[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

                              ----------                              

                         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

                              ----------                              


                         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)).
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    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
    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:
---------------------------------------------------------------------------
     \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\
---------------------------------------------------------------------------
     \6\ ``P/C Insurers Boost Underwriting Gain by 21 percent,'' 
National Underwriter, July 3, 2006.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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.''
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
     \9\ McQuaid, John; Schleifstein, Mark, ``Washing Away'' New 
Orleans Times Picayune. June 23-27, 2002.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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\
---------------------------------------------------------------------------
     \14\ Reviews of calls to the Americans for Insurance Reform 
hotline are available at www.insurancereform.org.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
     \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.
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    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!
---------------------------------------------------------------------------
     \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.
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