIABA supports targeted Federal legislation
along the lines of the provisions of the Gramm-Leach-Blilely
Act to improve the State-based system.
The proponents of OFC would have you believe that the
optional Federal charter proposal creates a parallel universe
of Federal chartered insurers, but leaves in place the State
chartered system in pristine condition. This is not the case.
To take one example discussed earlier, OFC would, as a
practical matter, force the State guarantee funds to accept and
backstop Federal chartered insurers, and there is nothing
optional about that.
This would mean unprecedented intrusion on State solvency
regulation. The State system would be responsible for insolvent
insurers, but could not regulate them to keep them from going
insolvent.
Additionally, some OFC supporters have criticized the
Federal tools approach because of enforcement concerns.
The reality, however, is that court enforcement of Federal
preemption occurs regularly, and would occur under both the
Federal tools approach and the optional Federal charter. As
long as the Federal standards are clear, enforcement of these
standards should not create more burdens on the court system
than litigation arising out of the NIA. The only difference is
that, under the NIA, a Federal regulator would receive
deference to preempt State consumer protection laws and
industry supporters of the NIA receive an advantage in court.
Ironically, those same groups have criticized the targeted
approach on both these grounds and have recently embraced this
approach and legislation pertaining to surplus and re-
insurance.
In conclusion, I would like to reiterate that while some
D.C. interests have proposed an optional Federal charter as the
only way to cure insurance regulation's ills, there is another
way to go.
A rifle shot approach reforming the current system without
settling it.
Targeted Federal legislation to improve the State-based
system presents members with a pragmatic, middle ground
solution that is achievable, something we can all work on
together. It is the only solution that can bring the
marketplace together to achieve this reform.
Thank you.
Senator Shelby. Mr. Beneducci.
STATEMENT OF JOSEPH J. BENEDUCCI,
PRESIDENT AND COO,
FIREMAN'S FUND INSURANCE COMPANY
Mr. Beneducci. Good morning, Mr. Chairman, Senator
Sarbanes, and Members of the Committee.
My name is Joe Beneducci. I am the president and chief
operating officer of Fireman's Fund Insurance Company.
Fireman's Fund was founded in 1863 with a mission to
support firefighters by donating a portion of our profits to
families of deceased firefighters. Today we proudly continue
dedicating a portion of our profits to support firefighters for
safer communities. Our company focuses on providing specialized
personal, commercial, and specialty insurance products
nationwide.
Thank you for the opportunity to be here today to discuss
insurance regulatory reform, a vitally important issue to
consumers, Fireman's Fund, and the members of our property
casualty insurance trade group, the American Insurance
Association.
I would like to summarize my remarks this morning with
three observations about the property casualty insurance market
and the best way to regulate the market.
Number one, our economy is not static and continues to
become more global every day. Consumer needs continue to expand
and grow in conjunction with our economy. These evolutions have
surpassed the current insurance regulatory environment's
effectiveness and viability.
Number two, the current regulatory system inhibits
innovation and actually perpetuates commoditization to the
detriment of consumers.
And number three, a market-based optional Federal charter
can benefit consumers by reforming regulation and encouraging
innovation, while retaining the State regulatory system for
companies who wish to remain there.
There is little disagreement that the current regulatory
system is broken. Many proposals have attempted to deal with
the inadequacies of the current system with literally decades
of debate. Yet not one has come close to delivering a modern
system that empowers consumers and focuses on real consumer
protections. It is time for a new approach.
An optional Federal regulatory track-based on clear and
more appropriate principles is the best way to foster
innovation and achieve regulatory modernization that works for
consumers, the industry, and our economy.
We strongly support the Bipartisan National Insurance Act
of 2006, introduced by Senators Sununu and Johnson.
Importantly, the act gives insurers the option of being
nationally regulated while preserving the current State system
for insurers who believe they can better serve policyholders
within such a framework.
Property casualty insurance stands out in our free market
economy because we are the only part of the financial services
sector still laboring under pervasive Government price and
product controls. This form of regulation is rationalized as
protecting the consumer.
In truth, it discourages and delays innovation, distorts
risk-based pricing, and limits consumer options. This makes it
difficult, if not impossible, for us to respond to increasing
and evolving customer needs.
S. 2509 provides a better alternative. It enhances capacity
by normalizing regulation and allows the marketplace, and by
extension consumers, to dictate the full range of price and
product choices. It establishes stronger refocused regulations
to protect consumers as they navigate the marketplace and look
to financially sound insurers for payment of covered claims.
In addition, an optional Federal charter would bring the
best balance of needed uniformity for those choosing a national
license, while respecting the decisions of others to remain
under State regulatory authority.
Over the long term, a Federal regulatory option will
effectively modernize industry regulation and empower
consumers. By relying on the hallmarks of the free market and
individual choice, S. 2509 recognizes our customer's changing
needs and our insurers' desire and the ability to meet those
needs in a highly competitive global market.
Without a doubt, everyone here supports a healthy U.S.
insurance marketplace that serves and empowers American
consumers. We appreciate, though, that creation of such a
modern, dynamic market is not without challenges and that
change can be unsettling for some. However, we believe the
creation of an optional--let me stress optional--Federal
charter is imperative to meet the needs of all types of
consumers and insurers.
There is no compelling reason not to fully explore and
debate this proposal.
Fireman's Fund and AIA look forward to defending and
advocating an optional Federal charter that truly would serve
consumers by fostering efficiency and innovation. We strongly
support S. 2509 and thank Senators Sununu and Johnson for
putting forth this thoughtful legislation.
Thank you, Mr. Chairman.
Senator Shelby. Thank you.
Mr. White.
STATEMENT OF JAXON WHITE,
CHAIRMAN, PRESIDENT, AND CEO,
MEDMARC INSURANCE GROUP
Mr. White. Good morning, Chairman Shelby and Ranking Member
Sarbanes. I am Jaxon White, chairman, president, and chief
executive officer of the Medmarc Insurance Group. I am a member
of the Board of Governors of the Property and Casualty Insurers
Association of America, referred to as PCI.
I am here today to present the association's views
regarding regulation of the insurance industry. I appreciate
the opportunity to appear before the Committee this morning.
PCI supports efforts to foster a healthy, well-regulated,
and competitive insurance marketplace that providers consumers
the opportunity to select the best possible products at the
best possible prices from a variety of financially sound and
responsible competitors.
PCI is composed of a broad section of insurers, including
stock, mutual, and reciprocal companies. PCI represents large
national insurers, regional insurers, single State companies,
and specialty insurers. Our members write nearly 40 percent of
all the property and casualty insurance written in the United
States, including 49 percent of the Nation's auto, 38 percent
of homeowners, 31 percent of business insurance policies, and
40 percent of the private worker's compensation market.
Our diversity means that PCI's positions on key issues such
as regulatory modernization reflect a wide-ranging industry
consensus and are crucial to the success of regulatory reform
proposals at both the State and Federal levels.
My company, the Medmarc Insurance Group, has been in
business for 26 years. I have served as the chief executive
officer for the last 21 years. Our group consists of three
property and casualty writers, one mutual company, and two
stock subsidiaries.
Medmarc specializes in products liability coverage targeted
primarily to manufacturers and distributors of medical devices
and life science products. You would find us in that specialty
category I just mentioned.
Our 2005 direct premiums written were just over $100
million and our net premiums were $66 million. We write
business in all 50 States, making us subject to regulatory
requirements in each jurisdiction.
PCI members share a common vision that competition and
market-oriented regulation are in the best interest of the
industry and the customers we serve. However, there is
widespread agreement among members that the current regulatory
system is too complex, too expensive, and too uncertain.
The key questions that all of us, insurers, regulators,
State and Federal legislators, and consumers should ask are:
One, what are the objectives and components of a fair and
reasonable regulatory system?
Two, is it possible for the current State-based system to
reform ourselves?
And three, if not, what can and should Congress do to
facilitate meaningful reform of the current system?
In our view, the effective regulatory system should foster
a competitive environment in which consumers can choose the
highest quality products from a variety of financially sound
competitors.
One of the inherent problems in the current system is the
inconsistency of the regulatory environment from State to
State. A patchwork quilt of rules and regulations adds up to a
bureaucratic nightmare that creates delays and roadblocks for
companies to expand into new States, that reduces the flow of
capital to certain markets, and increases the cost of
regulatory compliance and limits consumer choice.
Let me cite quickly a few examples. While most States
accept uniform affidavits from directors and officers regarding
their backgrounds, Florida does extensive background searches
and fingerprints of all officers and directors and officers and
directors of the parent companies. Fingerprints are routinely
rejected, causing some officers and directors to be
fingerprinted multiple times.
The State of New York has an extraterritoriality provision
that, in effect, requires a company to consent to be treated as
a New York domestic company.
While some States recognize statutory deposits held in
other States, some States require additional deposits in local
banks.
Financial and market conduct examinations are often
disjointed and inefficient and are so poorly coordinated that
examinations in one State may often not be accepted by other
States, adding duplication and cost.
But the core problem of the current system is the reliance
by many States on antiquated price controls that impose
barriers to market-based pricing systems. While other areas of
reform are important, the elimination of artificial price
controls is the single most significant element overshadowing
all other reform components.
PCI urges you to place the highest priority on competitive
market reforms as you consider regulatory reform proposals.
Twenty States still require that all changes, up or down,
must be revised and approved before they take effect. The
approval process can often take months. While many other States
purport to have flexible approval procedures, many insurers
feel it is safer to treat such regulations as de facto prior
approval because of potential retroactive disapprovals.
Unfortunately, States have made little progress in enacting
reforms on their own. While there are some positive
developments to report, the overall prognosis for States to
enact significant and systemic changes to the regulatory
environment remains questionable.
On an aggregate basis, the regulatory landscape in the
States remains virtually unchanged from the time Congress began
to evaluate the need for regulatory reform 4 years ago.
PCI commends the members of this Committee for your
commitment to improve the insurance regulatory environment. We
urge you to thoroughly examine all of the alternatives, to move
deliberately, and to consider the potential unintended
consequences, especially in the area of increased regulatory
cost of each reform proposal.
We believe the best place to start the debate, is to define
the principles of a good regulatory system, determine what such
a system should accomplish and then determine how best to
correct the flaws in the current system.
PCI is looking at various models of business regulation
here in the United States and abroad in an effort to build such
a regulatory model. We will share this information with you as
we consider various proposals to enhance the regulatory
environment.
We share the goals of the Committee, to develop a more
competitive marketplace, providing better availability of
insurance and expanding coverage capacity for consumers.
We look forward to working with Congress, State
legislators, and State regulators to modernize and improve the
regulatory system.
Thank you.
Senator Shelby. Commissioner, we will start with you,
Commissioner Iuppa.
The financial structures of insurance companies are
becoming, as we all know, increasingly complex as companies
expand abroad and utilize sophisticated financial products such
as derivatives and finite insurance.
Does every State have the technical expertise necessary to
properly oversee such complex companies as part of the solvency
regulation that you encounter?
Mr. Iuppa. Well, I certainly cannot speak for every State.
Senator Shelby. I understand, but you are representing----
Mr. Iuppa. I understand that. But I think the way I would
propose to respond to that is that the resources do exist
within the State system and we actually try to take advantage
of collaboration.
There are some States that are much stronger with regard to
the resources that they have. But clearly, with regard to the
changes in financial structure, the type of instruments that
are being used by carriers we are intimately involved with, we
are intimately involved with the development of new capital
standards that are coming out of Europe and what type of effect
they are going to have here.
So, I guess the short answer to that is I think we are
well-positioned to deal with those financial issues.
Senator Shelby. Do you believe you are keeping up with the
marketplace?
Mr. Iuppa. It is impossible for anyone to keep up with the
marketplace. The marketplace is the driver. We tend to react to
the changes and the developments in the marketplace.
And I think if you look back over the 135 years, you will
see that changes have been made, not only with regard to
insurance regulation but other forms of financial supervision.
Senator Shelby. Do you have any concerns that the States
will find it necessarily difficult to hire the highly trained
personnel needed to properly regulate a global insurance
company. In other words, the marketplace works here. You have
got to have sophisticated regulators, just like the Securities
and Exchange Commission has to, and the Comptroller of the
Currency has to, and the FDIC.
I mean, the world has changed a lot in the insurance
market, and all financial products, as you well know. So do you
believe the States--or do you have any concern that the States
will find it difficult to keep up with that?
Mr. Iuppa. I think that there is a concern, in terms of
competing with the private sector, for instance, for those
experts.
Senator Shelby. Sure.
Mr. Iuppa. There are certain limitations on resources that
the States have. But again, there is also a willingness by some
very smart, capable people, to respond to calls for public
service, even if it is only for a short period of time.
Senator Shelby. Mr. Johns, what impact does our State-based
system have on the ability of companies to compete domestically
and internationally, your company and others that you speak
with?
Mr. Johns. Senator Shelby, the problems we face in dealing
with this highly fragmented system of regulation are just
immense. Our company started in Alabama in 1907, but now we do
business coast-to-coast. We have also had, at some times, an
international operation.
We have companies headquartered in Birmingham. We have a
company headquartered in Kansas City. We have a company
headquartered in San Francisco.
Our strategy is to try to develop the best possible
products we can for middle income Americans. One of our
flagship products is just a term insurance policy, the most
simple of all life insurance products. We have a very difficult
time rolling out a new simple term insurance product because we
have to go through a 50-State, a 51 jurisdiction process.
Senator Shelby. What about the cost of dealing with 51
jurisdictions? Is that a concern?
Mr. Johns. It is very much a concern. We are examined
constantly. We have different States coming in examining the
same things over and over again in the market conduct area, for
example. It is not uncommon to have two or three States in at
the same time, reviewing us with respect to the same issues,
all doing their separate examinations, which we have to
ultimately pay for.
I could give you myriad examples of just the difficulty,
the practical difficulties, of trying to comply with 51 sets of
regulations that are, in some ways, consistent but that, in
many important ways, that are very inconsistent. It is just a
nightmarish way to have to do business.
It fit the world of 70 or 80 years ago very well, when most
companies, including our own, was locally focused. But now that
our focus is national, it is just out of step with the times.
Senator Shelby. Mr. Minkler, how would you respond to the
claim that our State-based system of regulation creates
barriers to entry that insulate brokers and agents from
competition? You have heard that before.
Mr. Minkler. I would say, Mr. Chairman, that the issues on
a State-regulated basis certainly can be addressed in a more
pragmatic way to address, with the tools we have talked about.
For me as a practitioner, I am not inhibited by a
competitive marketplace and the products that I can bring
forward. However, I am challenged by multiple licensing
requirements in the States that I do business in.
Senator Shelby. What about the expense? I asked that
question of Mr. Johns. What about the expense? You are an
independent agent; right?
Mr. Johns. Yes.
Senator Shelby. And you do business in how many States?
Mr. Johns. Approximately 14 States.
Senator Shelby. What about the cost?
Mr. Johns. The cost to continue to update and relicense my
staff is a substantial cost in both time and economic dollars.
That is for sure.
Senator Shelby. Mr. White, if price controls--I know people
do not like to use that term--if price controls were removed on
insurance nationwide, would most consumers see their insurance
rates increase, fall or stay the same? What lines of insurance,
in your judgment, are most likely to see their rates increase
following the elimination of price controls if we did that?
Mr. White. As a caveat, Mr. Chairman, we are in the
commercial casualty business. You are referring to personal
lines, but I would be happy to respond.
I think you will find a competitive marketplace, I like to
quote our company, ``Business goes where it is wanted.''
In that situation, when you find that there are
opportunities for smaller companies, as well as large
companies, to compete on a level playing field without the
barriers of the so-called price controls, that more efficient
organizations can create lower rates.
I submit to you that homeowner's insurance would vary
greatly throughout the country, as it does to some degree now.
However, I think auto insurance is a different type of approach
and you could see definitely lower rates there by being more
effective in our underwriting skills. But many States require
certain features of auto insurance that a consumer may not wish
to buy.
And so, going forward, price controls, to me, smack of the
past. And what we are looking for here, in regulatory reform,
is the future.
Senator Shelby. Senator Sarbanes.
Senator Sarbanes. Thank you very much, Mr. Chairman.
Gentlemen, I would like to explore the lay of the land on
this proposal with you, in a sense to get a feel, as they say,
of where you are coming from.
The first question I want to put is if there were a
Federal--if there were an optional Federal charter, and
therefore a Federal regulator, States now have a whole host of
consumer protection provisions. Would you anticipate that the
Federal regulator would be able to apply the whole range of
State consumer protection provisions? Mr. White.
Mr. White. In my judgment, Senator, I think that that
system could be built from the beginning, and it could be a
sound system that would incorporate the best of the State
provisions and put that into a Federal system.
Senator Sarbanes. Would you rule out any of the State
consumer protection provisions for application by the Federal
regulator?
Mr. White. I would not rule out any such application if it
made sense on a purely nationwide basis, and not necessarily
limited to single State protectionism.
Senator Sarbanes. Would you rule out pricing and rating
consumer protection provisions for the Federal----
Mr. White. I would rule those out because I believe the
competitive marketplace will address those.
Senator Sarbanes. You would rule those out right at the
beginning; is that correct?
Mr. White. I believe a competitive marketplace will take
care of the need for, or eliminate the need for such of those
boundaries.
Senator Sarbanes. I guess the answer to my question is yes,
you would rule them out; is that right?
Mr. White. Yes, I would, sir.
Senator Sarbanes. All right, Mr. Beneducci, your answer to
that question?
Mr. Beneducci. And the answer would be I do not see why a
Federal system would not be able to support that level of
consumer protection.
Senator Sarbanes. So you would allow them to pass on rating
and pricing; is that correct or not?
Mr. Beneducci. From a rating and pricing standpoint, just
to give you a perspective from one company's perspective,
average filing for any particular price or form typically takes
us anywhere between six and 9 months. It would be considered
fast if it is less than 3 months and it is not uncommon to see
it greater than a year or more.
If you look at the actual cost----
Senator Sarbanes. If you get an optional Federal charter,
so you come under the Federal regulator, in your perception,
would the Federal regulator be able to regulate rating and
pricing the way State regulators can now do? Or would that be
knocked out?
Mr. Beneducci. I do not think it would be necessary.
Senator Sarbanes. Mr. Minkler.
Mr. Minkler. Senator, I cannot imagine a scenario where a
Federal regulator could do as effective a job on a State-by-
State basis than our current system. Yes, there are things that
have to be modernized there. But as far as rate and form go,
every State has peculiarities. Every State has different
pooling mechanisms. Every State has different needs. So I
cannot imagine a Federal regulator being able to do the same
kind of consumer protection job that is now existing.
Senator Sarbanes. Well, of course, Mr. White would not let
them do the job at all, as I understand it, in this area. Mr.
Johns.
Mr. Johns. Senator Sarbanes, that is not a centerpiece
issue for the life insurance industry, since our pricing is not
generally regulated for life insurance annuity products by the
States, and rating is really not a centerpiece issue for us.
Senator Sarbanes. You would, I take it, put the life
insurance industry in one category, as opposed to other forms
of insurance; is that right?
Mr. Johns. The ACLI supports a dual system. We are
supportive of both life and property and casualty----
Senator Sarbanes. Do you support preempting States?
Mr. Johns. We think there probably are some issues where a
Federal regulator should have preemptive power. But when you
get into the sensitive issues of consumer protection, we think
there is very legitimate area for discussion there.
I would like to echo the comments of Senator Sununu, which
is that that piece of legislation is sort of not completely
formed. I think it would be very appropriate for Congress to
really build a very strong system for consumer protection that
would take the best of the State system, leave to the States
things that are best left to the States, but bring to the
Federal regulator the things that are best placed there.
Senator Sarbanes. Let me ask you all this question, why
should the charter be optional? Why should the entity to be
regulated be able to choose, on its own, its regulator and
therefore presumably be able to arbitrage the regulatory
framework?
Why don't we start with you, Mr. Iuppa, and we will go
across this way.
Mr. Iuppa. OK. Well, the interesting thing is even though
it is called an optional Federal charter, I do not think it
really optional. I think A, the issue of regulatory arbitrage
certainly comes into play----
Senator Sarbanes. Let me ask you this question. How many
States have joined the Interstate Insurance Product Regulation
Compact?
Mr. Iuppa. We now have 27 States, which represent around 42
percent of the market. We held our inaugural meeting just a few
weeks ago, in June, and expect to be operational in early 2007.
And again, using national standards.
So for those companies that are in those 27 States, and we
anticipate many more joining, they will have a single point of
filing. They will have national standards in those compacting
States to have their products measured against.
And the other thing to keep in mind is the companies and
the industries had significant input into the drafting of those
standards over the last 18 months, as well.
Senator Sarbanes. So, you have 27 States that have joined,
and another 10 or 12 that are considering joining? Is that
correct?
Mr. Iuppa. I think the number is probably even higher. As
you probably recognize, Senator, coming in January 2007 is
effectively a new legislative season for all the States. So we
are anticipating a significant number of the remaining States
to introduce legislation.
Senator Sarbanes. Let me go back--thank you.
Let me go back to my question and just come across the
panel real quick, because my time.
Mr. Johns.
Mr. Johns. Senator Sarbanes, we do not see the optional
Federal charter as presenting an opportunity for regulatory
arbitrage. We point to the banking system, where we think you
have very healthy systems, both State and Federal, that operate
in parallel.
Senator Sarbanes. Now, we are concerned about that. The OCC
has just preempted a number of consumer protection provisions
applied by the States to federally chartered banks under the
OCC.
Some banks are now shifting from State regimes to the OCC
regime. There is some suspicion that they are doing it just to
boost their membership and their fees and the jurisdiction. But
there seems to be a real problem there of regulatory arbitrage.
Mr. Johns. Senator, I am well aware of that issue and I
would suggest----
Senator Sarbanes. Did I misstate it?
Mr. Johns. No, sir, you did not. But I think you have the
opportunity to build the system that Congress wants here. I
think you have the opportunity to--I think it is a mistake to
confuse the concept of an optional Federal charter with the
problems that could be created if the regulatory structure is
not well formed.
I think those are two separate issues. I think the consumer
protection provisions in the draft legislation are not fully
fleshed out yet. I think there are statements in there to
suggest the direction is toward very strong consumer
protection. There is no reason that you cannot have better
consumer protection under an optional Federal charter than you
have under the existing State system.
Senator, I would like to say one other thing. While we
applaud the interstate compact and think it is a very good step
forward, and the ACLI has worked hand in glove and in
cooperation with the NAIC, it has been 7 or 8 years in the
making. It does not cover even half the population, yet. It
only addresses one of at least a dozen important issues.
And it is daunting to think, if we have to go down that
path, how long it would take to achieve true reform through
this kind of approach. I think the compact, in some ways,
illustrates the problem as much as the opportunities within the
State system.
Thank you.
Senator Sarbanes. Mr. Minkler.
Mr. Minkler. Senator, our position is we oppose a Federal
charter of any sort, whether optional or not.
That being said, I think that an optional charter at this
moment would become, for most of us, it would not be optional
over time. We would be forced into a federally regulated
program for a lot of reasons that I have indicated in my
earlier testimony.
So, in that case, we are not in favor of an option.
Senator Sarbanes. Mr. Beneducci.
Mr. Beneducci. Senator, as you have heard some of the
different opinions on this topic, I think it would be very
difficult if this was a mandated approach to actually have
passed.
So, in recognizing the different opinions that sit at the
table, this provides the best alternative for both sides to
actually get what is necessary.
Senator Sarbanes. If it could pass, would you prefer to
have it mandated?
Mr. Beneducci. No.
Senator Sarbanes. Why not?
Mr. Beneducci. Because I still do not feel by having an
optional Federal charter provides those that believe that
system is best supportive and can actually help consumers with
more innovative products and also streamline efficiency.
For those that actually feel otherwise, that the State
system is still supportive, that would still be up to them and
it would be their decision.
Senator Sarbanes. If I were the Federal regulator, do you
think I could get people to join if I did a pretty sizable
preemption of State consumer protection law?
Mr. Beneducci. I do not know. I could not answer that
question, Senator.
Senator Sarbanes. That is pretty hypothetical.
Mr. White.
Mr. White. Senator, the optional Federal charter should
remain optional. However, in the sense of smaller companies,
and here we distinguish personal lines and commercial lines, as
I said earlier we are commercial lines.
Our policy holders can be sued in third-party liability in
any of 50 States. By accident of where they happen to have
their corporate headquarters they get a certain style of
regulation. So we might have four or five different types of
appearances and policy forms for our policy holders.
So for a smaller company like us, 62 employees, about $65
million in revenue, the optional Federal charter would be an
enhancement if it contained the right features. Not
necessarily, as you said earlier, it would not be perfect in
all respects for consumer protection. But I believe that a
Federal regulator would, indeed, have those considerations
before him or her.
Senator Sarbanes. Mr. Chairman, I have gone over my time.
Senator Shelby. Senator Sununu.
Senator Sununu. Thank you, Mr. Chairman.
Mr. Minkler, you just indicated that you thought companies
would be forced into the Federal charter over time. Why would
that be?
Mr. Minkler. Senator, let me speak first for brokers and
agents like myself. For example, if I understand the language
of the bill correctly, while I think it makes a good faith
attempt to streamline the licensing procedures, currently if I
chose, for example, to be a State-chartered agent--we are not
talking about the carriers now, we are talking about an agent--
and I then wanted to do business with a federally chartered
carrier, it would appear that the national regulator could
impose mandates on me to actually become federally chartered
and/or to----
Senator Sununu. Absolutely not. Under the legislation, if
you are licensed in the State, you are able to sell any Federal
product, period, in that State.
Mr. Minkler. Correct.
Senator Sununu. And you may so choose to get licensed in
other States, as you are. You said 14 States. So that certainly
is not the case.
So why would you be required, or why would any participate
in the industry be required to take the Federal charter?
Mr. Minkler. While I agree that it appears that by being
licensed as a State chartered agent I would have the ability to
contract with a federally chartered carrier, it appears in the
language to me that the Federal regulator, the national
commissioner if you will, would still have oversight of my
conduct with that carrier and, indeed, could lead me to have to
receive a Federal license.
Senator Sununu. The national regulator would certainly have
oversight over the federally licensed products, but that by no
means would give them power to force you to accept or to apply
for a Federal license.
I think that is a misreading of the language.
Ranking member Sarbanes raised a couple of interesting
points and questions about consumer protection, and I think
that is an important issue and one that we are going to
continue to discuss here. I just want to highlight the consumer
protection aspects of the bill.
The legislation does set up a division of consumer affairs
and a division of insurance fraud. It makes insurance fraud a
Federal crime. We have also established an ombudsman, which was
a specific recommendation of Senator Johnson, to act as a
liaison between the regulator and people that might be
adversely affected.
To be sure, there may be other thoughts, ideas with regard
to consumer protection. But those are the key elements that we
have included in the legislation to deal with this issue.
I want to take a moment to eat up some of my time here to
address a concern that has been raised. It was raised in some
of the testimony here and in other venues. I think it is worth
addressing. And this is the idea of consumer confusion, that
this is a bad idea because consumers will be confused. And I
absolutely reject the idea, in just about any field of Federal
action, that consumers are too stupid to understand the
regulatory procedures or processes.
And it is done in many other areas where people do not like
legislation so they say this is going to be terrible, the
consumers will be confused. That is a simplistic way of saying
that consumers are dumb. And I patently reject that suggestion.
We have State chartered banks and federally chartered
banks. Consumers do not know and they do not care whether they
are a bank, whether they are a small business or a big business
doing commercial work or consumer banking, they do not care if
it is a State chartered bank or a federally chartered bank, or
a non-bank for that matter like a credit union.
We have, in telecommunications, cable, phone service,
cellular service. We have Federal regulations. We have State
regulations. We have local regulations. And I will maintain
that those regulations in telecom, just like in insurance,
raise cost, stifle innovation, limit product introduction. But
they do not create consumer confusion to the extent that
consumers are not able to take advantage of cellular service or
cable service or broadband service.
We have testimony here that agents are registered in 14
different States. I know agents that are registered in two
dozen different States. Now that is confusing. That is tough. I
certainly think that agents are intelligent enough to handle
that. And I also think that consumers are not too confused to
take advantages of the quality services offered by those
agents.
So, I think we need to get away from the idea that setting
up a dual charter system, or passing the so-called rifle shot
approach, which also would effectively create a dual system,
some Federal regulation, some State regulations. It is not
going to be too much for consumers to handle.
To that point, there has also been the suggestion that the
optional charter is one size fits all. It is anything but one
size fits all, because it is truly an optional charter.
Now, an individual agent or underwriter may feel that the
State does a better job in their regulation, that they are more
efficient, that the State regulatory structure brings them
closer to their customer, and may therefore choose to continue
to operate under a State system. And that is fine. I think that
is just fine.
But the so-called rifle shot approach, make no bones about
it, would preempt the actions of every participant in the
market in those areas that the rifle shot chose to address.
The proposal circulated in the House preempts every
participate in every area that it regulates. We simply do not
do this in this legislation.
So, you may have concerns that Senator Bunning expressed,
and I share, that we not create expensive bureaucracy and we
not act in a duplicative way, and we not engage in action that
would result in unintended consequences. And so you may say we
should not do anything in this area.
But let us not suggest for a moment that proposals
circulated in the House are not preemptive. They are extremely
preemptive in those areas where they choose to take action.
I do want to--I know I have run over--but I do want to ask
one series of questions with regard to desk drawer rules, which
I think Mr. White included in his written testimony. I found
this intriguing and would just ask that Mr. White describe a
bit for the Committee what are desk drawer rules? And if you
could just give a couple of examples to illustrate that.
Mr. White. Certainly, Senator.
It is a euphemism that is used in the industry for some
time now, having to do with the fact that there are a stated
set of requirements for a form approval or a rate approval. And
yet you run into interpretative situations that do not allow
that to go forward. It essentially is a hold that is placed on
the application.
And as you may know, there are no suspense rules when it
comes to rate and form filings. It is up, individually, to each
State, to address those. We have run into this from the point
of view of whether the rates are adequate.
Now, if our actuary, our consulting actuary, and our
marketplace assessments says that our rates are adequate and
then we have to deal with an individual who may have 2, 3, or 5
years of experience, very little experience in our line of
business which is highly specialized medical technology
products liability, we find that that individual can stop our
rate filing because they feel that there is some deficiency in
there but they cannot really pinpoint that deficiency. That is
an example.
Senator Sununu. So, it is a deficiency that is not
contained in any specific promulgated regulation or legislative
language?
Mr. White. No such thing. It is a interpretive matter on
the part of the individual reviewer.
Senator Sununu. There is a system, a delivery system for
filings out there called SERFF. Could you comment on that
generally? But my question is does that electronic system do
anything to address these somewhat ad hoc desk drawer rules or
underlying prior approval requirements?
Mr. White. I applaud the NAIC for pioneering that. It has
been around for 4 or 5 years now and there are States that use
it.
It tends to appeal to larger companies, not companies of
our size, which are smaller. And it is a fairly, what you would
call a ``me, too'' type process. Thus, you avoid the issues of
having to go through a protracted process when the document and
the form looks essentially the same as a competitors.
In our case, the desk drawer rules then, we do not use the
SERFF system because we do not feel it is efficient for our
purposes because we want particularity and specificity in our
rates.
The desk drawer rules do indeed come into play with us and
we eventually prevail. I should not say prevail. We are
eventually approved. But one has to go along with whatever the
interpretations are over a period of 30, 60, 90 days until
there is an accommodation reached.
Senator Sununu. Thank you, Mr. White.
Thank you, Mr. Chairman.
Senator Shelby. Senator Johnson.
Senator Johnson. Thank you, Mr. Chairman, Members of the
Committee.
Following up a bit on Senator Sununu's question, Mr. Iuppa,
how frequently used or how ever present are desk drawer rules?
Does anybody know?
Mr. Iuppa. I think the answer to that is it is considerably
less than it was say 5 or 10 years ago. We have gone, as part
of the SERFF system that was just referred to, not only is
there an electronic platform for filing rates and forms, but we
have put together product matrixes and product locators so that
the companies know beforehand what the statutory requirements
are for the filing of a particular product.
So they know going in, to eliminate the desk drawer rules.
We have been incredibly vigilant in trying to do that.
The other thing I want to point out is with regard to
SERFF, there are about 1,800 companies out of the 6,500
companies in the United States that do business here who are
making use of SERFF. I think the average turn around time is
about 23 days for product approval. The cost per filing is
considerably less than it is on the paper filing.
And what really strikes me is that there are still
companies that still use paper filings to insurance
departments, even though they can make an electronic filing in
just about every department.
Senator Johnson. Somewhat less than a third of the
companies have chosen to use the SERFF.
Now the NAIC places a lot of emphasis on acting uniform
laws and regs among the different States. To date can you tell
me how many NAIC model laws and regulations have been
implemented uniformly by the different States and, in your
case, by the State of Maine?
Mr. Iuppa. Well, I believe there is something like 300 or
400, possibly more, model laws and regulations that have been
adopted over the years. I certainly am not going to sit here
and say that every single one has been adopted in its entirety
by the States.
But what I would point to, for instance, in the area, of
financial oversight, which is a key aspect of consumer
protection, that essentially across the country in all 50
States, you have the same types of requirements. You have
effectively the same laws or substantially similar laws for
financial oversight.
And that is manifest through our accreditation program,
which has been in place now since the late 1980s.
Senator Johnson. Mr. Johns, critics of the OFC proposal are
concerned that it may be optional in theory, but in practice
competitive pressures may force all insurers into the Federal
system in short order. How do you respond to that?
Mr. Johns. Senator Johnson, I doubt that will be the case.
I am very skeptical about that argument.
I think that there are many insurance companies in this
country that are really locally focused. There are many that do
business only within one State or only one or two States, and I
think they will find it attractive to remain within the State
system.
I think the companies that will opt to go into an optional
Federal system are those whose business, like ours, is truly
national in scope, where there are efficiencies when you are
doing business in 51 jurisdictions to have one consistent set
of rules.
So, I really am very skeptical of that argument. I do not
foresee that happening.
Senator Johnson. Mr. Beneducci, one of the issues that
Senator Sununu and I had to discuss early on was the belief of
some that a life only optional Federal charter is easier to do
and it might make more sense for now. How would you respond?
We obviously have a more comprehensive life, property and
casualty bill here. How would you respond to those who suggest
a life only optional Federal charter is the better route to go?
Mr. Beneducci. Senator Johnson, unfortunately, sometimes
the easy way is not the best way, and I would not see any
different outcome or need for someone that is a life insurance
customer versus a property casualty customer. Both should be
entitled to the same level of efficiency and both should be
entitled to the same level of innovation and products.
So, I do not see there being a difference one way or the
other.
Senator Johnson. Mr. Johns, how do you respond to the
argument that consumers are better served with a State or local
regulator, particularly in terms of consumer protections? Could
you share some thoughts with us on that?
Mr. Johns. Senator Johnson, I offered some thoughts in
response to Senator Sarbanes' question, but I will add a few
more.
I start from the premise that we have the opportunity here
to build the best possible consumer protection system we can.
We can take from the State system the best ideas that are out
there. That is point one.
Point two is that the State system, though I think our
State regulators labor heroically to look out for the interest
of consumers, the system is fragmented and diverse and
different, it is just almost impossible to work within it to
the common goal of consumer protection.
And I really honestly do not think that the locale of the
regulator is really the determinative issue in terms of the
quality of consumer protection. I think it matters little
whether, if you have a consumer complaint, you pick up the
telephone and call Montgomery, Alabama, or, under Senator
Sununu--in your bill, you have regional consumer offices set up
so the consumers could have sort of a local feel to the service
if that is what they desire to do.
But I really do not think--I think that is sort of a red
herring issue, that just because you are on the ground local
that you do a better job of consumer protection.
Senator Johnson. I see my time is about expired, but let me
fit one question in here, for Mr. Minkler. Thank you for your
testimony.
In a recent speech to a State agent group, your
organization asked who these agents thought would have the ear
of a new Federal regulator. Do you believe that regulation is
based on an agent or agency having the ear of a regulator?
Should not regulation be based on consumer protection and fair,
consistent, and impartial treatment of insurers and producers
instead of on personal relationships or political connections?
Mr. Minkler. Senator, did I hear you say the ear of?
Senator Johnson. Of the regulator.
Mr. Minkler. I actually do believe that it is imperative
and much more consumer friendly to have a local representative
in place. This is not to talk to political patriotism. This is
to talk to the knowledge that a local regulator has of his or
her State.
In my State, for example, we will have, our regulator will
get calls regularly in the wintertime about backup of storm
damage, ice and snow. A regulator in Texas would never have
that call.
A Federal regulator in D.C. would have a difficult time to
know the intricacies of each State and how to best respond to
that.
We have a mature regulatory marketplace now. We have
approximately 13,000 regulatory personnel on the ground that
works very effectively. To have that same type of consumer
protection where a consumer could feel best served would indeed
mean replicating that in that type of scope again.
Senator Johnson. Thank you, Mr. Chairman.
Senator Shelby. Senator Bunning.
Senator Bunning. Thank you, Mr. Chairman.
This is for everyone except Mr. Iuppa.
Mr. Iuppa. Iuppa.
Senator Bunning. Iuppa. Are you all operating profitably
presently?
Mr. Johns. Yes.
Mr. Minkler. Yes.
Mr. Beneducci. Yes.
Mr. White. Yes.
Senator Bunning. The four of you. All of your agencies are?
Those you represent?
Mr. Minkler. Yes.
Senator Bunning. I just wanted to make sure that was the
case, in case that there was a driving need for some kind of
new regulations so that you could operate more profitably.
Mr. Beneducci, this question is for you, but Mr. White, or
any other witness should feel free to answer.
If given a choice to be federally regulated, I would assume
that insurers newly positioned in a national marketplace would
be able to cover all risk nationwide, such as natural
disasters, flood insurance, earthquakes.
Would you be able to guarantee the availability of this
insurance to all consumers in all regions of the country?
Would you support legislation that requires companies to
offer things like flood insurance as a condition of a Federal
charter?
Mr. Beneducci. Well, there are a few questions there to
address. As far as a new entrant to the market, I think that is
going to depend largely on what their expertise is. I would not
want to forget the responsibility of a carrier to actually
focus on products that they have an expertise in to be able to
provide to the market.
Just because the market would be open does not suggest
every company would actually be insuring every coverage in
every State for every consumer.
Senator Bunning. The Federal regulator could possibly say
that if you are going to sell in all 51 jurisdictions, you
should have to provide X coverage, whether you are on the Gulf
Coast for hurricane or water, or whether you are in California,
or even in Kentucky for that matter, for earthquake damage,
because we are on a fault line.
Mr. Beneducci. Senator, it does speak to, though, a
carrier's expertise in a particular coverage. And that is
really where different carriers will focus on different
coverages.
I think it would be wrong to assume that a carrier should
just provide coverage for the sake of making it available if
they do not have expertise to do it. It speaks to the
responsibility of the company.
Senator Bunning. Mr. White, on the same question.
Mr. White. Senator, financially and mechanically, I do not
think that that could work. From the financial side, many, many
insurers in this country are well under $100 million in
financial surplus. They might indeed have a national
opportunity, but they could never expand into multiple lines of
insurance.
Mechanically, most of us depend on reinsurance and I cannot
even speculate how many reinsurers would be interested in
reinsuring a newly chartered Federal company that has no
experience in underwriting earthquake or flood. So
mechanically----
Senator Bunning. That is generally why we have a Federal
program to do just that.
Mr. White. Indeed, because that is what we call the moral
hazard or other versions of that same genre, which says that
you only buy the insurance when you need it. That is not the
purpose of the way that we structure our company's products.
Senator Bunning. OK.
Mr. Johns, it is clear that you support legislation that
would create an optional Federal charter for both life and
property and casualty insurance.
Mr. Johns. Yes, sir.
Senator Bunning. There are differences between property and
casualty insurance and life insurance that may justify
different treatment.
Do you agree that there are such differences? And would you
support a life only option Federal charter if it were
introduced?
Mr. Johns. Senator Bunning, we are aware that there are
very clear differences in the life insurance industry and the
property and casualty industry. However, we think we have
operated under the same regulatory framework in the States for
150 years. We think that could be accomplished at the Federal
level, as well.
Our trade association position is that we do indeed support
a dual system.
Senator Bunning. This is for anyone.
We cannot ignore our experience with flood insurance as an
example of Federal involvement in insurance and customer
service. FEMA is still resolving claims, and as of yesterday
they were just being sued, for several years ago. We can expect
thousands of more disputes from last year's hurricanes. I do
not see why a Federal insurance regulator would handle disputes
any better than FEMA has.
Do you believe that a new Federal regulator would be more
effectively and efficiently responsive to the needs of
consumers that the States currently do?
Could a uniform Federal standard with State regulation
create the same efficiencies but provide better consumers
services? Anybody?
Mr. Minkler. Senator Bunning, I would say that there is no
evidence that a Federal regulator would do a better job than a
State regulator in any line of business. Flood is an excellent
example, but I would be concerned about any other of myriad of
coverages that a consumer would face.
We talked earlier about the lack of regulatory form in the
NIA bill. I would be concerned if a carrier decided that they
did not want to offer a standard coverage that is being offered
to consumers today, that they could just opt out of that part
of that. I do not think consumers are well served to move away
from a regularly acknowledged form of coverage, for example
homeowners, where a carrier could say we choose not to
participate--since we do not have to have a regulated form, we
choose not to participate in windstorm, for example.
So I think that would be a disadvantage for a Federal
regulator.
Senator Bunning. As you well know, this Committee is
considering the renewal of the flood insurance program, and we
have a deficit of about $25 billion in that insurance program
right now at the Federal level.
I am sure that you are aware that you could be involved in
that deficit right now if you had underwritten what you did not
underwrite and the Federal Government was required to
underwrite when no private sector insurer would. So I want you
to be aware that what might look really good to you might put
you in jeopardy in some places in the long term.
Mr. Beneducci. Senator, if I could add, I think one of the
reasons that we face that situation is because of some of the
regulation in terms of what can be charged for flood and the
terms by which it needs to be provided has actually restricted
capacity to insure that.
Senator Bunning. We are having that dispute in the courts
right now. As you well know, in Florida, FEMA is fighting
whether it was hurricane damage or water damage.
And if you lived in Naples, Florida, and you had a home and
the hurricane went through, whether the hurricane damaged your
house or whether the water damaged your house, that is in the
courts right now being disputed.
I just want you to know that, if you were writing that
insurance, what you could be up against in the courts right
now, privately.
Mr. Chairman.
Senator Shelby. Thank you.
Senator Carper.
STATEMENT OF SENATOR CARPER
Senator Carper. Thanks, Mr. Chairman.
To our witnesses, welcome. It is good to see all of you
today. Thanks for joining us and for your testimony and
responses to our questions.
Several of the questions I had planned to ask and to raise
with respect to optional Federal charter have been asked, you
have answered them, so I am going to move on to other issues
that I do not believe have been covered.
The first of those involves our representation at
international forums where we may or may not be participating,
and speaking with one voice on issues, particularly in the
insurance side of financial services. I want to talk a little
bit about that.
I want to have us focus a little bit on TRIA. As we look
toward trying to come up with a more permanent fix before the
end of next year.
First, let me say, financial services industries, as we all
know, is an international industry today. Our major banks and
security companies have a substantial presence, not just
throughout our hemisphere but all over the world. And as such,
their respective regulators, whether they be the OCC, the SEC,
and so forth, all have counterparts in other major countries.
They meet. They negotiate standards that are applicable to
companies, not just here but throughout our globe. I think a
prime example of this is probably the Basil Accords that set
international capital standards for banks.
This picture is in sharp contrast to the insurance
industry. There is no single voice at the Federal level to
represent U.S. interest in international communities and
forums.
I just want to ask our witnesses today to comment on this,
if you would, and to ask if you think that the lack of a
Federal voice harms U.S. interests? Maybe you think it is
helpful. I would welcome your thoughts.
Mr. Iuppa, I like your name a lot, so I am going to call on
you first, just so I can say Iuppa a couple of times. Welcome.
Why don't you lead us off.
Mr. Iuppa. Thank you very much.
I guess I would respectively disagree with some of your
premise from the international perspective. On the regulatory
side, supervisory side, we are very much represented
internationally.
In fact, in addition to being president of the NAIC, I
chair the International Association of Insurance Supervisors,
which is an international standard setting body for insurance
supervision.
I participate at the Financial Stability Forum alongside of
the Fed, the Treasury, the Bank of England, Bank of Japan, and
so forth. We are actively involved in the development of
capital standards, the new capital standards in Europe,
Solvency II which is more of a risk-based approach similar to
what we did here in the United States about 20 years ago.
So I think there is very much a U.S. voice in that
environment.
Senator Carper. OK. Thanks.
Mr. Johns.
Mr. Johns. Senator Carper, I am surprised you have not
given me a hard time about my name, John Johns. You have picked
on Superintendent Iuppa.
Senator Carper. What is your middle name?
[Laughter.]
Senator Carper. Maybe we should not go there.
Mr. Johns. Thank you. But in response to your question, I
think it is very much an issue for our industry, the fact that
we are so fragmented in this country and that we have no
spokesperson representing at the Government level here in
Washington the interest of our industry.
I will point out again that we are a $4.5 trillion
industry. We represent about 10 percent of the money invested
in the debt capital markets in the United States. We are a huge
force, not only in the United States but throughout the world,
in economic development because of the investment decisions we
make.
Our president of our trade association, Governor Frank
Keating, recently returned from a trip to Japan and South Korea
where he was advocating that they open up their markets to U.S.
companies. What do you think they said? They said, well, you
have got these incredible trade barriers in the United States.
You have this 51 jurisdiction insurance system our companies
find completely confusing and befuddling and a huge barrier to
entry into our markets.
So it is very difficult for us to go abroad and advocate
reform, modernization, improvement in their systems when they
come back and look at ours and say your system, from our
standpoint, is a big trade issue.
So I think you are right on with your comment, sir.
Senator Carper. Thank you, Mr. Johns.
Mr. Minkler.
Mr. Minkler. Senator, we have heard that there is a need
for oversight from a Federal regulator for tax issues, trade
policy development, that type of thing.
In conjunction with Mr. Johns' statement, while I am
certainly not an expert in this area, it is my understanding
that one of our main trading partners, the European Union,
actually uses a Federal tools approach that we are proponent of
here today.
While having a voice at the Federal level in the form of a
liaison for tax, trade, and policy development, we would be in
favor of that. But not in the form of a full blown regulator.
Senator Carper. All right, thanks.
Mr. Beneducci.
Mr. Beneducci. Yes, Senator. I would agree with Mr. Iuppa's
comment, in terms of us actually being represented and having
an international voice.
However, what troubles me is the message contained in that
voice is sometimes very contradicting.
We actually share a very positive tone internationally with
how open our market is and how accessible our market is. But
yet, at the same time, it is extremely cumbersome to operate
within.
And just on behalf of one company here, to give you a
sense, just simply to go through a filings process for a
company like Fireman's Fund, we average more than 2,000 filings
a year. And out of all of those filings, roughly 350 of which
are actually spent with true new products. The reason for that
is our internal market here, our U.S.-based system, actually
speaks to more conformity than it does to creativity. Very
simply because you are going to approve forms that you are more
familiar with.
And, from a company's perspective, we will gravitate more
toward them because you are not going to spend time with
product that you cannot get approved.
So I think there is a contradicting message that we send.
Senator Carper. All right.
Mr. White, last word.
Mr. White. Senator, we do not find it particularly
disturbing that there is not an international body that would
look after our interest. As a small a company as we are, we
have a substantial stakehold in the state of Israel. Our
policyholders conduct clinical trials in Western Europe, and we
have liaisons with companies there.
So we do not find that an overarching body would achieve
much for us. It is the quality of the service and the ability
to deliver that service at a point in time.
Senator Carper. Good. Well, thank you to each of you for
your responses.
Mr. Chairman, I have another question I could ask here but
I am going to submit it for the record, with respect to the
need for us to figure out what we are going to do after the end
of next year with respect to TRIA. I am going to submit that,
and if you could be good enough to respond for the record, I
would be most grateful.
Thank you all.
Senator Shelby. As all of you know, Senator Carper has
unique experience of congressman, Governor, and of course we
are glad he is with us in the U.S. Senate today. And he will
cover a lot of ground.
Senator Menendez.
Senator Sarbanes. Senator, could I just observe that the
TRIA extension we passed included a requirement that the
President's Working Group on Financial Markets, in consultation
with the insurance commissioners and the insurance industry and
representatives of the security industry and policyholders,
analyze the long-term availability and affordability of
insurance for terrorism risk and report to the Congress no
later than September 30 of this year.
I have to confess I have not followed it. I do not know
what the working group has done so far.
Senator Shelby. We will find out soon. Thank you, Senator
Sarbanes.
Senator Menendez.
STATEMENT OF SENATOR MENENDEZ
Senator Menendez. Thank you, Mr. Chairman. I appreciate the
panel's testimony.
In pursuit of reading some of your testimony and hearing
some of your answers, I have a series of questions.
First, Mr. Johns, on page eight of your testimony, you
refer to the Federal regulatory option available under S. 2509
as at least as strong as the better, if not the best, State
system.
Which one is that?
Mr. Johns. Senator, it is hard to say, because they are all
so different. I think every State----
Senator Menendez. How can you make the statement that it is
at least as strong as the better, if not the best, State system
if you cannot define what the best State system is?
Mr. Johns. Well, there are many good State systems, and I
am unable to identify the very best. But I do think you have
the opportunity, the framework of this legislation, to take the
very best aspects of the best States--and there are many of
them that are very good--and create a superior system. That is
the point we are trying to make.
Senator Menendez. Yes. I think your statement, however, is
a little overreach, based upon what you say there, unless you
can define for me what is the best State system.
Let me ask those of you who support the Federal charter
effort, what specific benefits will you be able to offer
consumers? Many of you, in your answers, have talked about
consumers. Well, what specific benefits will you be able to
offer consumers that you cannot provide under the existing
regulatory system.
Mr. Beneducci. Senator, if I could answer that just to
share with you--about 3 years ago, I will give you a specific
example. About 3 years ago we did some customer research with a
number of our commercial customers. And we asked them flat out
what is the most important thing to you as a consumer of
insurance? And if we could provide it, what would it look like?
The response from our customers was our data. We need you
to protect our data. That is what we need help with. And
certainly, in an evolving economy and global marketplace we all
know why, in addition with technology, why data is so
important.
Well, what we started to do was try to create a product and
service whereby we would actually create an online data backup
facility for our customers. We worked with a third party to try
to create such a product.
We then took it to different States to test how that might
be approved and what we would need to go through. And we
received responses anywhere from it would not be approved
because it would be considered tying of a financial product to
this would be considered rebating in other States to it would
be considered well, we will let you do it but we are going to
be very strict in terms of the pricing that will apply, all the
way to we will not approve it unless you actually have loss
experience.
The reason for the support for consumer, and they have
specifically asked for it, they need protection for data. And
the way that will typically take place today is we will provide
them a limit for their electronic data processing media. Then
when we have a loss, we will cut them a check but more than 80
percent of those customers that are hit with a severe loss will
not get back up and running. And the consumer loses.
Senator Menendez. What else?
Mr. Beneducci. I could give you other examples in terms of
another service very similar to this, where we have actually
looked at a service for providing employee screening for
customers and for our commercial customers, the process that
they go through to actually hire new employees and background
checks and drug testing.
Again, we have another service that we have worked with
another third party, the very same type of response. And these
needs are actually generated not by us but by the consumer to
say we could use products and services that would help us in
these areas.
Instead, what the industry conforms to is what would get
approved through the filing process rather than what the
products are that actual consumers need. So there are an
infinite number of examples.
Senator Menendez. Let me ask, several of you in your
testimony have talked about the inefficiencies and how that
costs consumers. Could you tell me, could you quantify that in
terms of if the Federal charter eliminates all those
inefficiencies for you, would you drive down the cost of the
product? Or would we be increasing the profit margin? Whoever
wants to answer that.
Mr. Beneducci. I will take a first stab at that, just to
give you a perspective, again from Fireman's Fund today, if you
just took a look at the filings that we go through, on average
that is a little bit higher than $15 million a year that we
spend just on the filing side.
And we have reached a point where the cost for filings is
actually now in excess of the amount of dollars that we spend
for external claims adjusters in our marketplace.
To answer your question, what would happen with those
dollars? What I would like to do is actually shift them to have
more claims support on the ground for consumers to be able to
provide better service.
Senator Menendez. The price would not necessarily go down?
Mr. Beneducci. I think the price would be more consistent
with the value provided from an insurance product. Some would
be more commodity based for companies that produce lower cost
products. Other products would be much more value based, based
on the true value as the examples that I gave you to the end
consumer.
Mr. White. Senator, I think you might want to distinguish
between a mutually owned insurance enterprise and a stock
insurance enterprise.
We are a mutual company. Our reason for building is to
build financial surplus and to have a bulwark of protection for
our policyholders.
Yes, we are profitable, as we all responded to Senator
Bunning earlier. But those profits, in our case, go to build
the financial security for our policyholders.
We would, indeed, attempt to lower prices if we could
resolve some of the inefficiencies in the rating and form
process.
Senator Menendez. Is that quantifiable?
Mr. White. Show me the law, please, and then I will
respond. I am not being facetious, but we would have to know
what was available to us.
Mr. Minkler. Senator, I can say with a high degree of
confidence, that in some of our product lines which tend to be
more commodity-like products, term insurance and fixed
annuities in particular, I think you would see a pass-through
of lower regulatory expense directly to the benefit of the
consumer.
I cannot tell you precisely how much benefit that would be,
but our trade association had a study conducted with the
assistance of CSC Corporation that revealed there are probably
billions of dollars of redundant expenses in the current State
system. At least there is an opportunity for that to be passed
on to the benefit of consumers.
Senator Menendez. Whenever I have different entities come
see me and they talk about the consumer incessantly. And then
when I ask them well, are you going to pass on whether it is a
subsidy that seeks to be eliminated in an agricultural bill or,
in this case, the inefficiencies that would seek to be
eliminated and therefore produce a revenue stream, whether that
revenue stream is used to drive down the cost of insurance or
to improve the coverage of insurance or to improve the bottom
line for companies that ensure, there is a big huge difference
as to who benefits as it relates to consumers.
So I always ask the question how is that going to
ultimately affect consumers? Because we can eliminate all the
inefficiencies in the world, if it does not get translated to
the consumer then it is good for the companies. And I
understand the nature of being profitable, but it does not
necessarily mean it is good for the consumers.
Mr. Chairman, I have one last question, if I may?
Senator Shelby. Go ahead.
Senator Menendez. Later on, in the next panel, the Consumer
Federation of America lists six different points or problems
already under existing issues. I just want to ask about one,
their top one.
They say ``Insurers are increasingly privatizing profit,
socializing risk, creating defective insurance products by
hollowing out insurance coverage, and cherry-picking locations
in which they will underwrite.''
Would that not be exacerbated in a Federal charter?
Mr. Beneducci. First of all, I cannot speak to all of the
references that are used there and all of the characteristics
that are used. I can respond in terms of how we create product.
The examples that I gave are not unique. We actually ask
our customers what is important to them and then try to
construct product around meeting those needs.
I think, unfortunately, some of those comments seem more
rhetoric than they do factual. I tried to provide some examples
that actually are fact, based on what our customers have asked
for.
Senator Menendez. Anyone else want to respond to that?
We will wait for the next panel then.
Thank you, Mr. Chairman.
Senator Shelby. Senator Schumer.
Senator Schumer. Thank you, Mr. Chairman.
Thanks for holding this hearing.
I have a specific question in a different area but I have
been unable to get answers that I would like to ask Mr.
Beneducci, because Fireman's obviously is a subsidiary of
Allianz. And we are having real concerns about Allianz living
up to its responsibilities based on the World Trade Center
attacks.
Two basic issues. One is that Allianz global risk insurance
coverage obligated Allianz to pay $432 million as a result of
the 9/11 attacks. Allianz, as I understand it--now there is a
court case, say is this one instance or two instances? You lost
that in the lower court, but you are appealing it. So that
would bring it up to $865 million, $432 million each. But I am
leaving that aside.
You clearly owe $432 million, based on the first court
case. You are the only company that has not lived up to that
$432 million. You have only paid $312 million. That is number
one.
More importantly, a number of insurance companies, when
they renegotiated the agreement between Silverstein Properties,
the Port Authority, and everybody else said we are going to
stick by the agreement because these are just technical
changes.
I wrote every insurance company that had not said they
would stick by the agreement, including Allianz. Got no answer
so far. The letter was about a month old? About a month old, 3
or 4 weeks old.
And so I would ask you two questions. One, why have you not
paid the $120 million extra you owe, at least based on the
minimal situation which it is a one occurrence and not a two
occurrence obligation?
And second, will you stick by your agreement, given this
new Port Authority agreement? Or will you try to wriggle out of
it?
Again, I have spoken with the heads of other major
insurance companies, AIG, Swiss Re, and others. They say they
are sticking with it.
Mr. Beneducci. Senator Schumer, unfortunately my answer is
probably going to disappoint you, and disappoint you in that by
virtue of referencing, by saying what will you do. We are a
subsidiary of the parent company. I actually am not involved in
the discussions with the parent as it relates to how they are
managing that negotiation or that court case.
So I really do not have knowledge of what that position is
and the direction that we intend to take. So unfortunately, I
cannot answer that question.
Senator Schumer. Now, I had asked the Chairman if at some
point, when we have a hearing on the insurance industry, if we
could take this up.
Senator Shelby. Sure.
Senator Schumer. Since we talked about it a couple of weeks
ago, we have gotten no answers.
Senator Shelby. Maybe we will get the parent here.
Senator Schumer. That would be nice.
I hope you will convey to mom and dad----
[Laughter.]
Mr. Beneducci. Point taken.
Senator Schumer. ----my concern that we would like answers
to these questions.
Mr. Beneducci. Will do.
Senator Schumer. Thank you, Mr. Chairman.
Senator Shelby. I want to thank the panelists. It has been
a very long discussion here today, but I think it has been
informative, as we examine the changes in the insurance
industry and the positions of Senators Sununu and Johnson and
others of an optional Federal charter.
We will have more hearings but we thank panel one today.
Thank you very much.
We are going to bring up panel two now.
On panel two, we will have Mr. Alan Liebowitz, president of
Old Mutual (Bermuda) Limited.
Mr. Robert A. Wadsworth, president and CEO of Preferred
Mutual Insurance Company.
Mr. Travis Plunkett, legislative director, Consumer
Federation of America.
Mr. Robert M. Hardy, Jr., vice president and general
counsel, Investors Heritage Life Insurance Company.
And Mr. Scott Sinder of the Scott Group.
If you will take your seats.
I will say at the outset, all of your written testimony
will be made part of the hearing record today, and we are going
to have a vote on the Senate floor in about 15 minutes, so if
you could basically sum up your testimony. You had the benefit
of panel one already.
Mr. Liebowitz, we will start with you.
STATEMENT OF ALAN F. LIEBOWITZ,
PRESIDENT, OLD MUTUAL (BERMUDA) LTD.
Mr. Liebowitz. Thank you, Mr. Chairman.
Senator Shelby. Thank you.
Mr. Liebowitz. Ranking member Sarbanes and members of the
Committee. My name is Alan Liebowitz, I am the president of Old
Mutual (Bermuda), a company affiliated with the Old Mutual
Financial Network. I am here on behalf of the American Banker's
Insurance Association, which happens to be the insurance
affiliate of the American Banker's Association. And both the
ABA and the ABIA participate in the optional Federal Charter
Coalition.
If I could leave you with just one message today, it is
this, we are currently trying to regulate a national and global
business through essentially local government.
The Supreme Court got it right 60 years ago when it
determined that insurance is a national business, and we have
been in denial ever since. This has resulted in increased
inefficiency and complexity. If we are serious about serving
the American consumer, serious about safeguarding the ultimate
consumer protection, namely a strong, well-capitalized
industry, then we need to make significant changes to the way
insurance is regulated in this country.
You have heard, and I am sure you will hear again, others
will highlight exactly the same problems with the State
insurance system as we all have identified previously, and I
will avoid doing it again. I would rather focus on the future,
and the future is an optional Federal regulatory system.
Senator Shelby. Thank you.
Mr. Liebowitz. The State system stifles innovation. Seven
years after Gramm-Leach-Bliley was passed, there is still no
uniformity in producer licensing. If they cannot get that
simple function right, how can we expect the States to be able
to effectively deal with the increasing complexities of a
global insurance market. The solution is an insurance
regulatory system, like the one proposed in S. 2509.
Instead of prior review of insurance forms, there would be
regulations covering product, form filing after the fact,
examinations for compliance, and strong penalties for
noncompliance.
A related problem to product availability is the cost of an
insurance policy. We allow the markets to set the price for
housing, food, clothing, items far more necessary to survival
than insurance. Why do we have the Government continue to set
prices for insurance?
Last, Mr. Chairman, I would like to address the issue of
capacity in our markets by comparing our regulatory system to
that of other nations. The difference between foreign insurance
regulatory structures and our own are stark.
80 percent of the countries that were surveyed by the
International Association of Insurance Supervisors have use and
file laws and no requirement for prior rate approval. We are
still clinging to both. The proposed national insurance act,
proposed by Senator Johnson and Senator Sununu, will advantage
consumers by allowing them access to a wider array of products
at more competitive prices, increase our global
competitiveness, and encourage additional capital investment in
our insurance industry.
Let me end with this one thought, if the State insurance
departments were in charge of our interstate highway system, we
would have cars that would be capable of doing no more than 50
miles an hour, with speed limits of 20 miles an hour. Everyone
would need multiple driver's licenses as we went from State to
State, and safety measures from State to State, so that foreign
manufacturers could not build cars because it would be too
complex.
The NAIC would say that we are perfectly safe on the
highway and eventually we are going to get to where we need to
go. The only question is, at what price?
Thank you.
Senator Shelby. Mr. Wadsworth.
STATEMENT OF ROBERT A. WADSWORTH,
CHAIRMAN AND CEO,
PREFERRED MUTUAL INSURANCE COMPANY
Mr. Wadsworth. Thank you, Chairman Shelby, ranking member
Sarbanes, and members of the Committee. My name is Bob
Wadsworth and I am pleased to testify today on behalf of the
National Association of Mutual Insurance Companies regarding
insurance regulatory reform.
Founded in 1895 NAMIC is the Nation's largest property and
casualty insurance company trade association with more than
1,400 members underwriting more than 40 percent of the property
and casualty premiums in the United States. I am also chairman
and chief executive officer of Preferred Mutual Insurance
Company, a multi-State PNC writer, located in New Berlin, New
York.
Preferred Mutual writes more than $197 million in four
States in the Northeast, New York, New Hampshire,
Massachusetts, and New Jersey. I also currently serve as
chairman of NAMIC.
NAMIC appreciates the opportunity to testify at this
important hearing on the future of insurance regulation. Many
of the witnesses you will hear today will say--and you have
heard today--will say that the current system of State
regulation is cumbersome, inefficient, and often denies
consumers the benefits of competition. I could not agree more.
Consumers and insurers need a modernized regulatory system
that will allow insurers to bring new products to market at
competitive prices. While I share my colleagues view with
respect to meaningful regulatory reform and that it is
critically to our industry and the public we serve, some of us
differ over the means of achieving that objective.
NAMIC believes that reforming the State-based regulatory
system is preferable to creating a new alternative system of
Federal regulation. Let me explain why. Since its inception,
the U.S. property and casualty insurance industry has been
regulated at the State level. NAMIC believes that State
regulation has generally served consumers and insurers well
over the years, but that it has not kept pace with changing
times.
For example, long after the large national industries
experienced sweeping deregulation, property and casualty
insurance companies remain subject to rigid price controls in
most States. That, more than anything else, must change. We
must end price regulation for all lines of property and
casualty insurance.
Other matters that deserve attention include the lack of
uniformity among States, underwriting restrictions, blanket
coverage mandates, and arbitrary and redundant market conduct
examinations. That said, State insurance regulation has many
strengths that NAMIC believes are worth building upon. Chief
among these are the ability of State insurance departments to
adapt to local conditions, to experiment and learn from each
other, and to respond to unique needs and concerns of consumers
in particular areas.
Unlike banking and life insurance, property casualty
insurance is highly sensitive to local risk factors, such as
weather conditions, torte law, medical costs, and building
codes.
What is more, because of the thorough knowledge of local
conditions, State regulators are attuned to the needs and
interests of each State's consumers. It is unlikely that a
distant Federal regulator would have the ability to be nearly
as responsive to the unique concerns of consumers in particular
States.
Many States have made progress in recent years toward
adopting needed reforms. They have softened company licensing
restrictions, for example. And in some States, they have moved
away from strict rate regulation. The influential national
organizations, such as NCOIL, NCSL, and ALEC have called for
the abolition of prior approval regulation.
Federal intervention and insurance regulation could take
several forms, ranging from a complete Federal takeover, to an
optional Federal charter, such as that embodied in S. 2509, to
the narrower approaches pursued by the House Financial Services
Committee in the various smart bill drafts in H.R. 5637.
With respect to S. 2509, NAMIC believes that an optional
Federal charter could lead to negative outcomes that would far
outweigh any potential benefits and that many of the
anticipated benefits would not be realized.
Let me briefly outline our greatest concern. First, when we
examine historical trends in other sectors of the economy, it
is clear to us that Federal regulation has proven no better
than State regulation at addressing market failures or
protecting consumers' interests.
Moreover, unlike State regulatory failures, Federal
regulatory can have disastrous economy-wide consequences. The
Savings and Loan debacle is just an example.
NAMIC is also concerned that while proponents of Federal
regulation may design a perfect system, they can neither
anticipate nor prevent the imposition of disastrous social
regulation at the Federal level.
By social regulation, I mean the measures that tend to
socialize the insurance costs by spreading risk discriminately
across different risk classes. Regulations that restrict
insurers underwriting freedom often have this effect.
Significantly, there is nothing in S. 2509 that would
prevent a Federal insurance regulator from restricting
underwriting freedom.
Since my time is almost over, I will conclude, Mr.
Chairman.
NAMIC believes that, while States have not acted as
rapidly, as thoroughly, to modernize insurance regulation is
necessary. We are encouraged that they have picked up the pace
of reform and are headed in the right direction. Given this
recent progress and the risk associated with creating an
entirely new Federal regulatory structure, NAMIC is convinced
that reform at the State level is the best and safest course of
action for consumers and insurers alike.
Thank you.
Senator Shelby. Mr. Plunkett.
STATEMENT OF TRAVIS PLUNKETT,
LEGISLATIVE DIRECTOR,
CONSUMER FEDERATION OF AMERICA
Mr. Plunkett. Mr. Chairman, Senator Sarbanes, and Members
of the Committee. My name is Travis Plunkett, I am the
legislative director of the Consumer Federation of America.
I would like to thank you for holding a very timely
legislative hearing. Consumers, especially those with low-and
moderate-incomes are presently facing a number of very serious
problems in the insurance market regarding insurance
availability, affordability, and hollowing out of coverage.
These are problems that the State-based regulatory system
has largely ignored or failed to adequately address. However,
insurance industry proposals that have been introduced recently
in the Senate and the House, such as those to create an
optional Federal charter and the Federal tools proposal would
likely increase these problems while further eroding incentives
for loss prevention.
We urge the Committee to reject these anti-consumer
proposals, and to examine options that will improve competition
in, and oversight of, the insurance market, while increasing
regulatory uniformity and protecting consumers.
My main message to you is that tough oversight of the
insurance market is not incompatible with vigorous competition.
In fact, the best State regulatory regimes, such as
California, achieve both goals. There are many legitimate
concerns that Congress could be raising about the problems
facing consumers in the insurance market today.
For example, hundreds of thousands of people along the
Nation's coasts are having their homeowners' insurance policies
nonrenewed and rates are skyrocketing.
Insurers are enjoying their highest profits ever during
this time of high losses because they have become increasingly
adept at privatizing profit and socializing risk. They have
hollowed out insurance coverage, for example, by adding
hurricane deductibles and making it much more expensive for
consumers to get reimbursed for true replacement costs, and
they are now cherry-picking the locations in which they will
underwrite.
Pending proposals in Congress do nothing to increase
scrutiny of insurer actions that have caused these
affordability and availability problems. They also do not deal
with other problems. They do not prevent insurers from using
inappropriate and possibly discriminatory information to
develop insurance rates, such as credit scores. These bills do
not spur increased competition in the insurance industry by
providing assistance the millions of consumers who find it
extremely difficult to comparison shop. They are not stupid,
but it is a very complex product, and they find it very
difficult to comparison shop.
These bills also do not eliminate the antitrust exemption,
under McCarren-Ferguson, that allows the insurance industry to
use cartel-like behavior. They do not address the serious
problem of reverse competition in certain lines, like credit,
title, and mortgage guarantee insurance.
They do not prod State regulators to do more to stop unfair
claim settlement practices, of the kind many homeowners on the
Gulf Coast have expressed concern about in the wake of
Hurricane Katrina.
Instead, these proposals, such as the Federal charter
proposal and the smart system. Sanction anticompetitive
practices by insurance companies in some cases. Override
important State consumer protection laws. Incite State
regulators into a race to the bottom to weaken insurance
oversight, a trend that has been underway for the last 5 years.
As an example, let us talk about S. 2509, allowing insurers
to choose whether they should be regulated by either a Federal
body or by State regulators. This can only undermine needed
consumer protections by allowing insurers to play State
regulators off each other. If elements of the insurance
industry truly want to increase their speed-to-market of their
products and increase other advantages that uniform Federal
regulation would provide, let them propose a Federal approach
like that offered in 2003 by Senator Hollings. It has strong
consumer protections and would not allow insurers to run back
to the States when oversight is tougher than they would like.
Property casualty insurers are particularly ill-suited to a
national approach, as dictated in S. 2509, or I should say,
allowed in S. 2509. This is because there are so many
differences from State to State, and the type of risks that
must be covered, as well as the regulatory and legal mandates
that must be met.
This bill also creates a Federal regulator that has little,
if any, authority to regulate very important items, such as
insurance rates, and a limited ability to regulate the form of
insurance policies.
Consumers do not care, Senators, who regulates insurance.
We only care that the regulatory system be excellent. We are
critical of the current State-based system, but we are not
willing to accept a Federal system that guts consumer
protections and establishes uniform but very weak regulatory
standards.
We agree that better coordination and more consistent
standards for licensing and examinations are desirable and
necessary and we agree that consumers pay for inefficiencies
but these are not the right approaches.
We urge you to look at a wide variety of options to ask the
right questions about problems that exist in the market and to
continue your investigations.
Thank you, very much.
Senator Shelby. Mr. Hardy.
STATEMENT OF ROBERT M. HARDY, JR.,
VICE PRESIDENT AND GENERAL COUNSEL,
INVESTORS HERITAGE LIFE INSURANCE COMPANY
Mr. Hardy. Good morning, Senator Shelby, Ranking Member
Sarbanes, and Members of the Committee. My name is Rob Hardy,
and I am vice president and general counsel of Investors
Heritage Life Insurance Company in Frankford, Kentucky.
I am pleased to be here today on behalf of the National
Alliance of Life Companies, a trade group that is primarily
composed of regional, small, and mid-sized life and health
insurance companies.
The NALC supports State regulation of insurance, and
opposes the concept of an optional Federal charter. The design
for the Federal charter is contemplated in Senate Bill 2509, is
purportedly based on a dual charter banking system. However,
there is no national crisis, as there was when the Federal
banking system was established, compelling Congress to act in
order to bolster consumer confidence. There is no outcry from
consumers demanding the Federalization of insurance.
To the contrary, according to an ACLI report monitoring the
attitudes of the public in 2004, the life insurance is regarded
as either very or somewhat favorable to the majority of the
people they polled.
Further, a solid majority of consumers agree that life
insurers provide good service and employ highly trained
professionals. This is hardly a clarion call from consumers for
drastic change, like the creation of an entirely new regulatory
structure under the Federal Government.
The primary purpose of insurance regulation, which you have
heard many times today, is to protect consumers. Attempting to
mirror the system that regulates the banking industry is a lot
like trying to put the square peg in the round hole.
First, unlike most bank products, which are based on the
national commodity, insurance is sold based on individual
needs.
Second, the distribution channels are completely different,
with insurance companies, which rely primarily on an agency
force, while banks rely on customers coming into their branches
to transact their business. Insurance has to be sold to
individuals by individuals.
As policy conflicts inevitably arise between the Federal
insurance regulator and the States, the Federal regulator will
ultimately force the States to resolve the conflict. We are
concerned that this is just a first step in a long series of
laws that will erode State insurance regulation. Therefore,
State charter producers and insurers will not have an option,
it will become mandatory.
We certainly applaud Congress for the vital role it has
played in encouraging States to take positive reform steps over
the last few years. The system is in need of continued
improvement, and the march toward modernizing the State
regulatory system continues.
However, we are very concerned that the creation of a new
Federal bureaucracy to regulate insurance will halt this
forward progress and create an entirely new set of problems for
everyone concerned.
It is undeniable that some insurance industry groups have
been involved in framing the concepts of the optional Federal
charter. We think the industry will be exposed to the very real
criticism that it is not industry's intent to create a more
aggressive regulator, but a friendlier regulator. Creating an
industry friendly regulator seems somewhat at odds with the
ultimate purpose of insurance regulation, the protection of the
consumer.
Indeed, we need smarter, more efficient regulation, but the
primary focus must remain on the protection of the
policyholders, not the convenience of industry. This may seem
odd coming from someone who assists in the management of
insurance companies, but we would not be in business if we did
not have the trust of our customers.
In creating the National Office of Insurance, the
Commission will basically have unlimited powers to employ as
many people and create as many offices as deemed necessary. The
NALC has indicated that State departments of insurance have
handled almost four million consumer inquiries, including
complaints, in 2004.
It is hard to imagine the Federal bureaucracy necessary
just to handle even a fraction of those inquiries, much less
all the other duties that would be required. And this would be
in addition to the 10,000 plus State insurance regulators
currently employed.
With regard to funding the office, fees and penalties would
be charged to the federally chartered companies and producers,
while States will still be allowed to receive premium taxes,
they will no longer receive revenues from other fees and
assessments, producer licensing fees, policy filing fees,
examination fees, et cetera. This will have a negative impact
on State budgets, which is a concern to us.
In conclusion, Congressional initiatives have gone a long
way in prompting the NAIC and the various States to adopt
necessary model laws that have improved and will improve the
State-based system, and will continue to do so.
There are ways to improve efficiency, but regulation of the
industry should remain with the States, while Federal
legislative tools push States to improve would be a welcome
addition, the creation of a large new Federal bureaucracy would
not.
Mr. Chairman, thank you for allowing me to share the views
of the NALC today.
Senator Shelby. Mr. Sinder.
STATEMENT OF SCOTT A. SINDER,
MEMBER, THE SCOTT GROUP
Mr. Sinder. Thank you, Chairman Shelby. My name is Scott
Sinder, I am the member of the law firm, the Scott Group, and I
also serve as the general counsel of the Council of Insurance
Agents and Brokers. The council represents the Nation's
insurance agencies and brokerage firms. Collectively, they sell
over 80 percent of all commercial property and casualty
insurance placed in this country, last year well over $200
billion.
Senator Sununu, Senator Johnson, we could not thank you
enough for introducing the National Insurance Act. It is long
overdue. I am going to start by respectfully disagreeing with
Mr. Hardy.
I think we do face a national crisis, and I think that you
have heard rumblings of it throughout the hearing. And that is,
we agree with everything that has been said about the
inefficiencies and the inadequacies of the current State system
and the need to address them. But one of the reasons we feel
that the optional Federal charter is the ultimate solution is
because the thing that has not been talked about enough are the
national problems that the State system is not situated to
address.
We have the flood insurance problem, the uncovered losses
in Alabama and the Gulf Coast. We have the terrorism insurance
problem.
The Federal solutions that have been proposed to date are
band aids. They try to take a little piece of a big business
and fix them. But the truth is, it is a national business, an
international business. We need a national solution to take the
entire business into account and address those solutions.
We do feel that ultimately a Federal charter will be
necessary to do that. I would like to say that there is
something that we can do in the short-term, though, that would
help to facilitate a more efficient marketplace, and it is
something that you can do now.
In the House, they have introduced a bill that would clean
up an area of surplus lines regulation and make it much more
easy to access for commercial policyholders. Surplus lines is
exactly what it says. It is nonmandatory insurance that is sold
to commercial policyholders, primarily, for them to insure
their risks. It is not regulated at the State level. It is a
nonregulated product. The people who regulate it in their
placement of their product are the brokers.
And the problem is that, today, if you are placing a 55-
State risk through the surplus lines marketplace, you have to
comply with 55 sets of State regulations. They are all the
same.
They impose a premium tax. They have rules on when you can
access the surplus lines market. They have rules on which
carriers you can place the coverage with. There are licensing
requirements for the placing brokers. And there are other
filing and disclosure requirements. Every State has the same
set, but they are all different and you have to comply with
each and every one of them.
So, for example, you have to disclose to your customers
that this insurance is not protected by the State guarantee
funds. If you place a 50-State policy, you have to include 50
of those disclosures on the policy, one for each and every
State in which the policy is placed.
This makes the marketplace very difficult to access for the
commercial policyholders, because it is expensive and
cumbersome.
But this is the area that is the first market of resort
when there is a failure in the marketplace for things like
flood insurance and terrorism insurance. And the easiest way to
fix this is to dictate that only one set of State's rules
applies, the State in which policyholder maintains their
corporate headquarters.
That, after all, is the only State that has any real
interest in that consumer, because that is where the corporate
treasurer resides, and these are risks that the corporation
does not have to insure at all.
The other market thing about this particular bill is that
all interested stakeholders agree that this is the right
solution. The brokers, the carriers, the policyholders that are
represented by the risk insurance management society, and even
the regulators.
At a June 2005 hearing, Diane Koken, who was, at that time,
served as the president of the NALC Council, testified as
follows, Federal legislation may be needed at some point to
resolve conflicting State laws regarding multi-State
transactions. The area where this most likely will be necessary
is surplus lines taxation. Federal legislation might also be
one option to consider to enable multi-State property risks to
access surplus lines coverage in their home State under a
single policy and a single set of rules. That is exactly what
the House Bill does.
The Business Insurance is the trade publication for the
industry. They have also endorsed the proposal. We urge the
Committee to consider it.
And in closing I will say, ultimately, though, we also
endorse the optional Federal charter proposal of Senator Sununu
and Johnson.
Senator Shelby. Thank you, Mr. Sinder.
In the interest of time, we have got about three or 4
minutes left in the Senate vote on the floor. I am going to
submit my questions. I have a number of questions to all of you
for the record.
Senator Sununu, Johnson, and Menendez, how about a minute
or so apiece?
Senator Sununu. I will try to do it in a minute.
First, let me say that on this issue of a crisis, even
though he does not support the bill, I am inclined to agree a
bit more with Mr. Hardy. There is not a crisis. There is not a
huge consumer outcry, and that is exactly why we should be
considering this bill now, because when we try to legislate in
moments of crisis, or on the basis of populist consumer outcry,
we tend to get it wrong.
So, this is the exact time that we should be talking about
this and discussing this, so that we can make every effort to
get it right. And we may not agree precisely on what
constitutes good legislation or bad legislation, but this is a
much better environment to address these issues.
I am curious to know of the five panelists, how many of you
have checking accounts.
All of you. And how many of you got your checking account
through mail order?
Oh. Very interesting.
How many actually went into the bank and talked to a
customer service representative to get your account.
I thought that might be the case.
So, let me stipulate that the idea that banks do not use
people to sell products to other people is a misnomer. Whether
it is a checking account or a savings account or a CD or a
mutual fund, there are people at banks that sell products to
other people, and we hope that those are good interactions. And
the insurance industry certainly is not unique in that regard.
Mr. Wadsworth, why do you not underwrite products in
Vermont? You have got Massachusetts, you have got New
Hampshire, you have got New York.
Mr. Wadsworth. Well we, to be perfectly honest, our market
share in those four States and the additional market
penetration we feel we can engender through time is just such
that we feel comfortable in the States we operate.
But, having said that, we certainly, in the future would
consider all alternatives.
Senator Sununu. It just seems to me odd that you are
covering New Hampshire and New York and Massachusetts, but not
Vermont. Granted, the population of Vermont is a little bit
less than New Hampshire, but I think in many regards,
economically, they ought to be similar markets. And you cannot
help but draw the conclusion that there are natural barriers to
entry here that make it unattractive.
Certainly, I think if you thought that you could make money
in Vermont, that if the barriers were not disproportionate, it
would seem to make sense that you would do business there.
Thank you, Mr. Chairman. I apologize.
Senator Shelby. Senator Johnson.
Senator Johnson. Well, I think Senator Sununu makes a good
point in this case, small States. That the entry into those
markets may not justify the expense and the administrative
problems and, as a result, consumers have fewer choices and
less competition.
I am confounded by the position of CFA here, which is, in
effect, an advocacy for business as usual. To endorse a
situation which currently leads to a race to the bottom, it
would seem that the greater competition and dual regulation
would help to stem that.
And it also seems to me that to suggest that a new Federal
regulator that is not even established would gut consumer
protections is simply a foolish allegation.
Let me ask Mr. Liebowitz and Mr. Sinder. Could you tell me
anything about the average time it takes to bring a new
insurance product to market, and are consumers harmed by the
current regulatory system? How do they benefit from an optional
Federal charter? And then, last, I just would note that some of
the most heavily regulated States have some of the highest
insurance rates for consumers.
But, Mr. Liebowitz and Mr. Sinder, do you care to take a
quick shot at that?
Mr. Liebowitz. Well, product filing in and of itself,
depending on the States that you are going into, could be as
quickly as 30 to 60 days, but it could take as long as a year-
and-a-half or two. But that is assuming that the product that
you are filing is along a traditional concept.
Where we think that there is the biggest harm being done
under the insurance regulatory environment is we are put into a
very small box, and the box never gets to move its boundaries.
It is the creativity that we hope would be improved by
having a Federal charter with a national regulator who may look
at and have other experiences beyond the fairly parochial
notion of what is an acceptable insurance risk.
And I heard somebody testify before about some privacy
insurance. It did not fit within the paradigm that our
insurance regulators were used to. And therefore, it does not
matter how long it took, it would never get approved. It would
be pocket vetoed.
Senator Johnson. Mr. Sinder.
Mr. Sinder. I would concur. There are two basic problems
for consumers. They are paying much more for the product
because of all the inefficiency and they are not getting access
to the types of products that they need to cover the risks that
they have in today's world.
Senator Johnson. Thank you.
Senator Shelby. Thank you.
I want to thank the panel again for your information. We do
have a number of Senators that are going to submit questions
for the record as we build a record in this area. The Committee
is adjourned.
[Whereupon, at 12:31 p.m., the hearing was adjourned.]
[Prepared statements supplied for the record follow:]
PREPARED STATEMENT OF ALESSANDRO IUPPA
Maine Superintendant of Insurance, and
President, National Association of Insurance Carriers
July 11, 2006
Chairman Shelby, Senator Sarbanes, and Members of the Committee,
thank you for inviting me to testify before the Committee on insurance
regulation reform.
My name is Alessandro Iuppa. I am the Superintendent of Insurance
in Maine. I currently serve as President of the National Association of
Insurance Commissioners (NAIC) and Chairman of the Executive Committee
of the International Association of Insurance Supervisors (IAIS). Prior
to becoming the Maine Superintendent of Insurance in 1998, I also
served as the Commissioner and Deputy Commissioner of Insurance with
the State of Nevada from 1986 to 1991. I am pleased to be here today on
behalf of the NAIC and its members to share with the Senate Banking
Committee the status of the State system of insurance supervision.
Today, I will make three basic points:
First, State insurance officials strongly believe that a
coordinated, national system of State-based insurance
supervision has met and will continue to meet the needs of the
modern financial marketplace while effectively protecting
individual and commercial policyholders. State insurance
supervision is dynamic, and State officials work continuously
to retool and upgrade supervision to keep pace with the
evolving business of insurance that we oversee. The perfect
example of our success is the Interstate Compact for life
insurance and other asset-preservation insurance products.
Twenty-seven States have joined the Compact in 27 months--with
more on the way--and we plan for this State-based national
system with its single point of entry and national review
standards to become fully operational in early 2007. Across the
regulatory spectrum, the members of the NAIC have modernized
the State system to implement multi-State platforms and uniform
applications. We have leveraged technology and enhanced
operational efficiency while preserving the benefits of local
protection, which is the real strength of the State system.
Second, insurance is a unique and complex product that is
fundamentally different from other financial services, such as
banking and securities. Consequently, the State based system
has evolved over the years to address these fundamental
differences. Unlike banking products, which provide individuals
up-front credit to obtain a mortgage or make purchases, or
securities, which offer investors a share of a tangible asset,
insurance products require policyholders to pay premiums in
exchange for a legal promise rooted in the contractual and tort
laws of each State. It is a financial guarantee to pay
benefits, often years into the future, in the event of
unexpected or unavoidable loss that can cripple the lives of
individuals, families and businesses. In doing so, insurance
products inevitably touch a host of important and often
difficult issues that generally are governed at the State
level. State officials are best positioned to respond quickly
and to fashion remedies that are responsive to local
conditions. We are directly accountable to consumers who live
in our communities and can more effectively monitor claims-
handling, underwriting, pricing and marketing practices.
Third, despite States' long history of success protecting
consumers and modernizing insurance supervision, some propose
to radically restructure the current system by installing a new
Federal insurance regulator, developing a new Federal
bureaucracy from scratch, and allowing insurance companies to
``opt out'' of comprehensive State oversight and policyholder
protection. Risk and insurance touch the lives of every citizen
and the fortunes of every business, and the nation's insurance
officials welcome congressional interest in these issues.
However, a bifurcated regulatory regime with redundant and
overlapping responsibilities will result in policyholder
confusion, market uncertainty, and other unintended
consequences that will harm individuals, families and
businesses that rely on insurance for financial protection
against the risks of everyday life. For these reasons, the
Senate Banking Committee and Congress should reject the notion
of a Federal insurance regime.
State Insurance Protections: Successful and Effective for More Than 135
Years
Risk affects everyone in society in one way or another. Insurance
is vested in the public interest by providing economic security to
individuals and families against life's many unknowns and by enabling
businesses large and small to manage risk inherent in economic
enterprise. The economic well being of every citizen is affected by the
strength and efficacy of insurance protections. Therefore, as the
public officials responsible for supervising the insurance industry,
State insurance officials take great pride in our nation's State-based
system of insurance protections that has successfully safeguarded
consumers for more than 135 years and overseen the solvency of
insurance companies operating in the United States.
The paramount objective of insurance supervision is consumer
protection, which is the hallmark of the State system. Each State has
an insurance official who is appointed or elected to oversee the
financial strength, policy content, market conduct, claims settlement
practices, and distribution and marketing systems of insurance
companies doing business in his or her State. In each of these areas,
an institutional framework and expertise has been developed at the
State level to afford policyholders and insurance consumers
comprehensive, life cycle protection.
Strong consumer protections instill public confidence in insurance
products and thereby serve the interests of the insurance marketplace.
Likewise, insurance consumers are served by operational efficiencies
that permit insurers to provide a wide array of appropriate products to
consumers more quickly and economically. The coordinated, national
system of State-based insurance supervision serves the needs of
consumers, industry and the marketplace at-large by ensuring hands-on,
front-line protection for insurance consumers while providing insurers
the uniform platforms and coordinated systems that they need to compete
effectively in an ever-changing marketplace.
Insurance: A Unique Financial Product That Is Regulated Effectively by
the States
Paying for insurance products is one of the largest consumer
expenditures of any kind for most Americans. Figures compiled by the
NAIC show that an average family easily can spend a combined total of
$7,107 each year for auto, home, life, and health insurance coverage.
This substantial expenditure--often required by State law or business
practice--is typically much higher for families with several members,
more than one car, or additional property to insure. Consumers clearly
have an enormous financial and personal stake in making sure insurers
keep the promises that they make.
Protecting consumers must start with a basic understanding that
insurance is a different business than banking and securities. Banks
give consumers the immediate benefit of up-front loans and credit based
upon a straightforward analysis of a customer's collateral and ability
to pay, and securities can be bought by anyone having the money at a
price set by open markets. In contrast, insurance is a commercial
product that consumers buy in advance in return for a financial
guarantee of future benefits for contingent events specified in the
policy. Insurers take into account each customer's potential loss
claims, depending on individual risk characteristics, which vary
according to the type of insurance, but may include factors such as
history of similar losses, sex, age, marital status, medical history,
condition of insured property, place of residence, type of business,
financial history, ``risk management'' preparations, or lifestyle
choices.
Insurance is thus based upon a series of subjective business
decisions--many of which are local rather than national in scope: Where
does the risk reside? Is the risk subject to earthquakes or hurricanes?
What is the policyholder's risk of civil liability under the laws of
the State? Will an insurance policy be offered to a consumer? At what
price? What are the policy terms and conditions? What is the structure
of the local hospital and physician marketplace? All of these
subjective business decisions add up to one absolute certainty:
insurance products can generate a high level of consumer backlash and
customer dissatisfaction that requires a high level of regulatory
expertise, accountability, and responsiveness.
Every day, State insurance departments ensure that insurers meet
the reasonable expectations of American consumers--including those who
are elderly or low-income--with respect to financial safety and fair
treatment. Nationwide in 2004, State insurance departments handled
approximately 3.7 million consumer inquiries and complaints regarding
the content of policies and the treatment on consumers by insurance
companies and agents. Many of these calls were resolved successfully
with little or no cost to the consumer. The States also maintain a
system of financial guaranty associations that cover policyholder
losses in the event of an insurer insolvency. The entire State
insurance system is authorized, funded, and operated at absolutely no
cost to the Federal Government.
States Oversee a Vibrant, Competitive Insurance Marketplace
In addition to successfully protecting consumers, State insurance
officials have proven adept stewards of a vibrant, competitive
insurance marketplace. The insurance industry in the United States has
grown exponentially in recent decades in terms of the amount and the
variety of insurance products and the number of insurers. NAIC data
from 2004 shows that there were 6,541 domestic insurers operating in
the United States with combined premium of $1.384 trillion. As a share
of the U.S. economy, total insurance income grew from 7.4 percent of
gross domestic product in 1960 to 11.9 percent in 2000.
Although these national numbers reflect a large industry, most
insurers and most of the nation's 3.2 million insurance agents and
brokers operate in three or fewer States. Even the giants of the
industry use slogans that imply a close knit local flavor such as
``like a good neighbor'' or ``you're in good hands.''
Today, companies of various sizes sell a vast array of products
across State and national boundaries. A wide range of insurance
services has become available to buyers, reflecting the growing
national economy and diversity of buyer needs and demand for insurance
protection and investment products. Industry changes have compelled the
evolution of regulatory institutions, and State supervisory evolution,
in turn, has contributed to the development of the insurance industry.
This development continues as the industry consolidates, insurers
restructure their product lines and companies extend their global
operations.
Insurance Regulatory Modernization: A Dynamic Process
Insurance supervision in recent years has been subject to
increasing external and internal forces to which the States have
responded. Fundamental changes in the structure and performance of the
insurance industry have complicated the challenge. Competitive forces
have caused insurers to assume increased risk in order to offer more
attractively priced products to consumers. Insurance markets have
become increasingly national and international in scope and have
widened the boundaries of their operations. High costs in some lines of
insurance and the economic consequences of natural and man-made
disasters have focused greater public attention on supervisory
decisions.
Yet the daily transactions that result in most of the premiums for
the U.S. insurance industry remain local in nature. The insurance
industry today is driven by individuals and families dealing with a
local insurance agent to provide coverage for homes and autos, health
care from local providers, whole and term life insurance products to
protect young families against the economic devastation caused by
premature death of a breadwinner, and annuities and other investments
to help fund a college education or retirement.
The convergence of forces has had a dramatic effect on the
supervision of insurance. Over the past two decades, the States have
engaged in an unprecedented program to revamp the framework of
insurance oversight. Insurance officials have worked continuously to
upgrade the State system to provide multi-State platforms and uniform
applications to leverage technology and enhance operational
efficiencies. A good share of this effort in the late 1980s and 1990s
was directed at strengthening financial oversight by establishing
higher capital standards for insurers, expanding financial reporting,
improving monitoring tools and accrediting insurance departments.
Subsequent initiatives have focused on improving the effectiveness and
efficiency of product regulation, market surveillance, producer
licensing, company licensing and general consumer protections.
The States have enhanced resources devoted to insurance supervision
in terms of coordination, technology and systems to support these
efforts, and the NAIC through its members has played a central role in
State efforts to strengthen and streamline our oversight of the
insurance industry. However, it is important to understand that these
are not one-time silver bullet solutions but a dynamic, on-going
process that changes and evolves with the business of insurance that we
oversee. The modern system of insurance supervision builds on our 135-
year record as stewards of a healthy, vibrant insurance marketplace
founded upon a bedrock of comprehensive policyholder and consumer
protection. But it also demands that State insurance officials be ever
vigilant and nimble to anticipate and respond to the ever-changing
needs of consumers, the industry and the modern marketplace.
A National System of State-Based Insurance Supervision
The Nation's insurance officials strongly believe that a
coordinated, national system of State-based insurance supervision has
met and will continue to meet the needs of the modern financial
marketplace while enhancing individual and commercial policyholder
protections. State insurance supervision is inherently strong when it
comes to protecting consumers because we understand local needs and
market conditions. State insurance officials also recognize that
today's modern financial services marketplace increasingly requires
national, harmonized solutions. However, national solutions need not be
Federal in nature. To this end, NAIC members have established a
comprehensive program to harmonize, streamline and coordinate State
insurance supervision across the regulatory spectrum when a multi-State
approach is warranted.
When the NAIC last testified before the Senate Committee on
Banking, Housing, and Urban Affairs in September 2004, we shared with
you our Reinforced Commitment: Insurance Regulatory Action Plan, in
which State insurance officials set clear goals and timetables for
States to accomplish the changes needed to achieve a more efficient
system of State supervision. In some areas, our goal has been to
achieve regulatory uniformity nationwide because it makes sense for
consumers and insurers. In areas where different standards among States
are justified because they reflect regional market conditions, we are
harmonizing and coordinating State regulatory procedures to facilitate
compliance.
Three years into this landmark undertaking, the NAIC and its
members are proud to report that we remain on time and on target to
achieve the goals set forth in the Insurance Regulatory Action Plan. In
fact, we are outpacing expectations in some critical areas of reform
and on track to reach all key insurance regulatory goals at the
scheduled dates. A copy of the NAIC's Insurance Regulatory Action Plan,
together with a comprehensive progress update through July 2006, is
attached as Attachment A to this statement.
Here is an update on where we stand on a few key initiatives:
Interstate Insurance Product Regulation Compact (IIPRC)
Following enactment of the Compact by 27 States in 27 months, the
IIPRC Commission held its inaugural meeting on June 13, 2006, and took
the first critical steps to becoming fully operational in early 2007.
The Compact creates a single-point-of-filing where insurers can file
new life insurance, annuities and other wealth-protection insurance
products and receive a single, streamlined review. This vital reform
allows insurers to speed new products to market nationally according to
strong uniform product standards while preserving a State's ability to
address front-line problems related to claims settlement, consumer
complaints, and unfair and deceptive trade practices. Although the
speed with which States have enacted the Compact has exceeded all
expectations and continues to outpace the target set by the Insurance
Regulatory Action Plan, State insurance officials have no intention of
resting and remain committed to adding new members during the balance
of 2006 and beyond.
System for Electronic Rate and Form Filing (SERFF)
SERFF represents the ultimate answer for insurers' speed-to-market
concerns. It provides a single-point-of-filing for those products that
are not subject to the IIPRC. Insurers that chose to use SERFF to file
their products experience an average 23-day turn-around time for the
entire filing submission and review cycle. SERFF enables States to
include several operational efficiency tools to facilitate an efficient
electronic filing. All 50 States, the District of Columbia, Puerto Rico
and over 1,800 insurance companies are committed to SERFF. Reflecting
on the past 5 years, SERFF has had a tremendous growth in the number of
product filings made by insurers electronically, and 2006 is already on
target for another impressive year, due to the strong SERFF commitment
from the States and industry.
National Licensing System for Insurance Producers
Through the development and use of electronic applications and data
bases, State insurance officials have implemented greater efficiencies
in the licensing and appointment of insurance producers. Moreover,
State insurance officials remain deeply committed to developing further
enhancements and achieving greater uniformity in the producer licensing
process. State insurance officials have developed an implemented a
standard uniform producer licensing application that is used in every
State. Additionally, an overwhelming majority of States now accept
nonresident licensing applications electronically, and all but a
handful of States that require appointments and terminations accept
them electronically.
Market Regulation
The NAIC is implementing a more effective and efficient market
regulatory system based upon structured and uniform market analysis,
uniform examination procedures, and interstate collaboration. A key
area of market analysis is the development of a uniform analysis
process, which States now are able to use to review complaint activity,
regulatory actions, changes in premium volume and other key market
indicators. In 2005, over 1,750 uniform market analysis reviews were
completed by 48 jurisdictions, and this process was automated to
enhance its use and provide States a centralized method to document and
share their market analysis conclusions and recommendations. In
conjunction with these efforts, the NAIC formed a high-level working
group to provide policy direction for collaborative actions, recommend
appropriate corrective actions and common solutions to multi-State
concerns, and promote the use of a continuum of cost-effective
regulatory responses.
A recent survey indicates that States have decreased the frequency,
length and cost of market examinations while increasing regulatory
effectiveness. Data received from 39 States show that overall exams
from 2003 to 2005 decreased 18 percent and those that did occur were
less costly. Moreover, companies experienced reductions in onsite,
single State exams and onsite exams that exceeded 1 month. Increased
market analysis, targeted examinations, and coordinated regulatory
interventions have resulted in more effective and efficient use of
State resources and fewer duplicative regulatory efforts. The NAIC
continues to make the increased effectiveness and efficiency of market
regulation a top priority.
Financial Initiatives
Regulating to ensure the insurance industry remains on solid
financial footing and individual insurers have the financial
wherewithal to pay their claims obligations continues to be a top
priority. With the creation of the NAIC Financial Accreditation Program
in 1990, the NAIC has been diligent in reviewing and re-reviewing the
standards and practices for assessing financial solvency. The past 5
years, in particular, have challenged the industry with bear markets,
large credit defaults, the terrorist attacks of 9-11, ballooning
asbestos liabilities and the devastating hurricane seasons of 2004 and
2005. Despite these enormous obstacles, insurers today are reporting
positive underwriting and operational results not seen for several
decades--a testament to the effectiveness of solvency regulation.
Company Licensing: The NAIC set its sites on standardizing how
insurers apply for State licenses to write insurance. To date, the NAIC
has developed a Uniform Certificate of Authority Application (UCAA)
that establishes the base forms for use in company licensing
applications. An electronic system has been built to facilitate the
expansion application and communication processes, making it easier
than ever to expand business territories. We have largely addressed the
issue of State-specific requirements often cited by the industry, and
have provided transparency for the State-specific requirements that
remain. The NAIC will continue to leverage information technologies and
rethink our processes to make business expansion efficient, while
keeping focus on protecting consumers from rogue insurance management.
Mergers and Acquisitions: The NAIC also has made great strides
toward coordinating solvency activities of insurers that are part of a
larger multi-State or multi-national group. These activities include
merger and acquisition transactions, corporate restructurings and on-
going financial solvency monitoring. With States working cooperatively
through the NAIC, we are reducing duplicative work and performing more
effective financial oversight of insurance enterprises.
Principles-Based Reserving: As part of its modernization efforts,
the NAIC is currently developing a principles-based framework for life
insurance reserve and capital requirements, utilizing principles of
risk management, asset adequacy analysis and stochastic modeling. The
framework used previously relied upon a rules-based or formulaic
approach to establish reserve and capital requirements for life
insurance products. This formulaic approach, as part of a comprehensive
solvency agenda, has established a very sound and secure life insurance
marketplace in the US. Having established a sound market, the NAIC is
now developing reserve and capital requirement methodologies to allow
life insurers to more precisely allocate capital relative to the risks
of their products. These efforts place the NAIC at the forefront of
other international efforts to establish principles-based reserve and
capital requirements.
Federal Legislation Must Not Undermine State Modernization Efforts
As States have moved forward to modernize insurance supervision,
Congress has begun to consider Federal legislation related to insurance
regulation. The NAIC and its members welcome congressional interest in
insurance supervision. At the same time, we urge careful analysis of
any proposal to achieve modernization of insurance supervision through
Federal legislation. Even well intended and seemingly benign Federal
legislation can have a substantial adverse impact on existing State
protections for insurance consumers. Because Federal law may preempt
conflicting State laws, hastily drafted or vague Federal laws can
easily undermine or negate important State legal protections for
American insurance consumers.
One of the great strengths of State insurance regulation is the
fact it is rooted in other State laws that apply when insurable events
occur. The NAIC urges Congress to avoid undercutting State authority
when considering any Federal legislation that would preempt important
consumer protections. Federal laws that appear simple on their face can
have devastating consequences by limiting the ability of State
insurance departments to protect the public.
Congress Should Reject Federal Chartering Legislation
Of particular concern to State insurance officials is legislation,
``The National Insurance Act of 2006'' (S. 2509), that would establish
a Federal insurance regulatory authority and allow insurance companies
to ``opt out'' of State oversight and policyholder protections. The
NAIC and its members believe that any bifurcated regulatory regime with
redundant, overlapping responsibilities will result in policyholder
confusion, market uncertainty, and a host of other unintended
consequences that will harm individuals, families and businesses that
rely on insurance for financial protection against the risks of
everyday life. Moreover, State insurance officials caution against any
proposal that would treat insurance just like banking and securities
products. Failure to recognize the fundamental differences between
these industries and how they are supervised would place essential
policyholder protections at risk, as well as preempt and transfer the
authority of accessible and responsible local officials to a distant,
Federal bureaucracy with limited congressional oversight.
Although some have suggested that S. 2509 simply builds upon the
best practices of insurance supervision that exist at the State level,
this simply is not true. In contrast to the well-established,
comprehensive framework of policyholder protections at the State level,
S. 2509 dramatically weakens the authority of the new Federal regime to
maintain functioning markets and safeguard consumers. Instead, it
contemplates bare-bones Federal oversight where the vast majority of
regulatory functions--including core protections--would be outsourced
to industry-run self-regulatory organizations. Where State laws provide
guidance to insurance commissioners regarding consumer safeguards and
industry oversight, S. 2509 delegates virtually all decisionmaking to a
Federal regime, which would be independent of congressional
appropriation and instead funded directly by the same insurance
companies that opt for a national charter. S. 2509 would preempt
protections in all States that prohibit discrimination on the basis of
race, religion and national origin; that require property and casualty
insurance rates to be adequate to pay claims and prohibit them from
being excessive or unfairly discriminatory; and that ensure that policy
forms meet basic policyholder protection standards. While striking down
these safeguards currently provided by State law, the bill fails to
provide any corresponding Federal safeguards. In fact, it expressly
forbids any regulatory standards for the rates that insurers charge,
the rating elements that they use to discriminate among risks, and for
the policy terms that they offer.
Some have said that a Federal regulatory regime merely adds an
optional choice to the insurance regulatory system in the United
States, and that it would not seriously affect the existing State
system. This assertion is incorrect. A Federal charter may be optional
for an insurer choosing it, but the negative impact of federally
regulated insurers will not be optional for consumers, producers,
State-chartered insurers, State governments, and local taxpayers who
are affected, even though they have little or no say in the choice of a
Federal charter.
Ultimately, a Federal charter and its regulatory system would
result in at least two separate insurance systems operating in each
State. One would be the current State-based system established and
operated under State law and government supervision. This system would
continue responding to State voters and taxpayers. A second system
would be a new Federal regulator with little or no experience or
grounding in the State laws that control the content of insurance
policies, claims procedures, contracts, and legal rights of citizens in
tort litigation. Nonetheless, this new Federal regulator would preempt
State protections and authorities that disagree with the laws that
govern policyholders and claimants of State-chartered insurers. At the
very least, this situation will lead to consumer, market and regulatory
overlap and confusion. At worst, it will lead to varying levels of
consumer protection, perhaps a ``race to the bottom'' regulatory
arbitrage to lower consumer protection standards, as insurers choose to
be chartered by Federal or State government based on which offers the
most lenient terms.
Granting a government charter for insurers means taking full
responsibility for the consequences, including the costs of
insolvencies and consumer complaints. The States have fully accepted
these responsibilities by covering all facets of insurance licensing,
solvency monitoring, market conduct, and handling of insolvent
insurers. The members of the NAIC do not believe Congress will have the
luxury of granting insurer business licenses without also being drawn
into the full range of responsibilities and hard-hitting criticism--
fair and unfair--that go hand-in-hand with offering and supervising a
government charter to underwrite and sell insurance. Furthermore, we
doubt States will be willing to accept responsibility for the mistakes
or inaction of a Federal regulator by including Federal insurers under
State guaranty associations and other important, proven consumer
protections.
Conclusion
The system of State insurance supervision in the United States has
worked well for more than 135 years. State regulators understand that
protecting America's insurance consumers is our first responsibility.
We also understand that commercial insurance markets have changed, and
that modernization of State insurance standards and procedures is
needed to facilitate more streamlined, harmonized and efficient
regulatory compliance for insurers and producers.
The NAIC and its members--representing the citizens, taxpayers, and
governments of all 50 States, the District of Columbia and the
territories--will continue to share our expertise with Congress on
insurance issues having a national impact and welcome congressional
interest in our modernization efforts. We respectfully request Congress
and insurance industry participants to work with us to further and
fully implement the specific improvements set forth in State officials'
A Reinforced Commitment: Insurance Regulatory Modernization Action
Plan. As our tremendous progress to date shows, this is the only
practical, workable way to achieve necessary changes quickly in a
manner that preserves and enhances the State protections that consumers
demand.
The Nation's consumers require a financially sound and secure
insurance marketplace that offers a variety of products and services.
They have that now through an effective and responsive State regulatory
system. When our record of success is measured against the
uncertainties of changing a State-based system that works well at no
cost to the Federal Government, State insurance officials believe that
Congress will agree that regulating insurance is best left to home
State officials who have the expertise, resources, and experience to
protect consumers in the communities where they live.
Thank you for this opportunity to address you, and I look forward
to your questions.
Attachment A
A Reinforced Commitment: Insurance Regulatory Modernization Action Plan
(Updated--July 2006)
Consumer Protection
An open process . . . access to information and consumers' views .
. . our primary goal is to protect insurance consumers, which we must
do proactively and aggressively, and provide improved access to a
competitive and responsive insurance market.
The NAIC members will keep consumer protection as their highest
priority by:
(1) Providing NAIC access to consumer representatives and having an
active organized strategy for obtaining the highly valued input of
consumer representatives in the proceedings of all NAIC committees,
task forces, and working groups;
Update: To help ensure active and organized consumer
representation, the NAIC provides funding for consumer representatives
to participate in NAIC activities. The NAIC also formally recognizes
three unfunded consumer representatives. Finally, the NAIC's Consumer
Protections Working Group provides a formal structure for consumer
issues.
(2) Developing disclosure and consumer education materials,
including written and visual consumer alerts, to help ensure consumers
are adequately informed about the insurance market place, are able to
distinguish between authorized an unauthorized insurance products
marketed to them, and are knowledgeable about State laws governing
those products;
Update:
Insure U
Under the theme, Insure U--Get Smart About Insurance, in March
2006, the NAIC created a virtual ``university curriculum'' of helpful
information that teaches consumers about the four basic types of
insurance: auto, home, life and health. And, to be most helpful, our
curriculum is organized around four specific life stages: young
singles, young families, established families and empty nesters/
seniors. Importantly, the campaign also covers the NAIC's ``Fight Fake
Insurance . . . Stop. Call. Confirm.''
The heart of Insure U is our online educational curriculum
available at www.InsureUonline.org. When consumers arrive at the Insure
U site, they are invited to select a life stage pathway that will teach
them about insurance issues and considerations directly related to
their needs. Upon completing a life stage Insure U curriculum,
consumers are invited to take a short online quiz. If they achieve a
passing grade on the quiz, they can print out a diploma, certifying
their successful completion of the Insure U curriculum.
As part of this campaign, the NAIC produced a new TV public service
announcement that warns consumers to protect themselves from being
scammed by fake insurance companies. The PSA employs the metaphor of a
house of cards that collapses when a consumer submits an insurance
claim, illustrating how an individual's foundation of protection can be
shattered by buying a policy from a fake insurance company. The spot
concludes with our strong tagline: Stop. Call. Confirm. Consumers may
also call a toll-free telephone number to find consumer representatives
in their home State insurance departments. In addition to reaching
English-speaking consumers, the NAIC has created two radio PSAs
specifically for the Hispanic community.
Stop. Call. Confirm. Fight Fake Insurance Campaign
The NAIC has continued efforts to warn insurance consumers about
potential fraud through a national consumer awareness and media
outreach campaign titled ``Fight Fake Insurance: Stop. Call. Confirm.''
The campaign, in its second year, features as its spokesperson
nationally known fraud expert and former con man Frank Abagnale, whose
life story was depicted in the movie ``Catch Me If You Can.'' The NAIC
developed and distributed a public service announcement featuring
Abagnale, which was distributed to television radio stations
nationwide. The PSAs included a 7-second tagline at the end mentioning
the respective State insurance department and contact information. A
generic version of the PSA is on the NAIC website www.naic.org. To
date, the spot received more than 60,000 broadcast hits, 78 print
placements and 93 online media placements for a total of 268 million
media impressions.
Get Smart About Insurance Week
The NAIC continued the tradition and success of Get Smart About
Insurance Week, a campaign that has involved more States each year,
since its inception. In 2005, a record high of 48 States took part and
implemented the consumer awareness program locally and on a statewide
level. This program received 77 million media placements.
(3) Providing an enhanced Consumer Information Source (CIS) as a
vehicle to ensure consumers are provided access to the critical
information they need to make informed insurance decisions;
Update: The CIS allows consumers to view a variety of information
about insurance companies and to file a consumer complaint or a report
of suspected fraud with a State insurance department. In 2005, the NAIC
Web site was updated with Frequently Asked Questions and information
regarding automobile insurance, life insurance, health insurance, and
homeowners insurance. In addition, general educational information was
added to aid consumers in identifying a company that might be servicing
an existing life insurance policy. To address the special insurance
needs of military personnel, the NAIC Web site was updated with
insurance information specifically tailored to the needs of military
personnel. Finally, the NAIC Web site contains consumer alerts on flood
insurance, consumer preparedness for storms, Medicare Part D, annuities
sales to seniors and identity theft insurance. Almost 219,000 users
accessed the CIS Web site for 1,201,495 hits in 2005.
(4) Reviewing and assessing the adequacy of consumer remedies,
including State arbitration laws and regulations, to ensure that
appropriate forums are available for adjudication of disputes regarding
interpretation of insurance policies or denials of claims; and
Update: The Consumer Protections Working Group reviewed a detailed
summary of the testimony received during its two public hearings in
2003. Because of the extensive testimony and focus this issue received
in 2003, the working group agreed the issues regarding State
arbitration laws have been appropriately reviewed and that further
discussion on this issue is unnecessary at this time. The Consumer
Protections Working Group and the Consumer Liaison Committee continue
to serve as the appropriate forums for discussing and assessing
consumer remedies.
(5) Developing and reviewing consumer protection model laws and
regulations to address consumer protection concerns.
Update: The Consumer Protections Working Group oversees this effort
as necessary. For example, in 2005 the Working Group completed a study
addressing the effectiveness of consumer disclosures that accompany
insurance products. In 2006, the Working Group is identifying key
elements that should be included in consumer disclosures.
Market Regulation
Market analysis to assess the quality of every insurer's conduct in
the marketplace, uniformity, and interstate collaboration . . . the
goal of the market regulatory enhancements is to create a common set of
standards for a uniform market regulatory oversight program that will
include all States.
The NAIC has established market analysis, market conduct, and
interstate collaboration, as the three pillars on which the States'
enhanced market regulatory system will rest. The NAIC recognizes that
the marketplace is generally the best regulator of insurance-related
activity. However, there are instances where the market place does not
properly respond to actions that are contrary to the best interests of
its participants. A strong and reasonable market regulation program
will discover these situations, thereby allowing regulators to respond
and act appropriately to change company behavior.
The NAIC, in conjunction with the National Conference of Insurance
Legislators, has helped develop the statutory framework set forth in
NCOIL's Market Conduct Surveillance Model Act. The provisions of this
model act are consistent with the NAIC's reforms of market analysis,
uniform examination procedures and interstate collaboration. The NAIC
will consider the adoption of the NCOIL model act as an NAIC model act
at or prior to the NAIC 2004 Fall National Meeting.
Market Analysis
While all States conduct market analysis in some form, it is
imperative that each State have a formal and rigorous market analysis
program that provides consistent and routine reports on general market
problems and companies that may be operating outside general industry
norms. To meet this goal:
(1) Each State will produce a standardized market regulatory
profile for each ``nationally significant'' domestic company. The
creation of these profiles will depend upon the collection of data by
each State and each State's full participation in the NAIC's market
information systems and new NAIC market analysis standards; and
Update: Based upon the information contained in the market
information systems, the NAIC developed and implemented automated
programs that generate standardized market regulatory profiles, which
include the following 5-year information for each company: (1) State
specific premium volume written, (2) modified financial summary
profile, (3) complaints index report, (4) regulatory actions report,
(5) special activities report, (6) closed complaints report, (7) exam
tracking systems summary, (8) modified IRIS ratios, (9) defense costs
against reserves information, and (10) Schedule T information.
In 2004, the NAIC created Level 1 Analysis, which consists of 16
uniform questions that are used by market analysts to evaluate
individual companies without the need to contact them for additional
information. In 2005, the Market Analysis Review System (MARS)
application automated the Level 1 Analysis questions, and provided
States with access to see analysis performed by other States. In
addition, the NAIC developed a further level of analysis (Level 2
Analysis), which provides analysts with detailed recommendations
concerning additional places to obtain crucial information on insurers,
both inside and outside of the insurance industry. Toward the end of
2006, the NAIC will release a Company Listing Prioritization Tool,
which will aid analysts in identifying outliers for various measures.
(2) Each State will adopt uniform market analysis standards and
procedures and integrate market analysis with other key market
regulatory functions.
Update: The NAIC adopted the Market Analysis Handbook during the
NAIC Winter National Meeting in December 2003. The guidelines in this
handbook provide States with uniform market analysis, standards, and
procedures, which will integrate market analysis with other regulatory
functions. In 2005, the NAIC combined the NAIC's Market Analysis
Handbook with the NAIC's Market Conduct Examiners Handbook to create a
more integrated system of market regulation. The purpose of the new
Market Regulation Handbook is to identify data and other information
that is available to regulators, and provide guidance on how that data
can be used to target the most significant market problems with the
most efficient regulatory response
Finally, the market conduct annual statement pilot project became a
permanent NAIC project in 2004 and continues to serve as a market
analysis tool that eighteen participating States use to consistently
review market activity of the entire insurance market place and
identify companies whose practices are outside normal ranges. This tool
is meeting its objective to help States more effectively target market
regulatory efforts. With this success, the NAIC is now discussing the
need for centralization of this data. That step will provide States
even greater uniformity in comparing companies' performance, not only
within their respective States, but also across the various States,
thus providing enhanced opportunities for coordinating market
regulatory efforts. As the statement continues to develop, States
should be able to reduce the number of State-specific data calls, and
move toward collecting data about claims, nonrenewals and
cancellations, replacement-related activity and complaints on an
industry-wide basis.
Market Conduct
States will also implement uniform market conduct examination
procedures that leverage the use of automated examination techniques
and uniform data calls; and
(1) States will implement uniform training and certification
standards for all market regulatory personnel, especially market
analysts and market conduct examiners; and
Update: A Market Analysis track was added to the NAIC's E-
Regulation Conference held annually in May. Because the NAIC funds each
State to send a market regulator to this conference, significant
training on market analysis techniques is accomplished through this
conference. In addition, the NAIC offers a classroom market analysis
training every August and multiple on-line market analysis training
sessions each year. Finally, market analysis techniques were
incorporated into the NAIC's Staff Education Program and Integrating
Market Regulation Programs.
In 2006, the NAIC is implementing its Insurance Regulator
Professional Designation Program to provide professional growth
opportunities for State insurance regulators at all levels, and to
promote the improvement of their knowledge, skills and best practices
in the areas of consumer protection, insurer solvency and market
conduct regulation. The designation program will provide insurance
regulators with a NAIC-sponsored professional designation recognizing
their expertise in insurance regulation, including market regulatory
functions. Regulators who complete the NAIC Designation Program will be
better equipped to provide high quality services and protections to
insurance consumers.
(2) The NAIC's Market Analysis Working Group will provide the
expertise and guidance to ensure the viability of uniform market
regulatory oversight while preserving local control over matters that
directly affect consumers within each State.
Update: The Market Analysis Working Group (MAWG) is already a
functioning group using adopted protocols for the coordination and
collaboration of market regulatory interventions. In 2005, the
structure of MAWG was refined to become a higher level working group,
analogous to the Financial Analysis Working Group. MAWG is now carrying
out the following functions: (1) providing policy oversight and
direction of the Collaborative Action Designees (CADs), collaborative
analysis and collaborative regulatory interventions; (2) facilitating
interstate communication and coordinating collaborative State
regulatory actions, (3) recommending appropriate corrective actions and
common solutions to multi-State problems, and (4) facilitating the use
of a broader continuum of regulatory responses.
Interstate Collaboration
The implementation of uniform standards and enhanced training and
qualifications for market regulatory staff will create a regulatory
system in which States have the confidence to rely on each other's
regulatory efforts. This reliance will create a market regulatory
system of greater domestic deference, thus allowing individual States
to concentrate their market regulatory efforts on issues that are
unique to their individual market place conditions.
Update: To help minimize variations in market conduct examinations
so that States can rely on each other's findings, the NAIC adopted the
Market Conduct Uniform Examination Outline. This outline, which was
developed in 2002, focuses on the following four areas: (1) exam
scheduling, (2) pre-exam planning, (3) core examination procedures and
(4) exam reports. Forty-one States and the District of Columbia have
self-certified compliance with all four uniform examination areas. To
ensure public accountability, the NAIC adopted a process for resolving
complaints about State noncompliance with Uniform Examination
Procedures.
In 2005, the NAIC adopted uniform core competencies, which each
State is encouraged to implement, for the following areas: (1)
resources, (2) market analysis, (3) continuum of regulatory responses
and (4) interstate collaboration. In 2006, the NAIC Market Regulation
and Consumer Affairs Committee will focus on consumer complaint
handling procedures and enhancing the continuity of regulatory
responses.
(1) Each State will monitor its ``nationally significant'' domestic
companies on an on-going basis, including market analysis and
appropriate follow up to address any identified problems; Update: As
referenced above, NAIC staff has provided company profiles to each
State for initial baseline monitoring of company activity. The Market
Analysis Handbook contains a spectrum of regulatory responses that
might be initiated. For example, the handbook identifies responses that
could range from consumer outreach and education to a desk audit to an
onsite examination. The NAIC is also creating a list of regulatory
actions that can be taken before an exam is called. Through the release
of the Market Initiative Tracking System (MITS) in June of 2006, States
now have the ability to track a broader continuum of market regulatory
actions by entering these actions into a centralized, electronic data
base.
(2) Market conduct examinations of ``nationally significant''
companies performed by a nondomestic State will be eliminated unless
there is a specific reason that requires a targeted market conduct
examination; and
Update: States continue to move toward targeted examinations based
upon market analysis, and are coordinating their efforts through MAWG.
The NAIC Examination Tracking System shows that the number of
comprehensive examinations conducted by non-domiciliary States has
dropped almost in half in the last 3 years (from 427 in 2003 to 226 in
2005). At the same time, the number of desk examinations and targeted
examinations has increased substantially (from 3 desk examinations in
2003 to 30 in 2005 and from 230 targeted examinations in 2003 to 346 in
2005.)
(3) The Market Analysis Working Group will assist States to
identify market activities that have a national impact and provide
guidance to ensure that appropriate regulatory action is being taken
against insurance companies and producers and that general market
issues are being adequately addressed. This peer review process will
become a fundamental and essential part of the NAIC's market regulatory
system.
Update: The NAIC adopted Market Analysis Working Group (MAWG)
procedures, which set forth guidelines for interstate collaboration and
centralized coordination through MAWG. Through MAWG, States are made
aware of analysis that points to potential market issues that could
have a national impact. In addition, MAWG ensures that participants
receive guidance and updates on on-going collaborative efforts. For
example, MAWG oversaw the coordination of two recent settlements
involving military personnel. Another key aspect is the development of
a referral process for States to use when referring potentially
troubled companies to MAWG. This process is being successfully used by
States. After referral, MAWG collaboratively decides on a recommended
course of action.
``Speed to Market'' for Insurance Products
Interstate collaboration and filing operational efficiency reforms
. . . State insurance commissioners will continue to improve the
timeliness and quality of the reviews given to insurers' filings of
insurance products and their corresponding advertising and rating
systems.
Insurance regulators have embarked on an ambitious `Speed to Market
Initiative' that covers the following four main areas:
1. Integration of multi-State regulatory procedures with individual
State regulatory requirements;
2. Encouraging States to adopt regulatory environments that place
greater reliance on competition for commercial lines insurance
products;
3. Full availability of a proactively evolving System for Electronic
Rate and Form Filing (known as `SERFF') that includes
integration with operational efficiencies (best practices)
developed for the achievement of speed to market goals; and
4. Development and implementation of an interstate compact to
develop uniform national product standards and provide a
central point of filing.
Update: To demonstrate that States are up to the challenge of
providing speed to market for insurance products without sacrificing
adequate consumer protection, a system of measurement is needed. NAIC
has developed a set of uniform metrics that rely on the four
operational efficiencies listed above. The Action Plan establishes 2008
as the goal for universal use; however, those working on the project
believe most jurisdictions will implement filing metrics long before
that date. SERFF has the necessary counting and reporting framework for
both paper and electronic product filings, and has been implemented in
all States.
Integration of Multi-State Regulatory Procedures
It is the goal that all State insurance departments will be using
the following regulatory tools by December 31, 2008:
(1) Review standards checklists for insurance companies to verify
the filing requirements of a State before making a rate or policy form
filing;
Update: The review standards checklists provide a means for
insurance companies to verify the filing requirements of a State before
making a rate or policy form filing. The checklists contain information
regarding specific State statutes, regulations, bulletins or case law
that pertain to insurance issues. Currently, most States have developed
and posted Review Standards Checklists to their State Web sites. All
insurers may access the information for all States via the NAIC Web
site.
States report that insurers taking advantage of this regulatory
modernization have found the likelihood for successfully submitting a
filing increases dramatically, vastly improving speed to market for
insurers.
(2) Product requirements locator tool, which is already in use,
will be available to assist insurers to locate the necessary
requirements of the various States to use when developing their
insurance products or programs for one or multiple-State markets;
Update: The product requirements locator tool is available to
assist insurers in locating the necessary requirements of various
States, which must be used when developing insurance products for one
or more States. This program allows someone to query a searchable NAIC
data base by product (i.e., auto insurance), requirement (i.e.,
cancellation statute), or State to determine what is needed to develop
an insurance product or make a filing in one specific State or many
States, for one type of insurance or for many types of insurance.
Thirty States have populated the property and casualty product
requirements locator tool, and eight States are in the process of
populating the tool. The life and health product requirements locator
tool is being re-tooled for greater efficiency, and should be
considered under development. The Action Plan establishes a goal of
2008 for universal use; however, those working on the project believe
most jurisdictions will implement this long before that date.
(3) Uniform product coding matrices, already developed, will allow
uniform product coding so that insurers across the country can code
their policy filings using a set of universal codes without regard for
where the filing is made; and
Update: Product coding matrices have been developed to provide a
uniform product naming convention and corresponding product coding, so
that insurers across the country can seamlessly communicate with
insurance regulators regarding product filings. This key feature forms
the basis for counting and measuring speed to market for insurance
products. The Action Plan establishes a goal of 2008 for universal use.
To date, 42 States have implemented the Uniform Product Coding matrix
within SERFF and other States are in progress.
(4) Uniform transmittal documents to facilitate the submission of
insurance products for regulatory review. The uniform transmittal
document contains information that is necessary to track the filing
through the review process and other necessary information. The goal is
that all States adopt it for use on all filings and data bases related
to filings by December 31, 2003.
Update: Uniform transmittal documents were developed to permit
uniform product coding, so that insurers across the country can code
their policy filings using a set of universal codes without regard for
where the filing is made. Instead of using the numerous codes developed
historically by each individual State for its own lines of insurance, a
set of common codes have been developed, using the annual statement
blanks as a guideline, in an effort to eliminate the need for insurance
companies to keep separate lists of codes for each State insurance
department's lines of insurance. To date, 18 States have fully
implemented use of the Uniform Transmittal Documents in SERFF, and
others are in varying states of progress. The Action Plan establishes a
goal of 2008 for universal use; however, those working on the project
believe most jurisdictions will implement this long before that date.
It is important to note that the SERFF system is being modified to
model the adopted uniform transmittal documents. When version 5 of
SERFF is released later in 2006, the Uniform Transmittal Documents will
effectively be in use by all States by virtue of the system design.
Adoption of Regulatory Frameworks That Place Greater Reliance on
Competition
States will continue to ensure that the rates charged for products
are actuarially sound and are not excessive, inadequate or unfairly
discriminatory. To the extent feasible, for most markets, States
recognize that competition can be an effective element of regulation.
While recognizing that State regulation is best for insurance
consumers, it also recognizes that State regulation must evolve as
insurance markets change.
Update: The NAIC has adopted a model law that places greater
reliance on competition for commercial lines insurance products. It is
actively encouraging States to consider it; however, hard market
conditions in the property and casualty insurance markets in many
States make it difficult for State legislators to support a relaxing of
rate regulatory requirements in a time when prices are dramatically
rising for businesses seeking coverage. The NAIC's Personal Lines
Market Regulatory Framework Working Group has discussed whether an
appropriate regulatory framework can be agreed upon by NAIC members.
Its work should be completed by the end of the year.
Full availability of a proactively evolving System for Electronic Rate
and Form Filing (SERFF)
SERFF is a one-stop, single point of electronic filing system for
insurance products. It is the goal of State insurance departments to be
able to receive product filings through SERFF for all major lines and
product types by December 2003. We will integrate all operational
efficiencies and tools with the SERFF application in a manner
consistent with our Speed to Market Initiatives and the recommendations
of the NAIC's automation committee.
Update: SERFF is the ultimate answer to speed to market concerns of
insurers. All 50 States, the District of Columbia, and Puerto Rico are
SERFF-ready. Insurers that have chosen to use SERFF are experiencing an
average 23-day turn-around time for the entire filing submission and
review cycle. SERFF offers functionality that can enable all regulatory
jurisdictions to accept electronic rate and form filings from insurance
companies for all lines of insurance and product types. There are 51
jurisdictions accepting filings for the property/casualty line of
business, 47 of which are accepting all major lines. There are 49
States accepting life filings, 43 of which are accepting all major
lines, and 46 States are currently accepting health filings via SERFF,
38 of which are accepting all major lines. SERFF enables States to
include all operational efficiency tools such as the review standards
checklists, requirements included in the product requirements locator,
and uniform transmittal documents to facilitate an efficient electronic
filing process. There are over 1,800 insurance companies licensed to
use SERFF and nearly 184,000 filings were submitted via SERFF thus in
2005. Thus far in 2006 (as of June 30), nearly 132,000 filings have
been submitted, averaging over 1,000 per day. The NAIC estimates that
the total universe in an average year is approximately 750,000 total
filings.
Implementation of an Interstate Compact
Many products sold by life insurers have evolved to become
investment-like products. Consequently, insurers increasingly face
direct competition from products offered by depository institutions and
securities firms. Because these competitors are able to sell their
products nationally, often without any prior regulatory review, they
are able to bring new products to market more quickly and without the
expense of meeting different State requirements. Since policyholders
may hold life insurance policies for many years, the increasing
mobility in society means that States have many consumers who have
purchased policies in other States. This reality raises questions about
the logic of having different regulatory standards among the States.
The Interstate Insurance Product Regulation Compact will establish
a mechanism for developing uniform national product standards for life
insurance, annuities, disability income insurance, and long-term care
insurance products. It will also create a single point to file products
for regulatory review and approval. In the event of approval, an
insurer would then be able to sell its products in multiple States
without separate filings in each State. This will help form the basis
for greater regulatory efficiencies while allowing State insurance
regulators to continue providing a high degree of consumer protection
for the insurance buying public.
State insurance regulators will work with State law and
policymakers with the intent of having the Compact operational in at
least 30 States or States representing 60 percent of the premium volume
for life insurance, annuities, disability income insurance and long-
term care insurance products entered into the Compact by year-end 2008.
Update: The NAIC adopted draft model legislation for the Interstate
Insurance Product Regulation Compact (the ``Compact'') in December
2002. Working with the National Conference of State Legislatures
(NCSL), the National Conference of Insurance Legislators (NCOIL), the
National Association of Attorneys General (NAAG), as well as the
American Council of Life Insurers (ACLI) and consumers, the NAIC
adopted technical amendments to the model legislation in July 2003. The
NCSL and NCOIL endorsed the Compact in July 2003.
Beginning with Colorado in March 2004, the Governors and
legislatures of 27 States adopted the Compact legislation in 27 months.
These 27 States include: Alaska, Colorado, Georgia, Hawaii, Idaho,
Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Minnesota, Nebraska,
New Hampshire, North Carolina, Oklahoma, Ohio, Pennsylvania, Puerto
Rico, Rhode Island, Texas, Utah, Vermont, Virginia, Washington, West
Virginia and Wyoming. These 27 States represent approximately 42
percent of the premium volume, and the Compact legislation remains
under consideration this year in the District of Columbia,
Massachusetts, Michigan, and New Jersey.
The Compact legislation set the high bar of 26 States or States
representing 40 percent of the Nation's premium volume to become
operational. After surpassing both triggers in the spring 2006, the
Compact Commission held its inaugural meeting on June 13, 2006, in
Washington, DC, and initiated an action plan to make the Compact fully
operational in early 2007. At the meeting, the Commission formed an
Interim Management Committee, elected Pennsylvania Insurance
Commissioner Diane Koken as the Interim Management Committee Chair,
began the process to adopt Commission Bylaws by September 2006, and
established an Interim Legislative Committee, consumer and industry
advisory committees, and a number of operational committees to
coordinate important elements of the startup process. These critical
steps will prepare the Compact to be ready to begin receiving and
making regulatory decision on product filings during the first part of
2007.
Producer Licensing Requirements
Uniformity of forms and process . . . the NAIC's broad, long-term
goal is the implementation of a uniform, electronic licensing system
for individuals and business entities that sell, solicit or negotiate
insurance.
The States have satisfied GLBA's licensing reciprocity mandates and
continue to view licensing reciprocity as an interim step. Our goal is
uniformity.
Building upon the regulatory framework established by the NAIC in
December of 2002, the NAIC's members will continue the implementation
of a uniform, electronic licensing system for individuals and business
entities that sell, solicit or negotiate insurance. While preserving
necessary consumer protections, the members of the NAIC will achieve
this goal by focusing on the following five initiatives:
(1) Development of a single uniform application;
Update: The NAIC adopted a Uniform Producer Licensing Application
that can be used for both resident and non-resident licensing. Every
State accepts the Uniform Producer Licensing Applications for non-
resident licensing. Thirty-four States accept the Uniform Producer
Licensing Applications for resident licensing.
(2) Implementation of a process whereby applicants and producers
are required to satisfy only their home State pre-licensing education
and continuing education (CE) requirements;
Update: This system of CE reciprocity is already established and
working. The NAIC continues to monitor this system to ensure CE
reciprocity remains in place. In addition, States are streamlining the
CE course approval process for CE providers. Forty-eight States and the
District of Columbia have signed the Uniform Declaration Regarding CE
Course Approval Guidelines.
(3) Consolidation of all limited lines licenses into either the
core limited lines or the major lines;
Update: The NAIC has adopted definitions for the following core
limited lines, and has included these limited lines as part of the
uniform applications: Car Rental, Credit, Crop, Travel and Surety.
Thirty States have adopted the NAIC definitions. The remaining States
continue to pursue legislative changes to consolidate all their limited
lines into these core categories. This process will continue through
the 2006 State legislative sessions.
(4) Full implementation of an electronic filing/appointment system;
and
Update: Forty States and the District of Columbia have implemented
an electronic filing/appointment system. In addition, five States are
processing electronic appointment renewals. Nine States do not require
appointments. The NAIC and its affiliate, the National Insurance
Producer Registry, continue to work with the remaining States to
implement an electronic filing/appointment system.
(5) Implementation of an electronic fingerprint system. In
accomplishing these goals, the NAIC recognizes the important and timely
role that State and Federal legislatures must play in enacting
necessary legislation.
Update: The NAIC successfully implemented a fingerprint pilot
program with the States of Alaska, California, Idaho and Pennsylvania
submitting fingerprints to the NAIC's centralized fingerprint
repository during 2005 and 2006. California and Pennsylvania have since
suspended their submissions to the repository. In addition, the NAIC
adopted an Authorization for Criminal History Record Check Model Act,
which provides States with the necessary language to obtain clear
authority to collect fingerprints and obtain criminal history record
information from the FBI. While States are currently able to obtain
access to the FBI data base through the adoption of proper legislative
authority, Federal law prohibits States from sharing criminal history
record information with each other. The NAIC continues to seek
solutions to enhance States access to the FBI data base and resolve the
prohibition against the sharing of such information among the States.
National Insurance Producer Registry (NIPR)
Through the efforts of NIPR, major steps have been taken to
streamline the process of licensing non-residents and appointing
producers, including the implementation of programs that allow
electronic appointments and terminations. Other NIPR developments
helping to facilitate the producer licensing and appointment process
include:
Update: There are 41 States and the District of Columbia accepting
electronic non-resident licensing applications through NIPR with the
goal of all States and territories by December 31, 2006. There are 17
States on electronic non-resident renewals. In addition, three States
are processing electronic resident licensing applications, and five
States are processing electronic resident renewals.
(1) Use of a National Producer Number (NPN), which is designed to
eliminate sole dependence on using social security numbers as a unique
identifier;
Update: There are 42 States and the District of Columbia currently
using the NPN as the unique identifier on the data base.
(2) Acceptance of electronic appointments and terminations or
registrations from insurers;
Update: There are 40 States and the District of Columbia accepting
electronic appointments and terminations through NIPR's Gateway. Nine
States do not require appointments. In addition, five States are
processing electronic appointment renewals. The NAIC and its affiliate,
the National Insurance Producer Registry, continue to work with the
remaining States to implement an electronic filing/appointment system.
(3) Use of Electronic Funds Transfer for payment of fees. The goal
is to have full State implementation of the services provided by NIPR
by December of 2006.
Update: There are 32 States using Electronic Funds Transfer for
payment of fees.
Insurance Company Licensing
Standardized filing and baseline review procedures . . . the NAIC
will continue to work to make the insurance company licensing process
for expanding licensure as uniform as appropriate to support a
competitive insurance market.
Except under certain limited circumstances, insurance companies
must obtain a license from each State in which they plan to conduct
business. In considering licensure, State regulators typically assess
the fitness and competency of owners, boards of directors, and
executive management, in addition to the business plan, capitalization,
lines of business, market conduct, etc. The filing requirements for
licensure vary from State to State, and companies wishing to be
licensed in a number of States have to determine and comply with each
State's requirements. In the past 3 years, the NAIC has developed, and
all States have agreed to participate in, a Uniform Certificate of
Authority Application process that provides significant standardization
to the filing requirements that non-domestic States use in considering
the licensure of an insurance company.
Update: Presently, all 50 States and the District of Columbia
accept the NAIC's Uniform Certificate of Authority Application (UCAA)
from insurers desiring to do business in their State. The UCAA has been
under development for sometime and work continues to eliminate a few
remaining State-specific filing requirements. However, many of these
additional requirements result from State statute or regulation in a
small number of States.
In its commitment to upgrade and improve the State-based system of
insurance regulation in the area of company licensing, the NAIC will:
(1) Maximize the use of technology and pre-population of data
needed for the review of application filings;
Update: NAIC Information Systems staff, with assistance from an
outside consultant, has completed a comprehensive business analysis of
the UCAA system. As a result, numerous modifications to improve the
application's automation and user-friendliness were recommended and
approved by the National Treatment and Coordination Working Group. Two
of the more significant recommendations were: convert the system to a
data input driven system versus a form-based system, and modify the
applications to interface with the Financial Data Repository (FDR) to
extract all possible application elements in order to complete the UCAA
more efficiently. These changes were implemented for both the expansion
and corporate amendment applications, and are currently in production
in the electronic UCAA tool.
(2) Develop a Company Licensing Model Act to establish standardized
filing requirements for a license application and to establish uniform
licensing standards; and
Update: The National Treatment and Coordination Working Group is in
the process of developing this model act. The Working Group reviewed
areas of the company licensing process that cause the most problems and
additional work for insurer applicants due to non-uniformity amongst
the States. As a result of that review, the Working Group dedicated
itself to first addressing uniformity in the definitions of lines of
business and in capital and surplus requirements, two very complicated
areas with wide-ranging implications to various regulatory processes.
The Working Group is currently considering two primary proposals
regarding definitions of lines of business: using the lines of business
from the statutory financial statement or using broader categories of
business that incorporate multiple lines of business from the statutory
financial statement within each category. The Working Group is also
discussing ways to synchronize these definitions with those used in the
product licensing area, to achieve even greater uniformity and synergy.
(3) Develop baseline licensing review procedures that ensure a fair
and consistent approach to admitting insurers to the market place and
that provide for appropriate reliance on the work performed by the
domestic State in licensing and subsequently monitoring an insurer's
business activity.
Update: Through the efforts of a consultant and the National
Treatment and Coordination Working Group, the Company Licensing Best
Practices Handbook was completed and adopted by the NAIC. This
publication provides a wealth of best practices for the entire company
licensing review process that occurs in each State. The most
significant areas addressed in the publication are the use of a
prioritization system for allocating review resources to various
applications, communication between the domiciliary and expansion
States, and review considerations that should be stressed for the
various application types. These best practices establish a consistent
approach for reviewing company licensing applications, and encourage
efficiency in review procedures to help ensure timely company licensing
decisions occur.
As company licensing is adjunct to a solvency assessment, the
members of the NAIC will consider expanding the Financial Regulation
and Accreditation Standards Program to incorporate the licensing and
review requirements as appropriate. This action will assure appropriate
uniformity in company licensing and facilitate reciprocity among the
States. As much of this work is well underway, the NAIC will implement
the technology and uniform review initiatives, and draft the model act
by December 2004.
Update: Once the Company Licensing Model Act has been completed and
the NAIC sees States conforming, the model and Company Licensing Best
Practices Handbook will be presented to the Financial Regulation
Standards and Accreditation (F) Committee for consideration.
Solvency Regulation
Deference to lead States . . . State insurance regulators have
recognized a need to more fully coordinate their regulatory efforts to
share information proactively, maximize technological tools, and
realize efficiencies in the conduct of solvency monitoring.
Deference to ``Lead States''
Relying on the concept of ``lead State'' and recognizing insurance
companies by group, when appropriate, the NAIC will implement
procedures for the relevant domestic States of affiliated insurers to
plan, conduct and report on each insurer's financial condition.
Update: The NAIC's Insurance Holding Company Working Group adopted
the Examination Coordination Initiative during the 2005 Spring National
Meeting. This initiative requires additional actions by the designated
`lead States' to proactively improve examination coordination, and
requires communicating those coordination efforts to the NAIC on select
groups.
In accordance with the Examination Coordination Initiative, each
group has been classified into one of three categories to represent the
coordination efforts expected for their upcoming exams. Within two
categories, (Currently Coordinated Exams and Focused Coordination
Efforts) States are required to coordinate exams in accordance with the
lead States designated examination schedule. If coordination cannot be
achieved, the non-lead must provide notification to the NAIC on the
elements that hindered exam coordination and the efforts that will be
taken to ensure coordination during the lead State's next planned
examination date. For examinations within the third category (Other
Exams to Coordinate), all States are requested to adhere to the lead
State's planned examination schedule. However, as these groups are
comprised of several companies domiciled in multiple States with
various examination schedules, further time will be needed for complete
coordination. As such, no notification requirement has been established
for the groups within these categories.
In order to assist States in complying with the Examination
Coordination Initiative, a new application is being developed within
the Exam Tracking System (Examination Calendar) that will serve as a
forum to collect information and notify other States about the lead
State's planned examination schedules, and also to provide reports on
the groups/companies that have been successful in coordinating with the
lead State. In addition, this application will provide a forum for non-
lead States to communicate regarding problems preventing exam
coordination, as well as their efforts toward future coordination. This
Examination Calendar application is expected to be available in 2006.
Additionally, in order to ensure that State coordination efforts
are improving communication and examination efficiencies, the lead
State and non-lead States will be requested to document in the
examination work papers how they communicated and coordinated their
efforts to improve examination efficiencies.
Financial Examinations
In regard to financial examinations, many insurers are members of a
group or holding company system that has multiple insurers and that may
have multiple States of domicile. These affiliated insurers often share
common management along with claims, policy and accounting systems, and
participate in the same reinsurance arrangements. Requirements for
coordination of financial examinations will be set forth in the NAIC
Financial Condition Examiners Handbook. To allow time for the States to
adjust examination schedules and resources, such coordination will be
phased in over the next 5 years, with the goal of full adherence to the
Handbook's guidance for examinations conducted as of December 2008.
Update: The Financial Examiners Handbook (E) Technical Group
revised the NAIC Financial Condition Examiners Handbook in the summer
of 2005. The revisions provide guidance on the responsibilities common
to the role of the lead State and non-lead States. These revisions also
include the key elements of the Examination Coordination Initiative and
the responsibilities of the States. As this Handbook is an NAIC
Accreditation Standard, the Financial Regulation Standards and
Accreditation (F) Committee will consider these changes in 2006.
In addition to the Examiners Handbook, the Financial Analysis
Handbooks have also been revised. These revisions stress the need to
maintain confidentiality of information, and refer to current
confidentiality arrangements in place between each State and Federal
banking agencies, State banking supervisors, and other functional
regulators. Part of the lead State's role is to perform a review of the
consolidated group, including analysis of the group's financial results
and overall business strategy.
As previously mentioned, there are proposals to provide a new
application so that the Exam Tracking System can serve as a forum to
collect planned examination schedules and report on the groups/
companies that are planned to be examined in accordance with `as of'
dates in order to improve coordination of exams. This `examination
calendar' became available in June 2006.
Insolvency Model Act
The NAIC will promote uniformity by reviewing the Insolvency Model
Act, maximizing use of technology, and developing procedures for State
coordination of imminent insolvencies and guaranty fund coverage. The
Financial Regulation Standards and Accreditation (F) Committee will
consider the requirements no later than January 1, 2008.
Update: In 2005, the NAIC adopted the Insurer Receivership Model
Act (IRMA) as the foundation of modernization in the receivership area.
IRMA is intended to comprehensively address the administration of an
impaired or insolvent insurer from conservation and rehabilitation to
liquidation and winding up of an estate. The Financial Condition (E)
Committee and its working groups are developing and considering changes
to the Property & Casualty Insurance Guaranty Association Model Act and
model language addressing the administration of high deductible
policies. It is also developing a recommendation for a proposed
revision to the accreditation standard addressing receiverships. The
Financial Regulation and Standards Accreditation (F) Committee is
expected to address this issue in 2007. The NAIC will also be working
on a revision to the Receivers' Handbook to incorporate the
modernization provisions of IRMA.
The NAIC continues its efforts to make improvements in the
automation of information and processes in the receivership area. The
Global Receivership Information Data base continues to be enhanced and
populated through the efforts of State insurance departments. The NAIC
has developed a Uniform Receivership Internet Template to allow States
to present minimum standard information to consumers in a manner that
is uniform from State to State. The NAIC is also developing a system
for use by States in the administration of proof-of-claims.
Changes of Insurance Company's Control
Streamline the process for approval of mergers and other changes of
control.
Coordination Using ``Lead States''
Regulatory consideration of the acquisition of control or merger of
a domestic insurer is an important process for guarding the solvency of
insurers and protecting current and future policyholders. At the same
time, NAIC members realize that these transactions are time sensitive
and the process can be daunting when approvals must be obtained in
multiple States. As a result, States will enhance their coordination
and communication on acquisitions or mergers of insurers domiciled in
multiple States by designing a system through which these multi-State
reviews are coordinated by one or more ``lead'' States.
Update: As noted above (Section VI), regulators are in process of
implementing the NAIC lead State framework.
Form A Database
Insurers are required to file for approval on documents referred to
as Form A filings when mergers or acquisitions are being considered.
The NAIC has created a data base to track these filings so that this
information is available to all State regulators. Usage will be
monitored to ensure that all States use the application to improve
coordination of Form A reviews and to alert State regulators to problem
filings. The Form A Review Guide and Form A Review Checklist, which
contain procedures to be utilized when reviewing a Form A Filing, will
be enhanced and incorporated into the existing NAIC Financial Analysis
Handbook as a supplement. NAIC members will work on amending the
Accreditation Program to include the Form A requirements to further
promote stronger solvency standards and State coordination, as well as
an efficient process for our insurers. The Form A requirements will be
targeted for incorporation into the Accreditation Program no later than
January 1, 2007.
Update: The NAIC's Form A Data base, initially released in March
2002, was designed to alert States to Form A filings from the same or
similar individuals or entities in other States. Efforts continue to
educate and inform regulators regarding the use and benefits of this
data base system. Benefits occur largely in the area of coordinating on
common Form A filings and identifying acquiring parties who are
suspicious. A formal training program was developed and offered to
States throughout 2004 and 2005.
The Insurance Holding Company Working Group adopted a revised
Holding Company Analysis Framework during the 2005 Spring National
Meeting. The revised Framework was referred to the Financial Analysis
Handbook Working Group, which developed a Holding Company Analysis
checklist and adopted it in October of 2005. The primary objective of
this Holding Company Analysis Checklist is (A) to gain an overall
understanding of the holding company structure or insurance group and
how the insurance subsidiary fits into the organization, and (B) to
assess the potential risks the holding company or other affiliates pose
to the insurance subsidiary.
Integrate Policy Form Approval and Producer Licensing into the Merger
and Acquisition Process
The NAIC members will develop procedures for the seamless transfer
of policy form approvals and producer appointments to take place
contemporaneously with the approval of mergers or acquisitions where
appropriate. We will begin developing and testing these procedures
through pilot programs in 2003 and fully incorporate them system wide
by 2006.
Update: With regard to integrating policy form approval and
producer licensing into the M&A process, two pilot projects have been
completed. However, further work to develop a procedural manual has not
been completed because the National Treatment and Coordination Working
Group is focused on modernizing the company licensing process.
Attachment B
Attachment C
Attachment D
Attachment E
______
PREPARED STATEMENT OF JOHN D. JOHNS
Chairman, President, and CEO, Protective Life Corporation
July 11, 2006
Mr. Chairman and Members of the Committee, my name is Johnny Johns,
and I am President and Chief Executive Officer of Protective Life
Insurance Company. I am appearing today on behalf of the American
Council of Life Insurers. The ACLI is the principal trade association
for U.S. life insurance companies, and its 377 member companies account
for approximately 90 percent of life insurance premiums, 95 percent of
annuity considerations and 91 percent of the industry's total assets.
I appreciate the opportunity to appear before you today to discuss
the current framework for regulating the life insurance business in the
United States and to present our views on ways in which that framework
can and should be modernized. Each year the ACLI surveys its board of
directors to establish the organization's advocacy priorities, and once
again this year regulatory modernization tops the list. This is a
critically important issue for the life insurance business, and on
behalf of my company as well as the ACLI and its other member life
insurers, I want to thank you for holding this hearing and placing
insurance regulatory modernization on the Committee's agenda.
The fundamental point I would like to make today is quite simple.
As the business of insurance has evolved over the years from an
enterprise that was largely local in nature to a $4.5 trillion industry
that is predominantly national and increasingly global in scope, the
accompanying system of regulation has failed to keep pace. As a
consequence, insurers are significantly handicapped in their ability to
compete efficiently and serve the best interests of their consumers.
Today's Life Insurance Business and the Importance of Efficient
Regulation
From the outset, I want to make it clear that, while we believe the
regulatory framework of our current State-based system is inefficient
and unresponsive to the needs of today's marketplace, we appreciate
very much the highly professional and competent regulators who work
within that system. In the many instances in which I have had the
privilege to work with State regulators, I have been impressed with
their diligent and conscientious efforts to protect policyholders and
ensure insurer solvency. Their job is not an easy one, especially when
they must regulate, not only within their own State law, but in some
cases also cooperatively within the laws of their fellow regulators in
other States. This testimony would not be complete without a sincere
recognition of the remarkable contributions that are made by the
regulators under such a challenging regulatory structure.
The present State-based system of insurance regulation was
instituted at a time when ``insurance'' was not deemed to be interstate
commerce. Consequently, the underpinnings of that system--which remain
pervasive today--contemplate doing business only within the borders of
a single State. Today, most life insurers do business in multiple
jurisdictions if not nationally or internationally. In short, our
system of regulation has failed to keep pace with changes in the
marketplace, and there is a wide gap between where regulation is and
where it needs to be.
Life insurers today provide an array of unique products and
services that benefit Americans in all stages of life with products
like life insurance, annuities, disability income insurance and long-
term care insurance. These products not only protect a family's
finances, but also enable Americans to save money, accumulate wealth
for retirement and convert it into a guaranteed lifetime stream of
retirement income. No other financial intermediary can do that.
Currently, there are over 373 million life insurance policies in
force, providing Americans with $18.4 trillion in financial protection.
In addition, Americans have saved $2.2 trillion toward their retirement
by investing through our annuity products. Our long-term commitments
and investments place us as one of the largest investors in the U.S.
economy assisting in economic growth. In managing these obligations,
the life insurance industry has invested $4.3 trillion in the financial
markets, representing 9 percent of the total capital. Life insurers are
one of the largest holders of long term, fixed rate commercial
mortgages in the United States. These long-term financial commitments
are generally 10 years and longer in maturity, much longer than
commitments made by other financial intermediaries.
Life insurers are also a vital component of the U.S. economy.
Fifty-one percent of the industry's assets, or $3.6 trillion, are held
in long-term bonds, mortgages, and real estate. This includes: $512
billion invested in Federal, State and local government bonds, helping
to fund urban revitalization, public housing, hospitals, schools,
airports, roads and bridges; $295 billion invested in mortgage loans on
real estate financing for homes, family farms and offices; $1.5
trillion invested in long-term U.S. corporate bonds. Twenty-nine
percent of the industry's assets, $1.3 trillion, are invested in
corporate stocks.
Beyond this significant investment we make in the economy, it is in
the area of long-term savings and retirement security that life
insurance may have the greatest positive impact on public policy in the
coming years. With 76 million baby boomers nearing retirement, the
United States faces a potential retirement crisis. We must confront the
fact that the average American nearing retirement has only $78,000 in
savings and assets, not including real estate. Industry research
indicates that 65 percent of Americans believe they will not be able to
save enough for retirement.
Future retirees will have fewer sources of guaranteed income than
previous generations due to the decline of traditional defined benefit
pension plans and the fact that Social Security, on average, replaces
only 42 percent of earnings. If nothing is done, there is a real
possibility that millions of Americans will outlive their retirement
assets.
The life insurance industry is uniquely positioned to help American
workers prepare for their financial futures. Our business continues to
be a prominent resource in helping both large and small employers
provide the right qualified retirement or savings plan for their
employees. Insurers act as asset managers or administrators for defined
benefit, 401(k), 403(b) 457 plans and other tax-qualified arrangements.
However, for the life insurance business to remain viable and serve
the needs of the American public effectively, our system of regulation
must become far more efficient and responsive to the needs and
circumstances of a 21st century global business. Life insurers today
operate under a patchwork system of State laws and regulations that
lack uniformity and are applied and interpreted differently from State
to State. The result is a system characterized by delays and
unnecessary expenses that hinder companies and disadvantage their
customers. We believe it is appropriate, and we are asking for your
help, to modernize our regulatory structure to ensure that we are able
to continue to serve our customers in the most efficient and effective
way.
Lack of Uniformity Hampers Multi-State Life Insurers
A significant impediment for multi-State insurers is the current
State-based system's inability to produce, in crucial areas, both
uniform standards and consistent application of those standards by the
States. I'd like to give you a brief outline of the business and
regulatory complexities commonly faced by life insurers under the
current system.
Before a company can conduct any activities, it must apply for a
license from its ``home'' or ``domestic'' State insurance department. A
license will be granted if the company meets the domestic State's legal
requirements, including capitalization, investment and other financial
requirements. If the company wishes to do business only in its home
State, this one license will be sufficient. However, in order to sell
products on a multi-State basis, a company must apply for licenses in
all the other States in which it seeks to do business. Each additional
State may have licensing requirements that deviate from those of the
company's home State, and the company will have to comply with all
those different requirements notwithstanding the fact that the home
State regulator will remain primarily responsible for the insurer's
financial oversight.
Once a company has all its State licenses in hand, it can turn its
attention to selling policies. To do that, a company must first file
each product it wishes to market in a particular State with that
State's insurance department for prior approval. A company doing
business in all States and the District of Columbia must, for example,
file the same policy form 51 different times and wait for 51 different
approvals before selling that product in each jurisdiction. And this
process must be repeated for each product the insurer wishes to offer.
Since these 51 different insurance departments have no uniform
standards for the products themselves or for the timeliness of response
for filings, a company may receive approval from one or two
jurisdictions in 3 months, from another ten jurisdictions in 6 months,
and may have to wait 18 months or longer to receive approval from all
jurisdictions.
This process is further complicated by the fact that each insurance
department may have its own unique ``interpretation'' of State
statutes, even those that are identical to the statutes in other
jurisdictions. As a result, a company will be required to ``tweak'' its
products in order to comply with each individual department's
``interpretation'' of what otherwise appeared to be identical law.
Since a company has to refile each product after it has been
``tweaked,'' the time lapse from original filing to final approval can
very well be double that which was originally expected. And, as a
result of the various ``tweaks,'' what started out as a single product
may wind up as thirty or more different products.
After a company has received approval to sell its products in a
State, it needs a sales force to market those products. Here again we
encounter the inefficiencies of the current State system. Each State
requires that anyone wishing to act as an insurance agent first be
licensed as such under the laws of that State. Each State has its own
criteria for granting an agent's license, and these criteria include
differing continuing education requirements once the license is issued.
Like companies, insurance agents wishing to work with clients in more
than one State must be separately licensed by the insurance departments
in each of those States. And, because of the differing State form
filing requirements for companies noted above which results in products
being ``tweaked'' for approval in each of the various jurisdictions,
persons granted agent licenses by more than one State will not always
have the ability to offer all clients the same products.
After this multitude of licenses and approvals has been secured, a
company can begin to sell products nationwide. However, the lack of
uniformity in standards and application of laws will continue to be a
complicated and costly regulatory burden that the company must
constantly manage. The very basic things that any business must do to
be successful--such as employing an advertising campaign, providing
systems support, maintaining existing products, introducing new
products and keeping a sales force educated and updated--are all
affected by 51 different sets of laws, rules and procedures.
Add to this the fact that States also police actual marketplace
activity by subjecting a company to market conduct examinations by the
insurance departments of the States in which it is licensed. Even
though State market conduct laws nationwide are based on the same NAIC
model laws, there is minimal coordination of these exams among the
various States. As a result, a company licensed to do business in all
jurisdictions is perpetually having States initiate market conduct
examinations just as one or more other States are completing theirs,
with the cost of each exam being borne by the company--and ultimately
its policyholders. And, because these examinations are largely
redundant, the benefits derived relative to the costs incurred are
marginal at best.
This tendency of the States to eschew uniformity, even when
developed through the NAIC, may soon play itself out in the need to
reform the reserving methodology used by our industry. The formulaic
approach currently mandated by State law is outdated and out of step
with more robust methodology used in, among others, European countries
and Canada. The current formulaic approach adds significant costs to
many of our products. Therefore, our products are unnecessarily
expensive, and consumers are adversely affected. Although the NAIC is
currently working to address the reserve problem, the structure of the
State-based system is inherently a significant impediment. This is the
case because each State has the ability to regulate the standards by
which the statutory reserves are established for insurers doing
business in that State. If one State refuses to enact reform, the
insurers doing business in that State are subject to the outdated
regulation, even if all other States enact the reform. In other words,
each State has veto power. If a State with a particularly large
population is the State that refuses to enact the reform, as a
practical matter that State's law will be the governing law for all
multistate carriers. Again, notwithstanding the efforts of outstanding
regulators at the State level, the very structure of the system is the
impediment.
I cannot overemphasize that the current regulatory system results
in unnecessary costs that, of necessity, are passed on to the consumer.
Today, every dollar spent on life insurance purchases less in coverage
than it should, due to the unnecessary cost of the current regulatory
system.
Competitiveness is restrained by the current system. The current
regulatory process creates unnecessary barriers to entry. Due to the
unnecessary costs imposed by the regulatory structure, equity investors
seeking an adequate return on capital are discouraged. Product
innovation is impeded by the regulatory structure, resulting in fewer
choices for consumers.
ACLI Policy on Insurance Regulatory Modernization: State and Federal
Solutions
The ACLI Board of Directors, after careful consideration and
extensive discussion with member life insurance companies--large and
small--determined to approach improving regulatory efficiency and
modernization on two tracks. One is to work with the States and the
NAIC to improve a State-based system of regulation. The other is to
work with Congress to put in place a Federal charter option for life
insurers and insurance producers.
While my remarks today focus on the need for a comprehensive
Federal solution to modernizing the insurance regulatory framework, I
would be remiss if I did not compliment the NAIC and the States for the
substantial progress they have made on developing an interstate compact
for expediting the filing and approval of life insurance products.
Recently, more than half the States enacted the compact legislation,
meaning that the compact commission--the body that will actually handle
product filings and approvals--can now be established and made
operational. Until all States, and certainly all States with
significant populations, become part of this compact mechanism, the
full benefits of this initiative will not be realized.
The ACLI is fully committed to the interstate compact concept and
is working with State regulators and legislators to pass legislation
necessary to have every State become a part of this mechanism. However,
it must be understood that the NAIC's interstate compact addresses only
a single issue--getting new products filed, approved and into the
marketplace in a timely manner. It does not address the many other
areas in which lack of uniformity in law or regulation from State to
State affects the ability of life insurers to provide their customers
with products and services in a timely and efficient manner. Other
issues that are in need of modernization include: reserving;
coordination of market conduct examinations; company licensing;
producer licensing; quantitative investment limitations; nonforfeiture
laws; State taxation of life insurers; replacements; reinsurance; and
national advertising programs. The interstate compact has no effect on
any of these issues, and that fact points out why the ACLI believes it
is imperative for Congress to move forward with an optional Federal
charter as the most appropriate comprehensive solution to regulatory
reform.
S. 2509
The ACLI is extremely encouraged to see the introduction by
Senators Sununu and Johnson ofS. 2509, the National Insurance Act
of2006. This is a comprehensive approach to insurance regulatory reform
and one that ACLI strongly supports.
Of course, we understand it is early in the process. ACLI and its
member companies look forward to working with this committee on the
mechanics of this legislation and making additional changes to refine
it as the legislation moves forward.
One of the fundamental values of a Federal charter option such as
that provided by S. 2509 is that it can achieve uniformity of insurance
laws, regulation and interpretations the moment it is put into place.
And only Congress can enact legislation that has this broad-based,
immediate effect. Many life insurers believe that regulatory
modernization is nothing short of a survival issue, and in that context
the speed with which progressive change takes place is critical.
Today's marketplace is intolerant of inefficient competition, and the
prospect of having to wait years for the States to address individually
the many areas in which efficiency of regulation must be improved is
not encouraging.
We believe it is appropriate for Congress to focus its attention on
a global, comprehensive alternative to State insurance regulation as
provided by S. 2509. This measure meets the needs and circumstances of
today' s national and multinational life insurers and will enable them
to much more effectively serve the needs of Americans in need of life
insurance protection and retirement financial security.
Unfounded Criticisms of the Optional Federal Charter
Critics of S. 2509 and the optional Federal charter it provides
have made several unfounded allegations that we would like to address
in this statement.
States Rights--S. 2509 is not an attack on States rights. Insurance
is the only segment of the U.S. financial services industry that does
not have a significant Federal regulatory component. Under S. 2509, the
States would retain a significant a role in insurance regulation as
their State regulatory counterparts now have in the banking and
securities industries.
S. 2509 does not mandate Federal insurance regulation of all
insurers. Rather, it allows an insurance company the option of seeking
a Federal charter if company management believes that to be more
complementary to the company's structure, operations or strategic plan.
It is not an affront to States' rights to seek the elimination of
conflicting or inconsistent State laws. A principal objective of S.
2509 is to reduce the regulatory burden caused by such conflicts and
redundancies and to do so by adopting the best State laws and
regulations as the applicable Federal standards.
A further objective of S. 2509 is to modernize the insurance
regulatory framework and, in so doing, make insurers significantly more
competitive in the national and global marketplace. Enhancing
competition is a sound and legitimate role for Congress and
substantially outweighs concerns over any diminution of the regulatory
role of the States.
Regulatory Arbitrage--Some have suggested that S. 2509 will lead to
regulatory arbitrage and a ``race to the bottom'' as companies seek
increasingly lax regulation and regulators rush to accommodate. From
our perspective, nothing could be further from the truth.
First and foremost, the ACLI and its member companies are not
seeking to migrate to a Federal system of insurance regulation that is
lax. S. 2509 provides for a strong system of life insurance regulation
that draws on the best existing State laws or NAIC model laws. It does
not free life insurers from strong solvency regulation and consumer
protection.
Second, the notion that adding one more system of regulation on top
of the 51 that already exist will somehow give rise to regulatory
arbitrage is groundless. Today, companies have the right in virtually
all jurisdictions to change their State of domicile--that is, to move
to a different State that would have primary responsibility for the
company's financial oversight. Consequently, there are 51 opportunities
for regulatory arbitrage today.
The Federal regulatory option made available by S. 2509 is at least
as strong as the better--if not the best--state system. How, then,
would the enactment of this legislation create some new opportunity for
this dreaded ``race-to-the-bottom?'' What possible harm would come from
companies moving to a Federal system of regulation that is as strong
as, if not stronger than, the one they are leaving?
Inherent in this assertion of possible regulatory arbitrage is the
notion that a company executive could wake up one morning and simply
decide to flip a company's charter. Quite simply, business does not
work that way. Such a change carries with it countless significant
consequences and considerations and is not entered into lightly. It is
costly, time consuming and initially highly disruptive. The notion of
regulatory arbitrage implies that companies would be inclined to move
into and out of regulatory systems on a whim or whenever decisions were
made or likely to me made that would be adverse to their interests. In
the real world, this does not and would not occur.
The Federal Charter Is Optional--S. 2509 provides for a Federal
charter option. It in no way mandates that companies be federally
regulated. Companies that do a local business or that for other reasons
would prefer to remain exclusively regulated by the States are
perfectly free to do so. As we read S. 2509, is appears to be ``charter
neutral'' in that it does not create tax or other unnecessary
advantages relative to State chartered competitors.
While individual motives may vary, ACLI member life insurance
companies are strongly united in their support for an optional Federal
charter. Some feel that a Federal charter is in the long-term best
interest of their company and its customers. Others have indicated that
while they intend to remain State chartered even if a Federal charter
were available to them, they see the threat of the Federal charter
option providing motivation to the States to continue their efforts to
enhance the efficiencies of State regulation.
State Premium Tax Revenues--Critics of S. 2509 and the optional
Federal charter have suggested that if such an option were to become a
reality, national insurers would somehow over time escape State premium
taxes, which constitute a significant source of revenue for all States.
This concern is totally unfounded.
As this Committee knows better than most, with the exception of
Government Sponsored Enterprises, all for-profit federally chartered
financial institutions such as commercial banks, savings banks and
thrifts pay State income taxes. For insurers, this State tax obligation
takes the form of a State premium tax. There is no precedent for, nor
is there any expectation of, exclusion from the authority of the States
to levy a premium tax. Indeed, S. 2509 expressly recognizes the States'
authority to tax national insurers.
Consumer Protections--While critics have argued that consumer
protections would suffer under an optional Federal charter, we believe
a careful reading of S. 2509 suggest quite the contrary. By drawing on
strong individual State laws or NAIC model laws, S. 2509:
Guarantees that consumers are protected against company
insolvencies by extending the current successful State-based
guaranty mechanism to national insurers and their
policyholders.
Ensures the financial stability of national insurers by
requiring adherence to statutory accounting principles that are
more stringent (conservative) than GAAP.
Duplicates the stringent investment standards currently
required under State law.
Mirrors the strong risk-based capital requirements of State
law to ensure companies have adequate liquid assets.
Duplicates State valuation standards that ensure companies
have adequate reserves to pay consumers' claims when they come
due.
Mirrors the existing nonforfeiture requirements under State
law that guarantee all insureds receive minimum benefits under
their policies.
S. 2509 then goes further than many states by providing for:
A Division of Insurance Fraud
A Division of Consumer Affairs
An Office of the Ombudsman
Financial and market conduct examinations at least once
every 3 years
In addition, consumers who deal with national insurers established
pursuant to S. 2509 would enjoy significant added protections and
benefits over those afforded by the States. For example, consumers will
experience uniform and consistent protections nationwide and will enjoy
the same availability of products and services in all 50 States.
Consumers will also benefit from uniform rules regarding sales and
marketing practices of companies and agents, and for the first time
consumer issues of national importance will receive direct attention
from a Federal regulator.
Conclusion
Mr. Chairman and Members of the Committee, I again thank you for
recognizing the importance and urgency of insurance regulatory
modernization and placing this critical issue on the agenda of this
Committee. My company, the ACLI and its member companies look forward
to working with you in the months ahead to address in a timely,
appropriate and comprehensive manner the critical issue of modernizing
this country's insurance regulatory system.
______
PREPARED STATEMENT OF THOMAS MINKLER
President, Clark-Mortenson Agency, Inc.
July 11, 2006
Good afternoon Chairman Shelby, Ranking Member Sarbanes, and
Members of the Committee. My name is Tom Minkler, and I am pleased to
be here today on behalf of the Independent Insurance Agents and Brokers
of America (IIABA) and to provide our association's perspective on
insurance regulatory reform. I am currently Chairman of the IIABA
Government Affairs Committee. I am also President of Clark Mortenson, a
New Hampshire-based independent agency that offers a broad array of
insurance products to consumers and commercial clients in New England
and beyond.
IIABA is the Nation's oldest and largest trade association of
independent insurance agents and brokers, and we represent a network of
more than 300,000 agents, brokers, and employees nationwide. IIABA
represents small, medium, and large businesses that offer consumers a
choice of policies from a variety of insurance companies. Independent
agents and brokers offer a variety of insurance products--property,
casualty, health, employee benefit plans and retirement products.
Introduction
IIABA believes it is essential that all financial institutions be
subject to efficient regulatory oversight and that they be able to
bring new and more innovative products and services to market quickly
to respond to rapidly evolving consumer demands. It is clear that there
are inefficiencies existing today with insurance regulation, and there
is little doubt that the current State-based regulatory system should
be reformed and modernized. At the same time however, the current
system does have great strengths--particularly in the area of consumer
protection. State insurance regulators have done an excellent job of
ensuring that insurance consumers, both individuals and businesses,
receive the insurance coverage they need and that any claims they may
experience are paid. These and other aspects of the State system are
working well. The ``optional'' Federal charter concept proposed by some
would displace these well-running components of State regulation and,
in essence, ``throw the baby out with the bathwater.''
As we have for over 100 years, IIABA supports State regulation of
insurance--for all participants and for all activities in the
marketplace, and we oppose any form of Federal regulation--optional or
otherwise. Yet despite this historic and longstanding support for State
regulation, we are not confident that the State system will be able to
resolve its problems on its own. That is why we feel that there is a
vital legislative role for Congress to play in helping to reform the
State regulatory system; however, such an effort need not replace or
duplicate at the Federal level what is already in place at the State
level. IIABA supports targeted, Federal legislation along the lines of
the NARAB provisions of the Gramm-Leach-Bliley Act (GLBA) to improve
the State-based system.
To explain the rationale for this approach, I will first offer an
overview of both the positive and negative elements of the current
insurance regulatory system. I will then outline the reasons for our
strong opposition to an optional Federal charter; and specifically our
opposition to S. 2509, the National Insurance Act of 2006. I will then
describe the NARAB provisions of GLBA and provide a more complete
explanation of IIABA's support for targeted Federal legislation to
modernize the State-based regulatory system.
The Current State of Insurance Regulation
From the beginning of the insurance business in this country, it is
the States that have carried out the essential task of regulating the
insurance marketplace to protect consumers. The current State insurance
regulatory framework has its roots in the 19th century with New
Hampshire appointing the first insurance commissioner in 1851, and
insurance regulators' responsibilities have grown in scope and
complexity as the industry has evolved. When a Supreme Court decision
raised questions about the role of the authority of the States,
Congress quickly adopted the McCarran-Ferguson Act \1\ (McCarran-
Ferguson) in 1945. That act, which was reaffIrmed by Congress in 1999,
declared that States should regulate the business of insurance and that
the continued regulation of the insurance industry by the States was in
the public's best interest.
---------------------------------------------------------------------------
\1\ McCarran-Ferguson Act, ch. 20, 59 Stat. 33 (1945) (codified as
amended at 15 U.S.C. 1011-1015 (1994)).
---------------------------------------------------------------------------
GLBA expressly states that McCarran-Ferguson remains the law of the
United States and further states that no person shall engage in the
business of insurance in a State as principal or agent unless such
person is licensed as required by the appropriate insurance regulator
of such State. Title III also unequivocally provides that ``[t]he
insurance activities of any person (including a national bank
exercising its powers to act as agent . . . ) shall be functionally
regulated by the States,'' subject only to certain exceptions which are
intended to prevent a State from thereby frustrating the new
affiliation policy adopted in GLBA. These provisions collectively
ensured that State insurance regulators retained regulatory authority
over all insurance activities, including those conducted by financial
institutions and their insurance affiliates. These mandates were
intended in large part to draw the appropriate boundaries among the
financial regulators, boundaries that unfortunately continue to be
challenged.
Most observers agree that State regulation has worked effectively
to protect consumers, largely because State officials are positioned to
be responsive to the needs of the local marketplace and local
consumers. Unlike most other financial products, the purchaser of an
insurance policy will not be able to fully determine the value of the
product purchased until after a claim is presented--when it is too late
to decide that a different insurer or a different product might make a
better choice. As a result, insurance is a product with which consumers
have many issues and questions and if a problem arises they want to
resolve it quickly and efficiently with a local call. In 2002 State
insurance regulators handled approximately 4.2 million consumer
inquiries and complaints. Today, State insurance departments employ
approximately 13,000 individuals who draw on over a century-and-a-half
of regulatory experience to protect insurance consumers.
Unlike banking and securities, insurance policies are inextricably
bound to the separate legal systems of each State, and the policies
themselves are contracts written and interpreted under the laws of each
State. When property, casualty, and life claims arise, their legitimacy
and amounts must be determined according to individual State legal
codes. Consequently, the constitutions and statue books of every State
are thick with language laying out the rights and responsibilities of
insurers, agents, policyholders, and claimants. State courts have more
than 100 years of experience interpreting and applying these State laws
and judgments. The diversity of underlying State reparations laws,
varying consumer needs from one region to another, and differing public
expectations about the proper role of insurance regulation require
local officials ``on the beat.''
Protecting policyholders against excessive insurer insolvency risk
is one of the primary goals of insurance regulation. If insurers do not
remain solvent, they cannot meet their obligations to pay claims. State
insurance regulation gets high marks for the financial regulation of
insurance underwriters. State regulators protect policyholders'
interests by requiring insurers to meet certain financial standards and
to act prudently in managing their affairs. The States, through the
National Association of Insurance Commissioners (NAIC), have developed
an effective accreditation system for financial regulation that is
built on the concept of domiciliary deference (the State where the
insurer is domiciled takes the lead role). When insolvencies do occur,
a State safety net is employed: the State guaranty fund system. States
also supervise insurance sales and marketing practices and policy terms
and conditions to ensure that consumers are treated fairly when they
purchase products and file claims.
Despite its many benefits, State insurance regulation is not
without its share of problems. The shortcomings of State regulation of
insurance fall into two primary categories-it simply takes too long to
get a new insurance product to market, and there is unnecessary
duplicative regulatory oversight in the licensing and post-licensure
auditing process.
In many ways, the ``speed-to-market'' issue is the most pressing
and the most vexing from a consumer perspective because we all want
access to new and innovative products that respond to identified needs.
Today, insurance rates and policy forms are subject to some form of
regulatory review in nearly every State, and the manner in which rates
and forms are approved and otherwise regulated can differ dramatically
from State to State and from one insurance line to the next. Such
requirements are significant because they not only affect the products
and prices that can be implemented, but also the timing of product and
rate changes in today's competitive and dynamic marketplace. The
current system, which may involve seeking approval for a new product or
service in up to 55 different jurisdictions, is too often inefficient,
paper intensive, time-consuming, and inconsistent with the advance of
technology and regulatory reforms made in other industries. In order to
maximize consumer choice in terms of the range of products available to
them, changes and improvements are needed.
Similarly, insurers are required to be licensed in every State in
which they offer insurance products, and the regulators in those States
have an independent right to determine whether an insurer should be
licensed, to audit its market-conduct practices, to review mergers and
acquisitions, and to outline how the insurer should be governed. It is
difficult to discern how the great cost of this duplicative regulatory
oversight is justified. (For a discussion of the need for agent
licensing reform please see NARAB section.)
Federal Chartering
There is growing consensus among observers, including State and
Federal legislators, regulators, and the insurance marketplace--that
insurance regulation needs to be updated and modernized. There is
disagreement, however, about the most effective and appropriate way in
which to obtain needed reforms. Some support pursuing reforms in the
traditional manner, which is to seek legislative and regulatory
improvements on an ad hoc basis in the various State capitals. A second
approach, pursued by several international and large domestic
companies, calls for the unprecedented establishment of full-blown
Federal regulation of the insurance industry. This call for an optional
Federal charter concerns me deeply. Although the proposed optional
Federal charter regulation might correct certain deficiencies, the cost
is incredibly high. The new regulator would add to the overall
regulatory infrastructure--especially for independent insurance agents
and brokers selling on behalf of both State and federally regulated
insurers--and undermine sound aspects of the current State regulatory
regime.
The best characteristics of the current State system from the
consumer perspective would be lost if some insurers were able to escape
State regulation completely in favor of wholesale Federal regulation.
As insurance agents and brokers, we serve on the front lines and deal
with our customers on a face-to-face basis. Currently, when my
customers are having difficulties with claims or policies, it is very
easy for me to contact my local company representative or a local
official within the State insurance department to remedy any problems.
If insurance regulation is shifted to the Federal Government, I would
not be as effective in protecting my consumers, as I have serious
reservations that some Federal bureaucrat on a 1-800 number will be as
responsive to a consumer's needs as a local regulator. The Federal
regulatory model proposes to charge a distant (and likely highly
politicized) Federal regulator with implementation and enforcement.
Such a distant Federal regulator may be completely unable to respond to
insurance consumer claims concerns. As a consumer, personal or
business, there would be confusion as to who regulates their policy,
the Federal Government or the State insurance commissioner. I could
have a single client with several policies with one company that is
regulated at the Federal level, while at the same time having several
other policies which are regulated at the State level.
S. 2509, the National Insurance Act
On April 5, 2006, Senators John Sununu (R-NH) and Tim Johnson (D-
SD) introduced S. 2509, the National Insurance Act of 2006 (NIA), a
wide-reaching Federal regulatory insurance bill that creates an
optional Federal charter for both the life and pic marketplaces. The
bill would create a parallel, Federal system of regulation and
supervision for insurers and producers, ostensibly modeled on the
system for banks.
Insurers choosing to become federally regulated would be regulated
primarily by a new Federal Office of National Insurance, patterned
largely on the Office of the Comptroller of the Currency (OCC). The
office would be within the Treasury Department and be headed by a
Commissioner appointed by the President. The NIA would also establish a
National Insurance Guaranty Corporation (NIGC). National insurers would
be required to participate in the respective life or pic guaranty funds
in ``qualified'' States. For business written in ``non-qualified''
states, national insurers would be required to participate in the new
NIGC. The bill requires national property casualty insurers to file
nothing more than a list of standard policy forms annually with the
Commissioner, but does not call for any rate or form approval of pic
products, or even disclosure to the Commissioner of non-standard pic
forms.
The NIA authorizes the chartering and licensing of national
insurance agencies and the licensing of Federal insurance producers.
The NIA authorizes a national insurance agency to sell insurance for
any federally chartered or State licensed insurer and would permit
federally licensed producers to sell insurance on behalf of any insurer
nationwide, whether the insurer is federally licensed or state
licensed. The bill would also prevent a State insurance regulator from
restricting the ability of a State-licensed producer to sell insurance
on behalf of a national insurer in the State in which the producer is
licensed, but it does not expressly grant any regulator the power to
regulate relationships between State licensed producers and national
insurers.
Although the sponsors' statement suggests that they do not
contemplate a requirement for producers to obtain a Federal license to
deal with national insurers, it is unclear whether the Commissioner's
authority to require such producers to become federally licensed might
be inferred from any other provisions of the bill (or conversely,
whether the Commissioner might forbid national insurers from dealing
with producers who lack a Federal license). Despite the sponsors'
statement this lack of clarity could lead to duplicative Federal
licensing requirements. Even if the sponsors' intentions are realized
the ensuing regulatory gap could eventually lead to additional Federal
licensing requirements for those producers choosing to remain at the
State level.
The Big ``I'' believes that S. 2509 creates an environment in which
the State system could not survive. The sponsors of the NIA assert that
this bill will create a healthy regulatory competition that will force
State regulators to cooperate and be more receptive of the role of
market forces. NIA proponents point to the dual banking system as an
example of how this would work, but this is an incomplete analogy. In
the banking context, the FDIC stands as the ultimate guarantor and
protector of the public's trust in the entire banking system--both
State and Federal. NIA lacks the same foundation in which both a State
and Federal system can prosper. It creates an uneven playing field and
will mark the beginning of the end of the State insurance regulatory
system.
While it is alleged that the banking regulatory system is the model
for the NIA, the bill bears only superficial resemblance to the
national chartering of commercial banks. The so-called dual banking
system itself is in reality multi-headed and was developed not by
design but piece meal, beginning in the Civil War years; it would not
be replicated today if we had a fresh start. At any rate, the NIA omits
many of the most significant structural (and prudential) features of
the banking model--it creates an OCC without the FDIC and the Fed
playing their important supervisory roles. The NIA cherry-picks the
features from several of these Federal banking laws to come up with a
model which lacks the consumer protections found in anyone of them, and
which ignores the problems it would create for State insurers, guaranty
funds, and their citizens.
This proposal turns the dual-banking model, which proponents
profess to admire, on its head. It is as if the FDIC's guaranty
function was returned to State-managed individual deposit insurance
funds, and then these State funds were forced by Congress to insure
both national banks and State chartered banks, but without the States
having any supervisory authority over the national banks. The FDIC
guarantees the deposits of both State and national banks. However,
since the S&L and banking crises of the 1980s the FDIC has exercised
enhanced regulatory powers as a supervisory backstop in order to
protect the guaranty funds. Under the NIA, the State guaranty funds
paradoxically would be encouraged to play the FDIC's role as guarantors
of National Insurers but would be denied the auditing or solvency
supervision over these insurers which the FDIC enjoys over all insured
banks. This scheme is not only the reverse of the banking system, but
it imprudently separates the solvency guarantee function from the
financial risk supervision of the new National Insurers. Also lacking
in the discretionary supervision created by the NIA is the discipline
of ``prompt corrective action'' that is a necessary component to
protect the FDIC guaranty funds.
This could have disastrous implications for solvency regulation
which ensures that companies meet their obligations to consumers by
largely bifurcating this key regulatory function from guaranty fund
protection. The FDIC (or Federal Reserve) exercises significant
solvency supervisory authority over all insured institutions, whether
State or nationally chartered, that is, every bank has at least two
layers of regulation--the FDIC and its charter regulator. But under the
National Insurance Act, the entities made responsible for guaranties to
policyholders of National Insurers--i.e., the State guaranty funds in
``qualified States''--would be prohibited from exercising any oversight
equivalent to FDIC over these National Insurers. This would be
equivalent to asking the FDIC to extend deposit insurance to State
chartered banks while prohibiting the FDIC from supervising those banks
or setting risk-based premiums for that protection. In 130 years of
State-based insurance regulation, the industry has never suffered
anything like the S&L crisis of the 1980s or the rash of bank failures
in the late 1980s and early 1990s. How long the State guaranty fund
system will be able to survive the examination-blind participation of
National Insurers (which will also have less rate and market conduct
supervision than under current state law) is an open question. This
separation of solvency regulation and the guaranty function creates a
troubling gap in the regulatory scheme. The States are clearly left
holding the bag under this proposal, which could lead to dysfunction in
the insurance marketplace to the detriment of both consumers and
companies.
The banking system also does not have a distribution system
equivalent to insurance agents and brokers, so there is no analogy in
the banking context for what happens when dual charters are imposed on
this distribution system. Because of this, IIABA believes that the NIA
puts local independent insurance agents and brokers at risk of being
Federalized. The NIA tries to diminish the problem by allowing
producers to remain State-licensed and still be able to access both
State and National Insurers for their clients. However, nothing in the
Act explicitly prohibits the Commissioner of National Insurance, in his
broad rulemaking authority, from conditioning either insurer or
producer rules in ways that could effectively force producers to obtain
an additional Federal license or even give up the State licenses.
Additionally, the bill would allow Federal intervention in the form of
market conduct reviews and audits even on companies and agents that
choose to remain State licensed and regulated. All of this could lead
to either dual regulation, or Federalization, of insurance agents
throughout the country.
As mentioned earlier, the IIABA also believes that local insurance
regulation works better for consumers and the State-based system
ensures a level of responsiveness to both consumers and the agents who
represent them that could not be matched at the Federal level. The NIA
attempts to address this concern by providing for the establishment of
Federal regional offices. However, to match the local responsiveness of
State regulators a Federal office would have to be established in every
state, and in many cases, multiple offices within each State. This
would create an entirely new and completely redundant Federal
regulatory layer. Why duplicate the current State-based system when you
can build off its strengths and modernize it? There is no way out of
this predicament for the supporters of OFC--either you significantly
increase the size of the Federal Government to match state regulators'
responsiveness to consumers or rely upon a distant Federal regulator in
Washington, DC, to meet consumer needs--and they will fail to meet
those needs.
By eliminating or drastically limiting regulatory review of policy
language for the small commercial and personal lines property-casualty
markets the NIA would leave consumers unprotected. IIABA has
consistently supported the insurers' desire for greater pricing
flexibility as we believe rating freedom will benefit consumers in the
long run. However, we do not believe that complete freedom from
supervision of policy forms is appropriate. Form supervision ensures
that consumers receive the information necessary to understand the
value of their policies and the terms of their insurance coverage.
Nevertheless, the NIA, in a single 12 line section of the 290-page bill
(section 1214), would effectively eliminate supervision of policy form
content in the property-casualty sector, including personal lines and
small commercial lines. The NIA would potentially foreclose access to
transparent information necessary to place consumers in the position to
compare property-casualty products and for regulators to ensure that
products are fairly constructed, responsive to the public's needs, and
otherwise in the public interest. The IIABA supports reasonable form
review modernization such as consistent, limited time periods for State
regulators to review forms, uniform product standards where
appropriate, and less regulatory review for large commercial entities;
but the NIA goes way too far.
The NIA could also potentially leave hard to insure risks with
state insurers and cause a negative impact on State residual market
mechanisms and other State funds which ensure that high-risk
individuals and businesses obtain the insurance coverage they need.
This could create an unlevel playing field for State and federally
regulated insurers. Here's how: the NIA, in its broad preemption of all
State laws that would otherwise apply to National Insurers, makes a
limited exception for the various State laws creating assigned risk
plans, mandatory joint underwriting associations and other mandatory
residual market mechanisms. However, the NIA fails to make a straight-
forward requirement that National Insurers must participate and take
their share of the burden for these mechanisms. This language only
ambiguously provides that National Insurers (and National Agencies and
federally licensed producers) shall ``be subject to . . . applicable
State law relating to participation'' in such mechanisms. \2\ Even this
limited application is further qualified in the NIA by three more
``outs'' for National Insurers: (1) if the mechanism's rates fail to
cover the ``expected value of all future costs'' of policies; (2)
requires the National Insurers to use any particular rate, rating
element, price or form;'' or (3) is ``inconsistent with any provision
of the Act.'' These exemptions are not available to State licensed
insurers and as a practical matter may well mean National Insurers do
not participate. At the very least it will take years to resolve what
that question-begging ``laws relating to participation'' really means.
Nor is it clear who will decide that; other parts of the NIA suggest
that the new Office of National Insurance not the States may assert
prerogative to decide how these State laws apply. In the end, it is not
clear that States will have any ``club'' or a ``stick'' to compel
participation by National Insurers, given all of the other limitations
and preemptions on State powers in the bill.
---------------------------------------------------------------------------
\2\ This formulation, which seems to defer the question of whether
the National Insurer will actually be required to participate, is
crucial because, for example, the ``applicable State law relating to
participation'' would have been enacted before National Insurers
existed and on its face may give National Insurers arguments that they
are not caught in the net of such laws. It would have been more
reassuring to policyholders and agents if the Act had mandated their
participation as if they were State-licensed insurers in the same lines
of business.
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In short, as constructed in the NIA, a dual (``optional'') system
could likely de-populate the capital base which shoulders the voluntary
and involuntary pools and residual market mechanisms for difficult-to-
place risks. This could create adverse selection where these risks are
only covered by State mechanisms and those insurers remaining at the
State level, disadvantaging those State-charted insurers.
In the end, the IIABA feels that the NIA would lead to a needless
Federal bureaucracy and unnecessarily infringe on States' rights. At a
minimum, the States will be forced to provide a safety net for national
insurers through the Federal mandate allowing entry of these insurers
into State guaranty funds while being completely preempted from
monitoring those companies for solvency. Worse, most of the States'
tools for dealing with residual markets and market conduct problems
will be preempted in some way for national insurers. National chartered
insurers will have an unequal advantage by escaping State residual
market burdens, as explained above, and may also enjoy an implicit
Federal guarantee, no matter that they will also get equal coverage
from the State guaranty funds. Moreover, unlike the Gramm-Leach-Bliley
Act (GLBA) which effectively empowers the States through uniform
regulatory standards, the NIA fails to give the any assistance except
through the threat of regulatory competition. Thankfully there is
another way to reform insurance regulation to the benefit of consumers,
agents & brokers, and insurance companies: targeted Federal legislation
already proven successful in GLBA.
National Association of Registered Agents and Brokers (NARAB)
One of the most significant accomplishments of GLBA for the
insurance marketplace was the NARAB Subtitle dealing with producer
licensing reform. Prior to the enactment of GLBA, each State managed
its agent/broker licensing process in a distinct and independent
manner, and there was virtually no consistency or reciprocity among the
States. For agents and brokers, who increasingly operate in multiple
jurisdictions, the financial and paperwork burdens associated with
multi-State licensing compliance became overwhelming; and consumers
suffered as duplicative and redundant regulatory requirements made it
difficult for producers to be responsive to their needs. While problems
still remain, producer licensing has improved measurably since GLBA,
and these changes are a direct result of Congress' decision to address
these issues legislatively.
NARAB put the ball in the States' court by threatening the creation
of a new national, NASD-style licensing entity--known as the National
Association of Registered Agents and Brokers--if the States did not
satisfy the licensing reform objectives articulated by Congress. The
creation of NARAB was only averted when a majority of the States and
territories (interpreted to be 29 jurisdictions) achieved a specified
level of licensing reciprocity within a 3-year period.
The NARAB concept shows what the Federal Government and the States
can accomplish in partnership and how Congress can establish Federal
goals or standards to achieve much needed marketplace reforms. The NAIC
and State policymakers had been trying to move toward reciprocal and
uniform licensing for over a century, but little progress was made
until Congress acted legislatively. This first step to modernized
licensing requirements would not have occurred without targeted Federal
legislation, or what some are now calling ``Federal tools.''
IIABA's Support for Targeted Federal Reforms
IIABA supports State regulation of insurance but feels that the
system needs to be modernized to bring it into the 2151 century.
Despite our continued support for the State system, we question whether
the States will be able to resolve their problems on their own. For the
most part, State reforms must be made by statute, and State lawmakers
inevitably face practical and political hurdles and collective action
challenges in their pursuit of improvements on a national basis.
Therefore, IIABA believes that Congressional legislative action is
necessary to help reform the State regulatory system. We propose that
two overarching principles should guide any such efforts in this
regard. First, Congress should attempt to fix only those components of
the State system that are broken. Second, no actions should be taken
that in any way jeopardize the protection of the insurance consumer,
which is the fundamental objective of insurance regulation and of
paramount importance to the IIABA as our members represent consumers in
the insurance marketplace.
IIABA believes the best alternative for addressing the current
deficiencies in the State based regulatory system is a pragmatic,
middle-ground approach that utilizes Federal legislative tools to
foster a more uniform system and to streamline the regulatory oversight
process at the State level. By using targeted and limited Federal
legislation to overcome the structural impediments to reform at the
State level, we can improve rather than replace the current State based
system and in the process promote a more efficient and effective
regulatory framework. Rather than employ a one-size-fits-all regulatory
approach, a variety of legislative tools could be employed on an issue-
by-issue basis to take into account the realities of today's
increasingly global marketplace. There are only a handful of regulatory
areas where uniformity and consistency are imperative, and Congress has
the ability to address each of these core issues on a national basis.
This can be done in a single legislative act or through enactment of a
number of bills dealing with a particular aspect of insurance
regulation starting with those areas in most need of reform where
bipartisan consensus can be established.
Congress's work in this area need not jeopardize or undermine the
knowledge, skills, and experience that State regulators have developed
over decades. While IIABA believes such a proposal must modernize those
areas where existing requirements or procedures are outdated, it is
important to ensure that this is done without displacing the components
of the current system that work well. In this way, we can assure that
insurance regulation will continue to be grounded on the proven
expertise of State regulators at the local level.
Some optional Federal charter proponents argue that using targeted
Federal legislation to improve State regulation is more intrusive on
the State system than Federal regulation. We strongly disagree. The
proponents would have you believe that the optional Federal charter
proposals create a parallel universe of Federal chartered insurers but
leave in place the State chartered system in pristine condition. This
is not the case. In fact, to take one example discussed earlier, OFC
would, as a practical matter, force the State guaranty funds to accept
and backstop Federal chartered insurers--there is nothing ``optional''
about that. This would be an unprecedented intrusion on State solvency
regulation--the State system would be responsible for insolvent
insurers but could not regulate them to keep them from going insolvent.
In contrast, targeted Federal legislation addresses limited aspects of
State insurance regulation only where uniformity is truly necessary and
is the least intrusive option. Unlike ``optional'' Federal charter,
this approach does not threaten to remove a substantial portion of the
insurance industry from State supervision almost completely pre-empting
all application of State law.
Additionally, some OFC supporters have criticized the Federal tools
approach because of enforcement concerns. They argue that Federal
standards are only as good as the enforcement mechanism ensuring that
States adhere to those standards. The reality, however, is that court
enforcement of Federal preemption occurs regularly and would occur
under both the Federal tools approach and the optional Federal charter.
As long as the Federal standards are properly crafted and clear,
enforcement of Federal standards would not create more burdens for the
court system than litigation arising under the NIA. The only difference
is that, under the NIA, a Federal regulator would receive deference to
preempt State consumer protection laws and industry supporters would
receive an advantage in court.
Ironically, those same groups who have criticized the targeted
approach on both these grounds have recently embraced this approach in
legislation introduced in the House just last month: H.R. 5637, the
Nonadmitted Insurance and Reinsurance Reform Act of 2006. H.R. 5637
would create a uniform system of premium tax allocation and collection
for surplus lines; provide for regulatory deference to the
policyholder's home state for the nonadmitted/surplus market; adopt the
NAIC nonadmitted insurance model act on a national basis; create
streamlined access to the surplus market for sophisticated commercial
purchasers; and rely on the home State for reinsurance solvency
oversight while prohibiting extra-territorial application of State law.
The legislation has near-unanimous industry support and significant
bipartisan cosponsorship: nine Republicans and nine Democrats.
Conclusion
IIABA has long been a supporter of reforming the insurance
marketplace. IIABA worked closely with this Committee in support of
GLBA and 5 years ago IIABA's National Board of State Directors took a
formal policy position to support Federal legislation to modernize
State insurance regulation. While GLBA reaffIrmed State functional
regulation of insurance, some large insurers are now advocating for an
``optional'' Federal charter. State regulators and legislators, many
consumer groups, independent insurance agents and brokers, some life
insurance companies, and many property-casualty companies are strongly
opposed to an optional Federal charter. The State system has proven
that it best protects consumers and can be modernized to work
effectively and effIciently for the entire insurance marketplace with
the right legislative pressure from Congress.
Targeted, Federal legislation to improve the State-based system
presents Members with a pragmatic, middle-ground solution that is
achievable--something we can all work on together. Unlike the creation
of an entirely new regulatory structure, the enactment of targeted
Federal legislation to address certain, clearly identified problems
with State regulation is not a radical concept. The Senate Banking
Committee has already proven that this approach can work with the NARAB
provisions of GLBA. Congress can achieve tangible reform for insurance
consumers now while the debate concerning broader more radical reforms
continues. We encourage the Senate Banking Committee to take up this
targeted approach once again--it is the only solution that can bring
the marketplace together to achieve reform.
______
PREPARED STATEMENT OF JOSEPH J. BENEDUCCI
President and COO, Fireman's Fund Insurance Company
July 11, 2006
Good morning, Chairman Shelby, Ranking Member Sarbanes, and Members
of the Committee. My name is Joe Beneducci, and I am President and
Chief Operating Officer of Fireman's Fund Insurance Company (Fireman's
Fund). Fireman's Fund Insurance Company is a premier property and
casualty insurance company providing personal, commercial and specialty
insurance products nationwide. Fireman's Fund is a member of the
Allianz Group, one of the world's largest providers of insurance and
other financial services. Founded in 1863 with a mission to support
firefighters, Fireman's Fund proudly continues this mission today
through the Fireman's Fund Heritage program.
Through the Fireman's Fund Heritage program, Fireman's Fund
employees and its network of independent agents award grants and
provide volunteer support to local fire departments, national
firefighter organizations and non-profit fire and burn prevention
organizations. Since launching the program in 2004, the company has
awarded millions of dollars each year toward the purchase of equipment,
firefighter training and community education programs.
I appreciate the opportunity to be here today on behalf of
Fireman's Fund and our property-casualty insurance trade group, the
American Insurance Association (AIA), and its more than 400 members, to
discuss insurance regulation reform--a topic that is critically
important to Fireman's Fund and AIA, to the individuals and businesses
that we serve, and to the industry that we represent.
We applaud this committee's leadership in recognizing the need to
examine the insurance regulatory system. Reform is critical to
enhancing competition, fostering innovation, and providing a solid
foundation for underwriting the risks necessary to advance a strong
U.S. economy--all to the benefit of policyholders and the public at
large.
Today, we stand at a regulatory crossroads that may well determine
the future of the insurance marketplace in the 21st century, its
ability to respond effectively and efficiently to losses--catastrophic
or otherwise--and the appropriate role of government. With this context
in mind, I would like to start with three observations about the
property-casualty insurance market and the best way to regulate the
market:
1. Our economy is not static and continues to become more global
every day. Consumer needs continue to expand and grow in
conjunction with our economy. These evolutions have surpassed
the current insurance regulatory environment's effectiveness
and viability.
2. The current regulatory system inhibits innovation and actually
perpetuates commoditization.
3. A market-based optional Federal charter can benefit consumers by
reforming regulation and encouraging innovation, while
retaining the state regulatory system for companies that wish
to remain there.
Let me elaborate on these observations. There is little
disagreement that the current system is broken. Many proposals have
attempted to deal with the inadequacies of that system. Indeed,
insurance regulatory reform has been a topic of discussion for more
than a century. The National Association of Insurance Commissioners
(NAIC), the state regulators' trade association, first pledged to
reform the state insurance regulatory system and to achieve uniformity
during the Grant Administration in 1871. More recently, since enactment
of the Gramm-Leach-Bliley Act, the state regulators have renewed that
pledge, and have worked through the NAIC, other organizations, and
within their respective states, on a variety of state-based models,
laws, and regulations aimed at modernizing the regulatory structure.
Although they were and are sincere in their efforts, no one has come
close to delivering a modern system that empowers consumers and focuses
on real consumer protections. As a result, we remain within a
regulatory framework that, by its very nature, lacks uniformity and
does not allow insurers to keep pace with ever-changing insurance
consumer needs.
It is time for a new approach. We believe that an optional Federal
charter approach, which relies on a combination of free markets and a
tightly focused regulatory system, represents our best opportunity to
advance regulatory modernization that works for consumers, the
industry, and the economy.
Three basic principles undergird an optional Federal charter
approach:
Place primacy on the private market, not regulatory fiat,
creating an environment that empowers consumers as marketplace
actors;
Focus government regulation on those areas where government
oversight protects consumers in the marketplace, such as
financial integrity and market conduct, rather than on those
activities that distort the market, such as government price
controls and hostility to innovation; and
Establish uniform, consistent, and efficient regulation.
We believe it is very important for the committee to judge any
reform proposal against these principles to ensure that any legislation
that may be enacted does not create or add more unnecessary regulatory
burdens, does not inadvertently restrict the options that a vibrant
private market can offer to consumers, and adds to the efficiency and
strength of insurance regulation.
We strongly support the bi-partisan National Insurance Act of 2006
(S. 2509 or Act), introduced by Senators Sununu and Johnson April 5th,
and believe that the reforms contained in the Act reflect these
principles. The legislation provides insurers the option of being
nationally regulated, while at the same time preserving the current
state regulatory system for insurers that believe they can better serve
their policyholders within that framework. Importantly, it also would
preserve critical elements of the current state system, such as state
premium taxes, the state guaranty fund system, and certain local
prerogatives with respect to workers' compensation and motor vehicle
insurance coverage requirements.
The regulatory system articulated in S. 2509 is modeled after the
dual banking system--a system that has worked well for almost 150
years. For insurers, passage of S. 2509 would be an important next step
in this committee's work on financial services modernization, building
on the Gramm-Leach-Bliley Act.
Most fundamentally for property-casualty insurers that choose a
national charter, S. 2509 would ``normalize'' regulation and allow the
marketplace--and, by extension, consumers in that marketplace--to
dictate the full range of price and product choices, rather than
empowering the government to do so through price and product controls.
In implementing a market-driven approach to the regulation of insurance
prices, S. 2509 would subject insurer pricing activities to the Federal
antitrust laws to the extent those activities are not regulated by
state law.
Although opponents may try to characterize elimination of
government rate and policy form review as ``deregulation,'' it is not.
By de-emphasizing those aspects of regulation that tend to politicize
insurance and weaken the private market, S. 2509 establishes stronger,
re-focused regulation in those areas where regulation actually is
necessary to protect consumers as they navigate the marketplace and
when they turn to financially sound insurers for payment of covered
claims. Under this modernized system, the Federal Government will not
be a market participant, nor will it exercise business judgment. Above
all, enactment of S. 2509 will assure that the insurance safety net
remains strong despite the ever-changing nature of risk.
The Critical Need for Insurance Regulatory Reform
The current state insurance regulatory system grew out of the
McCarran-Ferguson Act, which was enacted in 1945 largely to deal with
Federal antitrust and state tax concerns arising from a 1944 U.S.
Supreme Court determination that insurance was a product in interstate
commerce and, therefore, subject to Federal authority.
McCarran is a power-sharing statute that reflects Congress'
considered judgment to delegate--not abdicate--its authority over
insurance to states that regulate the business of insurance themselves.
In doing so, McCarran recognizes that Congress has the right to
intervene in insurance regulatory matters by enacting specific Federal
laws and provides insurers with an antitrust regime that is based on
the insurance regulatory role being entrusted to the states. Within
this statutory structure, it narrowly protects insurers from
application of the Federal antitrust laws to the extent that the
business of insurance is regulated by the states.
Under McCarran, the states have put in place sweeping regulatory
regimes that dictate what products insurers can provide, how much they
can charge for these products, and how they conduct even the most
routine aspects of their business. The result has been a regulatory
scheme that: 1) is focused on government intrusion in the market,
particularly in the area of insurance rate and form oversight; and, 2)
reflects assumptions about the insurance industry, insurance companies,
and insurance consumers that, while perhaps true in 1945, are far from
accurate today.
In this connection, the current system relies on outdated,
discredited government price and product controls, which are
rationalized by regulators in the name of ``protecting consumers,'' but
which, in truth, serve merely to interfere with the proper functioning
of the private market--to the detriment of consumers. These controls
are imposed in virtually every state, often in different and
inconsistent ways. Even within each jurisdiction, there are often
differing systems for different lines of business, making the process
incredibly inefficient and ultimately unresponsive to consumer needs. A
limited survey by AIA of state rate and form requirements found
hundreds that dictate how rates are to be filed and reviewed, and that
relate to the filing and review of new products. This cumbersome
apparatus simply is not viable in a society that relies on instant
availability to consumers of most other products and services. Indeed,
the property-casualty insurance industry remains the only U.S.
financial services industry that still labors under a pervasive system
of government price and product controls.
A Better Regulatory Alternative
Systemic insurance regulatory reform is urgently needed for the
good of insurance consumers and for the health of the insurance
marketplace. We need a new regulatory alternative based not on
regulatory red tape and government decisions concerning the
``appropriate'' rate for an insurer to charge or the ``appropriate''
insurance policy to offer to consumers, but on a rational reallocation
of regulatory resources to focus on the most critical aspects of the
insurance safety net. Additionally, the new system must replace the
current patchwork of conflicting state requirements with national
uniformity for insurers operating at the multi-State or national level.
S. 2509 embodies all of the elements of this paradigm and represents
the best approach for Congress to move forward in advancing reform.
I would like to discuss some of these concepts in more detail.
Free Market Principles Allow Competition To Flourish
The entrenched state focus on government price and product controls
discourages innovation and competition, ultimately denying consumer
choice. The current regulatory system concentrates on the wrong
principles. Ultimately, it is economically unwise for government to
repress prices, since this masks market stresses and problems. Over a
period of time, this can lead to a market crisis, forcing sizable
subsidized residual markets and market withdrawals that exacerbate the
problem. In this way, the use and administration of government price
and product controls limits flexibility for both insurers and
consumers. It also leads to a stark choice for companies as to whether
to continue writing insurance at all, rather than providing the market
freedom and range of options necessary for insurers to write as much
coverage as possible.
Recent attempts at reforming state rate and policy form regulation
have focused on changing the type of review (e.g., from ``prior
approval'' to ``file and use''), implementing so-called ``flex rating''
bands (which allow insurers to depart upwards or downwards from filed
rates by a certain percentage--typically from 5 percent to 12 percent--
without regulatory approval), and adopting exemptions for commercial
policyholders that meet identified threshold criteria. While these
measures may have been designed to provide modest improvement, they do
not address the fundamental problem with the state regulatory approach.
First, altering the type of review required does not change the
fact that pre-market intervention should not be occurring in the first
place. It also does not address the concern that even the most liberal
rate and form review system can be administered in a way that is just
as onerous as the most restrictive system.
Second, the creation of rating flex bands simply imposes government
restrictions on private markets, and, contrary to their name, limit the
flexibility of consumers and insurers outside the band.
Third, based on experience with so-called ``exempt commercial
policyholder'' laws in the various states, setting threshold criteria
that will allow certain policyholders to qualify for the exemption
results in a ``winners and losers'' contest that is antithetical to the
concept of market-based pricing. All policyholders, regardless of size
or sophistication or line of insurance, should be entitled to purchase
insurance from insurers operating in a free market environment.
Forcing private businesses to submit their products and prices to a
government official for review and approval is anathema to the free
market environment that forms the backbone of the U.S. economy. Price
and product controls are historical artifacts that have turned
insurance prices and products into political pawns that are used to
artificially suppress the real cost of risk and to delay products from
being offered to consumers, or, worse, to keep product options from
consumers altogether. This is a dangerous form of government
intervention in private markets--one that is at odds with our free
market economy--which distorts the real costs of assuming risk and
discourages prudent risk management behavior by individuals and
businesses. Consumer empowerment in the marketplace should not be
replaced by needless regulatory control.
Uniformity Is Critical in Serving the Needs of a National and
International Economy
The current regulatory system is a jumble of individual state
statutory and administrative requirements. As previously noted, state
insurance codes have spawned hundreds of different rate and form
regulatory requirements for the various lines of insurance, along with
many more disparate market conduct, claims, and other requirements.
Companies wishing to launch a national product cannot do so until both
the price and product have been separately reviewed or approved in
every state; this can take years to accomplish. Moreover, the need for
insurers to meet differing regulatory demands in each jurisdiction
increases compliance costs, discourages innovation, and makes it
difficult for insurers to service customers doing business in more than
one state.
Insurance Regulation Should Focus on Solvency and Protection of the
Insurance Safety Net
Certainty and security are critically important principles for
insurance consumers. A regulatory system ought to focus on ensuring
that a company is solvent and able to pay claims to instill confidence
among insurance consumers. The property-casualty insurance industry
stands out as one of the most heavily regulated sectors of the U.S.
economy. However, this is not just a question of regulatory degree, but
additionally, of misguided regulation that rewards inefficient market
behavior, subsidizes high risks, and masks underlying problems that
lead to rising insurance costs. Resources are misdirected to ``front-
end'' price and product regulation, while core functions like financial
solvency have taken a back seat. This is both unfortunate and
dangerous, because less focus on solvency means less security and less
confidence by consumers that covered claims will be paid. Financially
sound insurers are in everyone's best interest, because they are the
heart of a healthy, vibrant market.
The Market-Based Optional Federal Charter Approach in S. 2509
We believe that a market-based optional Federal charter approach
provides the best route to insurance regulatory reform. This is a
regulatory system that has worked well in the banking industry for well
over a century, and will modernize the insurance industry if adopted.
It does not regulate prices charged and products offered by market
participants, because it recognizes that governments, acting
unilaterally in these areas, cannot be effective surrogates for the
free market. Rather, it places regulatory emphasis on ensuring that
companies are financially sound and that consumers are protected from
misconduct by market participants. These are core regulatory functions
for most industries, and insurance is no exception. In addition, the
optional Federal charter would bring needed uniformity for those
choosing a national license, while respecting the decisions of others
to remain under state regulatory authority. Fireman's Fund and AIA
support the re-direction of regulation that an optional Federal charter
promises, and look forward to both defending and advocating this
regulatory framework for property-casualty insurers.
The structure of S. 2509 creates this modernized regulatory
paradigm. Insurers opting for a national charter are regulated by the
Office of National Insurance, housed in the Department of Treasury, led
by a National Insurance Commissioner appointed by the President with
the advice and consent of the Senate.
The Act requires creation of six regional offices, with discretion
given to the Federal regulator to authorize as many additional local
offices as necessary. Those opting in to the Federal system directly
fund Federal regulation, in addition to continuing to pay state premium
taxes. The Office of National Insurance is the single focal point of
regulation for nationally chartered insurers, and that office applies
the standards set forth in the Act or promulgated by regulation,
addresses complaints concerning nationally chartered entities, and
enforces the requirements of the Act. Thus, the Act supplies the
framework for uniformity, consistency, and clarity of regulation that
the state system has failed to create.
The Act also effectuates a fundamental shift in regulatory
application. Under this approach, the regulatory system for national
insurers starts from the premise that governments should not stifle the
growth of private markets through rate suppression, product denial, or
other intervention, but should allow private markets to flourish, with
insurers and consumers agreeing on the sharing of risk of loss.
In exchange for relief from rate regulation, the Act applies
Federal antitrust laws to insurer pricing activities that are no longer
regulated. AIA members, including Fireman's Fund, are willing to take
the risks inherent in this approach on the antitrust side because we so
strongly believe that a market without government rate and price
controls is critical to being able to serve customers in the years
ahead.
While S. 2509 relies on markets to determine the price of insurance
and trades pricing freedom for application of the Federal antitrust
laws, it does not abandon aspects of the state system that are
necessary. In this respect, the Act recognizes that there always will
be a need for markets of last resort--so-called ``residual markets''--
and that national insurers must participate in those markets when
participation is mandated by state law. Consistent with free market
principles, however, insurance prices in the subsidized residual market
must be adequate to prevent ``backdoor'' competition with the private
market. In addition, the Act requires national insurer participation in
state-mandated statistical and advisory organizations, and workers'
compensation administrative mechanisms--again, with the proviso that
states cannot use mandatory participation to re-impose rate and form
regulation over national insurers. This careful balancing of market-
based pricing and participation by national insurers in the data
collection mechanisms that support the state structure makes S. 2509 an
ideal model for rate regulatory modernization.
As previously noted, the Act also provides for relief from
government product controls, particularly from the required use of any
particular policy form, but it includes Federal supervision of policies
used by national insurers in the marketplace. First, the Act requires
national property-casualty insurers to submit annually a list of all
standard policy forms they use to the Office of National Insurance.
Second, under the Act, national insurers must maintain copies of all of
the policy forms they use for inspection by the Federal regulator. The
combination of these two requirements ensures that Federal regulators
will be aware of the policy forms that are being offered in the market,
but that they will not be able to interpose Byzantine review and
approval standards. These standards in many states have led to delays
of months--and sometimes years--in the roll-out of insurance policy
forms intended to be used nationwide.
The Act also includes special provisions that require national
insurers to adhere to compulsory coverage standards for motor vehicle
and workers' compensation insurance. Even here, though, states may not
use these special provisions to re-impose rate regulation on national
insurers.
We believe that the market-driven approach for insurance rates and
policy forms outlined in S. 2509 is key to cultivating and maintaining
a healthy insurance environment that works for both business and
individual insurance consumers. Indeed, market regulation of insurance
rates and policy forms empowers consumers, because consumer demands
will drive the range of product and pricing options available to them.
This stands in sharp contrast to the current regulatory approach, which
empowers regulators and often makes them the principal market
participant. This, in turn, leads to property-casualty insurance
commoditization, as regulators are not well-positioned to understand
the evolving insurance needs of individuals and businesses. For these
reasons, we support the approach taken by S. 2509, which demonstrates
faith in consumers in the marketplace.
Just as S. 2509 allows private markets to thrive through
elimination of government price and product controls, it regulates all
other aspects of the business of insurance. First, the Act provides
broad authority to the Federal regulator to protect consumers against
misconduct by nationally chartered entities in the market. The Act's
market conduct provisions cover all aspects of insurance operations,
and contemplate rulemaking to provide the more detailed parameters of
that authority.
Second, the Act provides strong Federal oversight of national
insurers' financial condition in order to ensure that companies are
financially sound and able to pay covered claims. It also includes
accounting, auditing, actuarial, investment, and risk-based capital
standards. For financial solvency, the Act defers to the state guaranty
fund system, requiring national insurer participation in that system,
but at the same establishing ``qualification'' standards that the state
guaranty funds must meet to avoid triggering the national insurance
guaranty corporation established by the Act. In these areas, the Act
generally follows uniform standards established by NAIC models.
For insurance consumers, the Act establishes both a Federal
ombudsman to serve as a liaison between the Federal regulator and those
affected by the regulator's actions, as well as consumer affairs and
insurance fraud divisions to provide strong consumer service and
protection.
Over the long-term, it is our view that a Federal regulatory
option, structured in the way set forth in S. 2509, will modernize
regulation of the industry, empowering consumers and emphasizing market
conduct and financial solvency oversight in the process. In creating
these needed systemic reforms, the Act will consolidate regulation into
a single uniform point of enforcement for those that choose the Federal
charter, without forcing change for those choosing to stay in the state
system.
The Critical Need To Move Forward
Insurance regulatory reform is not an academic exercise; it is a
critical imperative that will determine the long-term viability of one
of our nation's most vital economic sectors, and help define how our
economy manages risk in the future. The choice is between the existing
state regulatory bureaucracy or a new approach that relies on the
hallmarks of the free market and individual choice and recognizes the
evolution of our customers' needs in our global economy and insurers'
ability to support those needs in a modernized regulatory environment.
Without a doubt, everyone here supports a healthy U.S. insurance
marketplace that serves and empowers American consumers. We appreciate
that creation of such a modern, dynamic market is not without
challenges, and that change can be unsettling for some. However, we
believe that creating an optional Federal charter is imperative to meet
the needs of all types of customers and insurers. There is no
compelling reason not to fully explore and debate this proposal.
Fireman's Fund and AIA look forward to defending and advocating an
optional Federal charter that truly would serve consumers by fostering
efficiency and innovation. We strongly support S. 2509 and thank
Senators Sununu and Johnson for putting forth this thoughtful
legislation.
______
PREPARED STATEMENT OF JAXON WHITE
Chairman, President, and CEO, Medmarc Insurance Group
July 11, 2006
Chairman Shelby, and other Members of the Committee, I am Jaxon
White, Chairman, President, and Chief Executive Officer of the Medmarc
Insurance Group. I am a member of the Board of Governors of the
Property Casualty Insurers Association of America (``PCI'') and I am
here today to present the association's views regarding regulation and
competition in the insurance industry. I appreciate the opportunity to
appear before the committee.
PCI has been a supporter of the state regulatory system. We remain
hopeful that the current system can be reformed to address the many
problems our members encounter. However, since the current Federal
discussion and consideration of insurance regulatory reform began in
2002, we have not seen substantive, meaningful reform in state
regulation. We still would like to see such change and stand ready to
work with the states to accomplish reform. It just has not happened.
PCI Reflects the Views of the Broad Industry
The mission of PCI is to foster a healthy, well regulated, and
competitive insurance marketplace that provides both personal and
commercial insurance consumers the opportunity to select the best
possible products at the best possible prices from a variety of
competitors. PCI provides a responsible and effective voice on public
policy questions affecting property/casualty insurers and the millions
of consumers we serve.
PCI is uniquely positioned to speak to issues concerning insurance
regulation. PCI members write nearly 40 percent of all the property/
casualty insurance written in the United States, including 49.5 percent
of the nation's auto insurance, 38.3 percent of the homeowners
policies, 31.5 percent of the business insurance policies, and 40.2
percent of the private workers' compensation market.
The insurance industry is very complex, given the myriad of
products and the ways in which insurance products reach the consumer.
PCI reflects that variety in its membership and, as such, is well
suited to say if a given proposal addresses the full complexity and
needs of the industry.
PCI members are stock, mutual, reciprocal and lloyd's in form. Our
members write on an admitted and surplus lines basis and as risk
retention groups. Products are distributed through: agents, captive,
employees, independent agents, brokers, surplus lines brokers, managing
general agents, and directly to the consumer via telephone, Internet,
and company direct mail. Our members are national, regional, single
state in their company scope, and range in size from the very small to
some of the largest and most well-known insurers in the country. We
represent multi-line writers, personal lines-only writers, commercial
lines-only writers, specialty writers and monoline writers. PCI members
write all lines of business in every State.
For the last 21 years, I have served as chief executive officer of
the Medmarc Insurance Group. Our core products are products liability
and general liability, targeted primarily to manufacturers and
distributors of medical devices and life science products.
Interestingly, I serve an industry that is itself federally regulated.
We also write lawyers' professional liability in 24 states and the
District of Columbia.
While my personal experience and that of Medmarc is not as broad-
based as that of PCI, our experience crosses a number of disciplines in
the insurance world. Our group consists of three property casualty
writers and an insurance agency. The parent company is mutual in form.
Its three subsidiaries are all stock companies, domiciled in different
states.
Many would consider Medmarc to be a small organization, but not
insignificant in size. Our 2005 direct premiums were over $100 million,
with $66 million in net premium. We write on both an admitted and a
surplus lines basis in all states and the District of Columbia. We are
subject to myriad filing and reporting requirements for our admitted
companies in 51 jurisdictions to maintain our ability to do business
and to bring our products to market. Financial reporting to regulators
is done on a quarterly and annual basis and statistical, actuarial and
other reports are filed routinely throughout the year. This translates
into hundreds of filings made for each company, every year. There are
also reporting requirements for our surplus lines company and, contrary
to what some might say, surplus lines is not free from regulation.
Consumers
Insurance regulation affects more than just the insurers who
operate under these rules. Consumers are directly affected by the
regulatory environment, since it controls the products they receive,
the financial solidity of their insurer, and, in many cases, the price
they pay. Overzealous or unnecessary regulation harms consumers when it
restricts competition and limits consumer choice. Others with a stake
in the system include lenders desiring a degree of protection for
assets, investors, and the community as a whole. Most important, the
regulatory environment can have a significant impact on the states' and
the nation's economy, since the financial protection afforded by
insurance minimizes and manages risk and encourages businesses to
expand and create new jobs.
PCI Members Support Competitive Markets for Consumers and a Regulatory
Focus on Solvency Protection
Despite the diversity of PCI's membership, all our members share
the common vision that consumers are best served when markets are free,
fair, competitive, and fairly regulated. Consumers in those states
where regulation fosters a healthy competitive environment have the
greatest number of product choices and the most competitors offering
those choices. They benefit as well by having a system that allows
products to respond swiftly to changes in their needs. PCI also
believes market-oriented regulation frees up regulators and regulatory
resources to focus on the most important regulatory function: ensuring
that the real promise of insurance--that the insurer will be there to
pay a claim--is always met. In other words, to focus on strong, sound
solvency regulation.
The Regulatory System Imposes Needless Opportunity Cost and Limits
Consumer Choice
One of the inherent problems with the current system is the
continued inconsistency of the regulatory environment from State-to-
State. State regulation remains a patchwork quilt of inconsistent rules
and regulations, making it difficult for companies to operate in some
markets, increasing the cost of regulatory compliance, and reducing the
amount of choice, both in terms of companies and products, that
consumers have.
To the extent consumers cannot obtain products they need, they bear
an important opportunity cost as needs for financial protection remain
unmet or are addressed in less efficient ways.
Insurers, too, bear an important opportunity cost when unnecessary
regulation prevents a product from being brought to market quickly and
efficiently. Regulation reform that eliminates such obstacles avoids
such important opportunity costs and benefits consumers. Capital is
limited and companies in any industry will consider entering markets
that provide them the best opportunity to earn a fair return on
investment. The regulatory environment has a significant impact on
these business decisions and in the last 4 years, we regret to say that
we have not seen that environment get significantly better.
The concept of opportunity cost is clear when comparing the
situation where similar products are offered by the banking industry
and insurance industry. The concept of speed to market rests on the
idea that banks are able to quickly offer products that are responsive
to an expressed market need, usually without prior product approval by
a regulator. A competing insurer, offering a similar and competitive
product, is at a disadvantage in having to wait for state approvals in
order to introduce the insurer's new, similar product. The same
situation exists even without comparison to the banking industry when
an insurer is prevented from gaining approval of product improvements,
modifications or new product offerings in an efficient and timely
manner. Market opportunities do not last forever and the regulatory
approval process can and does significantly stifle the introduction of
new products and services. Consumers pay these costs in the form of
reduced competition, higher prices and fewer products from which to
choose.
Consumers Ultimately Bear Unnecessary Costs
Consumers are also hurt by the fact that they inevitably bear the
burden of the systemic costs of needless regulation. As is true in any
market economy, the costs of producing a product or service are borne
by the consumer, including the cost of regulation. In our view,
consumers should only bear the cost of necessary regulation, not
needless regulation. Much of the regulatory structure today is
needless, given the highly competitive nature of our industry. Over the
past 4 years, we have certainly seen efforts by the states at making
incremental improvements in the system, but these have been more of
form than of substance.
As Congress considers the insurance regulatory system and various
proposals for reform, PCI recommends that any proposal be examined in
light of the costs that would be passed on to the consumer. We urge you
not to forget that some reform proposals may add significant costs of
regulatory overlap or dual regulation onto consumers. Or a system might
place an additional burden of regulation by the courts, adding a cost
of litigation to the true cost of regulation. Or, as is currently the
case, a proposal may impose costs arising from a lack of uniformity
across the states or create regulatory diversions that make the
regulatory system unable to focus on the most critical element of
insurance regulation, solvency.
In summary, PCI believes that consumers want good, responsive
products at a reasonable price offered by companies who pay claims when
they are owed. Restrictive or obsolete regulations which erect barriers
to entry, impose inappropriate costs, or limit product availability and
innovation only burden the system and harm consumers. An effective
regulatory system should result in greater choice, convenience and
innovation for the consumer.
Competition Should Be the Cornerstone of Reform
The cornerstone of any regulatory modernization effort must be
modernization of rate and form filing requirements. While we have seen
some improvements in some states in the last few years, we do not
believe these efforts have gone nearly far enough or resulted in nearly
enough change on an aggregate basis.
This is an issue I've dealt with firsthand. My own company, as well
as all other PCI members, finds the current system too complex, to
expensive, and too uncertain. We never know when we will be able to
bring a new product ``on-line''--or even if a state regulator will
allow us to do so. This limits our ability to adapt to changing market
conditions and restricts our ability to compete.
As we developed our company, we found that our normal profit
planning became very difficult as did our ability to do business in a
state. To us, rate and form requirements in the states where we wanted
to do business were so bad that we made the business decision to
purchase a surplus lines insurer, free of significant elements of rate
and form regulation, rather than attempt to run the gauntlets of state
approvals. This was a solution that worked for us, but the nature of
the business for other insurers may leave them unable to adopt such a
plan due to their unique circumstances.
What Has Happened in the Last 4 Years?
The most recent round of discussions regarding state regulatory
reform began about 4 years ago. Since then, there have been numerous
hearings, both in the House and Senate. PCI testified on March 31, 2004
before the House Financial Services Capital Markets, Insurance and
Government Sponsored Enterprises Subcommittee stating:
Meaningful reforms that reflect the way business is conducted
and are adaptable to the changing business environment must be
adopted. Current regulatory systems frequently cause delays in
new products offerings for consumers and impose needless, and
costly, rate approval processes. In some states, the company
and agent licensing processes are also lengthy and cumbersome.
Conversely, in other states, the market withdrawal process is
bureaucratic and punitive in nature. Financial and market
conduct examinations are often disjointed and inefficient, and
suffer from a lack of coordination. These areas of state
regulation must be improved and simplified and greater
uniformity must be achieved.
PCI members are disappointed by the poor track record of the states
toward those meaningful reforms in the last 4 years. Some procedural
progress has been seen, but even these procedural changes place new
burdens on insurers in states that otherwise would not impose the
burden, but for the desire for uniformity of procedure. Stated another
way, we have seen some change in form, not always clearly for the
better, and little change in substance.
Despite the efforts of a number of states to modify the rate and
form filing requirements toward a more open market, on an aggregate
basis, the regulatory landscape in the states remains virtually
unchanged for the last 4 years.
There is no uniformity across state lines as states still differ
significantly on how property/casualty rates and forms are regulated.
Even within a state, different lines of business continue to be
regulated differently. Insurers still must submit personal lines policy
forms for review and approval in over 40 States before the forms can be
used. For personal lines rates, insurers can submit rates on a file and
use basis in approximately thirty states, while the remaining number of
states are primarily prior approval. Implementation of ``file and use''
may sound like an improvement, but there are significant lead time
requirements with file and use that an insurer must adhere to prior to
releasing a product into the market. Also, many insurers feel it safer
to treat ``file and use'' as de facto prior approval because of
potential retroactive disapprovals and requirement that the insurer
must disgorge any profits made during the period.
Approval remains the determining element in all filing methods,
whether prior approval, file and use or use and file. The result is
political manipulation ranging from outright disapproval to disapproval
of rating plans, rating factors, discounts and territorial rating.
Rates no longer reflect true risk of loss, but rather a system of
subsidies, unjustly higher rates for some, and a stifling of
competition. The consumer continues to lose.
There is less restrictive regulation on the commercial lines side,
but given the multi-State nature and the commercial savvy of those
insureds, much more streamlining is needed, but has not happened.
Most states allow commercial policy forms to be submitted under
file and use rules. However, commercial insurers have the same concern
with ``file and use'' regarding retroactive disapprovals. ``Speed to
market'' does not really exist, as companies must wait to receive
approvals before using their products. Many commercial risks operate in
a multi-State environment with needless regulatory complexity for both
the business consumer and the insurer. To meet the needs of multi-State
commercial risks, insurers need to secure approval of a new or revised
commercial policy form and the corresponding rates in the majority of
the states before the product can be implemented for the multi-State
insured.
It is true that some states have continued to pursue a bona fide
regulatory modernization agenda, but those are few in number and
limited in scope. For example, South Carolina enacted legislation as
follows:
In 1999, a flex rating system for auto was implemented.
In 2000, South Carolina eliminated prior approval rate
requirements for commercial policies with a threshold of
$50,000 in premium or more. In 2002, the premium threshold was
removed.
In 2004, legislation was enacted implementing flex-rating
for homeowners.
Other states have taken some steps toward improving the regulatory
review process. For example, Maryland in 2000 implemented a rate filing
exemption for the large commercial risk with a premium threshold of
$75,000. In 2006, the premium threshold was reduced to $25,000. Other
states have similarly implemented or expanded exemptions for large
commercial risks. But not all states have exemptions for large
commercial risks and thresholds for determining the exemption vary
greatly by state. It still is difficult if not impossible for an
insurer to place, with certainty of compliance, a multi-State exempt
risk.
As to some particular states, we have seen positive auto reforms in
New Jersey and some progress in flex rating in Connecticut, but flex
rating is an incremental progress. However, in the Massachusetts auto
insurance market, perhaps the nation's most restrictive regulatory
environment, the only progress has been discussion and bill
introduction to reform the auto market. It remains a state in which the
number of auto insurers doing business is significantly lower than is
typical in the states throughout the nation. At this point, we have to
say that we hold slim hopes of passage of meaningful auto insurance
reform in the near term.
The NAIC and the states joining the compact are to be commended for
progress regarding the life insurance compact. However, progress on
property & casualty rate and form filing requirements has been limited
to the implementation of State Filing Review Requirements Checklists
and the System for Electronic Rate and Form Filing (SERFF). But SERFF
is procedural, not substantive, as to a company's ability to use a rate
or a form. The majority of the states are accepting SERFF filings for
property/casualty but not all lines in all states. Per the SERFF web
site, only 302 filings were processed via SERFF in 1998. In 2005,
183,362 SERFF filings were processed. Even with SERFF, Florida has
developed its own electronic filing system in order to meet its own
internal processing needs.
SERFF is only an electronic delivery system for filings, addressing
process, but it does not significantly assist with true speed to market
as the actual approval process remains. The implementation of the
checklists combined with the SERFF tool do nothing to address the
underlying law or the cultural practices and desk drawer rules that
some state insurance departments have institutionalized. These tools do
not address the varying requirements among states nor do they address
variances among state analysts in the same insurance department.
Promulgation of filing checklists is a procedural improvement. As
of July 1, 2006, all states with the exception of five have developed
and published state filing requirements checklists for property and
casualty lines of business. That is all they are, however, checklists
regarding filing.
In the area of company licensing, my company chose to buy an
admitted carrier as we did not believe in 1995 that we could be
licensed in all states within 5 years. I am not certain that my opinion
would change today. The NAIC has made procedural progress with the
Uniform Certificate of Authority Application (UCAA) to cut the red tape
of applying for a certificate. However, in doing so, the UCAA, in order
to accommodate each state's unique requirements, made the requirements
additive of numerous differing state requirements, or the ``highest
common denominator'' by including many individual state requirements so
that the application contains many items that many states do not use or
consider in the application process. This is not better regulation,
only an amalgam of each state's requirements. On the substantive side,
there were provisions encouraging states to respond by a certain date
to applications. In practice that is not always followed so that an
insurer cannot plan a date by which it can reasonably expect to be able
to do business in a given state. Finally, some states continue their
unique requirements. I'm not sure if this is reflective of better state
regulation or not, but one PCI member indicated that, for their company
to implement a multi-State corporate name change, it took 1 year. In
and of itself, an improvement, but given that this is only a change of
name, much too long a time to implement so simple a change.
It is necessary here to talk about ``desk drawer'' rules. These are
regulatory rules that have not been codified or formally adopted
through regulatory proceedings. Insurance companies are not in a
position to know what the desk drawer standards are in advance, and
they are used by states with applications for a license, in rate or
form filings or in market conduct examinations. Companies are not kept
abreast of revisions, should they occur as these rules are unwritten.
In fact, the authority for these standards is often lacking or
questionable. Applications of these unpublished and unpredictable
procedural requirements often serve as barriers to market entry and
thwart the efforts of insurers to offer new products and services for
consumers.
As to producer licensing, the NAIC and the states did move quickly
toward reciprocity to avoid NARAB, but this was due to the pressure
from the Gramm Leach Bliley Act. There has been some streamlining of
procedures regarding licensing including a uniform application.
However, as a practical example, procedures for handling something as
simple as a producer's change of address have not yet come ``on line.''
Nor has there been real movement toward uniformity of licensing.
In the area of market conduct, as a businessman, one thing I look
for is certainty and predictability of outcomes. We can adapt to
requirements, hopefully fair, that are set before us. But in the area
of market conduct examinations, we have not seen a movement toward
consistency and clarity. Desk drawer rules are often used to critique a
company. Examinations are often neither targeted at insurers with
evidence of market conduct problems, nor are they always coordinated to
minimize expense to the company. One aspect of market conduct
examination has actually gotten worse. PCI has seen a rise in the use
of ``contract examiners'' who bring to the process an inherent conflict
of interest in that it is in their interest to extend examinations upon
the insurers for whose examination they will be paid, ironically, by
the insurer.
Further Considerations
Even considering where the regulatory system stands today and of
the lack of progress in reform over the past 4 years, PCI strongly
urges Congress to move with caution in considering changes to insurance
regulation. PCI supports the state regulatory system and we would like
to see state system improved. Any reform proposals must take into
account that insurance is a major part of the U.S. economy and a
complex market that has evolved over time. We urge careful
consideration of potential unintended consequences of changes before
any actions are taken.
We believe the best place to start the debate is to define the
principles of a good regulatory system, determine what such a system
should accomplish, and then determine how best to correct the flaws in
the current system. PCI is looking at various models of business
regulation, here in the United States and abroad in an effort to build
such a regulatory model. For example, one question is, should
``principle based regulation'' rather than ``rules based regulation''
be the standard for financial regulation and would the concept be
exportable to insurance regulation in other areas or in general? We
have also spoken about various areas of insurance company operations.
As we examine the regulatory system, we will be looking at those areas
to determine what might define ``good regulation'' of those activities.
We urge Congress and anyone else looking at insurance regulation to do
the same.
As you continue your review and consideration of these issues, we
look forward to working with you and offering our perspectives on the
proposals you will consider. PCI offers a reflection of the considered
views of the breadth of the insurance industry.
______
PREPARED STATEMENT OF ALAN F. LIEBOWITZ
President, Old Mutual (Bermuda) Ltd.
July 11, 2006
Chairman Shelby, Ranking Member Sarbanes and Members of the
Committee, my name is Alan Liebowitz, and I am President of Old Mutual
(Bermuda) Ltd., an insurance company affiliated with the Old Mutual
Financial Network. Old Mutual is a global diversified financial
services network that extends from Europe to Asia, Africa and North
America. In the United States, the Old Mutual Financial Network
provides retirement savings and financial protection products in all 50
States through Fidelity & Guaranty Life, Americom Life & Annuity, and
Fidelity & Guaranty Life of New York. Our life insurance companies have
combined assets of over $12 billion and serve nearly 650,000
policyholders.
I am here today on behalf of the American Bankers Insurance
Association (ABIA), the insurance affiliate of the American Bankers
Association (ABA). ABIA's members are banking institutions that are
engaged in the business of insurance and insurance companies and
administrators that provide insurance products or services to banks.
Together with our colleagues at the American Council of Life Insurers,
the American Insurance Association, the Council of Insurance Agents and
Brokers and many other trade associations, ABIA and ABA participate in
the Optional Federal Charter Coalition.
I began my professional career as a lawyer in a firm specializing
in insurance regulatory matters. I dealt primarily with insurance
departments on company formation, licensing and corporate governance.
From there, I became general counsel to a New York domiciled life
insurer where I dealt with all legal issues including licensure in 17
states, policy drafting, filing and advertising compliance.
I joined the largest U.S. bank holding company in 1985 and for 15
years represented it on insurance related issues including the Bank
Holding Company Act and 50 state insurance laws. It was during this
period that the contrast between bank and insurance regulatory schemes
became starkly evident. It became abundantly clear to me that consumers
were not benefiting from the insurance regulatory system and, in fact,
were being denied access to more affordable and creative products by
virtue of the constraints placed on insurers in the name of consumer
protection. I see very little today indicating that this deficiency has
been addressed. What changes have occurred have taken place at the
margins of reform, have been incomplete and have only been in response
to congressional action.
Since 2000 I have been president of Old Mutual (Bermuda) Ltd., a
Bermuda domiciled insurer that focuses on delivering primarily U.S.
capital market based products around the world through financial
institution distribution. This experience has made me familiar with the
insurance laws of many countries, including the United Kingdom, Hong
Kong, the Middle East, Israel, Mexico and various Latin American
countries.
The differences between foreign insurance regulatory structures and
our own are as stark as the differences between our banking and
insurance systems. In these countries, unlike the United States,
insurance regulation is uniform. As a result, consumers and insurers
are not subject to policy or pricing differences simply because of
their location. Meaningful reform to the insurance regulatory system
must be instituted in the United States to keep our home markets
healthy and to address the growing competitive disparity between our
domestic market and the markets of other nations. To me, the problem is
simple: the states seem capable of only debating reform; instituting
reform occurs only when Congress acts.
No where is this more true than in the three regulatory areas most
at issue for bankers selling insurance products: producer or agent
licensing, product availability and price controls. These regulatory
functions are executed differently in every one of the 56 U.S.
jurisdictions. Regulating insurance in this fashion is inefficient and
provides little benefit to the consumer. For example, after centuries
of experience watching free markets efficiently determine prices for
other products to the overwhelming benefit of consumers, we in the
United States continue to allow the states to set the price of
insurance products. In addition, there is no uniform product regulation
whatsoever among all 50 states. And, perhaps most importantly, it took
an act of Congress before 40 states--and to date only 40 states--
instituted a reciprocal, but not uniform, agent licensing system.
Problems with the Current Insurance Regulatory System
Producer Licensing
Creating a single standard for licensing agents should have been
easy. It should have been work the states completed more than a century
ago but little was done about instituting uniform agent licensing until
1999 when passage of the Gramm-Leach-Bliley Act (GLBA) forced the
states to adopt act. In 2000, the National Association of Insurance
Commissioners (NAIC) said its goal was the ``implementation of a
uniform, electronic licensing system for individuals and business
entities that sell, solicit or negotiate insurance.'' Six years later,
that goal has yet to be realized.
Currently, different States impose different qualification and
testing standards and different continuing education requirements on
producers. Licenses recognized in one State are not necessarily
recognized in another State. Worse, agents associated with banks are
sometimes subject to sales limitations not applicable to agents who are
unassociated with banks. For banks that operate agent networks in
multiple States, these differences impose compliance costs and other
financial burdens that are significant and, ultimately, borne by
consumers.
In 1999, as part of GLBA, Congress adopted a requirement designed
to promote the adoption of uniform agent licensing rules by the states.
The so-called NARAB provision of GLBA required the establishment of an
organization to develop uniform licensing rules and regulations, but
only if a majority of the States did not adopt either uniform or
reciprocal licensing laws and regulations within 3 years of the date of
enactment of GLBA. To facilitate compliance with GLBA, the NAIC
developed a reciprocal licensing Model Act, which has currently been
adopted by about 40 States. Because the States could avoid NARAB--and
the uniformity mandate it represented--if only a majority of States
enacted the Model, that action by a majority of States has allowed some
States, including some of the largest States like California, to avoid
the issue of licensing reform entirely.
And, the more important goal of achieving licensing uniformity has
been put off indefinitely. GLBA allowed the goal of uniform agent
licensing laws to remain unrealized so long as a majority of States
passed reciprocal licensing laws. Unfortunately, reciprocity is not
uniformity. Instead, it is the recognition and acceptance of
differences among States. Seven years after passage of GLBA,
significant differences in State licensing laws remain.
To solve this problem, I recommend adoption of a uniform agent
licensing standard, preferably through the creation of an Optional
Federal Charter. The proposed National Insurance Act, S. 2509,
introduced by Senator John Sununu (R-NH) and Senator Tim Johnson (D-
SD), creates a uniform agent licensing standard by allowing agents to
apply for a National Producer License. This national license would
allow an agent to sell insurance products anywhere in the United States
and would not compel the states to change their laws at all. By
definition, the National Insurance Act creates a regulatory framework
for insurance much like the dual banking system with which we are all
familiar. While the licensing provisions establish a national
producer's license, they do not require state-licensed agents to obtain
that license in order to sell the products of federally chartered
insurers.
The result is a competitively neutral agent licensing regime.
Agents who desire only a state license will be able to sell exactly the
same array of products in their state as a federally licensed agent
operating in the same state. Alternatively, an agent who needs to sell
products in multiple states will not have to obtain the individual
state licenses offered by every state but may instead obtain the
Federal license offered under this Act. By offering the Federal license
as an option to the existing system of state licenses, the Act
preserves the authority of states to regulate agents licensed in their
states but also allows those desirous of the efficiency a single
Federal license offers the ability to obtain one.
Rate Regulation
Three basic components are necessary to provide for the insurance
needs of consumers: an agent has to be licensed to sell insurance
products, there have to be products to sell and those products must be
at prices consumers can afford. Price controls have long been thought
to satisfy this latter requirement but, in fact, they work against
consumers' interests in the overwhelming majority of cases.
In most States, an insurance product can only be sold after the
State insurance regulator approves the price of an insurance product.
Some States regulate the price of an insurance policy; some States
regulate the loss ratio a given product line must maintain. Generally,
the effect of price controls has been higher prices and fewer choices.
When prices are set artificially high, consumers are denied access to
lower costs even if there is a willing seller. When price controls are
set artificially low, the number of willing sellers is reduced
resulting in greatly diminished consumer choice.
Price controls are only appropriate, arguably, when associated with
a utility or a monopoly. In such situations, a single company could set
and hold prices at unreasonable levels. The insurance industry,
however, is a competitive industry. There are thousands of insurers
operating in the United States, and the only significant barrier to
entry for new companies is the cost of compliance with the kaleidoscope
of state insurance regulations and the inability to adjust prices based
on market forces. In such a competitive market, competition among firms
will protect consumers from unfair pricing schemes much more
efficiently than the government. More importantly, allowing markets to
set prices efficiently controls risk by making riskier choices more
expensive.
The consumer benefits associated with competitive rates are more
than just speculative. Several States already have moved away from rate
regulation and, in those States, there is evidence that rates have
fallen on certain products. A study by Scott Harrington for the AEI-
Brookings Joint Center for Regulatory Studies entitled ``Insurance
Deregulation and the Public Interest'' found that auto insurance is
less costly and more available in 14 States that do not require prior
approval of rates than in 27 other States that do require prior
approval.
I have arrived at the same conclusion as Mr. Harrington. As a
nation, we allow markets to set the price of housing, food and
clothing, necessities more instrumental to the survival of most of us
than insurance products. There is no basis for allowing the government
to continue setting prices for insurance products when it's clear we
are only saving consumers from lower prices and more choices.
Product Approval
Similar to price controls, most States' insurance departments won't
approve an insurance policy for sale unless subject to prior review by
the insurance regulator. ABIA's members have found that the impediments
created by most States' prior approval requirements have had the
undesirable effect of depriving consumers of innovative insurance
products and retarded the ability of insurers to develop these products
in a timely fashion.
Under the current State system of insurance regulation, it can take
months, and sometimes years, for a company to receive permission from
State insurance regulators to introduce a new product in every State.
Such delays are an inevitable result of a system in which every State
has an opportunity to review and approve insurance products and where
the standards of review are different in every State. If the insurance
industry cannot gain some relief from the States' prior approval
regime, life insurers will continue to lose market share to other non-
insurance investment products and property and casualty insurers will
reduce or eliminate their efforts to develop innovative products that
offer more comprehensive benefits at lower costs.
To alleviate this problem I recommend adoption of an insurance
regulatory system with many of the features of the current banking
system. Instead of prior review of insurance forms, a system like the
one proposed in S. 2509 should be adopted. Under such a system, the
National Insurance Commissioner would establish regulations for
insurance products, require forms to be filed with the Commissioner,
examine insurers for compliance with these regulations and impose
strong penalties for non-compliance. Senators Sununu and Johnson are
not proposing de-regulation of insurance products but, instead, a more
permissive system patterned after banking regulation and designed to
promote, rather than stifle, innovation.
Consumer Benefits of Creating an Optional Federal Charter
ABIA's member companies design systems and products to suit the
needs and demands of consumers. Accordingly, we recognize that any
insurance modernization proposal must be responsive to those needs and
demands. The proposed National Insurance Act introduced by Senator
Sununu and Senator Johnson will advantage consumers by allowing them
access to a wider array of products at more competitive prices. The
proposed legislation will also ensure that companies are more
financially sound, and that the United States insurance industry is
better represented abroad. Foreign financial regulators tend to agree:
Commenting in the Financial Times last week, Sir Howard Davies,
Director of the London School of Economics and a former chair of
Britain's Financial Services Authority, observed that,
There is no Federal regulator or Federal charter available to
U.S. companies. As a result, there is a lack of leadership in
insurance regulation nationally and internationally. This is
unfortunate when insurers are engaged in far more complex
financial transactions than they used to be. Many U.S. insurers
would welcome the opportunity to seek Federal oversight: the
Treasury could make it possible for them to do so. A positive
side-benefit would be to strengthen U.S. influence in the
International Association of Insurance Supervisors and make it
more effective in dealing with problems of unregulated insurers
and reinsurers in offshore centres.
I agree with Sir Howard. Establishing an Optional Federal Charter
will assist the United States in remaining globally competitive in two
important ways. Firstly, the current regulatory system greatly impedes
our ability to negotiate in the international regulatory arena. Whereas
most countries are represented by a single Federal regulator, like in
Great Britain, the United States is represented by a variety of state
insurance regulators who, by definition, do not and cannot speak for
the United States.
Second, the difficulty of entering the U.S. market under the
current state regulatory system dissuades foreign capital from
investing in the U.S. market, restricting overall insurance capacity,
and reducing the number of insurance products available to U.S.
consumers. It is simply the case that there are relatively few foreign
companies willing to expend the time and resources necessary to
navigate our confusing state regulatory system. By that measure, it is
also the case that there are many American companies that do not have
the resources to enter every state's market. In that regard, foreign
insurers and small domestic insurers share the same problem: the
benefit of entering every state's market does not equal its cost.
But, improving American competitiveness in the global insurance
arena is only one welcome benefit of the proposed National Insurance
Act. The real merit is in the myriad ways consumers are advantaged and
I will detail them for you now.
Consumer Access to Sound Insurance Products
An insurance policy is a promise to pay benefits after a triggering
event. An often overlooked consumer benefit in S. 2509 is the
imposition of rigorous financial solvency standards for federally
chartered insurers. These standards include risk-based capital
requirements ensuring that National insurers are adequately
capitalized; Investment standards ensuring that National insurers
invest their assets prudently; and, dividend restrictions, which
prevent insolvent National insurers from paying dividends. Such
standards should give consumers confidence that a federally chartered
insurer will be able to pay claims on its policies.
The proposed National Insurance Act ensures Federal solvency
standards are met by requiring regular examinations and setting forth
enforcement measures for non-compliance. These examination and
supervisory powers are designed to ensure that federally chartered
insurers are safe and sound. Examination and enforcement standards
contained in S. 2509 include: the authority to require federally
chartered insurers to file regular reports on their operations and
financial condition; the authority to regularly examine federally
chartered insurers, and to the extent appropriate, their affiliates;
and the authority to initiate an enforcement action against federally
chartered insurers that fail to comply with applicable standards.
Enforcement penalties are patterned after those available to Federal
banking regulators, which include the power to remove officers and
directors and to impose civil money penalties of up to $1 million a
day.
These standards are significantly more stringent than what exists
at the state level today.
More Rigorous Market Conduct Standards
The proposed National Insurance Act also protects consumers through
Federal market conduct standards. Currently, market conduct exams are
performed inconsistently by each state's insurance regulator. Some
states are rigorous; some states are not. Some states impose market
conduct examinations on insurers and insurance brokers by requiring
them to hire a consultant selected by the states. The proposed National
Insurance Act would protect consumers by preventing unfair methods of
competition and unfair and deceptive acts and practices in the
advertising, sale, issuance, distribution and administration of
insurance policies through a single, uniform examination standard, a
routine examination cycle and strict penalties for non-compliance.
Critics of optional Federal chartering often claim that a Federal
insurance regulator would not be able to adequately police sales and
claims practices by National insurers or producers. The Federal
regulation of the banking industry shows that Federal agencies can
effectively enforce consumer protection standards.
Today, thousands of banks are offering a variety of products to
consumers through hundreds of thousands of branches, ATMs, loan
production offices and other outlets throughout the United States.
These banks are subject to Federal consumer protection statutes such as
the Truth-in-Lending Act, the Truth-in-Savings Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act and many others. The
Federal banking agencies, which are responsible for enforcing
compliance with these various consumer protection laws, have been able
to fully and effectively enforce compliance with the laws. They have
done so through a combination of regular examinations backed up by the
threat of enforcement actions. Federal market conduct standards for
insurers backed by examinations and the threat of enforcement should
work equally well for consumers of insurance.
Consumer Benefits of Uniformity
Nationwide uniformity of policies and sales practices that would be
created by S. 2509 reduces consumer confusion, especially for those
consumers who move from State to State for professional or personal
reasons. Under the proposed National Insurance Act, the same life
insurance policy could be offered in every State. Companies could use
the same policy form, same disclosure statements, and same
administrative procedures throughout the United States. A consumer who
moved from New Jersey to New York, and then to Connecticut would have
the same purchasing experience in each state if the product being
offered was issued by a National insurer.
Uniform regulation also facilitates delivery of insurance products
over the Internet. As we all know, the Internet can reach consumers,
regardless of where they are located. To date, however, the use of the
Internet to deliver insurance products has been complicated by
variations in State insurance sales laws. A single Federal sales
practice standard applied nationwide would eliminate such
complications. This would expand consumer access to insurance products
through the Internet. The proposed National Insurance Act would make
expanded Internet sales a reality.
Conclusion
ABIA has concluded that the current insurance regulatory system is
badly in need of reform and, judging by the organizations represented
here today, we are not alone in that conclusion. Virtually all industry
participants and even insurance regulators have spent years detailing
the failings of the State system. The question, therefore, is not if
the system needs reform but how to reform it. Some organizations would
prefer to let the states continue the unacceptably slow process of
reforming themselves. Others believe Congress should impose Federal
insurance standards on the states. We believe Senator Sununu and
Senator Johnson have defined the appropriate solution; namely, an
Optional Federal Charter for insurers and insurance producers. The
``Optional Federal Charter'' solution addresses the shortcomings of the
existing State insurance regulatory system by creating a national
regulatory framework, yet preserves the State system for those who
prefer it.
The proposed National Insurance Act is the path forward and we urge
the Committee to consider it at its next opportunity.
______
PREPARED STATEMENT OF ROBERT A. WADSWORTH
Chairman and CEO, Preferred Mutual Insurance Company
July 11, 2006
Good morning Chairman Shelby, Ranking Member Sarbanes and Members
of the Committee. My name is Bob Wadsworth, and I am pleased to testify
today on behalf of the National Association of Mutual Insurance
Companies regarding insurance regulation reform. Founded in 1895, NAMIC
is the Nation's largest property and casualty insurance company trade
association, with more than 1,400 members underwriting more than 40
percent of the property-casualty insurance premium written in the
United States.
I am the Chairman and Chief Executive Officer of Preferred Mutual
Insurance Company, a multi-State writer located in New Berlin, New
York. Preferred Mutual writes more than $197 million in premium across
four states. I also currently serve as Chairman of NAMIC.
NAMIC appreciates the opportunity to testify at this important
hearing. It comes at a critical time in insurance regulation. The
present system of state regulation is too slow and cumbersome and often
denies consumers the benefits of competition. Consumers and insurers
have a shared interest in a modernized system of regulation that will
facilitate the bringing of new products to market in a timely fashion
and assure that they are competitively priced.
The question is how best to achieve these goals. NAMIC believes
that reform at the state level is more likely to produce better results
than Federal involvement in insurance regulation. Let me explain why
NAMIC takes this position, as opposed to some other trade associations,
including some property-casualty trade associations.
NAMIC and the Role of Mutual Insurers
The great majority of our members are mutual insurers, companies
that do not have shareholders, but are controlled by and operated for
policyholders. The first successful insurance company formed in the
American colonies was actually a mutual: The Philadelphia
Contributionship for the Insurance of Houses from Loss by Fire. It was
created in 1752 after Benjamin Franklin and a group of prominent
Philadelphia citizens came together to help insure their properties
from fire loss. The company is still in business today and is a NAMIC
member.
In those early days before America declared its independence from
British rule, most insurance companies followed the Contributionship
model; that is, groups of neighbors typically formed entities to help
each other avoid the certain financial ruin that would befall them if
their properties were destroyed by fire. The other predominate type of
insurance company is the stock company, which is owned by its
shareholders.
NAMIC members account for 47 percent of the homeowners market, 39
percent of the automobile market, 34 percent of the workers'
compensation market, and 32 percent of the commercial property and
liability market.
The History of Insurance Regulation
Since the beginning of the property-casualty insurance business, it
has been regulated at the state level. In 1944, the U.S. Supreme Court
in the South Eastern Underwriters case found that insurance was a
business in interstate commerce that could be regulated by the Federal
Government. The Congress responded by enacting the McCarran-Ferguson
Act in 1945 which declared that ``[T]he business of insurance, and
every person engaged therein, shall be subject to the laws of the
several States.'' The only exception to this rule is where the Congress
enacts legislation that ``specifically relates to the business of
insurance.'' Since 1945, with few exceptions, insurance has been
regulated at the state level.
NAMIC believes that state regulation has generally served both
consumers and insurers well over the years, particularly with respect
to the property-casualty business. Unlike the life insurance business,
the property-casualty insurance is primarily a state-based business.
While some of our products cover interstate activities, most of our
products that directly affect your constituents--auto, farm, and
homeowners insurance--are single state products. As such, we believe
the states have the best understanding of the products and the people
for whom they provide protection.
Weaknesses of State Regulation
While the state regulatory structure has worked well for years, it
has not always kept up with changing times. Insurers, large and small
alike, need several changes in the regulatory structure in and among
the states if they are to provide customers with the products they need
at the lowest possible prices.
First and foremost among needed changes is an end to price
regulation of all lines of property-casualty insurance. Only one state,
Illinois, allows personal automobile and homeowners insurers to set
prices through what is known as ``open competition.'' While some other
states have made notable progress in this area, particularly on the
commercial side, the fact remains that auto insurance is the only
product in America with multiple sellers whose price is regulated by
the government rather than by the marketplace. We trust people to make
decisions that can have a far greater impact on their lives--such as
their health plans and retirement investments--without government
control as to the prices that can be charged. We understand the
political sensitivity to permitting property-casualty insurers to
compete on the basis of price, but we submit that it is an historical
anachronism that is at odds with the faith we place in individuals and
a free marketplace throughout the American economy.
A brief review of state experience with different approaches to
pricing is instructive. The experience in Illinois, an open competition
state since 1969, shows the benefits of unregulated prices--stable
rates and low residual markets because the Illinois market attracts the
largest share of all private passenger auto and homeowner insurers in
the Nation. Other examples abound. South Carolina has adopted a flex-
rating system for personal lines and has seen prices fall and new
insurers enter the market. The recent reforms in New Jersey, once cited
as the poster child for overregulation, have produced similar results.
In nearly every state that has adopted market-based rating schemes, the
market has improved.
On the other hand, almost every state that has availability or
affordability problems suffers from overregulation and price controls.
Massachusetts, a strict prior approval state, now has only 18 insurers
selling private passenger auto insurance; Illinois has hundreds. Far
too often, policymakers in these troubled jurisdictions react by
placing a tighter regulatory grip on the market, which usually leads
more insurers to leave the state, thus exacerbating availability and
affordability problems.
California, in contrast, is often cited as a success by proponents
of strict rate regulation. A careful analysis of the California
situation, however, demonstrates that rate regulation ultimately works
against consumers, just as Federal restrictions on the rate of interest
banks could offer on deposits into the 1980s harmed bank customers.
California aggressively regulates pricing, especially for auto
insurance. Its recent rate experience is better than that of most
states, meaning that premiums there are relatively low compared to
similarly situated states. Supporters of rate regulation attribute this
to Proposition 103, a ballot initiative passed in 1988 that mandated
auto insurance rate rollbacks and established a prior approval system
of rate regulation. In reality, California's relatively low auto
insurance rates are almost entirely the result of that state's Supreme
Court overturning its own previous decision to permit individuals to
file so-called third-party bad faith suits against the at-fault
driver's auto insurer.
This decision was handed down in 1988, the same year that
Proposition 103, calling for strict regulation of the industry, was
adopted. The highly respected RAND Institute for Civil Justice found
that the third party bad faith claims permitted before the 1988
decision increased bodily injury liability premiums by 32 (low
estimate) to 53 (high estimate) percent. Thus, when these suits were
barred there was a dramatic reduction in the cost of bodily injury
liability claims. However, because of the difficulties of changing
rates in the strict prior approval regime of Prop 103, insurers did not
lower premiums commensurately, resulting in increased insurer profits.
Thus, it is a reasonable conclusion that the result of the restrictive
Prop 103 ratemaking system has been higher, not lower, rates for
California insureds than they would have experienced had Prop 103 not
been adopted.
While insurance price controls are the most troublesome feature of
state insurance regulation, there are many others that deserve
attention. These include the lack of uniformity among states with
respect to routine matters such as producer licensing and form filing;
underwriting restrictions that prevent insurers from accurately
assessing risk; blanket coverage mandates that force insurers to
provide coverage for particular risks they may not wish to cover, and
for which consumers may not be willing to pay; and arbitrary and
redundant ``market conduct examinations'' that cost insurers enormous
sums that could otherwise be used to pay claims
Because of these and other problems, some very large insurance
companies, including some of our members, are now asking for a Federal
regulator that would pre-empt the states' ability to regulate all
insurers.
The Strengths of State-Based Regulation
Notwithstanding the misguided laws and regulations that plague
insurance markets in many states, the decentralized system of state-
based insurance regulation has inherent virtues that would be lacking
in a national insurance regulatory system. State insurance regulation
has the capacity to adapt to local market conditions, to the benefit of
consumers and companies, and affords states the opportunity to
experiment and learn from each other.
A state insurance commissioner is able to develop expertise in
issues that are particularly relevant to his or her state. Unlike
banking and life insurance, property-casualty insurance is highly
sensitive to local risk factors such as weather conditions, tort law,
medical costs, and building codes. Many state building codes are
tailored to the risk found in that state. In the Midwest, the focus is
on damage from hail and tornados, while codes in coastal regions focus
on preventing loss from hurricanes. In other states, seismic concerns
dictate the type of construction. All these factors are considered by
insurers in assessing risk and pricing insurance products. State
insurance regulation is able to take account of these state and
regional variations in ways that Federal regulation would not.
Insurance consumers directly benefit from state regulators'
familiarity with the unique circumstances of their particular states.
Over time, each state's insurance department has accumulated a level of
``institutional knowledge'' specific to that state. Historically, state
regulators have drawn upon that knowledge to develop consumer
assistance programs tailored to local needs and concerns. Compared to a
Federal regulator, state regulators have a greater incentive to deal
fairly and responsibly with consumers. Twelve state insurance
departments are headed by commissioners who are directly elected by
their states' voters; the others serve at the pleasure of Governors who
also must answer to voters. A Federal regulator, by contrast, would be
far less accountable to consumers in particular states, and would thus
have less motivation to be responsive to their needs.
Is There a Need for Federal Regulation?
NAMIC believes that the answer to this question lies in both an
examination of how the states are responding to the problems outlined
in the previous section and the likely outcome of Federal legislation.
State Reforms
States have not been oblivious to the criticisms leveled against
them. They have made significant progress in addressing antiquated
rules such as those involving price controls and company licensing
restrictions. The results in recent years have been encouraging. On the
matter of price regulation,
Nine states have adopted flex-band rating systems for
property-casualty products to replace the rigid system of price
controls.
Fourteen states have adopted the more flexible use and file
system.
Twenty four states have established no filing requirements,
mostly for large commercial risks.
Only 16 states still require statutory prior approval.
Several of these states, however, are among the largest in the
country, accounting for 40.8 percent of the total auto
insurance market and 41.4 percent of the total homeowners
insurance market nationwide.
With respect to insurer licensing, the Uniform Certificate
of Authority Application (UCAA) is now used in all insurance
jurisdictions.
A system of electronic filing has been implemented by most
states and has streamlined the process by which rates and forms
are filed by companies.
Twenty-seven states have now adopted the Life Insurance
Interstate Compact, which allows the compact to now function
and serve as a single point of filing for life insurance
products.
The National Conference of Insurance Legislators (NCOIL),
the National Conference of State Legislatures (NCSL) and the
American Legislative Exchange Council (ALEC) have all endorsed
competition as the best regulator of rates. NCOIL has adopted a
significant model law that would create a use and file system
for personal lines and an informational filing system for
commercial lines.
NCOIL has also adopted a Market Conduct Model Law that
would bring significant reform to that area of state
regulation.
The Risks of Federal Regulation
There are many options that Federal policymakers can take, from
broader approaches such as a complete Federal takeover or an optional
Federal charter to the narrower approaches pursued by the House
Financial Services Committee in its different SMART bill drafts and in
H.R. 5637, the Nonadmitted and Reinsurance Reform Act .
The Sununu-Johnson bill (S. 2509), titled the ``National Insurance
Act of 2006,'' would establish an optional Federal charter modeled on
bank regulation. In essence, the bill would allow every insurer to
choose whether to be regulated by the states or by a new Federal
regulatory system to be administered by an Office of National
Insurance. NAMIC is deeply concerned that the optional Federal charter
proposal could lead to negative outcomes that would far outweigh any
potential benefits, and that many of those benefits will not be
realized.
In theory, an optional Federal charter might increase competition
among multi-State insurers by streamlining and centralizing insurance
regulation. It might exempt federally chartered insurers from
notoriously inefficient and archaic rate regulation, which serves
mainly to force low-risk policyholders to subsidize high-risk
policyholders. In theory, it might promote regulatory competition
between Federal and state regulators, with each striving to create
regulatory regimes that provide the greatest benefit to insurers and
consumers alike.
The problem, as we see it, is that in practice, optional Federal
chartering might achieve few or none of these results, and that the
potential risks are too great. Here are our greatest concerns:
The ``Big Mistake''
Federal regulation has proven no better than state regulation at
addressing market failures or protecting consumer interests and, unlike
state regulatory failures, Federal regulatory mistakes can have
disastrous economy-wide consequences. The savings and loan debacle of
the 1980s that ended up costing taxpayers over $100 billion is the
biggest such disaster in recent memory. When a state regulator makes a
mistake, the damage is localized and can more easily be ``fixed.''
Proponents of an optional Federal charter for insurance argue that
congressional action could bring a system resembling that found in
Illinois to the entire country. But it is entirely possible that the
system that eventually emerges will instead resemble the highly
regulated states. The fallout from a strict national regulatory climate
could do serious harm to large sectors of the economy.
Negative Charter Competition
S. 2509 is modeled on the dual banking system, with a Federal
analogue to the Office of the Comptroller of the Currency (OCC) and the
Office of Thrift Supervision (OTS). That model is at best problematic.
During the 1980s and 1990s, the OCC promulgated rules, regulations and
orders expanding bank powers and limiting the applicability of state
consumer protection laws (including those relating to predatory or sub-
prime lending), thereby encouraging state-chartered banks to migrate to
Federal charters. As the OCC is funded by the fees it charges the
national banks it regulates, it had every reason to encourage state
chartered banks to flip their charters and build the OCC's regulatory
empire, at the expense of both consumers and taxpayers.
This was not a one-way street. State thrift supervisors also
competed with the OTS for savings and loan charters and many of the
most costly S & L failures were by state-chartered thrifts that had
even broader powers than Federal S & Ls and were subject to very little
supervision by their state regulators.
Social Regulation
NAMIC is also concerned that while proponents of Federal regulation
may design a ``perfect system,'' they can neither anticipate nor
prevent the imposition of disastrous social regulation in exchange for
the new regulatory structure.
While NAMIC favors price competition, we are not so naive as to
believe that the same political dynamic that makes it so difficult to
achieve price competition in the states will not recur during the
debate on S. 2509 and its successors. Just as political expediency
occasionally leads state office-holders and candidates to call for
insurance price controls and rate rollbacks, we can easily imagine
situations in which their Federal counterparts would be tempted to do
the same. What we are likely to be left with, then, is no pricing
freedom and more social regulation.
``Social regulation,'' as we use that term, encompasses any number
of measures that tend to socialize insurance costs by spreading risk
indiscriminately among risk classes. In particular, regulations that
restrict insurers' underwriting freedom often have this effect. It is
important to note that accurately assessing and classifying the risk of
loss associated with particular individuals and properties is the sine
qua non of the property-casualty insurance business. Without risk-based
underwriting, the insurance enterprise cannot operate.
As Bob Litan of Brookings explained in a recent article,
Individuals or firms with higher risks of claims . . . should
pay higher premiums. If this were not the case--that is, if
insurers required higher-risk customers to subsidize lower-risk
customers--then insurers who provided coverage only to low-risk
policyholders could underprice their competitors and capture
just these customers, driving out their competitors in the
process.
Government restrictions on underwriting freedom ostensibly guard
against unfair business practices and ensure that insurance will be
available to meet market demand. In many instances, however, the effect
of these regulatory interventions is to create dysfunctional market
conditions that lead to problems such as adverse selection and cross-
subsidies. Adverse selection occurs when low-risk insureds purchase
less coverage, and high-risk insureds purchase more coverage, than they
would if the price of insurance more closely reflected the expected
loss for each group. Government-imposed underwriting restrictions
foster adverse selection by depriving insurers of the ability to
distinguish between individuals who have a low probability of
experiencing and those with a high probability of experiencing a loss.
By weakening the link between expected loss costs and premiums,
underwriting restrictions create cross-subsidies that flow from low-
risk insureds to high-risk insureds. S. 2509's promise of rate
deregulation for federally chartered insurers will mean little if
Federal regulators impose underwriting restrictions that impair the
ability of insurers to charge premiums based on risk. There is nothing
in S. 2509 to prevent this, and we find no reason to be optimistic that
a Federal insurance regulator would voluntarily refrain from eventually
restricting underwriting freedom. Indeed, even without explicit
insurance regulatory authority, the Federal Government has attempted on
various occasions to restrict the use of certain underwriting
variables. In the 1990s, for instance, the Department of Housing and
Urban Development launched a campaign to prevent insurers from using
the age and value of a home to assess the risk of loss associated with
residential properties. More recently, some Members of Congress have
proposed placing limitations on insurers' freedom to underwrite and
price life insurance based on foreign travel, despite the obvious risks
in countries wracked by war, pestilence, uncontrollable viruses or
natural disasters.
Such regulatory interference in the marketplace could ultimately
make coverage less available and affordable for most consumers. We
prefer that the states continue to work together to achieve greater
regulatory uniformity.
The Potential for Dual Regulation
Proponents of an optional Federal charter argue that the
legislation would simply create an alternative regulatory scheme for
those who seek it. We believe that it could well result in dual
regulation for insurers as it has for banks. Current banking law gives
banks the choice of being regulated under either a Federal or state
charter, but all banks are subject to some regulation by the Federal
Deposit Insurance Corporation (FDIC), regardless of their charter. It
is certainly within the realm of reality that in order for an Optional
Federal Charter to work, Congress would eventually be forced to replace
the state guaranty funds with a Federal insurance fund similar to the
FDIC. If this occurs, insurers choosing to remain under state
regulatory jurisdiction could nevertheless find themselves subject to a
vast array of Federal rules, but would not enjoy the benefits of
uniformity. Over time, the multi-State writers would effectively be
forced into the Federal system, leaving smaller companies with the
states--in effect, creating adverse selection in regulation.
One must look only as far as the health insurance system to see the
potential pitfalls of dual regulation. As you know, health insurance is
regulated by both state and Federal law. This redundant regulatory
scheme is partially responsible for the increasing costs of health
insurance. It also has created a situation in which consumers seeking
assistance from regulators are often caught between state and Federal
agencies, depending on the problem at hand. The added costs of dual
health insurance regulation are eventually passed on to consumers, as
are all regulatory costs. Under an optional Federal charter for
property-casualty insurance, consumers will likely suffer the same
confusion that exists under the health insurance regulatory structure:
Which problem falls under which jurisdiction? Whom do they call for
help? What agency deals with what problem? Uncertainties that currently
befuddle health insurance consumers could easily recur under a dual
property-casualty regulatory system.
The Illusion of ``Choice''
In theory, an optional Federal charter could promote regulatory
competition between state governments and the Federal Government. Such
competition would provide strong motivation for further state reforms,
and would deter the Federal insurance regulator as well as state
regulators from undertaking excessively burdensome market
interventions.
But regulatory competition will work only if most insurers can
switch charters at relatively low cost. In fact, the largely fixed
costs of adopting a Federal charter are likely to be quite high, and
switching back to a state charter could be even more expensive. As a
practical matter, thousands of small to medium sized insurers would
find themselves trapped in the regulatory system they initially chose
because they would be unable to absorb the costs associated with
switching between regulatory regimes. The result would be an unlevel
playing field on which only the largest insurers would have the
financial wherewithal to choose the regulatory regime that happened to
be most hospitable at any given time. Moreover, the inability of most
insurers to switch readily between state and Federal regulation would
undermine the regulatory competition that supporters envision.
In sum, an optional system would not necessarily result in the
optimal system, particularly over time. As with the banking system, it
would generally mean that the large insurers would opt for the Federal
system and the small ones would be left in the state system and may be
subject to dual regulation. Perhaps the goals of S. 2509 could be
better met by using the Congress' powers to improve the state systems
instead. We offer one such approach in the next section of the
testimony.
If Not OFC, What Can Be Done?
As I indicated earlier, the ``shotgun'' approach to insurance
regulatory reform embodied in the optional Federal charter proposal
would bring uncertain benefits while potentially creating a variety of
negative consequences. I have also indicated that government rate
regulation and restrictions on underwriting freedom pose the greatest
impediments to the creation of healthy, competitive property-casualty
insurance markets. If Congress wishes to eliminate these defects, it
may do so without establishing a Federal insurance regulatory authority
or by mandating an extensive overhaul of the state-based system of
insurance regulation. Instead, it might consider a simple piece of
legislation that would do just two things:
1. Prohibit states from limiting property-casualty insurers' ability
to set prices for insurance products, except where the
insurance commissioner can provide credible evidence that a
rate would be inadequate to protect against insolvency.
2. Prohibit states from limiting or restricting the use of
underwriting variables and techniques, except where the
insurance commissioner can provide credible evidence that a
challenged variable or technique bears no relationship to the
risk of future loss.
In conclusion, NAMIC believes that the states have not acted as
rapidly and as thoroughly to modernize insurance regulation as we
believe is necessary, but we are encouraged that they have picked up
the pace of reform and are headed in the right direction. The states
need more time and perhaps a Federal prod to complete the job. Given
this recent progress and the risks associated with creating an entirely
new Federal regulatory structure, NAMIC is convinced that reform at the
state level is the best and safest course for consumers and insurers
alike.
______
PREPARED STATEMENT OF TRAVIS PLUNKETT
Legislative Director, Consumer Federation of America
July 11, 2006
Mr. Chairman and Members of the Committee, thank you for your
invitation to testify today. America's insurance consumers, including
small businesses, are vitally interested in how insurance will be
regulated in the future. Therefore, your hearing is timely. We
especially appreciate the fact that the Committee is beginning its
review with an overall examination of insurance regulation--why it
exists, what are its successes and failures--rather than solely
reviewing proposed legislation, such as the Oxley-Baker ``SMART''
proposal or the optional Federal charter approach. \1\ In order to
determine whether Federal legislation is necessary and what should be
its focus, it obviously makes a great deal of sense for the Committee
to first conduct a thorough assessment of the current situation. If the
``problems'' with the present insurance regulation regime are not
properly diagnosed, the ``solutions'' that Congress enacts will be
flawed.
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\1\ CFA strongly opposes both of these proposals as undermining
needed consumer protections.
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In this testimony, I will first discuss why regulation of the
insurance industry is necessary, including a review of the key reasons
regulation is required and why some current developments make
meaningful oversight even more essential. I will then point out that
consumers are agnostic on the question of whether regulation should be
at the state or Federal level but we are very concerned about the
quality of consumer protections that are in place, wherever the locus
of regulation resides in the future. I will then list a few of the most
pressing problems that insurance consumers are presently facing that
require a regulatory response.
I then provide a brief history if the insurance industry's desire
for Federal regulation in the early years of this country and the
reasons why the industry switched to favoring state regulation in the
later half of the 19th century. The industry is now split on the
question of whether state-based regulation should continue. I will
point out that the industry has generally shifted its allegiance over
the years to support the oversight by the level of government that
imposes the weakest regulatory regime and the fewest consumer
protections.
I explain why market ``competition'' alone cannot be relied upon to
protect insurance consumers. The absence of regulatory oversight for
policy forms (i.e., coverages) and risk classifications (i.e., how
consumers are grouped for the purpose of charging premiums) often leads
to a hollowing out of coverage offered in insurance policies, unfair
discrimination and the abdication of the insurance system's primary
role in loss prevention. Industry proposals for deregulation--
euphemistically termed ``modernization''--will likely increase problems
with insurance availability and affordability and further erode
incentives for loss prevention. Industry claims that competition is
incompatible with regulation are not borne out by the facts. The
experience in states like California demonstrates that appropriate
regulation enhances competition, requires insurers to compete fairly
and in a manner that benefits consumers and results in a generous
return for these companies.
I then set forth the principles for a regulatory system that
consumers would favor, showing ways to achieve regulatory uniformity
without sacrificing consumer protections.
Finally, I briefly discuss some of the regulatory proposals put
forth in recent years by the insurers, including the optional Federal
charter approach and the SMART Act, both of which CFA strongly opposes.
We do indicate support for repeal of the McCarran-Ferguson Act's broad
antitrust exemption that insurers enjoy, as it allows them to collude
in pricing and other market decisions.
Why Is Regulation of Insurance Necessary?
The rationale behind insurance regulation is to promote beneficial
competition and prevent destructive or harmful competition in various
areas.
Insolvency
One of the reasons for regulation is to prevent competition that
routinely causes insurers to go out of business, leaving consumers
unable to collect on claims. Insolvency regulation has historically
been a primary focus of insurance regulation. After several
insolvencies in the 1980s, state regulators and the National
Association of Insurance Commissioners (NAIC) enacted risk-based
capital standards and implemented an accreditation program to help
identify and prevent future insolvencies. As fewer insolvencies
occurred in the 1990s through to today, state regulators appear to be
doing a better job.
Unfair and Deceptive Policies and Practices
Insurance policies, unlike most other consumer products or
services, are contracts that promise to make certain payments under
certain conditions at some point in the future. (Please see the
attached fact sheet on why insurance is different from many other
products for regulatory purposes.) Consumers can easily research the
price, quality and features of a television, but they have very limited
ability to do so on insurance policies. Because of the complicated
nature of insurance policies, consumers rely on the representations of
the seller/agent to a far greater extent than for other products.
Regulation exists to prevent competition that fosters the sale of
unfair and deceptive policies and claims practices.
Unfortunately, states have not fared as well in this area. Rather
than acting to uncover abuses and instigate enforcement actions, states
have often reacted after lawsuits or news stories brought bad practices
to light. For example, the common perception among regulators that
``fly by-night'' insurance companies were primarily responsible for
deceptive and misleading practices was shattered in the late 1980s and
early 1990s by widespread allegations of such practices among household
names such as MetLife, John Hancock, and Prudential. For instance,
MetLife sold plain whole life policies to nurses as ``retirement
plans,'' and Prudential unilaterally replaced many customers' whole
life policies with policies that didn't offer as much coverage. Though
it is true that state regulators eventually took action through
coordinated settlements, the allegations were first raised in private
litigation; many consumers were defrauded before regulators acted.
The recent revelations and settlements by New York Attorney General
Eliot Spitzer show that even the most sophisticated consumers of
insurance can be duped into paying too much for insurance through bid-
rigging, steering, undisclosed kickback commissions to brokers and
agents and through other anticompetitive acts.
Insurance Availability
Some insurance is mandated by law or required to complete financial
transactions, such as mortgage loans. In a normal competitive market,
participants compete by attempting to sell to all consumers seeking the
product. However, in the insurance market, participants compete by
attempting to ``select'' only the most profitable consumers. This
selection competition leads to availability problems and redlining. \2\
Regulation exists to limit destructive selection competition that harms
consumers and society.
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\2\ The industry's reliance on selection competition can have
negative impacts on consumers. Insurance is a risk spreading mechanism.
Insurance aggregates consumers' premiums into a common fund from which
claims are paid. Insurance is a contractual social arrangement, subject
to regulation by the states.
The common fund in which wealth is shifted from those without
losses (claims) to those with losses (claims) is the reason that the
contribution of insurance companies to the Gross National Product of
the United States is measured as premiums less losses for the property-
casualty lines of insurance. The U.S. Government recognizes that the
losses are paid from a common fund and thus are a shift in dollars from
consumers without claims to those with claims, not a ``product'' of the
insurance companies.
Competition among insurers should be focused where it has positive
effects, e.g., creating efficiencies, lowering overhead. But rather
than competing on the basis of the expense and profit components of
rates, the industry has relied more on selection competition, which
merely pushes claims from insurer to insurer or back on the person or
the state. States have failed to control against the worst ravages of
selection competition (e.g., redlining).
Some of the vices of selection competition that need to be
addressed include zip code or other territorial selection; the
potential for genetic profile selection; income (or more precisely
credit report) selection; and selection based on employment. Targeted
marketing based solely on information such as income, habits, and
preferences, leaves out consumers in need of insurance, perhaps
unfairly.
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Lawsuits brought by fair housing groups and the Department of
Housing and Urban Development (HUD) over the past 15 years have
revealed that insurance availability problems and unfair discrimination
exist and demonstrate a lack of oversight and attention by many of the
states. NAIC had ample opportunity after its own studies indicated that
these problems existed to move to protect consumers. It retreated,
however, when, a few years ago, the insurers threatened to cutoff
funding for its insurance information data base, a primary source of
NAIC income.
Serious problems with home insurance availability and affordability
surfaced this spring along America's coastlines. Hundreds of thousands
of people are having their homeowners insurance policies non-renewed
and rates are skyrocketing. As to the decisions to nonrenew, on May 9,
2006, the Insurance Services Office (ISO) President and CEO Frank J.
Coyne signaled that the market is ``overexposed'' along the coastline
of America. In the National Underwriter article, ``Exposures Overly
Concentrated Along Storm-prone Gulf Coast'' (May 15, 2006, Edition),
the ISO executive ``cautioned that population growth and soaring home
values in vulnerable areas are boosting carrier exposures to dangerous
levels.'' He said, ``The inescapable conclusion is that the effects of
exposure growth far outweigh any effects of global warming.''
Insurers have started major pullbacks in the Gulf Coast in the wake
of the ISO pronouncement. On May 12, 2006, Allstate announced it would
drop 120,000 home and condominium policies and State Farm announced it
would drop 39,000 policies in the wind pool areas and increase rates
more than 70 percent. \3\ Collusion that would be forbidden by
antitrust laws in most other industries appears to be involved in the
price increases that have occurred. (See section entitled ``Where Have
All the Risk Takers Gone?'' below.)
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\3\ ``Insurers Set To Squeeze Even Tighter,'' Miami Herald, May
13, 2006.
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One obvious solution to discrimination and availability problems is
to require insurers to disclose information about policies written by
geo-code, and about specific underwriting guidelines that are used to
determine eligibility and rates. Such disclosure would promote
competition and benefit consumers; but state regulators, for the most
part, have refused to require such disclosure in the face of adamant
opposition from the industry. Regulators apparently agree with insurers
that such information is a ``trade secret'' despite the absence of
legal support for such a position. In addition, though insurance
companies compete with banks that must meet data disclosure and lending
requirements in underserved communities under the Community
Reinvestment Act (``CRA''), insurers refuse to acknowledge a similar
responsibility to communities.
Reverse Competition
In certain lines of insurance, insurers market their policies to a
third party, such as creditors or auto dealers, who, in turn, sell the
insurance to consumers on behalf of the insurer for commission and
other compensation. This compensation is often not disclosed to the
consumer. Absent regulation, reverse competition leads to higher--not
lower--prices for consumers because insurers ``compete'' to offer
greater compensation to third party sellers, driving up the price to
consumers.
The credit insurance market offers a perfect example of reverse
competition. Every few years, consumer groups issue reports about the
millions of dollars that consumers are overcharged for credit
insurance. Despite the overwhelming evidence that insurers do not meet
targeted loss ratios in most states, many regulators have not acted to
protect consumers by lowering rates.
The markets for low value life insurance and industrial life
insurance are characterized by overpriced and inappropriately sold
policies and a lack of competition. This demonstrates the need for
standards that ensure substantial policy value and clear disclosure.
Insurers rely on consumers' lack of sophistication to sell these
overpriced policies. With some exceptions, states have not enacted
standards that ensure value or provide timely, accurate disclosure.
Consumers continue to pay far too much for very little coverage.
Information for Consumers
True competition can only exist when purchasers are fully aware of
the costs and benefits of the products and services they purchase.
Because of the nature of insurance policies and pricing, consumers have
had relatively little information about the quality and comparative
cost of insurance policies. Regulation is needed to ensure that
consumers have access to information that is necessary to make informed
insurance purchase decisions and to compare prices.
While the information and outreach efforts of states have improved,
states and the NAIC have a long way to go. Some states have succeeded
in getting good information out to consumers, but all too often the
marketplace and insurance regulators have failed to ensure adequate
disclosure. Their failure affects the pocketbooks of consumers, who
cannot compare adequately on the basis of price.
In many cases, insurers have stymied proposals for effective
disclosure. For decades, consumer advocates pressed for more meaningful
disclosure of life insurance policies, including rate-of-return
disclosure, which would give consumers a simple way to determine the
value of a cash-value policy. Today, even insurance experts can't
determine which policy is better without running the underlying
information through a computer. Regulators resisted this kind of
disclosure until the insurance scandals of the 1990s, involving
widespread misleading and abusive practices by insurers and agents,
prompted states and the NAIC to develop model laws to address these
problems. Regulators voiced strong concerns and promised tough action
to correct these abuses. While early drafts held promise and included
some meaningful cost-comparison requirements, the insurance industry
successfully lobbied against the most important provisions of these
proposals that would have made comparison-shopping possible for normal
consumers. The model disclosure law that NAIC eventually adopted is
inadequate for consumers trying to understand the structure and actual
costs of policies.
California adopted a rate of return disclosure rule a few years ago
for life insurance (similar to an APR in loan contracts) that would
have spurred competition and helped consumers comparison-shop. Before
consumers had a chance to become familiar with the disclosures,
however, the life insurance lobby persuaded the California legislature
to scuttle it.
Are the Reasons for Insurance Regulation Still Valid?
The reasons for effective regulation of insurance are as relevant,
or in some instances even more relevant, today than 5 or 10 years ago:
Advances in technology now provide insurers access to
extraordinarily detailed data about individual customers and
allow them to pursue selection competition to an extent
unimaginable 10 years ago.
Insurance is being used by more Americans not just to
protect against future risk, but as a tool to finance an
increasing share of their future income, e.g., through
annuities.
Increased competition from other financial sectors (such as
banking) for the same customers could serve as an incentive for
misleading and deceptive practices and market segmentation,
leaving some consumers without access to the best policies and
rates. If an insurer can't compete on price with a more
efficient competitor, one way to keep prices low is by offering
weaker policy benefits (i.e., ``competition'' in the fine
print).
States and lenders still require the purchase of auto and
home insurance. Combining insurer and lender functions under
one roof, as allowed by the Gramm Leach Bliley Act, could
increase incentives to sell insurance as an add-on to a loan
(perhaps under tie-in pressure)--or to inappropriately fund
insurance policies through high-cost loans.
As consumers are faced with these changes, it is more important
than ever that insurance laws are updated and the consumer protection
bar is raised, not lowered.
Given That Regulation Is Important for Consumers, Who Should Regulate--
the States or the Federal Government?
Consumers do not care who regulates insurance; we only care that
the regulatory system be excellent. Consumer advocates have been (and
are) critical of the current state-based system, but we are not willing
to accept a Federal system that guts consumer protections in the states
and establishes one uniform but weak set of regulatory standards.
CFA's Director of Insurance, Bob Hunter, was one of very few people
who have served both as a state regulator (Texas Insurance
Commissioner) and as a Federal regulator (Federal Insurance
Administrator when the Federal Insurance Administration was in HUD and
had responsibility for the co-regulation of homeowners insurance in the
FAIR Plans, as well as flood and crime insurance duties). His
experience demonstrates that either a Federal or the state system can
succeed or fail in protecting consumers. What is critical is not the
locus of regulation, but the quality of the standards and the
effectiveness of enforcement of those standards.
Both a state and a Federal system have potential advantages and
disadvantages. Here are some of them:
Despite many weaknesses that exist in insurance regulation at the
state level, a number of states do have high-quality consumer
protections. Moreover, the states also have extensive experience
regulating insurer safety and soundness and an established system to
address and respond to consumer complaints. The burden of proof is on
those who for opportunistic reasons now want to shift away from 150
years of state insurance regulation to show that they are not asking
Federal regulators and American consumers to accept a dangerous ``pig
in a poke'' that will harm consumers.
CFA agrees that better coordination and more consistent standards
for licensing and examinations are desirable and necessary--as long as
the standards are of the highest--and not the lowest--quality. We also
agree that efficient regulation is important, because consumers pay for
inefficiencies. CFA participated in NAIC meetings over many months
helping to find ways to eliminate inefficient regulatory practices and
delays, even helping to put together a 30-day total product approval
package. Our concern is not with cutting fat, but with removing
regulatory muscle when consumers are vulnerable.
Top Six Problems Consumers Have Today With Insurance
1. Insurers Are Increasingly Privatizing Profit, Socializing Risk and
Creating Defective Insurance Products by Hollowing out
Insurance Coverage and Cherry Picking Locations in Which They
Will Underwrite
There are two basic public policy purposes of insurance. The first
is to provide individuals, businesses and communities with a financial
security tool to avoid financial ruin in the event of a catastrophic
event, whether that event is a traffic accident, a fire or a hurricane.
Insurers provide this essential financial security tool by accepting
the transfer of risk from individuals and by spreading the individual
risks through the pooling of very large numbers of individual risks.
The pool of risks is diversified over many types of perils and many
geographic locations.
The second essential purpose of insurance is to promote loss
prevention. Insurance is the fundamental tool for providing economic
incentives for less risky behavior and economic disincentives for more
risky behavior. The insurance system is not just about paying claims;
it is about reducing the loss of life and property from preventable
events. Historically, insurers were at the forefront of loss prevention
and loss mitigation. At one point, fire was a major cause of loss. This
is no longer true, in large part due to the actions of insurers in the
20th century.
Left to a ``competitive'' or deregulated market, insurers are
undermining these two core purposes of insurance. The remainder of this
section discusses how insurers have hollowed out the benefits offered
in many insurance policies so they no longer represent the essential
financial security tool required by consumers and how insurers have
pushed the risk of loss onto taxpayers through Federal or state
programs. The most glaring example of these two actions is demonstrated
by Hurricane Katrina. Losses covered by insurance companies were a
minority fraction of the losses sustained by consumers because insurers
had succeeded in shifting exposure onto the Federal Government through
the flood insurance program, \4\ onto states through state catastrophe
funds and onto consumers with higher deductibles and lesser coverage.
Despite the worst catastrophe year ever in terms of dollars paid by the
private insurance industry, the property-casualty industry realized
records profits in 2005. The trend toward shifting risk away from the
primary insurance market has clearly gone too far when the property-
casualty insurance industry experiences record profits in the same year
as it experiences record catastrophe losses.
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\4\ The National flood Insurance Program has been in place since
1968 because insurers could not price or underwrite the risk. The
program has now developed the information for such pricing and
underwriting and consideration should be given to returning some of
this risk to private insurance control. The Federal program has had
excessive subsidies and has been ineffective in mitigating risk as well
as the private insurers could do it.
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The critical conclusion to take from this section is that what the
insurance industry calls ``competition'', which is essentially a
completely deregulated market in which price collusion is not prevented
by the application of antitrust law, will not protect consumers from
unfair or unreasonable policy form or coverage decisions by insurers.
The overwhelming evidence is that a market failure regarding policy
forms and coverage has triggered a need for greater regulatory
oversight of these factors to protect consumers.
Where Have All the Risk Takers Gone? Unaffordable Home Insurance That
Covers Less and Less Risk.
In 2004, four major hurricanes hit Florida, but the property-
casualty insurance industry enjoyed record profits of $38 billion. In
2005, Hurricane Katrina resulted in the highest hurricane losses ever,
but the insurance industry also had another record year of profits,
which reached $45 billion. \5\ Here is a chart from a Los Angeles Times
article on this subject:
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\5\ Gosselin, Peter, ``Insurers Saw Record Gains in Year of
Catastrophic Losses,'' Los Angeles Times, April 5, 2006.
Since the article was published, the property-casualty industry has
reported the largest quarterly profit since ISO started keeping records
in 1986. In the first quarter of 2006, the industry surplus rose by
$13.0 billion to $440.1 billion. \6\
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\6\ ``P/C Insurers Boost Underwriting Gain by 21 percent,''
National Underwriter, July 3, 2006.
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The property-casualty industry is overcapitalized because of all of
the retained earnings it is accumulating. Today, the industry has $440
billion in capital, up from $297 billion in 2001. The net premium
written to surplus ratio as of today is one to one, which means that
for every dollar of premium that was sold, the industry had a dollar of
surplus. Historically, this is an extremely safe leverage ratio. As a
result, with the exception of property insurance on the nation's
coasts, insurance prices are falling and coverage is easily available.
\7\
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\7\ Council of Insurance Agents and Brokers, news release,
``Commercial PC Rates Hold Flat or Drop Slightly for First Quarter 2006
Renewals, Council Survey Shows,'' April 19, 2006. According to the
Council, commercial property-casualty rates held steady or fell
slightly during the first quarter of 2006, with renewal premiums for
half of all account sizes remaining stable or dropping between 1 and 10
percent in the first 3 months of the year.
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Some might argue that insurers are risk takers. That may be true
for the reinsurance industry, but it is certainly not true for the
primary market. The primary market has succeeded in eliminating much
risk. This is not an opinion, but a simple fact.
If one purchases a property-casualty insurance company's stock,
with few exceptions, one has bought into a business that is lower in
risk than the market in general, hurricanes notwithstanding. This is
shown in any Value Line publication, which tests the riskiness of a
stock. One key measure is the stock's Beta, which is the sensitivity of
a stock's returns to the returns on some market index, such as the
Standard & Poor's 500. A Beta between 0 and 1, such as utility stocks,
is a low-volatility investment. A Beta equal to 1 matches the index. A
Beta greater than 1 is anything more volatile than the index, such as a
``small cap'' fund.
Another measure of a shareholder's risk is the Financial Safety
Index, with 1 being the safest investment and 5 being least safe. A
third measure of risk is the Stock Price Stability reported in 5
percentile intervals with 5 marking the least stability and 100 marking
the highest.
Consider these numbers from the Value Line of March 24, 2006, for
Allstate, which has taken a leading role in claiming that catastrophe
insurance is too risky for the private market alone to bear:
Beta = 0.90; Financial Safety = 2; Stock Price Stability = 90
The top 12 insurers in Value Line post these average results:
Beta = 0.95; Financial Safety = 2.2; Stock Price Stability = 84
By all three measures, property-casualty insurance is a below-
average risk business: safer than buying an S&P 500 index fund. Another
measure of insulation from risk is the record industry profits for 2004
and 2005 that have already been mentioned.
How did insurers do it? Some of the answers are clear:
First, insurers made intelligent use of reinsurance, securitization
and other risk spreading techniques. That is the good news.
Second, after Hurricane Andrew insurers modernized ratemaking by
using computer models. This development was a mixed blessing for
consumers. While this caused huge price increases for consumers, CFA
and other consumer leaders supported the change because we saw insurers
as genuinely shocked by the scope of losses caused by Hurricane Andrew.
Insurers promised that the model, by projecting either 1,000 or 10,000
years of experience, would bring stability to prices. The model
contained projections of huge hurricanes (and earthquakes) as well as
periods of intense activity and periods of little or no activity.
In the last few months, however, CFA has been shocked to learn that
Risk Management Solutions (RMS) and other modelers are moving from a
10,000-year projection to a 5-year projection, which will cause a 40
percent increase in loss projections in Florida and the Gulf Coast and
a 25-30 percent jump in the Mid-Atlantic and Northeast. This means that
the hurricane component of insurance rates will sharply rise, resulting
in overall double-digit rate increases along America's coastline from
Maine to Texas. The RMS action interjects politics into a process that
should be based solely on sound science. It is truly outrageous that
insurers would renege on the promises made in the mid-1990s. CFA has
called on regulators in coastal states to reject these rate hikes.
It is clear that insurance companies sought this move to higher
rates. RMS's press release of March 23, 2006, states:
Coming off back-to-back, extraordinarily active hurricane
seasons, the market is looking for leadership. At RMS, we are
taking a clear, unambiguous position that our clients should
manage their risks in a manner consistent with elevated levels
of hurricane activity and severity,' stated Hemant Shah,
president and CEO of RMS. `We live in a dynamic world, and
there is now a critical mass of data and science that point to
this being the prudent course of action.'
The ``market'' (the insurers) sought leadership (higher rates), so
RMS was in a competitive bind. If it did not raise rates, the market
would likely go to modelers who did. So RMS acted and other modelers
are following suit. \8\ It is simply unethical that scientists at these
modeling firms, under pressure from insurers, appear to have completely
changed their minds at the same time after over a decade of using
models they assured the public were scientifically sound. RMS has
become the vehicle for collusive pricing.
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\8\ According to the National Underwriter's Online Service on
March 23, 2006, ``Two other modeling vendors--Boston-based AIR
Worldwide and Oakland, Calif.-based Eqecat--are also in the process of
reworking their hurricane models.''
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In a third major development, insurers have not only passed along
gigantic price increases to homeowners in coastal areas, but they have
also sharply gutted coverage. Hurricane deductibles of two to 5 percent
were introduced. Caps on home replacement costs were also added. State
Farm has a 20 percent cap. Other insurers refuse to pay for any
increased replacement costs at all, even though demand for home
rebuilding usually surges in the wake of a hurricane, driving
replacement costs up sharply. Insurers also excluded coverage for laws
and ordinances, so that if a home has to be elevated to meet flood
insurance standards or rewired to meet local building codes, insurers
no longer have to pay.
Finally, insurers have simply dumped a great deal of risk, non-
renewing tens of thousands of homeowner and business properties.
Allstate, the leading culprit after Hurricane Andrew, is emerging as
the heavy once more in the wake of Katrina. After Andrew, Allstate
threatened to non-renew 300,000 South Floridians, provoking a state
moratorium on such action. Today, Allstate is non-renewing even in Long
Island.
These actions present a serious credibility problem for insurers.
They told us, and we believed, that Hurricane Andrew was their ``wake
up'' call, with the size and intensity surprising them and causing them
to make these massive adjustments in price, coverage and portfolio of
risk. What is their excuse now for engaging in another round of massive
and precipitous actions?
Insurers surely knew that forecasters had predicted for decades
that an increased period of hurricane activity and intensity would
occur from the 1990s to about 2010. They also surely knew a storm of
Hurricane Katrina's size, location and intensity was possible. The New
Orleans Times-Picayune predicted exactly the sort of damage that
occurred in a series of articles 4 years ago. \9\
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\9\ McQuaid, John; Schleifstein, Mark, ``Washing Away'' New
Orleans Times Picayune. June 23-27, 2002.
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Take Allstate's pullout from part of New York. It is very hard to
look at this move as a legitimate step today when no pullout occurred
after Hurricane Andrew. Why isn't the probability of a dangerous storm
hitting Long Island already accounted for in the modeling--and rate
structure--that were instituted after Hurricane Andrew? This type of
precipitous action raises the question of whether Allstate is using the
threat of hurricane damage as an excuse to drop customers they have had
but do not want to retain for other reasons, such as clients in highly
congested areas with poorer credit scores. Whether it was mismanagement
that started a decade ago or the clever use of an opportunity today,
consumers are being unjustifiably harmed. Insurance is supposed to
bring stability, not turmoil, into peoples' lives.
2. The Revolution in Risk Classification Has Created Many Questionable
Risk Characteristics, Generated New Forms of Redlining and
Undermined the Loss Prevention Role of the Insurance System
As discussed above, one of the primary purposes of the insurance
system is to promote loss prevention. The basic tool for loss
prevention is price. By providing discounts for characteristics
associated with less risky behavior and surcharges for characteristics
associated with more risky behavior, the insurance system provides
essential economic signals to consumers about how to lower their
insurance costs and reduce the likelihood of events that claim lives or
damage property.
Over the past 15 years, insurers have become more ``sophisticated''
about rating and risk classification. Through the use of data mining
and third party data bases, like consumer credit reports, insurers have
dramatically increased the number of rating characteristics and rate
levels used.
We are certainly not against insurers using sophisticated analytic
tools and various data bases to identify the causes of accidents and
losses. We would applaud these actions if the results were employed to
promote loss prevention by helping consumers better understand the
behaviors associated with accidents and by providing price signals to
encourage consumers to avoid the risky behaviors surfaced by this
sophisticated research.
Unfortunately, insurers have generally not used the new risk
classification research to promote loss prevention. Rather, insurers
have used new risk classifications to undermine the loss prevention
role of insurance by placing much greater emphasis on risk factors
unrelated to loss prevention and almost wholly related to the economic
status of potential policyholders. The industry's new approach to risk
classification is a form of redlining, where a host of factors are
employed that are proxies for economic status and sometimes race.
For example, although Federal oversight of the impact of credit
scores in insurance underwriting and rating decisions has been quite
poor, \10\ it is well-documented in studies by the Texas and Missouri
Departments of Insurance that credit scoring is biased against low
income and minority consumers. \11\ And recently, GEICO's use of data
about occupation and educational status has garnered the attention of
New Jersey legislators. \12\ But other factors have not received
similar visibility. Several auto insurers use prior liability limits as
a major rating factor. This means that for two consumers who are
otherwise identical and who are both seeking the same coverage, the
consumer who previously had a minimum limits policy will be charged
more than the consumer who previously was able to afford a policy with
higher limits. As with credit scoring and occupation/educational status
information, this risk classification system clearly penalized lower
income consumers.
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\10\ Federal agencies with potential oversight authority paid
virtually no attention to the possible disparate impact of the use of
credit scoring in insurance until Congress mandated a study on this
matter as part of the Fair Access to Credit Transactions (FACT) Act
(Section 215). Unfortunately, the agency charged with completing this
study, the Federal Trade Commission, has chosen to use data for this
analysis from an industry-sponsored study that cannot be independently
verified for bias or accuracy. It is very likely, therefore, that the
study will offer an unreliable description of insurance credit scoring
and its alternatives.
\11\ ``Report to the 79th Legislature: Use of Credit Information
by Insurers in Texas,'' Texas Department of Insurance, December 30,
2004; ``Insurance-Based Credit Scores: Impact on Minority and Low
Income Populations in Missouri,'' Missouri Department of Insurance,
January 2004.
\12\ Letter from Consumer Federation of America and NJ CURE to
NAIC President Alessandro Iuppa regarding GEICO rating methods and
underwriting guidelines, March 14, 2006.
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Once again, deregulated ``competition'' alone will not protect
consumers from unfair risk classification and unfair discrimination.
Once again, this market failure demands close regulatory scrutiny of
the use of risk classification factors when underwriting, coverage and
rating decisions are made.
Let me present one more example of the illegitimate use of risk
classification factors to illustrate our concern. Insurers have
developed loss history data bases--data bases in which insurers report
claims filed by their policyholders that are then made available to
other insurers. Insurers initially used the claims history data bases--
Comprehensive Loss Underwriting Exchange (CLUE) reports, for example--
to verify the loss history reported by consumers when applying for new
policies. However, in recent years, insurers started data mining these
loss history data bases and decided that consumers who merely made an
inquiry about their coverage--didn't file a claim, but simply inquired
about their coverage--would be treated as if they had made a claim.
Penalizing a consumer for making an inquiry on his or her policy is not
just glaringly inequitable; it undermines loss prevention by
discouraging consumers from interacting with insurers about potentially
risky situations.
Although insurers and the purveyors of the claims data bases--
including ChoicePoint--have largely stopped this practice after much
criticism, simple competitive market forces without adequate oversight
harmed consumers over a long period and undermined the loss prevention
role of the insurance system. Moreover, as with the use of many
questionable risk classification factors, competitive forces without
regulatory oversight can actually exacerbate problems for consumers as
insurers compete in risk selection and price poor people out of
markets.
3. Insurance Cartels--Back to the Future
The insurance industry arose from cartel roots. For centuries,
property-casualty insurers have used so-called ``rating bureaus'' to
make rates for insurance companies to use jointly. Not many years ago,
these bureaus required that insurers charge rates developed by the
bureaus. (The last vestiges of this practice persisted into the 1990s.)
In recent years, the rate bureaus have stopped requiring the use of
their rates or even calculating full rates because of lawsuits by state
attorneys general. State attorneys general charged in court that the
last liability insurance crisis was caused in great part by insurers
sharply raising their prices to return to ISO rate levels in the mid-
1980s. As a result of a settlement with these states, ISO agreed to
move away from requiring final prices. ISO is an insurance rate bureau
or advisory organization. Historically, ISO was a means of controlling
competition. It still serves to restrain competition since it makes
``loss costs'' (the part of the rate that covers expected claims and
the costs of adjusting claims) which represent about 60-70 percent of
the rate. ISO also makes available expense data to which insurers can
compare their costs in setting their final rates. ISO sets classes of
risk that are adopted by many insurers. ISO diminishes competition
significantly through all of these activities. There are other such
organizations that also set pure premiums or do other activities that
result in joint insurance company decisions. These include the National
Council on Compensation Insurance (NCCI) and National Insurance
Services Organization (NISS). Examples of ISO's many anticompetitive
activities are attached.
Today the rate bureaus still produce joint price guidance for the
large preponderance of the rate. The rating bureaus start with historic
data for these costs and then actuarially manipulate the data (through
processes such as ``trending'' and ``loss development'') to determine
an estimate of the projected cost of claims and adjustment expenses in
the future period when the costs they are calculating will be used in
setting the rates for many insurers. Rate bureaus, of course, must bias
their projections to the high side to be sure that the resulting rates
or loss costs are high enough to cover the needs of the least
efficient, worst underwriting insurer member or subscriber to the
service.
Legal experts testifying before the House Judiciary Committee in
1993 concluded that, absent McCarran-Ferguson's antitrust exemption,
manipulation of historic loss data to project losses into the future
would be illegal (whereas the simple collection and distribution of
historic data itself would be legal). This is why there are no similar
rate bureaus in other industries. For instance, there is no CSO
(Contractor Services Office) predicting the cost of labor and materials
for construction of buildings in the construction trades for the next
year (to which contractors could add a factor to cover their overhead
and profit). The CSO participants would go to jail for such audacity.
Further, rate organizations like ISO file ``multipliers'' for
insurers to convert the loss costs into final rates. The insurer merely
has to tell ISO what overhead expense load and profit load they want
and a multiplier will be filed. The loss cost times the multiplier is
the rate the insurer will use. An insurer can, as ISO once did, use an
average expense of higher cost insurers for the expense load if it so
chooses plus the traditional ISO profit factor of 5 percent and
replicate the old ``bureau'' rate quite readily.
It is clear that the rate bureaus \13\ still have a significant
anti-competitive influence on insurance prices in America.
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\13\ By ``rate bureaus'' here I include the traditional bureaus
(such as ISO) but also the new bureaus that have a significant impact
on insurance pricing such as the catastrophe modelers (including RMS)
and other non-regulated organizations that impact insurance pricing and
other decisions across many insurers (credit scoring organizations like
Fair Isaac are one example).
The rate bureaus guide pricing with their loss cost/
---------------------------------------------------------------------------
multiplier methods.
The rate bureaus manipulate historic data in ways that
would not be legal absent the McCarran-Ferguson antitrust
exemption.
The rate bureaus also signal to the market that it is OK to
raise rates. The periodic ``hard'' markets are a return to rate
bureau pricing levels after falling below such pricing during
the ``soft'' market phase.
The rate bureaus signal other market activities, such as
when it is time for a market to be abandoned and consumers
left, possibly, with no insurance.
More recently, insurers have begun to utilize new third party
organizations (like RMS and Fair Isaac) to provide information (often
from ``black boxes'' beyond state insurance department regulatory
reach) for key insurance pricing and underwriting decisions, which
helps insurers to avoid scrutiny for their actions. These organizations
are not regulated by the state insurance departments and have a huge
impact on rates and underwriting decisions with no state oversight.
Indeed RMS's action, since it is not a regulated entity, may be a
violation of current antitrust laws.
4. Reverse Competition in Some Lines of Insurance
As indicated above, some lines of insurance, such as credit
insurance (including mortgage life insurance), title insurance and
forced placed insurance, suffer from ``reverse competition.'' Reverse
competition occurs when competition acts to drive prices up, not down.
This happens when the entity that selects the insurer is not the
ultimate consumer but a third party that receives some sort of kickback
(in the form of commissions, below-cost services, affiliate income,
sham reinsurance, etc.).
An example is credit insurance added to a car loan. The third-party
selecting the insurer is the car dealer who is offered commissions for
the deal. The dealer will often select the insurer with the biggest
kickback, not with the lower rate. This causes the price of the
insurance to rise and the consumer to pay higher rates.
Other examples of reverse competition occur in the title and
mortgage guaranty lines, where the product is required by a third party
and not the consumer paying for the coverage. In these two cases, the
insurer markets its product not to the consumer paying for the product,
but to the third party who is in the position to steer the ultimate
consumer to the insurer. This competition for the referrers of business
drives up the cost of insurance--hence, reverse competition.
We know from the investigations and settlements by New York
Attorney General Eliot Spitzer that even sophisticated buyers can
suffer from bid rigging and other negative consequences of ``reverse-
competition.'' Even when unsophisticated consumers purchase insurance
lines that don't typically have reverse competition, these buyers can
suffer similar consequences if they do not shop carefully. Independent
agents represent several insurance companies. At times, this can be
helpful, but not always. If a buyer is not diligent, an agent could
place the consumer into a higher priced insurer with a bigger
commission rate for the agent. Unfortunately, this happens too often
since regulators have not imposed suitability or lowest cost
requirements on the agents.
5. Claims Problems
Many consumers face a variety of claims problems. Often, their only
recourse is to retain an attorney, an option that is not affordable for
consumers in many situations. For example, many Gulf Coast residents
are in litigation over handling of homeowners claims by insurers after
Hurricane Katrina. We have seen many reports from consumers of
situations that appear to involve bad claims handling practices,
particularly related to policy forms that appear ambiguous. \14\
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\14\ Reviews of calls to the Americans for Insurance Reform
hotline are available at www.insurancereform.org.
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Some insurers have also adopted practices that routinely ``low-
ball'' claims offers through the use of computerized claims processing
and other techniques that have sought to cut claims costs arbitrarily.
6. The Revolving Door Between Regulators and the Insurance Industry
Results in Undue Industry Influence at the National Association
of Insurance Commissioners
The NAIC recently celebrated its founding by asking former
presidents of the Association to fete the organization. The list was
astonishing for the number of ex-regulators who now work for the
insurance industry:
2005: Diane Koken--currently Pennsylvania Commissioner
2004: Ernest Csiszar--moved in mid-term as NAIC President to
lobby on behalf of the property-casualty insurers as President
of the Property Casualty Insurers Association
2003: Mike Pickens--currently lobbies on behalf of insurers as
a private attorney
2002: Terrie Vaughn--currently lobbies on behalf of life
insurers as a Board Member of Principal Financial Group
2001: Kathleen Sebelius--currently Governor of Kansas
2000: George Nichols--currently works for New York Life
1998: Glenn Pomeroy--currently works and lobbies on behalf of
General Electric Insurance Solutions
1996: Brian Atkinson--currently President of the Insurers
Marketplace Standards Association, an organization controlled
and supported by life insurers
1993: Steve Foster--currently works for Deloitte and Touche
1992: Bill McCartney--currently works and lobbies on behalf of
USAA
The revolving door of regulators to industry and of industry to
regulators is particularly troubling given the role of the NAIC in
state insurance regulation. The NAIC plays a major role in guiding
state insurance oversight, yet it is organized as a non-profit trade
association of regulators and, consequently, lacks the public
accountability of a government agency, like an insurance department.
For example, it is not subject to Freedom of Information statutes. In
addition, policy decisions are made at the NAIC by allowing each state
one vote, not matter the population of the state. This means that the
Commissioner of Insurance in South Dakota has equal influence as the
California or New York regulator. The result is that regulators in
states comprising a minority of the country's population can determine
national policy for the entire country. This problem is exacerbated by
the inappropriate industry influence resulting from the revolving door
between regulators and industry.
Why Have Insurers Recently Embraced Federal Regulation (Again)?
The recent ``conversion'' of some insurers to the concept of
Federal regulation is based solely on the notion that such regulation
would be weaker. Insurers have, on occasion, sought Federal regulation
when the states increased regulatory control and the Federal regulatory
attitude was more laissez-faire. Thus, in the 1800s, the industry
argued in favor of a Federal role before the Supreme Court in Paul v.
Virginia, but the court ruled that the states controlled because
insurance was intrastate commerce.
Later, in the 1943 SEUA case, the Court reversed itself, declaring
that insurance was interstate commerce and that Federal antitrust and
other laws applied to insurance. By this time, Franklin Roosevelt was
in office and the Federal Government was a tougher regulator than were
the states. The industry sought, and obtained, the McCarran-Ferguson
Act. This law delegated exclusive authority for insurance regulation to
the states, with no routine Congressional review. The Act also granted
insurers a virtually unheard of exemption from antitrust laws, which
allowed insurance companies to collude in setting rates and to pursue
other anticompetitive practices without fear of Federal prosecution.
From 1943 until recently, the insurance industry has violently
opposed any Federal role in insurance regulation. In 1980, insurers
successfully lobbied to stop the Federal Trade Commission from
investigating deceptive acts and practices of any kind in the insurance
industry. They also convinced the White House that year to eliminate
the Federal Insurance Administration's work on insurance matters other
than flood insurance. Since that time, the industry has successfully
scuttled any attempt to require insurers to comply with Federal
antitrust laws and has even tried to avoid complying with Federal civil
rights laws.
Notice that the insurance industry is very pragmatic in their
selection of a preferred regulator. They always favor the least
regulation. It is not surprising that, today, the industry would again
seek a Federal role at a time they perceive little regulatory interest
at the Federal level. But, rather than going for full Federal control,
they have learned that there are ebbs and flows in regulatory oversight
at the Federal and state levels, so they seek the ability to switch
back and forth at will.
Further, the insurance industry has used the possibility of an
increased Federal role to pressure NAIC and the states into gutting
consumer protections over the last three or 4 years. Insurers have
repeatedly warned states that the only way to preserve their control
over insurance regulation is to weaken consumer protections. \15\
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\15\ The clearest attempt to inappropriately pressure the NAIC
occurred at their spring 2001 meeting in Nashville. There, speaking on
behalf of the entire industry, Paul Mattera of Liberty Mutual Insurance
Company told the NAIC that they were losing insurance companies every
day to political support for the Federal option and that their huge
effort in 2000 to deregulate and speed product approval was too little,
too late. He called for an immediate step-up of deregulation and
measurable ``victories'' of deregulation to stem the tide. In a July 9,
2001, Wall Street Journal article by Chris Oster, Mattera admitted his
intent was to get a ``headline or two to get people refocused.'' His
remarks were so offensive that CFA's Bob Hunter went up to several top
commissioners immediately afterward and said that Materra's speech was
the most embarrassing thing he had witnessed in 40 years of attending
NAIC meetings. He was particularly embarrassed since no commissioner
challenged Mattera and many commissioners had almost begged the
industry to grant them more time to deliver whatever the industry
wanted.
Jane Bryant Quinn, in her speech to the NAIC on October 3, 2000,
said: ``Now the industry is pressing state regulators to be even more
hands-off with the threat that otherwise they'll go to the feds.'' So
other observers of the NAIC see this pressure as potentially damaging
to consumers.
Larry Forrester, President of the National Association of Mutual
Insurance Companies (NAMIC), wrote an article in the National
Underwriter of June 4, 2000. In it he said, `` . . . how long will
Congress and our own industry watch and wait while our competitors
continue to operate in a more uniform and less burdensome regulatory
environment? Momentum for Federal regulation appears to be building in
Washington and state officials should be as aware of it as any of the
rest of us who have lobbyists in the nation's capital . . . NAIC's
ideas for speed to market, complete with deadlines for action, are
especially important. Congress and the industry will be watching
closely . . . The long knives for state regulation are already out . .
. ''
In a press release entitled ``Alliance Advocates Simplification of
Personal Lines Regulation at NCOIL Meeting; Sees it as Key to Fighting
Federal Control'' dated March 2, 2001, John Lobert, Senior VP of the
Alliance of American Insurers, said, ``Absent prompt and rapid progress
(in deregulation) . . . others in the financial services industry--
including insurers--will aggressively pursue Federal regulation of our
business . . . ''
In the NAIC meeting of June 2006, Neil Alldredge of the National
Association of Mutual Insurance Companies pointed out that ``states are
making progress with rate deregulation reforms. In the past 4 years, 16
states have enacted various price deregulation reforms . . . (but)
change is not happening quickly enough . . . He concluded that the U.S.
Congress is interested in insurance regulatory modernization and the
insurance industry will continue to educate Congress about the slow
pace of change in the states.'' Minutes of the NAIC/Industry Liaison
Committee, June 10, 2006.
---------------------------------------------------------------------------
They have been assisted in this effort by a series of House
hearings, which rather than focusing on the need for improved consumer
protection have served as a platform for a few Representatives to issue
ominous statements calling on the states to further deregulate
insurance oversight, ``or else.''
This strategy of ``whipsawing'' state regulators to lower standards
benefits all elements of the insurance industry, even those that do not
support any Federal regulatory approach. Even if Congress does nothing,
the threat of Federal intervention is enough to scare state regulators
into acceding to insurer demands to weaken consumer protections.
Unfortunately for consumers, the strategy has already paid off,
before the first insurance bill is ever marked up in Congress. In the
last few years, the NAIC has moved suddenly to cut consumer protections
adopted over a period of decades. The NAIC is terrified of
Congressional action and sees the way to ``save'' state regulation is
to gut consumer protections to placate insurance companies and
encourage them to stay in the fold. This strategy of saving the village
by burning it has made state regulation more, not less vulnerable to
Federal takeover.
The NAIC has also failed to act in the face of a number of serious
problems facing consumers in the insurance market.
NAIC Failures To Act
1. Failure to do anything about abuses in the small face life
market. Instead, NAIC adopted an incomprehensible disclosure on
premiums exceeding benefits, but did nothing on overcharges,
multiple policies, or unfair sales practices.
2. Failure to do anything meaningful about unsuitable sales in any
line of insurance. Suitability requirements still do not exist
for life insurance sales even in the wake of the remarkable
market conduct scandals of the late 1980s and early 1990s. A
senior annuities protection model was finally adopted (after
years of debate) that is so limited as to do nothing to protect
consumers.
3. Failure to call for collection and public disclosure of market
performance data after years of requests for regulators to
enhance market data, as NAIC weakened consumer protections. How
does one test whether a market is workably competitive without
data on market shares by zip code and other tests?
4. Failure to call for repeal of the antitrust exemption in the
McCarran-Ferguson Act as they push forward deregulation model
bills.
5. Failure to do anything as an organization on the use of credit
scoring for insurance purposes. In the absence of NAIC action,
industry misinformation about credit scoring has dominated
state legislative debates. NAIC's failure to analyze the issue
and perform any studies on consumer impact, especially on lower
income consumers and minorities, has been a remarkable
dereliction of duty.
6. Failure to end use of occupation and education in underwriting
and pricing of auto insurance.
7. Failure to address problems with risk selection. There has not
even been a discussion of insurers' explosive use of
underwriting and rating factors targeted at socio-economic
characteristics: credit scoring, check writing, prior bodily
injury coverage limits purchased by the applicant, prior
insurer, prior nonstandard insurer, not-at-fault claims, not to
mention use of genetic information, where Congress has had to
recently act to fill the regulatory void.
8. Failure to heed calls from consumer leaders to do something about
contingency commissions for decades until Attorney General
Spitzer finally acted.
9. Failure to do anything on single premium credit insurance abuses.
10. Failure to take recent steps on redlining or insurance
availability or affordability. Many states no longer even look
at these issues, 30 years after the Federal Government issued
studies documenting the abusive practices of insurers in this
regard. Yet, ongoing lawsuits continue to reveal that redlining
practices harm the most vulnerable consumers.
11. Failure to take meaningful action on conflict of interest
restrictions even after Ernie Csiszar left his post as South
Carolina regulator and President of the NAIC in September 2004
to become President of the Property Casualty Insurers
Association of America after negotiating deregulation
provisions in the SMART Act desired by PCIAA members.
NAIC Rollbacks of Consumer Protections
1. The NAIC pushed through small business property-casualty
deregulation, without doing anything to reflect consumer
concerns (indeed, even refusing to tell consumer groups why
they rejected their specific proposals) or to upgrade ``back-
end'' market conduct quality, despite promises to do so. As a
result, many states adopted the approach and have rolled back
their regulatory protections for small businesses.
2. States are rolling back consumer protections in auto insurance as
well. New Jersey, Texas, Louisiana, and New Hampshire have done
so in the last 2 years.
3. NAIC has terminated free access for consumers to the annual
statements of insurance companies at a time when the need for
enhanced disclosure is needed if price regulation is to be
reduced.
Can Competition Alone Guarantee a Fair, Competitive Insurance Market?
Consumers, who over the last 30 years have been the victims of
vanishing premiums, churning, race-based pricing, creaming, and
consumer credit insurance policies that pay pennies in claims per
dollar in premium, are not clamoring for such policies to be brought to
market with even less regulatory oversight than in the past. The fact
that ``speed-to-market'' has been identified as a vital issue in
modernizing insurance regulation demonstrates that some policymakers
have bought into insurers' claims that less regulation benefits
consumers. We disagree. We think smarter, more efficient regulation
benefits both consumers and insurers and leads to more beneficial
competition. Mindless deregulation, on the other hand, will harm
consumers.
The need for better regulation that benefits both consumers and
insurers is being exploited by some in the insurance industry to
eliminate the most effective aspects of state insurance regulation such
as rate regulation, in favor of a model based on the premise that
competition alone will protect consumers. \16\ We question the entire
foundation behind the assumption that virtually no front-end regulation
of insurance rates and terms coupled with more back-end (market
conduct) regulation is better for consumers. The track record of market
conduct regulation has been extremely poor. As noted above, insurance
regulators rarely are the first to identify major problems in the
marketplace.
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\16\ If America moves to a ``competitive'' model, certain steps
must first be taken to ensure ``true competition'' and prevent consumer
harm. First, insurance lines must be assessed to determine whether a
competitive model, e.g., the alleviation of rate regulation, is even
appropriate. This assessment must have as its focus how the market
works for consumers. For example, states cannot do away with rate
regulation of consumer credit insurance and other types of insurance
subject to reverse competition. The need for relative cost information
and the complexity of the line/policy are factors that must be
considered.
If certain lines are identified as appropriate for a
``competitive'' system, before such a system can be implemented, the
following must be in place:
* Policies must be transparent: Disclosure, policy form and other
laws must create transparent policies. Consumers must be able to
comprehend the policy's value, coverage, actual costs, including
commissions and fees. If consumers cannot adequately compare actual
costs and value, and if consumers are not given the best rate for which
they qualify, there can be no true competition.
* Policies should be standardized to promote comparison-shopping.
* Antitrust laws must apply.
* Anti-rebate, anti-group and other anti-competitive state laws
must be repealed.
* Strong market conduct and enforcement rules must be in place with
adequate penalties to serve as an incentive to compete fairly and
honestly.
* Consumers must be able to hold companies legally accountable
through strong private remedies for losses suffered as a result of
company wrongdoing.
* Consumers must have knowledge of and control over flow and access
of data about their insurance history through strong privacy rules.
* There must be an independent consumer advocate to review and
assess the market, assure the public that the market is workably
competitive, and determine if policies are transparent.
Safeguards to protect against competition based solely on risk
selection must also be in place to prevent redlining and other
problems, particularly with policies that are subject to either a
public or private mandate. If a competitive system is implemented, the
market must be tested on a regular basis to make sure that the system
is working and to identify any market dislocations. Standby rate
regulation should be available in the event the ``competitive model''
becomes dysfunctional.
If the industry will not agree to disclosing actual costs,
including all fees and commissions, ensuring transparency of policies,
strong market conduct rules and enforcement then it is not advocating
true competition, only deregulation.
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Given this track record, market conduct standards and examinations
by regulators must be dramatically improved to enable regulators to
become the first to identify and fix problems in the marketplace and to
address market conduct problems on a national basis. From an efficiency
and consumer protection perspective, it makes no sense to lessen
efforts to prevent the introduction of unfair and inappropriate
policies in the marketplace. It takes far less effort to prevent an
inappropriate insurance policy or market practice from being introduced
than to examine the practice, stop a company from doing it and provide
proper restitution to consumers after the fact.
The unique nature of insurance policies and insurance companies
requires more extensive front-end regulation than other consumer
commodities. And while insurance markets can be structured to promote
beneficial price competition, deregulation does not lead to, let alone
guarantee, such beneficial price competition.
Front-end regulation should be designed to prevent market conduct
problems from occurring instead of inviting those problems to occur. It
should also promote beneficial competition, such as price competition
and loss mitigation efforts, and deter destructive competition, such as
selection competition, and unfair sales and claims settlement
practices. Simply stated, strong, smart, efficient and consistent
front-end regulation is critical for meaningful consumer protection and
absolutely necessary to any meaningful modernization of insurance
regulation.
Is Regulation Incompatible With Competition?
The insurance industry promotes a myth: that regulation and
competition are incompatible. This is demonstrably untrue. Regulation
and competition both seek the same goal: the lowest possible price
consistent with a reasonable return for the seller. There is no reason
that these systems cannot coexist and even compliment each other.
The proof that competition and regulation can work together to
benefit consumers and the industry is the manner in which California
regulates auto insurance under Proposition 103. Indeed, that was the
theory of the drafters (including CFA's Bob Hunter) of Proposition 103.
Before Proposition 103, Californians had experienced significant price
increases under a system of ``open competition'' of the sort the
insurers now seek at the Federal level. (No regulation of price is
permitted but rate collusion by rating bureaus is allowed, while
consumers receive very little help in getting information.) Proposition
103 sought to maximize competition by eliminating the state antitrust
exemption, laws that forbade agents to compete, laws that prohibited
buying groups from forming, and so on. It also imposed the best system
of prior approval of insurance rates and forms in the nation, with very
clear rules on how rates would be judged.
As our in-depth study of regulation by the states revealed, \17\
California's regulatory transformation--to rely on both maximum
regulation and competition--has produced remarkable results for auto
insurance consumers and for the insurance companies doing business
there. The study reported that insurers realized very nice profits,
above the national average, while consumers saw the average price for
auto insurance drop from $747.97 in 1989, the year Proposition 103 was
implemented, to $717.98 in 1998. Meanwhile, the average premium rose
nationally from $551.95 in 1989 to $704.32 in 1998. California's rank
dropped from the third costliest state to the 20th.
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\17\ ``Why Not the Best? The Most Effective Auto Insurance
Regulation in the Nation,'' June 6, 2000; www.consumerfed.org.
---------------------------------------------------------------------------
I can update this information through 2003. \18\ As of 2003, the
average annual premium in California was $821.11 (20th in the nation)
versus $820.91 for the nation. So, from the time California went from
reliance simply on competition as insurers envisioned it to full
competition and regulation, the average auto rate rose by 9.8 percent
while the national average rose by 48.7 percent. In 1989, California
consumers were paying 36 percent more that the national average, while
today they pay virtually the national average price. A powerhouse
result!
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\18\ State Average Expenditures and Premiums for Personal
Automobile Insurance in 2003, NAIC, July 2005.
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How Can Uniformity Be Achieved Without Loss of Consumer Protections?
CFA would endorse a more uniform national or multi-state approach
if certain rigorous conditions were met. The attached fact sheet,
Consumer Principles and Standards for Insurance Regulation, provides
detailed standards that regulators should meet to properly protect
consumers, whether at the state, multi-state or national level. It
should be noted that none of the proposals offered by insurers or on
behalf of insurers (such as the Oxley-Baker ``SMART'' proposal) come
close to meeting these standards.
One obvious vehicle for multi-state enforcement of insurance
standards is the NAIC. The NAIC Commission of the Interstate Insurance
Product Regulation Compact began operation with a small staff on June
13th of this year. We have favored empowering the NAIC to implement
such a multi-state approach only if the NAIC's decisionmaking
procedures are overhauled to make it a more transparent, accountable
body with meaningful regulatory powers. These steps would include
public access to insurer filings during the review process and formal,
funded consumer participation. To date, regulators have refused to take
these steps. Moreover, the Commission will be unlikely to carry out its
role as a truly independent regulator due to inadequate funding. The
Commission will be receiving and reviewing life, annuity and long term
care filings for at least 27 states, but its current budget only allows
for a total staff of three people. As stated above, recent NAIC
failures demonstrate that it is not an impartial regulatory body that
can be counted on to adequately consider consumer needs.
Because of its historical domination by the insurance industry,
consumer organizations are extremely skeptical about its ability to
confer national treatment in a fair and democratic way. It is essential
that any Federal legislation to empower the NAIC include standards to
prevent undue industry influence and ensure the NAIC can operate as an
effective regulatory entity, including:
Democratic processes/accountability to the public, which
must include: notice and comment rulemaking; on the record
voting; accurate minutes; rules against ex-parte communication;
public meeting/disclosure/sunshine rules/FOIA applicability.
A decisionmaking process subject to an excellent
Administrative Procedures Act.
Strong conflict of interest and revolving door statutes
similar to those of the Federal Government to prevent undue
insurance industry influence. If decisionmaking members of the
NAIC have connections, past or present, to certain companies,
the process will not be perceived as fair.
Independent funding. The NAIC cannot serve as a regulatory
entity if it relies on the industry for its funding. The bill
should establish a system of state funding to the NAIC at a set
percentage of premium so that all states and insured entities
equally fund the NAIC.
National Independent Advocate. To offset industry
domination, an independent, national, public insurance counsel/
ombudsman with necessary funding is needed. Consumers must be
adequately represented in the process for the process to be
accountable and credible.
Regulation by Domiciliary States Will Lead to Unacceptably Weak
Standards
We oppose allowing a domiciliary state to essentially act as a
national regulator by allowing domiciled companies to comply only with
that state's standards. This approach has several potential problems,
including the following:
It promotes forum shopping. Companies would move from state
to state to secure regulation from the state that has the least
capacity to regulate, provoking a ``race to the bottom.''
The state of domicile is often under the greatest political
and economic pressure not to act to end harmful business
practices by a powerful in-state company.
The resources of states to properly regulate insurance vary
widely.
It is antithetical to states' rights to apply laws from
other states to any business operating within their borders. If
such a move is made, however, it is imperative that consumers
have a national, independent advocate.
It promotes a lack of consistency in regulation because
companies could change domiciliary state status.
Residents of one state cannot be adequately represented by
the legislature/executive of another. If a resident's state
consumer protections did not apply, the resident would be
subject to laws of a state in which they have no
representation. How can a consumer living in Colorado influence
decisions made in Connecticut?
Rather than focusing on protecting consumers, this system
would change the focus to protecting itself and its regulatory
turf, as has happened in the bank regulatory system. State and
Federal banking regulators have competed to lower their
consumer protections to lure banks to their system.
We would be particularly concerned with proposals to give
exclusive control of market conduct exams to a domiciliary
state. Unscheduled exams by a state are very important for that
state's ability to protect its consumers from abuse. States
must retain the ability to act quickly based on complaints or
other information.
``One-Stop'' Policy Approval Must Meet High Standards
Allowing insurers to get approval for their products from a single,
unaccountable, non-state regulatory entity would also lead to extremely
weak protections unless several conditions are met:
An entity, such as the NAIC's Coordinated Advertising, Rate
and Form Review Authority (CARFRA), that is not subject to
authorizing legislation, due process standards, public
accountability, prohibitions on ex-parte communications, and
similar standards should not have the authority to determine
which lines would be subject to a one-stop approval process or
develop national standards. It also must have funding through
the states, not directly from insurers. Independent funding
ensures that the regulatory entity is not subject to unfair and
detrimental industry influence.
Any standards that apply must be high and improve the
ability of consumers to understand policies and compare on the
basis of price. Consumers do not want ``speed-to-market'' for
bad policies.
Any entity that serves as national standard setter,
reviewer and/or approver needs Federal authorizing legislation.
An ``interstate compact'' or ``memorandum of understanding'' is
unworkable and unaccountable.
Giving the regulated insurer the option to choose which
entity regulates it is an invitation to a race to the bottom
for regulatory standards.
Standardization of forms by line has the potential to
assist consumers if done in such a way to enhance understanding
of terms, benefits, limitations and actual costs of policies.
Public/consumer input is essential if the entity makes
decisions that ultimately affect information provided to and
rates charged consumers.
We support the concept of an electronic central filing
repository, but the public must have access to it.
To retain oversight of policies and rates affecting their
residents, states must have the ability to reject decisions of
the entity.
Any national system must include a national, externally
funded consumer-public advocate/counsel to represent consumers
in standard setting, development of forms, rate approval, etc.
Current Federal Proposals
Given the extremely sorry state of state regulation, it is hard to
believe that a Federal bill could be crafted that would make matters
worse. Yet, insurers have managed to do it--not once, but twice! Their
bills not only don't provide the basic standards of consumer protection
cited above, they would undermine the low standards of consumer
protection now extant in many states. For example, several trade
associations have drafted legislation that would create an ``optional
Federal charter'' for insurance regulation, patterned on the nation's
bifurcated Federal/state bank chartering structure. In response,
Senator Ernest Hollings introduced legislation before he retired that
would establish Federal minimum standards for insurance regulation and
repeal insurers' antitrust exemption under the McCarran-Ferguson Act.
Senator Hollings' goal was to prevent competition between state and
Federal regulators to lower standards. Most recently, Representatives
Michael Oxley and Richard Baker have circulated a discussion draft
entitled the ``State Modernization and Regulatory Transparency (SMART)
Act.'' We will comment separately on each.
Optional Federal Insurance Charter
The bills that have been drafted by trade associations like the
American Bankers Association and the American Council of Life Insurers
would create a Federal regulator that would have little, if any,
authority to regulate price or product, regardless of how non-
competitive the market for a particular line of insurance might be.
They also offer little improvement in consumer information or
protection systems to address the major problems cited above. Insurers
would be able to choose whether to be regulated by this Federal body or
by state regulators.
Consumer organizations strongly oppose an optional Federal charter
that allows the regulated company, at its sole discretion, to pick its
regulator. This is a prescription for regulatory arbitrage that can
only undermine needed consumer protections. Indeed the drafters of such
proposals have openly stated that this is their goal. If elements of
the insurance industry truly want to obtain uniformity of regulation,
``speed to market'' and other advantages through a Federal regulator,
let them propose a Federal approach that does not allow insurers to run
back to the states when regulation gets tougher. We could all debate
the merits of that approach.
CFA and the entire consumer community stand ready to fight optional
charters with all the strength we can muster.
The Insurance Consumer Protection Act of 2003, S. 1373
Only one recent bill considers the consumer perspective in its
design, adopting many of the consumer protection standards cited in
this testimony. That is S. 1373 introduced by Senator Hollings. The
bill would adopt a unitary Federal regulatory system under which all
interstate insurers would be regulated. Intrastate insurers would
continue to be regulated by the states.
The bill's regulatory structure requires Federal prior approval of
prices to protect consumers, including some of the approval procedures
(such as hearing requirements when prices change significantly) being
used so effectively in California. It requires annual market conduct
exams. It creates an office of consumer protection. It enhances
competition by removing the antitrust protection insurers hide behind
in ratemaking. It improves consumer information and creates a system of
consumer feedback.
If Federal regulation is to be considered, S. 1373 should be the
baseline for any debate on the subject.
SMART Act
Rather than increase insurance consumer protections for individuals
and small businesses while spurring states to increase the uniformity
of insurance regulation, this sweeping proposal would override
important state consumer protection laws, sanction anticompetitive
practices by insurance companies and incite state regulators into a
competition to further weaken insurance oversight. It is quite simply
one of the most grievously flawed and one-sided pieces of legislation
that we have ever seen, with absolutely no protections for consumers.
The consumers who will be harmed by it are our nation's most
vulnerable: the oldest, the poorest and the sickest.
For example, the discussion draft would preempt state regulation of
insurance rates. This would leave millions of consumers vulnerable to
price gouging, as well as abusive and discriminatory insurance
classification practices. It would also encourage a return to insurance
redlining, as deregulation of prices would include the lifting of state
controls on territorial line drawing. States would also be helpless to
stop the misuse of risk classification information, such as credit
scores, territorial data and the details of consumers' prior insurance
history, for pricing purposes. The draft bill goes so far as to
deregulate cartel-like organizations such as the Insurance Services
Office and the National Council on Compensation Insurance, while
leaving the Federal antitrust exemption fully intact.
What the draft does not do is as revealing as what it does require.
It does not create a Federal office to represent consumer interests,
although the draft creates two positions to represent insurer
interests. It takes no steps to spur increased competition in the
insurance industry, such as providing assistance or information to the
millions of consumers who find it extremely difficult to comparison
shop for this complex and expensive product, or eliminating the
antitrust exemption that insurers currently enjoy under the McCarran-
Ferguson Act. Insurers are not required to meet community reinvestment
requirements, as banks are, to guarantee that insurance is available in
underserved communities. Nothing is done to prevent insurers from using
inappropriate information, such as credit scores or a person's income,
to develop insurance rates.
CFA supports the goals outlined in several sections of this draft.
As stated above, we are not opposed to increasing uniformity in
insurance regulation. Unfortunately, however, in almost every
circumstance in which the draft attempts to ensure uniformity, it
chooses the weakest consumer protection approach possible. (For more
details on CFA's concerns with this draft, please see the attached
letter to House Financial Services leaders dated September 9, 2004.)
H.R. 5637--Non-admitted Insurance/Reinsurance Regulation
This sharply scaled-back version of the SMART Act would only apply
to surplus (non-admitted insurance) lines of insurance and reinsurance.
It would provide for a method of collecting state premium taxes for
surplus lines and allocating this income to the states. It would give
deference to the regulations of the home state of the entity purchasing
the insurance policy and in regulating surplus lines brokers. Further,
the bill would adopt the NAIC's non-admitted insurance model act for
eligibility requirements for surplus lines carriers on a national
basis, preempting other state laws. It allows large buyers of insurance
to get surplus lines coverage without having to show, as most states
require today, that a search of the licensed market was made and no
coverage was found.
It would give deference to the home state of the ceding insurer for
regulation, prohibiting any state from enforcing extra-territorial
authority of its laws. Solvency regulation would be done by the state
of domicile of the reinsurer.
CFA opposes this bill because it is based upon many faulty
assumptions. First, it assumes that large buyers of insurance are
sophisticated enough that they don't need protections that would
normally be provided in an insurance transaction. Of course, the
investigations and settlements implemented by New York Attorney General
Eliot Spitzer mentioned above refute this assumption.
Second, the bill assumes that the domiciled state of an insurer is
best for solvency regulation. This is not true. When CFA's Bob Hunter
was Insurance Commissioner of Texas, he had to investigate an insolvent
insurer in another state because the commissioner of that state refused
to do so. Several directors of that insurer were former Governors and
insurance commissioners of the domiciliary state. We list above several
other objections to giving deference to the state of domicile, which
are also relevant.
Third, the bill raises concerns about great regulatory confusion
and ineptitude that would likely result when the state of the insured
entity regulates all parts of that entity's insurance transaction. What
does Iowa, for instance, know about the hurricane risk/claims of the
operations of an Iowa business on the Gulf Coast or how no-fault or
other unique state laws should apply to a given claim situation?
Fourth, the bill would allow consumers to be harmed in the event
that a surplus lines insurer becomes insolvent. This is because the
guaranty associations in all states do not cover claims for surplus
lines insurers. This may be no problem for the defunct policyholder and
the defunct insurer, but it sure is a problem for the people that the
policyholder may have injured.
Federal Insurance Reform That Insurers Won't Discuss: Amending the
McCarran-Ferguson Act To Provide Federal Oversight of and,
Perhaps, Minimum Standards for Efficient and Effective
Regulation
Insurers want competition alone to determine rates, they say. How
about a simple repeal of the antitrust exemption in the McCarran-
Ferguson Act to test their desire to compete under the same rules as
normal American businesses?
Another amendment to the McCarran Act we would suggest is to do
what should have been done at the beginning of the delegation of
authority to the states: have the FTC and other Federal agencies
perform scheduled oversight of the states' regulatory performance and
propose minimum standards for effective and efficient consumer
protection. The Hollings bill or relevant provisions of Proposition 103
in California might be the basis for such minimum standards.
Conclusion
CFA looks forward to working with the Committee to strengthen
consumer protection for insurance consumers, Mr. Chairman. I will be
happy to respond to questions at the appropriate time.
Attachment 1
Consumer Principles and Standards for Insurance Regulation
1. Consumers should have access to timely and meaningful information
about the costs, terms, risks and benefits of insurance
policies.
Meaningful disclosure prior to sale tailored for particular
policies and written at the education level of the average
consumer sufficient to educate and enable consumers to assess a
particular policy and its value should be required for all
insurance; it should be standardized by line to facilitate
comparison shopping; it should include comparative prices,
terms, conditions, limitations, exclusions, loss ratio
expected, commissions/fees and information on seller (service
and solvency); it should address non-English speaking or ESL
populations.
Insurance departments should identify, based on inquiries
and market conduct exams, populations that may need directed
education efforts, e.g., seniors, low-income, low education.
Disclosure should be made appropriate for medium in which
product is sold, e.g., in person, by telephone, on-line.
Loss ratios should be disclosed in such a way that
consumers can compare them for similar policies in the market,
e.g., a scale based on insurer filings developed by insurance
regulators or an independent third party.
Non-term life insurance policies, e.g., those that build
cash values, should include rate of return disclosure. This
would provide consumers with a tool, analogous to the APR
required in loan contracts, with which they could compare
competing cash value policies. It would also help them in
deciding whether to buy cash value policies.
A free look period should be required; with meaningful
state guidelines to assess the appropriateness of a policy and
value based on standards the state creates from data for
similar policies.
Comparative data on insurers' complaint records, length of
time to settle claims by size of claim, solvency information,
and coverage ratings (e.g., policies should be ranked based on
actuarial value so a consumer knows if comparing apples to
apples) should be available to the public.
Significant changes at renewal must be clearly presented as
warnings to consumers, e.g., changes in deductibles for wind
loss.
Information on claims policy and filing process should be
readily available to all consumers and included in policy
information.
Sellers should determine and consumers should be informed
of whether insurance coverage replaces or supplements already
existing coverage to protect against over-insuring, e.g., life
and credit.
Consumer Bill of Rights, tailored for each line, should
accompany every policy.
Consumer feedback to the insurance department should be
sought after every transaction (e.g., after policy sale,
renewal, termination, claim denial). The insurer should give
the consumer notice of feedback procedure at the end of the
transaction, e.g., form on-line or toll-free telephone number.
2. Insurance policies should be designed to promote competition,
facilitate comparison-shopping and provide meaningful and
needed protection against loss.
Disclosure requirements above apply here as well and should
be included in the design of policy and in the policy form
approval process.
Policies must be transparent and standardized so that true
price competition can prevail. Components of the insurance
policy must be clear to the consumer, e.g., the actual current
and future cost, including commissions and penalties.
Suitability or appropriateness rules should be in place and
strictly enforced, particularly for investment/cash value
policies. Companies must have clear standards for determining
suitability and compliance mechanism. For example, sellers of
variable life insurance are required to find that the sales
that their representatives make are suitable for the buyers.
Such a requirement should apply to all life insurance policies,
particularly when replacement of a policy is at issue.
``Junk'' policies, including those that do not meet a
minimum loss ratio, should be identified and prohibited. Low-
value policies should be clearly identified and subject to a
set of strictly enforced standards that ensure minimum value
for consumers.
Where policies are subject to reverse competition, special
protections are needed against tie-ins, overpricing, e.g.,
action to limit credit insurance rates.
3. All consumers should have access to adequate coverage and not be
subject to unfair discrimination.
Where coverage is mandated by the state or required as part
of another transaction/purchase by the private market (e.g.,
mortgage), regulatory intervention is appropriate to assure
reasonable affordability and guarantee availability.
Market reforms in the area of health insurance should
include guaranteed issue and community rating and, where
needed, subsidies to assure health care is affordable for all.
Information sufficient to allow public determination of
unfair discrimination must be available. Geo-code data, rating
classifications and underwriting guidelines, for example,
should be reported to regulatory authorities for review and
made public.
Regulatory entities should conduct ongoing, aggressive
market conduct reviews to assess whether unfair discrimination
is present and to punish and remedy it if found, e.g.,
redlining reviews (analysis of market shares by census tracts
or zip codes, analysis of questionable rating criteria such as
credit rating), reviews of pricing methods, and reviews of all
forms of underwriting instructions, including oral instructions
to producers.
Insurance companies should be required to invest in
communities and market and sell policies to prevent or remedy
availability problems in communities.
Clear anti-discrimination standards must be enforced so
that underwriting and pricing are not unfairly discriminatory.
Prohibited criteria should include race, national origin,
gender, marital status, sexual preference, income, language,
religion, credit history, domestic violence, and, as feasible,
age and disabilities. Underwriting and rating classes should be
demonstrably related to risk and backed by a public, credible
statistical analysis that proves the risk-related result.
4. All consumers should reap the benefits of technological changes in
the marketplace that decrease prices and promote efficiency and
convenience.
Rules should be in place to protect against redlining and
other forms of unfair discrimination via certain technologies,
e.g., if companies only offer better rates, etc. online.
Regulators should take steps to certify that online sellers
of insurance are genuine, licensed entities and tailor consumer
protection, UTPA, etc. to the technology to ensure consumers
are protected to the same degree regardless of how and where
they purchase policies.
Regulators should develop rules/principles for e-commerce
(or use those developed for other financial firms if
appropriate and applicable.)
In order to keep pace with changes and determine whether
any specific regulatory action is needed, regulators should
assess whether and to what extent technological changes are
decreasing costs and what, if any, harm or benefits accrue to
consumers.
A regulatory entity, on its own or through delegation to an
independent third party, should become the portal through which
consumers go to find acceptable sites on the web. The standards
for linking to acceptable insurer sites via the entity and the
records of the insurers should be public; the sites should be
verified/reviewed frequently and the data from the reviews also
made public.
5. Consumers should have control over whether their personal
information is shared with affiliates or third parties.
Personal financial information should not be disclosed for
purposes other than the one for which it is given unless the
consumer provides prior written or other form of verifiable
consent.
Consumers should have access to the information held by the
insurance company to make sure it is timely, accurate and
complete. They should be periodically notified how they can
obtain such information and how to correct errors.
Consumers should not be denied policies or services because
they refuse to share information (unless information is needed
to complete the transaction).
Consumers should have meaningful and timely notice of the
company's privacy policy and their rights and how the company
plans to use, collect and or disclose information about the
consumer.
Insurance companies should have a clear set of standards
for maintaining the security of information and have methods to
ensure compliance.
Health information is particularly sensitive and, in
addition to a strong opt-in, requires particularly tight
control and use only by persons who need to see the information
for the purpose for which the consumer has agreed to the
sharing of the data.
Protections should not be denied to beneficiaries and
claimants because a policy is purchased by a commercial entity
rather than by an individual (e.g., a worker should get privacy
protection under workers' compensation).
6. Consumers should have access to a meaningful redress mechanism when
they suffer losses from fraud, deceptive practices or other
violations; wrongdoers should be held accountable directly to
consumers.
Aggrieved consumers must have the ability to hold insurers
directly accountable for losses suffered due to their actions.
UTPAs should provide private cause of action.
Alternative Dispute Resolution clauses should be permitted
and enforceable in consumer insurance contracts only if the ADR
process is: 1) contractually mandated with non-binding results,
2) at the option of the insured/beneficiary with binding
results, or 3) at the option of the insured/beneficiary with
nonbinding results.
Bad faith causes of action must be available to consumers.
When regulators engage in settlements on behalf of
consumers, there should be an external, consumer advisory
committee or other mechanism to assess fairness of settlement
and any redress mechanism developed should be an independent,
fair and neutral decisionmaker.
Private attorney general provisions should be included in
insurance laws.
There should be an independent agency that has as its
mission to investigate and enforce deceptive and fraudulent
practices by insurers, e.g., the reauthorization of FTC.
7. Consumers should enjoy a regulatory structure that is accountable to
the public, promotes competition, remedies market failures and
abusive practices, preserves the financial soundness of the
industry and protects policyholders' funds, and is responsive
to the needs of consumers.
Insurance regulators must have a clear mission statement
that includes as a primary goal the protection of consumers:
The mission statement must declare basic fundamentals by
line of insurance (such as whether the state relies on rate
regulation or competition for pricing). Whichever approach is
used, the statement must explain how it is accomplished. For
instance, if competition is used, the state must post the
review of competition (e.g., market shares, concentration by
zone, etc.) to show that the market for the line is workably
competitive, apply anti-trust laws, allow groups to form for
the sole purpose of buying insurance, allow rebates so agents
will compete, assure that price information is available from
an independent source, etc. If regulation is used, the process
must be described, including access to proposed rates and other
proposals for the public, intervention opportunities, etc.
Consumer bills of rights should be crafted for each line of
insurance and consumers should have easily accessible
information about their rights.
Regulators should focus on online monitoring and
certification to protect against fraudulent companies.
A department or division within the regulatory body should
be established for education and outreach to consumers,
including providing:
Interactive websites to collect from and disseminate
information to consumers, including information about
complaints, complaint ratios and consumer rights with
regard to policies and claims.
Access to information sources should be user friendly.
Counseling services to assist consumers, e.g., with
health insurance purchases, claims, etc. where needed
should be established.
Consumers should have access to a national, publicly
available data base on complaints against companies/sellers,
i.e., the NAIC data base. (NAIC is implementing this.)
To promote efficiency, centralized electronic filing and
use of centralized filing data for information on rates for
organizations making rate information available to consumers,
e.g., help develop the information brokering business.
Regulatory system should be subject to sunshine laws that
require all regulatory actions to take place in public unless
clearly warranted and specified criteria apply. Any insurer
claim of trade secret status of data supplied to the regulatory
entity must be subject to judicial review with the burden of
proof on the insurer.
Strong conflict of interest, code of ethics and anti-
revolving door statutes are essential to protect the public.
Election of insurance commissioners must be accompanied by
a prohibition against industry financial support in such
elections.
Adequate and enforceable standards for training and
education of sellers should be in place.
The regulatory role should in no way, directly or
indirectly, be delegated to the industry or its organizations.
The guaranty fund system should be prefunded, national fund
that protects policyholders against loss due to insolvency. It
is recognized that a phase-in program is essential to implement
this recommendation.
Solvency regulation/investment rules should promote a safe
and sound insurance system and protect policyholder funds,
e.g., providing a rapid response to insolvency to protect
against loss of assets/value.
Laws and regulations should be up to date with and
applicable to e-commerce.
Antitrust laws should apply to the industry.
A priority for insurance regulators should be to coordinate
with other financial regulators to ensure consumer protection
laws are in place and adequately enforced regardless of
corporate structure or ownership of insurance entity. Insurance
regulators should err on side of providing consumer protection
even if regulatory jurisdiction is at issue. This should be
stated mission/goal of recent changes brought about by GLB law.
Obtain information/complaints about insurance sellers
from other agencies and include in data bases.
A national system of ``Consumer Alerts'' should be
established by the regulators, e.g., companies directed to
inform consumers of significant trends of abuse such as race-
based rates or life insurance churning.
Market conduct exams should have standards that ensure
compliance with consumer protection laws and be responsive to
consumer complaints; exam standards should include agent
licensing, training and sales/replacement activity; companies
should be held responsible for training agents and monitoring
agents with ultimate review/authority with the regulator.
Market conduct standards should be part of an accreditation
process.
The regulatory structure must ensure accountability to the
public it serves. For example, if consumers in state X have
been harmed by an entity that is regulated by state Y,
consumers would not be able to hold their regulators/
legislators accountable to their needs and interests. To help
ensure accountability, a national consumer advocate office with
the ability to represent consumers before each insurance
department is needed when national approaches to insurance
regulation or ``one-stop'' approval processes are implemented.
Insurance regulator should have standards in place to
ensure mergers and acquisitions by insurance companies of other
insurers or financial firms, or changes in the status of
insurance companies (e.g., demutualization, non-profit to for-
profit), meet the needs of consumers and communities.
Penalties for violations must be updated to ensure they
serve as incentives against violating consumer protections and
should be indexed to inflation.
8. Consumers should be adequately represented in the regulatory
process.
Consumers should have representation before regulatory
entities that is independent, external to regulatory structure
and should be empowered to represent consumers before any
administrative or legislative bodies. To the extent that there
is national treatment of companies, a national partnership, or
``one-stop'' approval, there must be a national consumer
advocate's office created to represent the consumers of all
states before the national treatment state, the one-stop state
or any other approving entity.
Insurance departments should support public counsel or
other external, independent consumer representation mechanisms
before legislative, regulatory and NAIC bodies.
Regulatory entities should have a well-established
structure for ongoing dialog with and meaningful input from
consumers in the state, e.g., a consumer advisory committee.
This is particularly true to ensure that the needs of certain
populations in the state and the needs of changing technology
are met.
Attachment 2
Attachment 3
Why Insurance Is an Essential Public Good, Not Some Normal Product That
Can Be Regulated Solely Through Competition
1. Complex Legal Document. Most products are able to be viewed,
tested, ``tires kicked'' and so on. Insurance policies,
however, are difficult for consumers to read and understand--
even more difficult than documents for most other financial
products. For example, consumers often think they are buying
insurance, only to find they bought a list of exclusions.
2. Comparison Shopping Is Difficult. Consumers must first understand
what is in the policy to compare prices.
3. Policy Lag Time. Consumers pay a significant amount for a piece
of paper that contains specific promises regarding actions that
might be taken far into the future. The test of an insurance
policy's usefulness may not arise for decades, when a claim
arises.
4. Determining Service Quality Is Very Difficult. Consumers must
determine service quality at the time of purchase, but the
level of service offered by insurers is usually unknown at the
time a policy is bought. Some states have complaint ratio data
that help consumers make purchase decisions, and the NAIC has
made a national data base available that should help, but
service is not an easy factor to assess.
5. Financial Soundness Is Hard To Assess. Consumers must determine
the financial solidity of the insurance company. One can get
information from A.M. Best and other rating agencies, but this
is also complex information to obtain and decipher.
6. Pricing Is Dismayingly Complex. Some insurers have many tiers of
prices for similar consumers--as many as 25 tiers in some
cases. Consumers also face an array of classifications that can
number in the thousands of slots. Online assistance may help
consumers understand some of these distinctions, but the final
price is determined only when the consumer actually applies and
full underwriting is conducted. At that point, the consumer
might be quoted a much different rate than he or she expected.
Frequently, consumers receive a higher rate, even after
accepting a quote from an agent.
7. Underwriting Denial. After all that, underwriting may result in
the consumer being turned away.
8. Mandated Purchase. Government or lending institutions often
require insurance. Consumers who must buy insurance do not
constitute a ``freemarket'', but a captive market ripe for
arbitrary insurance pricing. The demand is inelastic.
9. Incentives for Rampant Adverse Selection. Insurer profit can be
maximized by refusing to insure classes of business (e.g.,
redlining) or by charging regressive prices.
10. Antitrust Exemption. Insurance is largely exempt from antitrust
law under the provisions of the McCarran-Ferguson Act.
Compare shopping for insurance with shopping for a can of peas.
When you shop for peas, you see the product and the unit price. All the
choices are before you on the same shelf. At the checkout counter, no
one asks where you live and then denies you the right to make a
purchase. You can taste the quality as soon as you get home and it
doesn't matter if the pea company goes broke or provides poor service.
If you don't like peas at all, you need not buy any. By contrast, the
complexity of insurance products and pricing structures makes it
difficult for consumers to comparison shop. Unlike peas, which are a
discretionary product, consumers absolutely require insurance products,
whether as a condition of a mortgage, as a result of mandatory
insurance laws, or simply to protect their home or health.
Attachment 4
Collusive Activity by the Insurance Services Organization That Is
Allowed by the McCarran-Ferguson Antitrust Exemption
The ISO website has extensive information on the range of services
they offer insurance companies. The website illustrates the deep
involvement that this organization has in helping to set insurer rates,
establishing policy forms, underwriting policies and in setting other
rules.
Some examples:
The page ``The State Filing Handbook,'' promises 24/7
access to ``procedures for adopting or modifying ISO's filings
as the basis for your own rates, rules and forms.''
The page ``ISO MarketWatch Cube'' is a ``powerful new tool
for analyzing renewal price changes in the major commercial
lines of insurance . . . the only source of insurance premium-
change information based on a large number of actual
policies.'' This price information is available ``in various
levels of detail--major coverage, state, county and class
groupings--for specific time periods, either month or quarter .
. . ''
``MarketWatch'' supplies reports ``that measure the change
in voluntary-market premiums (adjusted for exposure changes)
for policies renewed by the same insurer group . . . a valuable
tool for . . . strategically planning business expansion,
supporting your underwriting and actuarial functions . . . ''
``ISO's Actuarial Service'' gives an insurer ``timely,
accurate information on such topics as loss and premium trend,
risk classifications, loss development, increased limits
factors, catastrophe and excess loss, and expenses.''
Explaining trend, ISO points out that the insurer can
``estimate future costs using ISO's analyses of how inflation
and other factors affect cost levels and whether claim
frequency is rising or falling.'' Explaining ``expenses'' ISO
lets an insurer ``compare your underwriting expenses against
aggregate results to gauge your productivity and efficiency
relative to the average . . . '' NOTE: These items, predicting
the future for cost movement and supplying data on expenses
sufficient for turning ISO's loss cost filings into final
rates, are particularly anti-competitive and likely, absent
McCarran-Ferguson antitrust exemption protection, illegal.
``ISO's Actuarial Services'' web page goes on to state that
insurers using these services will get minutes and agendas of
``ISO's line actuarial panels to help you keep abreast of
ratemaking research and product development.''
The ``Guide to ISO Products and Services'' is a long list
of ways ISO can assist insurers with rating, underwriting,
policy forms, manuals, rate quotes, statistics, actuarial help,
loss reserves, policy writing, catastrophe pricing, information
on specific locations for property insurance pricing, claims
handling, information on homeowner claims, credit scoring,
making filings for rates, rules and policy forms with the
states and other services.
Finally, ISO has a page describing ``Advisory Prospective Loss
Costs,'' which lays out the massive manipulations ISO makes to the
historic data. A lengthy excerpt follows:
Advisory Prospective Loss Costs are accurate projections of
average future claim costs and loss-adjustment expenses--
overall and by coverage, class, territory, and other
categories. Your company can use ISO's estimates of future loss
costs in making independent decisions about the prices you
charge for your policies. For most property/casualty insurers,
in most lines of business, ISO loss costs are an essential
piece of information. You can consider our loss data--together
with other information and your own judgment--in determining
your competitive pricing strategies.
The insurance pricing problem--Unlike companies in other
industries, you as a property/casualty insurer don't know the
ultimate cost of the product you sell--the insurance policy--at
the time of sale. At that time, losses under the policy have
not yet occurred. It may take months or years after the policy
expires before you learn about, settle, and pay all the claims.
Firms in other industries can base their prices largely on
known or controllable costs. For example, manufacturing
companies know at the time of sale how much they have spent on
labor, raw materials, equipment, transportation, and other
goods and services. But your company has to predict the major
part of your costs--losses and related expenses--based on
historical data gathered from policies written in the past and
from claims paid or incurred on those policies. As in all forms
of statistical analysis, a large and consistent sample allows
more accurate predictions than a smaller sample. That's where
ISO comes in. The ISO data base of insurance premium and loss
data is the world's largest collection of that information. And
ISO quality checks the data to make sure it's valid, reliable,
and accurate. But before we can use the data for estimating
future loss costs, ISO must make a number of adjustments,
including loss development, loss-adjustment expenses, and
trend.
Loss development . . . because it takes time to learn about,
settle, and pay claims, the most recent data is always
incomplete. Therefore, ISO uses a process called loss
development to adjust insurers' early estimates of losses to
their ultimate level. We look at historical patterns of the
changes in loss estimates from an early evaluation date--
shortly after the end of a given policy or accident year--to
the time, several or many years later, when the insurers have
settled and paid all the losses. ISO calculates loss
development factors that allow us to adjust the data from a
number of recent policy or accident years to the ultimate
settlement level. We use the adjusted--or developed--data as
the basis for the rest of our calculations.
Loss-adjustment expenses--In addition to paying claims, your
company must also pay a variety of expenses related to settling
the claims. Those include legal-defense costs, the cost of
operating a claims department, and others. Your company
allocates some of those costs--mainly legal defense--to
particular claims. Other costs appear as overhead. ISO collects
data on allocated and unallocated loss-adjustment expenses, and
we adjust the claim costs to reflect those expenses.
Trend--Losses adjusted by loss-development factors and loaded
to include loss-adjustment expenses give the best estimates of
the costs insurers will ultimately pay for past policies. But
you need estimates of losses in the future--when your new
policies will be in effect. To produce those estimates, ISO
looks separately at two components of the loss cost--claim
frequency and claim severity. We examine recent historical
patterns in the number of claims per unit of exposure (the
frequency) and in the average cost per claim (the severity). We
also consider changes in external conditions. For example, for
auto insurance, we look at changes in speed limits, road
conditions, traffic density, gasoline prices, the extent of
driver education, and patterns of drunk driving. For just three
lines of insurance--commercial auto, personal auto, and
homeowners--ISO performs 3,000 separate reviews per year to
estimate loss trends. Through this kind of analysis, we develop
trend factors that we use to adjust the developed losses and
loss-adjustment expenses to the future period for which you
need cost information.
What you get--With ISO's advisory prospective loss costs, you
get solid data that you can use in determining your prices by
coverage, state, territory, class, policy limit, deductible,
and many other categories. You get estimates based on the
largest, most credible set of insurance statistics in the
world. And you get the benefit of ISO's renowned team of
actuaries and other insurance professionals. ISO has a staff of
more than 200 actuarial personnel--including about 50 members
of the Casualty Actuarial Society. And no organization anywhere
has more experience and expertise in collecting and managing
data and estimating future losses.
ISO's activities extensively interfere with the competitive market,
a situation allowed by the provisions of the McCarran-Ferguson Act's
extensive antitrust exemption.
______
PREPARED STATEMENT OF ROBERT M. HARDY, JR.
Vice President and General Counsel, Investors Heritage Life Insurance
Company
July 11, 2006
Good morning Chairman Shelby, Ranking Member Sarbanes, and Members
of the Committee. My name is Rob Hardy. I am Vice President and General
Counsel of Investors Heritage Life Insurance Company in Frankfort,
Kentucky, a life insurance company that was started by my grandfather,
Harry Lee Waterfield, in 1960. I am the third generation of the
Waterfield family that has been involved in the management of the
business, and I fully expect several more generations will follow. We
have approximately 100 employees and we are licensed to do business in
30 States, primarily in the Midwest and Southeast.
We market life insurance products through various distribution
systems; however, our primary markets are in the prearranged funeral
market and the final expense market. More than 3,800 agents are
appointed to sell our products and we have more than 400,000 policies
in force insuring families and individuals across our marketing
distribution system.
I am pleased to be here today on behalf of the National Alliance of
Life Companies (NALC), a trade group that is primarily composed of
small and mid-sized life and health insurance companies. Most of our
members are regional in scope operating in up to 30 States and a number
of members are licensed in all 50 States. The NALC has been in
existence since 1993 and its predecessor organization, The National
Association of Life Companies was in existence for more than 35 years.
The NALC's primary mission is to promote fair and effective regulation
that will allow the industry to thrive for the benefit of policy owners
and shareholders.
The NALC supports state regulation of insurance for all
participants and all activities and opposes the concept of an optional
Federal charter. In fact, I am confident that a number of small and
mid-sized life insurance companies that are not members of our
association also share the concerns I raise. A Federal charter may make
life simpler for some companies, especially large insurance companies,
but it is our belief that a Federal regulatory scheme would not be in
the best interest of the industry as a whole.
Others may argue that a Federal charter simply allows companies a
choice to submit to Federal regulation. We do not believe it is that
simple. Proponents of a Federal regulator want a simple, one stop shop
to provide greater efficiency and uniformity for the insurance
industry. Based on that premise, one could argue for Federalizing first
responders, state health or environmental agencies, or even education.
Should we simply Federalize all of those functions for the sake of
convenience?
No one who believes in our republic can seriously believe that such
action would be a good idea. It is recognized that business convenience
is often trumped by such factors as, consumer protection and unique
market needs impacting a community. Insurance is no different.
The design for a Federal charter, as contemplated in S. 2509, the
National Insurance Act (also known as ``Optional Federal Charter''), is
based on the dual charter banking system. However, there is no national
crisis, as there was when the Federal banking system was established,
compelling Congress to act in order to bolster consumer confidence.
There is no outcry from consumers demanding the Federalizing of
insurance. To the contrary, according to ACLI's own report, Monitoring
Attitudes of the Public 2004, the life insurance industry is regarded
as ``either very or somewhat favorable by the majority of people''
polled. Further, ``a solid majority of consumers agreed that life
insurers . . . provide good service and employ highly trained
professionals.''
Another noteworthy outcome from that report is how consumers feel
about life insurance agents. ACLI's study found that ``most consumers
agreed that life insurance agents exhibit no more high-pressure than
other sales people.'' That's good news. This is hardly a clarion call
from consumers for drastic changes like the creation of an entirely new
regulatory structure in the Federal Government.
So what is it we're trying to fix here? We agree that there is
still much work to be done to improve market efficiencies and
uniformity, but indications are that States are moving in the right
direction.
Insurance v. Banking
The primary purpose of insurance regulation is to protect consumers
by promoting competitive markets, enforcing insurance laws, and
assuring financial soundness and solvency of insurers. It is essential
that all financial institutions be subject to efficient regulatory
oversight. However, attempting to mirror the system that regulates the
banking industry is a lot like trying to put the square peg in a round
hole.
First, unlike most bank products, which are based on a national
commodity, insurance is sold based on individual needs. Second, the
distribution channels are completely different with insurance
companies, which rely primarily on agents, while banks rely on
consumers coming in to their branches to withdraw or deposit their
money. Insurance has to be sold to individuals by individuals.
The Federal banking laws were enacted during a time of a national
financial crisis, and without Federal intervention, there was a very
real risk of financial collapse. It was extremely important for the
Federal Government to back bank deposits to give investors and
customers the confidence to trust banks. There is no national crisis in
the insurance industry that would require the creation of another
Federal bureaucracy.
A Dual Regulatory System Would Create an Unlevel Playing Field
Proponents of S. 2509 suggest that since banks have successfully
managed in a dual regulatory world, insurance companies could do the
same. However, because of the differences between the industries
discussed above, I believe it is inaccurate to compare the two
industries.
Small to mid-sized insurance companies tend to be more regional in
scope. With the introduction of a Federal regulator for insurance, the
rules will necessarily be different and the ``playing field'' will
become unlevel. If all the presumptions supporting S. 2509 hold true
(e.g. greater efficiency, lower costs of doing business, etc.), then
small companies, like mine, could be forced to move to a Federal
charter in order to remain competitive, or risk being gobbled up, or
simply go out of business. Therefore, what is dubbed as ``optional'' is
not really optional at all. It's mandatory.
Effectuating Change Within the Current System
We certainly want to applaud this Committee, in particular, and
Congress as a whole, for the vital role it has played in pushing States
to take positive reform steps over the past few years. Without
Congressional efforts, measures such as the Interstate Compact for
Insurance, speed to market reform, the National Association of
Registered Agents and Brokers (NARAB) licensing provisions, the
financial accreditation system and the improvements being considered
for better coordination of market conduct reviews would not have
occurred as quickly as they have, if at all. These examples prove that
what the States can not or will not do on their own, narrowly tailored
Federal legislation and guidance can lead them to do so.
The fact of the matter is that, notwithstanding what proponents
would have you believe, the system is not completely broken. It is not
perfect and it is in need of improvement but, positive steps have
occurred, and the march toward modernizing the state regulatory system
continues. We are very concerned that the creation of a new, Federal
bureaucracy to regulate insurance will halt the forward progress and
create an entirely new set of problems for everyone concerned.
Last month, the 26th and 27th States adopted the Interstate Compact
for approval of life insurance policy forms, formally making the
Compact functional. A great deal of work went into the drafting of the
compact language and passage of compact legislation- a team effort by
industry, consumer groups, and regulators. Indeed, it offers a
promising opportunity to address many of the speed-to-market concerns
you hear about today, without the need for making radical changes in
our existing regulatory framework.
Of course, the first question that must be asked is how a Federal
charter or any other solution will impact consumers. Improving the
state system is in the best interests of consumers. State officials are
positioned to be responsive to the needs of the local marketplace and
local consumers. We believe consumers are more comfortable with having
complaints resolved with regulators in their local communities, rather
than calling a hotline in Washington or some regional headquarters.
Likewise, consumers have grown comfortable raising public policy
concerns regarding insurance issues with elected state officials across
the country.
If a new Federal regulator is empowered, those complaints will now
be added to the already busy agendas of United States Senators and
Members of Congress. Simply put, state governments have a unique and
deep knowledge of the insurance markets within their States, and a
unique ability to address malfunctions when, and as, they arise. Is it
a perfect system? No. Can it be improved? Like everything else in the
world, it can, and should, be improved and work continues everyday to
make it better and more efficient.
One example of this work is the relationship between the NAIC and
NCOIL. I have been involved in the industry for almost 20 years now and
I have seen real progress between these two organizations. I believe
that progress is vital to the uniformity that we are all seeking.
Kentucky is a perfect example. The interaction between our NCOIL
representatives, the Kentucky Office of Insurance and the NAIC was the
primary driver in the adoption of the Interstate Compact by our
legislature this spring. The relationship with NCOIL allowed our
representatives to supplement the background and education that our
state legislators received from our Office of Insurance and gave the
legislature, as a whole, the confidence to pass the measure.
Choosing a Regulator
It is undeniable that some insurance industry groups have been
intimately involved in framing the concept of an optional Federal
charter for insurance. We think the industry will be exposed to the
very real criticism that it is not industry's intent to create a more
aggressive regulator, but a friendlier regulator--a ``champion of
industry,'' if you will. Creating an industry-friendly regulator seems
somewhat at odds with the primary goal of insurance regulation, which
is consumer protection.
Indeed, we need smarter, more efficient regulation, but the primary
focus must remain on the protection of policy holders, not the
convenience of the industry. This may seem odd coming from someone who
runs an insurance company, but we wouldn't be in business if we didn't
have the trust of our customers.
In order to create the proposed bureaucracy, the Federal Government
will have to pull the expertise from somewhere; and that somewhere will
be from the States, which have been regulating insurance for over 150
years. This will have the effect of weakening the state regulatory
structure. The ultimate and likely consequence will be that the
industry will end up with two weak regulators rather than one strong
system.
More importantly, there is a huge presumption that Federal
regulation will be more streamlined and more efficient. In looking at
other Federal agencies, all staffed by good people with good
intentions, few can honestly conclude that this presumption is correct.
From my experience, when I need to speak to someone at a state
department of insurance, I have that opportunity. We are not sure that
the same result can be achieved under a Federal bureaucracy without it
being large enough to handle all of the inquiries that States now
receive.
Creation of the Office of National Insurance (ONI)
In creating the Office of National Insurance, the Commissioner will
basically have unlimited powers to employ as many people and create as
many offices as deemed necessary. A current Federal agency analogous to
the proposed Office of National Insurance, based on the individual
nature of required services is, arguably, the Social Security
Administration (SSA). SSA has over 1,300 offices and employs over
65,000 people to service benefit recipients, not to mention constituent
support provided by every Member of Congress. The NAIC has indicated
that the state departments of insurance handle over 4 million consumer
inquiries, including complaints. Can you imagine the Federal
bureaucracy necessary just to handle even a fraction of those
inquiries? And this would be in addition to the thousands of state
insurance regulators currently employed, who will continue to do their
jobs at the state level. I imagine we could end up with more insurance
regulators per capita than any other area of business.
Funding
Funding is also a huge issue with regard to how the funding of a
Federal regulator will affect the States. Fees, assessments, and
penalties will be charged to federally chartered companies and
producers. While States will still be allowed to receive premium taxes
in the short-term, they will no longer receive revenues from other fees
and assessments; for example, examination fees from federally licensed
insurers and producers. This will likely have a negative impact on
state budgets.
Curiously, Section 1122 of the bill provides that fees and
assessments charged against the companies and producers are not
considered government or public monies. How can the government take
money from the private sector and that revenue not be considered
``government or public monies''?
Further, according to the NAIC, it took $880 million to run the
various state insurance departments. How much will it take to run the
Office of National Insurance? No one knows the answer to that question,
but it is clear that the Commissioner will have the discretion to
assess whatever it takes. Since the intent is to establish a parallel
system similar to banking, it should be noted that banking is regulated
by at least six different regulatory bodies, employing over 30,000
people.
Preemption
The recent Federal district court decision in OCC v. Spitzer,
giving Federal agencies full authority to promulgate preemption
regulations, shows the extent to which Federal agencies with unbridled
authority are willing to go to usurp States' rights. In that case, the
court determined that the Office of the Comptroller of the Currency
(OCC) possesses exclusive governmental enforcement authority, which OCC
granted itself by regulation, with respect to all laws--Federal and
state--that apply to national banks. In short, it means the OCC has the
authority to prohibit States from using the court system to enforce
applicable state laws against national banks. This bill gives the
Commissioner of Insurance that same degree of authority. As a matter of
public policy, this is a concern to us because, according to this
Federal court, States will have no standing to use the court system to
inspect, examine, regulate or compel action by a national insurer or
producer operating within its borders.
Global Marketplace
We unquestionably live in a global marketplace today. But the
United States still has the most sophisticated and largest insurance
market in the world. I think it is reasonable to say that any company
in the world that wants to do business here is doing business here. In
recent years, this process has been streamlined and now all 50 States
and the District of Columbia accept the NAIC's Uniform Certificate of
Authority Application. This process has helped foreign and domestic
companies alike.
Conclusion
The NAIC has worked hard since 2000 to modernize the regulatory
framework and improve efficiencies in the process. Congressional
initiatives have gone a long way in prompting the NAIC and the various
States to adopt necessary model laws that will improve the state-based
system. Now is not the time to create a whole new bureaucracy. Pay
close attention and prod when necessary to keep the modernization
effort going. There are better ways to improve efficiency, but
regulation of the insurance industry should remain with the States.
While Federal legislative tools to push States to improve would be a
welcome addition, the creation of a large, new Federal bureaucracy is
not necessary. Thank you very much for the opportunity to share the
views of NALC today.
______
PREPARED STATEMENT OF SCOTT A. SINDER
Member, The Scott Group
July 11, 2006
Good morning, Chairman Shelby, Ranking Member Sarbanes and members
of the Committee. Thank you for the opportunity to testify before you
today on behalf of The Council of Insurance Agents & Brokers (The
Council), which I serve as general counsel. We are grateful for the
initiation of this effort to explore the contours of the current
regulatory structure of the insurance industry and the potential need
for change.
Insurance regulatory reform, which is critical for the long-term
health of the industry, is long overdue. Modernization of the insurance
regulatory structure is an important element in maintaining a strong,
vibrant insurance sector and is essential to allow the marketplace to
evolve in order to address the needs of insurance policyholders in the
21st century.
The Council represents the nation's leading insurance agencies and
brokerage firms. Council members specialize in a wide range of
insurance products and risk management services for business, industry,
government, and the public. Operating both nationally and
internationally, Council members conduct business in more than 3,000
locations, employ more than 120,000 people, and annually place more
than 80 percent--well over $200 billion--of all U.S. insurance products
and services protecting business, industry, government and the public
at-large, and they administer billions of dollars in employee benefits.
Since 1913, The Council has worked in the best interests of its
members, securing innovative solutions and creating new market
opportunities at home and abroad.
Executive Summary
Insurance regulatory reform is long overdue. The State regulatory
system is simply not equipped to handle the increasingly complex and
sophisticated insurance marketplace, and the patchwork quilt of
insurance regulation has a very real impact on the availability and
affordability of coverage for insurance consumers. This is why The
Council is a strong supporter of insurance regulatory reform and is
working so hard for change.
The Council is very grateful for the work of Senators Sununu and
Johnson in drafting The National Insurance Act of 2006, S. 2506. We
believe the proposal is an excellent framework on which to build a
dialog around the issues of insurance regulatory modernization. We
endorse the legislation for many reasons, not the least of which is its
purely voluntary nature--voluntary for companies and agents/brokers, as
well as consumers. The bill provides real choice for all participants
in the insurance marketplace.
The Council has been a strong advocate for such legislation for a
number of years. We hope progress is made on S. 2506, but all of us
know that this is a difficult set of issues and debate will take a
considerable amount of time. It is a major undertaking with a great
number of issues to be resolved. Political reality dictates that it
will not be an easy process, nor will it be quick. Meanwhile, however,
insurance regulation is in desperate need of reform. In order to better
serve our policyholders and clients, we need practical solutions to
real marketplace problems. We hope that debate over the Optional
Federal Charter will not stop the members of this committee from
considering less controversial incremental reforms that address
fundamental flaws in the system and for which solutions are readily at
hand.
Regulation of surplus lines insurance provides a perfect example.
Although the purchase of surplus lines insurance is generally
considered to be less regulated than the admitted marketplace, in
reality the regulatory structure governing such coverage is quite
burdensome and restrains the availability of coverage. When surplus
lines activity is limited to a single state, regulatory issues are
minimal. When activity encompasses multiple States, however, which is
the norm in the surplus lines market, full regulatory compliance is
difficult, if not impossible. Thus, the difficulty of complying with
the inconsistent, sometimes conflicting requirements of multiple state
laws is a real problem. Simply keeping track of all the requirements
can be a Herculean task.
The House Financial Services Committee is considering legislation
that would fix this problem. H.R. 5637, the Nonadmitted and Reinsurance
Reform Act, would streamline surplus lines regulation by consolidating
regulatory oversight of surplus lines transactions into a single
state--the insured's home state--thus eliminating the overlapping,
conflicting rules that inhibit the non-admitted marketplace and harm
consumers. The proposal does not deregulate the non admitted insurance
marketplace or reduce consumer protections. Even the National
Association of Insurance Commissioner's most recent past president,
Diane Koken of Pennsylvania, has acknowledged that this is an area
where Federal intervention may well be needed ``to resolve conflicting
state laws regulating multi-state transactions.''
Surplus lines regulatory reform will not detract at all from the
debate over the OFC, nor is a substitute for that legislation. But in
the meantime, it is an achievable reform, a somewhat uncontroversial
reform, and its resolution will save millions of dollars for carriers
and consumers and, we believe, ultimately increase compliance with
state premium tax requirements by resolving the conflicts that make
compliance difficult if not impossible today.
Optional Charter--Introduction
The insurance marketplace has changed and evolved in the millennia
since ancient traders devised systems for sharing losses and in the
centuries since the Great Fire of London led to the creation of the
first fire insurance company. Indeed, insurance has become increasingly
sophisticated and complex in the last 60 years, since enactment of the
McCarran-Ferguson Act, which preserved a state role in the regulation
of insurance.
In the United States, insurance has historically been governed
principally at the state, rather than the national, level. This
historic approach, codified by McCarran-Ferguson in 1945, made sense
when risks and the impact of losses due to those risks was concentrated
in relatively small geographic areas and the insurance markets were
similarly small. Initially, risks were generally local and losses were
most likely to be felt by the local community. Fire, for example, was a
major threat not only to individual property-owners, but to entire
communities because of the widespread devastation fire can cause. As
populations and economies grew, so did the risks, and the impact of
losses became more widespread. The pooling of risks has grown ever
wider, and more sophisticated as well.
State regulation of insurance addressed those needs. The primary
objective of insurance regulation has always been to monitor and
regulate insurer solvency because the most essential consumer
protection is ensuring that claims are paid to policyholders. State
regulation initially advanced that goal by giving consumers with no
direct knowledge of carriers based in other communities comfort that
they would be able to--and would--pay claims when they came due. This,
in turn, led to increased availability and affordability of coverage
because carriers were able to expand their reach, making the insurance
marketplace more competitive.
But things have changed. While some risks--and insurance markets--
remain local or State-based, in general, insurance has become a
national and international marketplace in which risks are widely spread
and losses widely felt. The terrorist attack on the World Trade Center
and the devastation caused by Hurricane Katrina are, perhaps, the two
most notable examples, but many policyholders, particularly in the
commercial sector, have risks spread across the country and the globe.
Rather than encouraging increased availability and improving the
affordability of insurance to cover such risks, the state regulatory
system does just the opposite. By artificially making each state an
individual marketplace, it constrains the ability of carriers to
compete and thereby reduces availability and affordability.
Insurance Regulatory Reform: Despite recent improvements, there
remain significant problems in the state insurance regulatory system;
because the States cannot solve these problems on their own,
congressional action is necessary.
Although the state insurance regulators, through the National
Association of Insurance Commissioners (NAIC), have attempted to
institute regulatory reforms without Federal involvement, the reality
is that today's marketplace demands far more dramatic action than the
States alone are able to provide. As I have mentioned, insurance is no
longer the local market it once was. It is a national and international
marketplace, the development of which is far outstripping the pace of
reform efforts by state regulators and legislatures. The state
regulatory system is simply not equipped to handle this increasingly
complex and sophisticated marketplace. Competition and efficiency in
the insurance industry lag behind other financial services sectors due
to the regulatory inefficiencies and inconsistencies in the state
insurance regulatory system. These inefficiencies and inconsistencies
must be addressed if the insurance sector is going to be able to keep
up with the pace of change in the rapidly evolving global marketplace
and thereby provide adequate and affordable coverage to insurance
consumers.
The Council regards itself as a pioneer within our industry with
respect to regulatory modernization, although reform is a frustratingly
long process. We formed our first internal committee to address the
problems of interstate insurance producer licensing more than 60 years
ago. Our efforts were finally rewarded with the enactment of the NARAB
provisions of the Gramm-Leach-Bliley Act (GLBA) a few years ago--a
first step on the road to insurance regulatory reform. The proposed
National Insurance Act is the next step on the road to modernization.
I want to emphasize at the outset that we are not advocating
deregulation of the insurance marketplace or any reduction in consumer
protections. What we are advocating--as we did with NARAB and producer
licensing reform--is fixing the current regulatory system to allow
insurance companies and producers to have a choice between state and
Federal oversight. Many insurers and producers will likely choose to
remain within the state system because it works best based on the size
of their business and their customer base. For the same reasons, others
will choose the Federal option. For this latter group, jettisoning the
current multi-state system for a single Federal regulator makes eminent
good sense, allowing them to avoid the overlapping, burdensome dictates
of 55 jurisdictions for a single regulator and thereby easing
regulatory burdens--and doing so without sacrificing consumer
protections. We believe the long-term effects of such reform on the
marketplace will ultimately benefit the consumer by increasing capacity
and improving availability of coverage.
Continuing Problems Under the Current Regulatory System
Although the States have made some strides in recent years in
simplification and streamlining regulatory requirements, almost all the
concrete progress has been in the producer licensing area--thanks to
the enactment of GLBA's NARAB provisions. NARAB compliance
notwithstanding, there remain several problem areas in the interstate
licensing process that impose unnecessary costs on our members in terms
of time and money. In addition, insurance companies face problems doing
business on a multi-state basis, and recent efforts by the States to
streamline rate and policy form approval processes have not proven very
successful. The operation of and access to alternative markets--such as
surplus lines and risk retention groups--is also hampered by
unnecessarily cumbersome and duplicative regulatory requirements. These
continuing problems with the state-by-state insurance regulatory
process has led us to the following conclusion: regulatory reform is
needed, and it is needed now.
Producer Licensure: Welcome Improvements, but Incomplete Reform
The NARAB provisions included in GLBA required that at least 29
States enact either uniform agent and broker licensure laws or
reciprocal laws permitting an agent or broker licensed in one state to
be licensed in all other reciprocal States simply by demonstrating
proof of licensure and submitting the requisite licensing fee.
After enactment of GLBA, the NAIC pledged not only to reach
reciprocity, but ultimately to establish uniformity in producer
licensing. The regulators amended the NAIC Producer Licensing Model Act
(PLMA) to meet the NARAB reciprocity provisions, and their goal is to
get the PLMA enacted in all licensing jurisdictions. As of today,
nearly all the States have enacted some sort of licensing reform, and
the NAIC has officially certified that a majority of States have met
the NARAB reciprocity requirements, thereby averting creation of NARAB.
This is a good effort, but problems remain; there is still much work to
be done to reach true reciprocity and uniformity in all licensing
jurisdictions.
Although most of the States have enacted the entire PLMA, a number
of States have enacted only the reciprocity portions of the model. Of
the States that have enacted the entire PLMA, several have deviated
significantly from the model's original language. One state has enacted
licensing reform that in no way resembles the PLMA. And two of the
largest States in terms of insurance premiums written, Florida and
California, have not enacted legislation designed to meet the NARAB
reciprocity threshold at all.
The inefficiencies and inconsistencies that remain in producer
licensing affect every insurer, every producer and every insurance
consumer. Many Council member firms continue to hold hundreds of
resident and non-resident licenses across the country. For some, the
number of licenses has actually increased since enactment of GLBA. In
addition to initial licenses, Council members face annual renewals in
51-plus jurisdictions, in addition to satisfying all the underlying
requirements and post-licensure oversight. Undeniably, progress in
streamlining the producer licensing process has been made since GLBA's
NARAB provisions were enacted in 1999, but these numbers--and, more
critically, the regulatory and administrative burdens they represent--
vividly demonstrate that the job is not yet finished. Most States
retain a variety of individual requirements for licensing, and they all
differ with respect to fees, fingerprinting and certifications, among
other requirements.
In addition to the lack of full reciprocity in licensing procedures
for nonresidents, the standards by which the States measure compliance
with licensing requirements differ from state to state, as well. These
include substantive requirements--pre-licensing education, continuing
education and criminal background checks, for example--as well as
administrative procedures such as agent appointment procedures and
license tenure and renewal dates. While these may seem like small
issues, they can easily turn into large problem for insurance producers
licensed in multiple jurisdictions: they must constantly renew licenses
throughout the year, based upon the individual requirements in each
State. In addition to the day-to-day difficulties the current set-up
imposes, this inconsistent application of law among the States inhibits
efforts to reach full reciprocity. Some States may be disinclined to
license as a non-resident a producer whose home state has ``inferior''
licensing standards, even a state with similar or identical statutory
language. In fact, several States that have failed to adopt compliant
licensure reciprocity regimes (notably California and Florida) claim
their refusal is based on this absence of uniform standards--thus
implying that the standards of other States do not measure up.
A third major area in need of streamlining is the processing of
license applications. Although a uniform electronic producer licensing
application is now available for use in many States--arguably, the
biggest improvement in years--several states, including Florida and
South Carolina, do not use the common form, and in States that use the
form, there is no common response mechanism. Each state follows up on
an application individually, which can be cumbersome and confusing.
Thus it is clear that, despite the revolutionary NARAB
achievements, comprehensive reciprocity and uniformity in producer
licensing laws remains elusive, and it does not appear the NAIC and the
States are capable of fully satisfying those goals. Indeed, until
recently, Florida completely barred non-residents from being licensed
to sell surplus lines products to Florida residents or resident
businesses. And several States including Florida required nonresident
agents and brokers who sold a policy of an admitted company to their
residents or resident businesses to pay a mandated ``countersignature
fee'' to a registered agent in order to complete that transaction.
These practices have been terminated only because The Council filed a
lawsuit in every jurisdiction in which countersignatures were required.
Countersignature laws in Florida, South Dakota, Nevada, Puerto Rico,
and the Virgin Islands have been struck down by Federal judges in those
jurisdictions, and the West Virginia legislature repealed its law
rather than defend it in court. The rulings tossing out the
countersignature laws in Nevada and the Virgin Islands are still in the
appeals process and are not yet final.
Access to Alternative Markets
In the last several years, high rates for property and casualty
insurance have been a serious problem for many mid-sized and larger
commercial firms. Hard markets such as these cause availability to
decrease and the cost of coverage to increase. During these periods,
insureds--particularly sophisticated commercial insureds--are
increasingly drawn to the appeal of alternatives to the traditional,
regulated marketplace to expand their coverage options and hold down
costs. There are two excellent mechanisms in place that offer such
alternative markets: surplus lines insurance and risk retention groups.
Although surplus lines insurance and insurance purchased through risk
retention groups technically are less regulated than insurance in the
admitted market, there are, nonetheless, state regulatory requirements
and Federal laws that apply to these alternative market mechanisms that
prevent this marketplace from fully realizing its potential. Creation
of an optional Federal charter would transform these markets,
increasing options and decreasing costs for insurance consumers.
Surplus Lines. Surplus lines insurance provides coverage for
unique, unusual or very large risks for which insurance is unavailable
in the admitted market. A surplus lines product is an insurance product
sold by an insurance company that is not admitted to do business in the
state in which the risk insured under the policy is located. In
essence, the insured goes to wherever the insurance company is located
to purchase the coverage. The insurer may be in another state, or it
may be in Great Britain, Bermuda or elsewhere. Potential insureds can
procure this insurance directly, but they generally do so through their
insurance brokers. In short, ``surplus lines'' are: (1) insurance
products sold by insurance carriers that are not admitted (or licensed)
to do business in a state, (2) to sophisticated commercial
policyholders located in that state, (3) for insurance coverages that
are not available from insurers admitted (or licensed) to do business
in that state. Surplus lines products tend to be more efficient and a
better fit for commercial coverages because they can be tailored to the
specific risk profiles of insured with specialized needs.
Surplus lines insurance is universally recognized as an important
component of the commercial property and casualty insurance marketplace
in all States, and commercial property and casualty business is done
increasingly through the surplus lines marketplace. In fact, in 2004,
$33 billion in premium was purchased by policyholders in the surplus
lines market.
Although the purchase of surplus lines insurance is legal in all
States, the regulatory structure governing such coverage is a morass.
When surplus lines activity is limited to a single state, regulatory
issues are minimal. When activity encompasses multiple States, however,
full regulatory compliance is difficult, if not impossible. And I
should note that multi-State surplus lines policies are the norm rather
than the exception because surplus lines coverage is uniquely able to
address the needs of insureds seeking coverage in more than one State.
Thus, the difficulty of complying with the inconsistent, sometimes
conflicting requirements of multiple State laws is a real problem.
Simply keeping track of all the requirements can be a Herculean task.
For example: Maryland and the District of Columbia require a monthly
``declaration'' of surplus lines business placed, but only require
payment of premium taxes on a semi-annual basis; Virginia, in contrast,
requires that a declaration be filed and taxes be paid quarterly; New
Jersey has 36 pages of instructions for surplus lines filings,
including a page discussing how to number the filings and a warning not
to file a page out of sequence because that would cause a rejection of
the filing and could result in a late filing.
As a general matter, state surplus lines regulation falls into five
categories: (i) taxation; (ii) declinations; (iii) insurer eligibility;
(iv) regulatory filings; and (v) producer licensing and related issues.
Taxes: States have inconsistent and sometimes conflicting
approaches regarding the allocation of premium taxes, which can lead to
double taxation and confusion when a surplus lines policy involves
multi-State risks.
Single situs approach--100 percent of the premium tax is
paid to the insured's State of domicile or headquarters State.
This approach is imposed by some States regardless of what
percentage of the premium is associated with risks insured in
the state. Virginia, for example, utilizes this rule.
Multi-State approach--Premium tax is paid to multiple
States utilizing some method of allocation and apportionment
based upon the location of the risk(s). Because there is no
coordination among the States on allocation and apportionment,
determination of the amount of tax owed to each state is left
to brokers and insureds. If a policy covers property insured in
a single situs state and in an apportionment state, double
taxation also is unavoidable. A majority of the States utilize
this basic rule but the manner in which it is implemented
(including the allocation formula) can vary wildly.
No clear requirement--More than a dozen States that impose
surplus lines premium taxes do not have statutory or regulatory
provisions indicating the state's tax allocation method,
leaving it up to the insured and the insured's broker to
determine how to comply with the state law. In such States,
determination as to whether any tax should be paid and whether
the allocation of any such tax is permissible and appropriate
is often based on informal guidance from state insurance
department staff.
In addition to the near-impossibility of determining the correct
allocation for surplus lines premium tax in a way that does not risk
paying too much or too little tax, the differences among the States
with respect to tax rates, tax exemptions, taxing authorities, and the
timing of tax payments impose huge burdens on surplus lines brokers
(who are responsible for paying the taxes if they are involved in the
placement) and on commercial consumers, who must navigate these
requirements on their own for placements that do not involve a broker
and who ultimately bear the costs of not only the tax but the
administrative costs of compliance in any event.
For example, state surplus lines premium tax rates range from about
1 percent to 6 percent. In one state, Kentucky, surplus lines taxes are
levied not at the state level but at the municipality level. Aon, a
member of The Council, reports that in order to properly rate taxes in
Kentucky, it must use electronic maps to determine the city and county
in which a risk is located. There are hundreds of cities and counties
in the state. Some counties charge a tax in lieu of the city tax, some
charge it in addition to the city tax, some charge the difference
between the city and county taxes, and some do not charge a city or
county tax at all.
The due dates for premium taxes vary even more widely across the
States. Surplus lines premium taxes are due:
Annually on a date certain in some States; the dates vary
but include: January 1, January 31, February 15, March 1, March
15, April 1, and April 16;
Semi-annually in some States. Again, the dates vary but
include: February 1 and August 1, February 15 and August 15,
and March 1, and September 1;
Quarterly in some States (generally coinciding with the
standard fiscal quarters);
Monthly in some States; and
Sixty days after the transaction in some States.
The States also differ with respect to what is subject to the tax,
what is exempt from the tax, whether governmental entities are taxed,
and whether brokers' fees are taxed as part of or separately from the
premium tax (if they are taxed at all). As you can see, determining the
proper surplus lines tax payment for the placement of a multi-State
policy is a daunting task.
Declinations: Most States require that an attempt be made to place
coverage with an admitted insurer before turning to the surplus lines
market. Some States specifically require that one or more licensed
insurers decline coverage of a risk before the risk can be placed in
the surplus lines market. If it is determined that a portion of the
risk is available in the admitted market, many States require that the
admitted market be used for that portion of the risk.
State declination requirements are inconsistent and conflicting,
and the methods of proving declinations vary tremendously, from
specific requirements of signed affidavits to vague demonstrations of
``diligent efforts.'' For example, Ohio requires five declinations, but
does not require the filing of proof of the declinations. New Mexico
requires four declinations and submission to the insurance department
of a signed, sworn affidavit. Hawaii does not require declinations but
prohibits placement of coverage in the surplus lines market if coverage
is available in the admitted market. Further, Hawaii does not require
filing of diligent search results but requires brokers to make such
information available to inspection without notice by the state
insurance regulator. In California, prima facie evidence of a diligent
search is established if an affidavit says that three admitted insurers
that write the particular line of insurance declined the risk. In
Alabama, the requirement is much more vague. The broker is required
only to demonstrate ``a diligent effort'' but no guidance is provided
suggesting what constitutes such an effort. In Connecticut, the broker
must prove that only the excess over the amount procurable from
authorized insurers was placed in the surplus lines market.
Insurer Eligibility: Most States require that a surplus lines
insurer be deemed ``eligible'' by meeting certain financial criteria or
having been designated as ``eligible'' on a state-maintained list.
Although a majority of the States maintain eligibility lists (also
called ``white lists''), in many of the remaining States the surplus
lines broker is held responsible for determining if the non-admitted
insurer meets the state's eligibility criteria. In addition, although
the NAIC maintains a list of eligible alien (non-U.S.) surplus lines
insurers that is used by four States, this does not seem to have any
bearing on the uniformity of the eligible lists in the remaining
States. As one would expect, as a result of differing eligibility
criteria from state to state--and changes in individual States from
year to year--the insurers eligible to provide surplus lines coverage
varies from state to state. This can make it exceedingly difficult to
locate a surplus lines insurer that is ``eligible'' in all States where
a multi-state policy is sought.
The flip side of insurer eligibility is also an issue: that is,
when multi-state surplus lines coverage is placed with an insurer that
is an admitted insurer (not surplus lines) licensed in one of the
States in which part of the risk is located. This is problematic
because surplus lines insurance cannot be placed with a licensed
insurer. In these situations, more than one policy will have to be
used, or the insured will have to use a different surplus lines
carrier--one that is not admitted, but ``eligible'' in all States in
which the covered risks are located.
Filings: Most States require one or more filings to be made with
the State insurance department in connection with surplus lines
placements. These may include filings of surplus lines insurer annual
statements, filings regarding diligent searches/declinations, filings
detailing surplus lines transactions, and filings of actual policies
and other informational materials. Some States that do not require the
filing of supporting documentation require brokers to maintain such
information and make it available for inspection by the regulator.
Like other surplus lines requirements, State filing rules vary
widely. Some States require signed, sworn affidavits detailing diligent
search compliance; some require such affidavits to be on legal sized
paper, others do not; some States require electronic filings, others
require paper; some States have specific forms that must be used,
others do not; some States require the filing of supporting
documentation, some do not--although some of those States place the
burden on the broker, who is required to store the information in case
regulatory inspection is required. In addition, although most filings
are required to be submitted to the State insurance regulator, in at
least one State, Kentucky, municipalities also require submission of
surplus lines materials. There are hundreds of cities and counties in
the State and each requires a separate quarterly and annual report by
the licensee. As with the tax situation, this creates a terrible burden
on surplus lines insurers and brokers, and unnecessarily increases
consumer costs.
Depending on the State in question, filings can be required
annually, quarterly, monthly or a combination thereof. For example,
several States require the filing of surplus lines information in the
month following the transaction in question: Colorado requires such
filings by the 15th of the month; and the District of Columbia by the
10th. Other States peg the filing date to the date of the transaction
or the effective date of the policy: Florida requires filing within 21
days of a transaction; Idaho within 30 days; Kansas within 120 days;
Missouri requires filing within 30 days from the policy effective date
and New York 15 days from the effective date; Illinois and Michigan
require semi-annual filings of surplus lines transactions. Although
Illinois does not require filing of affidavits, carriers must maintain
records of at least three declinations from admitted companies for each
risk placed in the surplus lines market. Some States have different
deadlines for different filings. Louisiana, for example, requires
quarterly filings of reports of all surplus lines business transacted,
and ``diligent search'' affidavits within 30 days of policy placement.
North Dakota, in contrast, requires a single annual filing of all
surplus lines transactions, and allows 60 days for the filing of
``diligent search'' affidavits.
In addition, some States treat ``incidental exposures''--generally
relatively small surplus lines coverages--differently from more
substantial coverages with respect to filing requirements. States have
differing definitions of what constitutes incidental exposures and who
has to make required filings for such an exposure: some States require
the broker to make the filings; others the insured; and some require no
filings at all for incidental exposures.
a. Producer Licensing and Related Issues. In addition to the
substantial issues outlined above, there are other vexing regulatory
issues facing the surplus lines marketplace:
Producer Licensing: All States require resident and non-
resident surplus lines producers to be licensed, and all States
have reciprocal processes in place for non-resident licensure.
Nevertheless, there remain significant differences among some
States with respect to producer licensing that can delay the
licensure process, particularly for non-residents. For example,
most States require that an individual applying for a surplus
lines broker license be a licensed property and casualty
producer. The States vary, however, as to how long the
applicant must have held the underlying producer license. In
addition, some, but not all, States exempt from licensure
producers placing multi-State coverage where part of the risk
is located in the insured's home State. In States without such
an exemption, the laws require a producer to be licensed even
for such incidental risks.
Sophisticated Commercial Policyholders: Some States exempt
``industrial insureds'' from the diligent search, disclosure,
and/or filing requirements. The definition varies among the
States, but generally industrial insureds are analogous to the
concept of sophisticated commercial insureds. They are required
to have a full time risk manager, minimum premium requirements
for selected lines of coverage, and a minimum number of
employees. If an insured meets a State's criteria, the
insured's surplus lines transaction is exempt from the surplus
lines requirements, as provided for by the State.
Automatic Export: A number of States allow certain risks to
be placed directly in the surplus lines market. This is called
``automatic export'' because no diligent search is required
before the risk is exported from the admitted market to the
surplus lines market. As with every other surplus lines
requirement, however, the States are not uniform in their
designation of the risks eligible for automatic export.
Courtesy Filings: A courtesy filing is the payment of
surplus lines tax in a State by a surplus lines broker who was
not involved in the original procurement of the policy.
Courtesy filings are helpful when a broker places a multi-State
filing that covers an incidental risk in a State in which the
broker is not licensed. The problem is that most States either
prohibit courtesy filings or are silent as to whether they will
be accepted. This uncertainty essentially requires surplus
lines producers to be licensed even in States where they would
otherwise be exempt.
The Nonadmitted and Reinsurance Reform Act. In the House,
Representatives Ginny Brown-Waite (R-FL) and Dennis Moore (D-KS) have
sponsored H.R. 5637, the Nonadmitted and Reinsurance Reform Act. The
bill proposes a common-sense reform that would streamline surplus lines
regulation and ease regulatory burdens, while preserving consumer
protections and the financial soundness of the surplus lines
marketplace, which is the most important protection of all. The
proposed legislation would provide an effective resolution to the
current regulatory morass by focusing on the home State of the insured:
all premium taxes would be payable to the insured's home State and
surplus lines insurance transactions would be governed by the rules of
the insured's home State.
The Council supports the legislation and efforts to initiate
insurance regulatory modernization by focusing on surplus lines. We
look forward to seeing the bill move through the Financial Services
Committee and on to the full House for consideration. Having said that,
surplus lines is but one segment of a huge industry. While H.R. 5637 is
an excellent start for insurance regulatory modernization, it is clear
that more global reform--such as the National Insurance Act--will be
necessary to address the full range of regulatory issues affecting the
insurance marketplace.
I note that Business Insurance, the insurance trade publication, in
its June 26, 2006 issue, published an editorial in support of the Act,
stating that ``the measure would bring much-needed uniformity to the
taxation and regulation of nonadmitted insurers while giving risk
managers a streamlined process for tapping that vital market . . .
While we would prefer comprehensive insurance regulatory reform,
including the optional Federal charter, we support incremental change.
Even a little reform is far better than none at all.''
In addition, although the state regulators have been silent on the
proposed legislation, the NAIC has acknowledged that congressional
action on surplus lines reform may be necessary. In testimony in June
2005, before the House Financial Services Subcommittee on Capital
Markets, Insurance and Government Sponsored Enterprises, Diane Koken,
the Pennsylvania Insurance Commissioner and then-president of the NAIC,
stated
Either Federal legislation, or another alternative such as an
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.
b. Risk Retention Groups. Enacted in 1981, the Product Liability
Risk Retention Act was developed by Congress in direct response to the
insurance ``hard market'' of the late 1970's. The current version of
the law--the Liability Risk Retention Act of 1986--was enacted in
response to the ``hard market'' of the mid-1980s and expanded the
coverage of the Act to all commercial liability coverages. Risk
Retention Groups (RRGs) created under the Act are risk-bearing entities
that must be chartered and licensed as an insurance company in only one
State and then are permitted to operate in all States. They are owned
by their insureds and the insureds are required to have similar or
related liability exposures; RRGs may only write commercial liability
coverages and only for their member-insureds.
The rationale underlying the single-State regulation of RRGs is
that they consist only of ``similar or related'' businesses which are
able to manage and monitor their own risks. The NAIC has recognized
that the purpose of Risk Retention Groups is to ``increase the
availability of commercial liability insurance.''
Speed to Market
The State-by-State system of insurance regulation gives rise to
problems outside the area of producer licensing that require immediate
congressional attention, as well. Although these problems appear to
affect insurance companies more than insurance producers, the
unnecessary restraints imposed by the State-by-State regulatory system
on insurers harm producers as much as companies because they negatively
affect the availability and affordability of insurance, and, thus, our
ability to place coverage for our clients.
Most Council members sell and service primarily commercial
property/casualty insurance. This sector of the insurance industry is
facing severe challenges today due to a number of factors, including:
the losses incurred as a result of the September 11 terrorist attacks;
increased liability expenses for asbestos, toxic mold, D&O liability
and medical malpractice; and years of declining investment returns and
consistently negative underwriting results. Some companies have begun
to exit insurance markets as they realize that they can no longer write
these coverages on a break-even basis, let alone at a profit. The end
result is increased prices and declining product availability to
consumers. This situation is exacerbated by the current State-by-State
system of insurance regulation.
The current U.S. system of regulation can be characterized as a
prescriptive system that generally imposes a comprehensive set of prior
constraints and conditions on all aspects of the business operations of
regulated entities. Examples of these requirements include prior
approval or filing of rates and policy forms. Although the prescriptive
approach is designed to anticipate problems and prevent them before
they happen, in practice, this approach hinders the ability of the
insurance industry to deal with changing marketplace needs and
conditions in a flexible and timely manner. This approach also
encourages more regulation than may be necessary in some areas, while
diverting precious resources from other areas that may need more
regulatory attention.
It is also important to note that insurers wishing to do business
on a national basis must deal with 51 sets of these prescriptive
requirements. This tends to lead to duplicative requirements among the
jurisdictions, and excessive and inefficient regulation in these areas.
Perhaps the best (or worst, depending upon your perspective) example of
this are the policy form and rate pre-approval requirements still in
use in many States. Over a dozen States have completely de-regulated
the commercial insurance marketplace for rates and forms, meaning that
there are no substantive regulatory approval requirements in these
areas at all. Other States, however, continue to maintain pre-approval
requirements, significantly impeding the ability of insurers to get
products to market. Indeed, some studies have shown that it can take as
much as 2 years for a new product to be approved for sale on a
nationwide basis. Banking and securities firms, in contrast, can get a
new product into the national marketplace in 30 days or less. The lag
time for the introduction of new insurance products is unacceptable. It
is increasingly putting the insurance industry at a competitive
disadvantage as well as undermining the ability of insurance consumers
to access products that they want and need.
Let me give you an example that all Council members are familiar
with: a few years ago, PAR, an errors and omissions captive insurer
sponsored by The Council, sought to revise its coverage form. In most
States, PAR was broadening coverage, although in a few cases, more
limited coverage was sought. PAR had to refile the coverage form in 35
States where PAR writes coverage for 65 insureds. After 2 years and
$175,000, all 35 States approved the filing. Two years and $5,000 per
filing for a straightforward form revision for 65 sophisticated
policyholders is unacceptable and is symptomatic of the problems caused
by outdated rate and form controls.
We support complete deregulation of rates and forms for commercial
lines of insurance. There is simply no need for such government
paternalism. Commercial insureds are capable of watching out for their
own interests, and a robust free market has proved to be the best price
control available. The proposed National Insurance Act contemplates
this approach by restricting the Federal regulator's authority to
dictate rates or the determination of rates.
Solutions--Congressional Leadership and Action Is Critical if Insurance
Regulatory Reform Is To Become a Reality
Studies have shown that the regulatory modernization efforts
attempted by the NAIC in the past several years have been the direct
result of major external threats--either the threat of Federal
intervention, or the wholesale dislocation of regulated markets. It
follows that there is no guarantee the State-based system will adopt
further meaningful reforms without continued external threats to the
States' jurisdiction. Too much protectionism and parochialism
interferes with the marketplace, and the incentive for reform in
individual States simply does not exist without a Federal threat. Thus,
congressional involvement in insurance regulatory reform is entirely in
order and, in fact, overdue. Broad reforms to the insurance regulatory
system are necessary to allow the industry to operate more efficiently,
to enable the insurance industry to compete in the larger financial
services industry and internationally, and to provide consumers with a
strong, competitive insurance market that brings them the best product
at the lowest cost.
As we all know, there are, essentially, two approaches to insurance
regulatory reform currently under consideration--issue-by-issue reform
and the optional Federal charter. These approaches, although different,
are not necessarily mutually exclusive--partial reform now does not
rule out further reform in the future. Indeed, both may be necessary in
order to bring comprehensive reform to the insurance marketplace. As we
have mentioned, The Council strongly supports the surplus lines reform
that is now under consideration in the House and believes such
legislation will not detract at all from the debate over the OFC, nor
is a substitute for that legislation. In fact, we believe it will help
set the stage for creation of an optional Federal charter.
Having said that, however, we believe the ultimate solution--at
least for the property and casualty industry--is enactment of
legislation creating an optional Federal insurance charter as
contemplated in the National Insurance Act. An optional Federal charter
would give insurers and producers the choice between a single Federal
regulator and multiple State regulators. It would not dismantle the
State system, rather it would complement the State system with the
addition of a Federal partner. It is likely that many insurers and
producers--particularly those who operate in a single State or perhaps
a small number of States--would choose to remain State-licensed. Large,
national and international companies, on the other hand, would very
likely opt for a Federal charter, thereby relieving themselves of the
burden of compliance with 51 different regulatory regimes.
The National Insurance Act creates an optional Federal regulatory
structure for both the life and property and casualty insurance
industries; that option extends equally to both insurance companies and
insurance agents and brokers (producers); and the bill carefully
addresses essential elements of insurance regulation including
licensure, rate approval, guaranty funds, and State law preemption. The
Act preserves the State system for those that choose to operate at the
State level, but offers a more sophisticated regulatory structure for
insurers and producers that operate on a national and international
basis in this increasingly global industry.
S. 2509 creates a truly optional insurance regulatory
system for all industry players. The structure it creates gives
insurance companies and producers a real choice as to whether
they want to operate under Federal or state oversight. The Act
preserves the ability of insurers and insurance producers to
operate under State licenses, while giving both the option of
doing business under a single Federal license.
S. 2509 gives insurance producers a choice between Federal
and state oversight, and in no way increases regulatory burdens
on producers. Far from creating additional licensure
requirements for insurance producers, the Act has the potential
of significantly reducing the regulatory burdens producers face
in securing licenses. Under the Act, insurance producers can
choose to keep their existing State licenses and sell for all
insurers--state and national--wherever they hold a State
license. Or they can choose a single national license and sell
for all insurers--state and national--in all U.S.
jurisdictions. An additional benefit for producers that choose
a national license is that they would be subject to a single
set of requirements covering qualifications to do business,
testing, licensing, market conduct and continuing education.
Although the States have taken some steps in recent years
toward uniform and reciprocal producer licensing requirements,
it will be many years before they will enjoy such a streamlined
system at the state level--if ever.
Insurance consumers, too, have a choice. Consumers retain
complete control to choose the insurers and producers with
which they wish to do business. If a consumer deems it
important that their insurance company be subject to the rules
of a particular State or the Federal regulator, they can use
that as a factor in their purchase decision.
Consumers' product choices will expand. A single Federal
regulator for national insurers will give insurance consumers
expanded product choices. By offering an alternative to the
multiple State regulatory that insurers must now jump through,
the Federal charter will enable insurers to get products to
market in a more streamlined fashion. This will enable them to
address consumers needs more quickly and more specifically with
products tailored to consumer needs.
S. 2509 bolsters rather than diminishes current protections
for insurance consumers. At present, insurance consumer
protections are uneven from state to state. Some States have a
robust system of consumer protection, while others devote fewer
resources to it. Under the Act, consumers purchasing products
from national insurers would have the same protections and
rights whether they live in Los Angeles, Topeka, or Providence.
Importantly, their rights under a policy would not change
simply because they move across the Potomac from Washington to
Alexandria.
The consumer protections in S. 2509 are stronger than those
in many States and provide protections that are simply
unavailable in many States. For example, the Act requires every
insurer to undergo both a financial and a market conduct
examination at least once every 3 years. In addition, the Act
provides for the creation of a Division of Fraud, Division of
Consumer Affairs, and an Office of the Ombudsman to protect
consumers. The Act makes the commission of a ``fraudulent
insurance act'' a Federal crime and subjects National Insurers
to Federal antitrust laws.
The Act provides for comprehensive, rigorous oversight of
insurers and insurance producers that protects producers in
case of insolvency and is comparable to the best practices
currently in place in the States. In addition to traditional
consumer protections, the Act protects insurance consumers in
another essential way: federally chartered insurers will be
subject to the financial solvency oversight of a Federal
regulator with the resources and staff to adequately supervise
large corporations that may be beyond the capability of the
States. The Act provides for financial and market conduct
examinations every 3 years, allows for self-regulatory
organizations to be created to police the industry, ensures
that sufficient resources and Federal attention will be devoted
to insurance oversight, and does not eliminate or reduce in any
way the ability or effectiveness of state insurance regulation.
In addition, S. 2509 leaves the State guarantee system intact
to ensure policyholders are protected in case of insurer
insolvency. The Act sets stringent standards that state funds
must meet in order to secure national insurer participation. A
national guaranty fund is established to protect policyholders
in States where the guaranty fund falls short of the national
standards.
The Council has been a strong advocate for legislation such as the
National Insurance Act for a number of years. We realize this is a
major undertaking with a great number of issues to be resolved.
Political reality dictates that it will not be an easy process, nor
will it be quick. We look forward to being a constructive voice in this
debate.
In closing, as I noted above, improvements in the State insurance
regulatory system have come about largely because of outside pressure,
notably, from the Congress. Despite its ambitious reform agenda, the
NAIC is not in a position to force dissenting States to adhere to any
standards it sets. Thus, it is clear that congressional leadership will
be necessary to truly reform the insurance regulatory regime in the
United States. On behalf of The Council, I thank you for your genuine
interest in these issues. We stand ready to assist you in any way.