[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




 
                THE NEED FOR INSURANCE REGULATORY REFORM

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

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS,

                       INSURANCE, AND GOVERNMENT

                         SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 3, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-66


                                     
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York         DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana                RON PAUL, Texas
BRAD SHERMAN, California             STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York           DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas                 WALTER B. JONES, Jr., North 
MICHAEL E. CAPUANO, Massachusetts        Carolina
RUBEN HINOJOSA, Texas                JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri              CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York           GARY G. MILLER, California
JOE BACA, California                 SHELLEY MOORE CAPITO, West 
STEPHEN F. LYNCH, Massachusetts          Virginia
BRAD MILLER, North Carolina          TOM FEENEY, Florida
DAVID SCOTT, Georgia                 JEB HENSARLING, Texas
AL GREEN, Texas                      SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri            GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois            J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin,               JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee             STEVAN PEARCE, New Mexico
ALBIO SIRES, New Jersey              RANDY NEUGEBAUER, Texas
PAUL W. HODES, New Hampshire         TOM PRICE, Georgia
KEITH ELLISON, Minnesota             GEOFF DAVIS, Kentucky
RON KLEIN, Florida                   PATRICK T. McHENRY, North Carolina
TIM MAHONEY, Florida                 JOHN CAMPBELL, California
CHARLES A. WILSON, Ohio              ADAM PUTNAM, Florida
ED PERLMUTTER, Colorado              MICHELE BACHMANN, Minnesota
CHRISTOPHER S. MURPHY, Connecticut   PETER J. ROSKAM, Illinois
JOE DONNELLY, Indiana                KENNY MARCHANT, Texas
ROBERT WEXLER, Florida               THADDEUS G. McCOTTER, Michigan
JIM MARSHALL, Georgia                KEVIN McCARTHY, California
DAN BOREN, Oklahoma

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
 Subcommittee on Capital Markets, Insurance, and Government Sponsored 
                              Enterprises

               PAUL E. KANJORSKI, Pennsylvania, Chairman

GARY L. ACKERMAN, New York           DEBORAH PRYCE, Ohio
BRAD SHERMAN, California             RICK RENZI, Arizona
GREGORY W. MEEKS, New York           RICHARD H. BAKER, Louisiana
DENNIS MOORE, Kansas                 CHRISTOPHER SHAYS, Connecticut
MICHAEL E. CAPUANO, Massachusetts    MICHAEL N. CASTLE, Delaware
RUBEN HINOJOSA, Texas                PETER T. KING, New York
CAROLYN McCARTHY, New York           FRANK D. LUCAS, Oklahoma
JOE BACA, California                 DONALD A. MANZULLO, Illinois
STEPHEN F. LYNCH, Massachusetts      EDWARD R. ROYCE, California
BRAD MILLER, North Carolina          SHELLEY MOORE CAPITO, West 
DAVID SCOTT, Georgia                     Virginia
NYDIA M. VELAZQUEZ, New York         ADAM PUTNAM, Florida
MELISSA L. BEAN, Illinois            J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin,               BLACKBURN, MARSHA, Tennessee
LINCOLN DAVIS, Tennessee             GINNY BROWN-WAITE, Florida
ALBIO SIRES, New Jersey              TOM FEENEY, Florida
PAUL W. HODES, New Hampshire         SCOTT GARRETT, New Jersey
RON KLEIN, Florida                   JIM GERLACH, Pennsylvania
TIM MAHONEY, Florida                 JEB HENSARLING, Texas
ED PERLMUTTER, Colorado              GEOFF DAVIS, Kentucky
CHRISTOPHER S. MURPHY, Connecticut   JOHN CAMPBELL, California
JOE DONNELLY, Indiana                MICHELE BACHMANN, Minnesota
ROBERT WEXLER, Florida               PETER J. ROSKAM, Illinois
JIM MARSHALL, Georgia                KENNY MARCHANT, Texas
DAN BOREN, Oklahoma                  THADDEUS G. McCOTTER, Michigan


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    October 3, 2007..............................................     1
Appendix:
    October 3, 2007..............................................    55

                               WITNESSES
                       Wednesday, October 3, 2007

Bell, Hon. Walter, Commissioner, Alabama Department of Insurance, 
  and President of the National Association of Insurance 
  Commissioners..................................................    10
Bykowski, John, President and Chief Executive Officer, SECURA 
  Insurance, on behalf of the National Association of Mutual 
  Insurance Companies............................................    11
Condron, Christopher M., Chairman of the Board and Chief 
  Executive Officer, AXA Equitable Life Insurance Company, on 
  behalf of the American Council of Life Insurers................    13
Counselman, Albert R., CPCU, President and Chief Executive 
  Officer, RCM&D, Inc., on behalf of The Council of Insurance 
  Agents & Brokers...............................................    15
McCartney, William H., Senior Vice President, Insurance 
  Regulatory Policy, United Services Automobile Association, on 
  behalf of the American Insurance Association...................    17
Soto, Alex, CPCU, ARM, President, InSource, Inc., on behalf of 
  the Independent Insurance Agents & Brokers of America, Inc.....    19

                                APPENDIX

Prepared statements:
    Kanjorski, Hon. Paul E.......................................    56
    Bell, Hon. Walter............................................    58
    Bykowski, John...............................................    80
    Condron, Christopher M.......................................    91
    Counselman, Albert R.........................................   101
    McCartney, William H.........................................   122
    Soto, Alex...................................................   136

              Additional Material Submitted for the Record

Kanjorski, Hon. Paul E.:
    Statement of the National Association of Professional 
      Insurance Agents...........................................   152
Royce, Hon. Edward R.:
    Letter to the NAIC Reinsurance Task Force from the European 
      Commission on Internal Markets.............................   156


                         THE NEED FOR INSURANCE
                           REGULATORY REFORM

                              ----------                              


                       Wednesday, October 3, 2007

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                          Insurance, and Government
                             Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:37 p.m., in 
room 2128, Rayburn House Office Building, Hon. Paul E. 
Kanjorski [chairman of the subcommittee] presiding.
    Members present: Representatives Kanjorski, Sherman, Moore 
of Kansas, Scott, Bean, Hodes; Pryce, Hensarling, Baker, Shays, 
Manzullo, Royce, Capito, Garrett, Gerlach, Davis of Kentucky, 
Roskam, and Marchant.
    Ex officio: Representative Bachus.
    Also present: Representatives Pomeroy and Fossella.
    Chairman Kanjorski. The hearing of the subcommittee will 
come to order.
    I ask unanimous consent that Mr. Pomeroy and Mr. Fossella 
be permitted to participate in today's hearing. Without 
objection, it is so ordered. Also, without objection, all 
members' opening statements will be made a part of the record.
    We meet this afternoon to review and discuss the need for 
insurance regulatory reform. Now that we have completed our 
initial work in the House on extending the Terrorism Risk 
Insurance Act for a second time, I am pleased that we can 
finally turn our attention to another important insurance 
issue.
    This hearing is the first in a series that we will convene 
on insurance regulatory matters during the 110th Congress. 
Although we have already reviewed this topic in a variety of 
ways during about two dozen hearings since the start of the 
decade, approximately one-third of the members joined the 
Capital Markets Subcommittee this year. This hearing, 
therefore, will give them an opportunity to begin to learn the 
issues. It will also provide veterans of our panel with a fresh 
look at these matters.
    The vast majority of interested parties in the debate on 
insurance regulatory modernization, myself included, agree that 
there is no longer a question of whether or not to pursue 
reform. The question we must answer is how best to achieve this 
reform. To do so, we must start at the beginning and establish 
in this Congress a better appreciation of the industry's needs, 
a clearer understanding of recent developments in the domestic 
insurance marketplace and world stage, and an enhanced 
awareness of the policy underpinnings of the industry's 
existing regulatory structure. A careful examination of these 
points will help to lay the groundwork for any decision that 
the Capital Markets Subcommittee will make in the future.
    On this point, I want to explain, briefly, my plan for the 
process by which we ought to proceed to consider insurance 
regulatory reform. Today, we will hear from a number of key 
participants in the insurance industry, including the 
regulators, on the need for regulatory modernization. In their 
oral testimony, I hope that our witnesses will confine their 
remarks to their experiences in the current system and to any 
new developments in the insurance industry. I am also curious 
to know if any recent changes point in favor of or against 
pursuing certain regulatory reforms.
    Because many others asked to testify today, we will hear 
additional perspectives on the need for reform in a subsequent 
hearing or in future hearings. This issue is important and 
complicated. The imposition of the Federal Government in some 
form into an area traditionally regulated by the States has 
enormous implications for insurers, businesses, and consumers. 
Therefore, we should not rush into considering reform 
legislation.
    After establishing a need for reform, we will begin to 
explore policy options for reform. During these hearings, we 
will hear from a number of stakeholders representing a variety 
of views on generic reform options. Additionally, we will 
almost certainly convene separate hearings at some point on 
discrete issues like solvency protections, enforcement systems, 
product approval, and best practices for reform implementation.
    Before moving to finalize any legislation, I would 
additionally envision that we will create bipartisan, member-
driven task forces to study targeted issues related to 
insurance regulatory reform and will put together 
recommendations for a bill. These task forces should help us to 
reach a consensus. I invite my colleagues to let me know of 
their interest in leading and serving on these task forces.
    With a solid understanding of these complex issues, this 
subcommittee, and eventually the U.S. Congress, can make 
meaningful, well-thought-out reforms. This process is not a 
sprint. We need to review these issues and the potential 
consequences of changes to the industry, consumers, business, 
and the general public.
    Let me be clear: I have no battle plan, no ax to grind, and 
am open to considering all points of view. I may have 
inclinations toward pursuing certain reforms, but I have made 
no final decisions about how to implement such reforms and how 
to build a broad consensus that garners the support of many, 
not just a slim majority. I plan to work through the issues 
step-by-step.
    In reviewing the testimony of our witnesses today, I know 
they all hold strong opinions on which reforms might best 
accomplish their particular goals or undermine their perceived 
competitive advantages. American businesses and families rely 
on insurance daily. It is our job in Congress to balance the 
need of consumers to have the most innovative and worthwhile 
insurance products on the market against the economic stability 
and efficiency of the insurance markets.
    In closing, I am optimistic that through careful 
deliberation and hard work, we can identify a genuine consensus 
about how best to achieve regulatory reform in the insurance 
marketplace.
    I am also appreciative of the work of my ranking Republican 
member, who joined me in sending out the invitations to our 
witnesses. It is my hope that bipartisanship will continue to 
guide our work in this area in the months ahead. I also look 
forward to an opening dialogue today.
    The gentlelady from Ohio, Ms. Pryce.
    Ms. Pryce. Thank you very much, Mr. Chairman.
    I would like to start by relating a story retold in the 
National Association of Insurance Commissioners' 1995 annual 
report. It describes a fascinating scenario.
    It is the story of the very first NAIC meeting, described 
as ``remarkable in its harmony.'' The New York superintendent 
of insurance and the founder of the NAIC, George Miller, told 
the Baltimore underwriter, ``The 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. The 
companies and the public will both be largely benefited.'' That 
was in 1871.
    And 126 years later, in the 1980's and 1990's, the 
Democratic-controlled Congress, still looking at this, 
criticized promises by the States and the NAIC to modernize the 
insurance regulatory system, issuing reports entitled ``Failed 
Promises'' and ``Wishful Thinking.''
    In 2000, the NAIC appeared before this committee and 
promised the Congress uniformity in their statement of intent 
on modernization. In 2001, product review uniformity was sought 
through CARFRA. In 2002, the NAIC president said that CARFRA 
was being replaced by the Interstate Compact.
    Finally, in 2003, after the GAO issued a major critique of 
States' lack of coordination and market conduct oversight, the 
NAIC announced that the collective action problem was too great 
a challenge to overcome, and they would likely be unable to 
meet it.
    Six years ago, at yet another hearing, Chairman Oxley asked 
the NAIC representatives, ``If Congress sets a goal of 3 to 4 
years for achieving comprehensive uniformity by NAIC for 
product approval, do you feel confident you can meet the 
goal?'' The response was that, ``The current system is not good 
for consumers. The goal must be met, and if it is not met, then 
there needs to be questions raised about whether the States can 
solve the problems identified.'' Six years have passed, and it 
is clear that the problems cannot be solved by the States 
alone.
    Where progress has occurred, it has been largely because of 
Federal pressure. For example, the achievement of uniform 
solvency standards and reciprocal agent licensing standards has 
been pursuant to congressional mandates or threats. And 
consumers have been well-served by the Risk Retention Act that 
was passed in 1981 to allow liability consumers to form their 
own self-insurance underwriting and purchasing groups. We have 
also seen progress with Gramm-Leach-Bliley and, hopefully, 
TRIA. Targeted reforms work. In the banking industry, the 
optional Federal charter has worked. These are not mutually 
exclusive efforts.
    I will be introducing legislation later this year with some 
of my Democratic colleagues to expand risk retention to allow 
businesses to band together to address their property as well 
as their liability insurance needs. This effort is supported by 
universities, hospitals, health-care providers and numerous 
other groups, and it is another example of how Congress can act 
to create more options and more uniformity without requiring 
additional Federal presence. We should also see if we can find 
the best aspects of the dual banking system and determine if or 
whether they should be applicable to insurance regulation.
    Along with the chairman, I am open to any and all 
approaches that move us forward in reforming the market. We can 
all agree that serious concerns have been raised about the 
efficacy of the current regulatory framework. These are 
inefficiencies that are hurting consumers and stifling 
innovation. We do not need to count back to 1871. We have had 
over 15 hearings and roundtables on insurance reform in the 
last several years alone. The need is clear. The time to act is 
now.
    I am ready to put my full energies into working with you, 
Mr. Chairman, and with the chairman and ranking member of the 
full committee on a package of reforms wherever we can achieve 
consensus and move the markets forward.
    I appreciate your holding this hearing, and I look forward 
to the testimony with an open mind, in terms of reaching some 
consensus.
    Thank you, sir.
    Chairman Kanjorski. Thank you, Ms. Pryce.
    Mr. Sherman of California.
    Mr. Sherman. Thank you, Mr. Chairman.
    I think the gentlelady from Ohio has it right in her 
historical analysis, and that is, what uniformity we have 
gotten from the States has been as a result, often, of Federal 
pressure. And hopefully, this hearing will do the trick again, 
or the series of hearings, and perhaps we will not need 
legislation, but we do need a system by which products can be 
approved more quickly. And the standards for judging whether 
those products meet consumer needs need to be more uniform.
    We have had throughout this country's history the State 
regulation of insurance. I am not eager to jump away from that, 
but I am also not eager to be listening to another round of 
complaints about how long it takes to get products approved, 
particularly in the life and annuity area.
    Secondly, I would point out that, although on this panel I 
do not think we are hearing from the insurance agents--I am 
sure, with future panels, we will--I do not think any optional 
Federal charter or any of the other Federal reforms of which we 
are thinking will directly affect insurance agents. But they 
are important stakeholders, and more importantly, they are 
there on the ground, looking at the interests of consumers, and 
should be able to benefit us with their expertise.
    If we do end up having to go with an optional Federal 
charter, we have to make sure that this is not a lowest-common-
denominator charter. The whole idea of forum shopping or 
regulator selection or hopping has the feel of it that, well, 
companies will just go to whichever regulator gives them the 
best deal. We need to make sure that any optional Federal 
charter has very strong consumer protections. It does not need 
to be a collection of each of the most restrictive ideas any of 
the 50 States can come up with, but it also should not be a 
circumstance where a Federal regulatory agency views itself as 
competing for business by trying to serve its customers, 
namely, the individual insurance companies.
    So I look forward to continued good consumer protection 
and, hopefully, to a faster process of approving new products.
    I yield back.
    Chairman Kanjorski. The gentleman from Louisiana, Mr. 
Baker.
    Mr. Baker. Thank you, Mr. Chairman.
    I certainly appreciate your continuing interest in this 
subject. I know you and I have spent many hours over the past 
years engaging in efforts to find some regulatory remedy for 
this most complex issue.
    Of all of the sectors of the financial world, the insurance 
world is the one that enjoys the least or the lowest rate of 
return on equity. It has the most regulatory barriers, and it 
has the most significant challenges in the political and 
economic world today.
    As an outgrowth of the Hurricane Katrina problem, the 
committee has already acted to pour the wind casualty insurance 
into the flood insurance program, which we all know is such an 
enormous success. We have passed recently a national 
catastrophe program for the State of Florida, which we are told 
will not adversely impact the taxpayers of the United States, 
but if you were to start out--for whatever reason I could not 
conceive--to start your own insurance company today and would 
want to sell that product nationally, you would have to go 
through 54 different, varying regulatory processes in order to 
have that product sold.
    You would then be told that in some States you can use red 
paper, in others pink, in others green; some you staple, some 
you paper clip, while others you must sort individually. In 
some places, there are countersignatory requirements. In 
others, it is anyone's guess.
    This is a mess, and we are moving, unfortunately, in the 
wrong direction in this session of the Congress to make matters 
worse, not better. It is clear academically, intellectually, 
and any kind of ``ly'' you want to apply to it, that the less 
we regulate industry and provide a more competitive 
environment, the more likely there is to be products offered at 
a better price to the consumer. Look at auto rates across this 
country, and look at where States act in the consumers' best 
interest and regulate everything that moves. We have fewer 
providers, higher rates, and more disgruntled automobile 
insureds.
    The way for us to proceed is to find a way to lessen the 
regulatory burden, to allow people to innovate and, yes, even 
come to Louisiana and sell hurricane coverage if we allow free 
markets to function in a rational way.
    Mr. Chairman, I know your thoughts on these matters. I know 
how hard you have worked in the past, and I really look forward 
to working with you to find the magic cure to this problem that 
has only taken us 40 years to examine.
    Thank you.
    Chairman Kanjorski. Thank you, Mr. Baker.
    The gentlelady from Illinois, Ms. Bean.
    Ms. Bean. Thank you, Chairman Kanjorski and Ranking Member 
Pryce, for holding today's hearing on insurance regulatory 
reform.
    In addition, I would like to thank all of our distinguished 
panelists for sharing their expertise with us today.
    I think it is safe to say that the members who serve on 
this committee would agree that America's preeminence in the 
economic world hinges upon the health of our capital markets 
and on our global leadership in the financial services 
industry.
    Earlier this year, New York City Mayor Michael Bloomberg 
and U.S. Senator Charles Schumer commissioned a report on what 
changes were needed to keep the United States competitive in 
the global marketplace. One of the report's top recommendations 
was the creation of an optional Federal charter for insurance.
    In July, Representative Royce and I introduced the National 
Insurance Act of 2007 to address issues of competitiveness and 
consumer choice. The bill would create an optional Federal 
charter for life and property-casualty insurers. Designed to 
emulate the regulatory structure found in the dual banking 
system, the NIA would give insurance providers the choice of 
being regulated at the State level or by the new Federal 
regulator. The bill gives consumers what they want: choice and 
protection. Insurance customers will have more pricing and 
product options, driven by a competitive marketplace freed from 
State price controls and regulatory hurdles, as Congressman 
Baker just alluded to. Consumer protection would be 
strengthened.
    The current State-based regulatory system has hurt the U.S. 
insurance industry's ability to compete globally. In 2006 
alone, the U.S. insurance services' trade deficit totaled $24 
billion. The current system, which requires insurers to work 
with 51 different State regulators, is burdensome and slows the 
time to market for new products sometimes by years. This 
discourages insurance innovation and product development. A 
national charter would foster greater industry innovation and 
agility.
    The insurance industry has changed and has evolved 
dramatically since 1871 when the National Association of 
Insurance Commissioners was established, but for 136 years, the 
regulatory system has not significantly changed. It is time to 
allow the insurance industry to move into the 21st century so 
we can more effectively compete on the global stage and provide 
more pricing and product options to our consumers.
    As a resident of and as a representative for the State of 
Illinois, I have seen firsthand the benefits to consumer 
pricing and to product options in a deregulated environment. We 
can extend those benefits nationally with this bill. For years, 
hearings have been held identifying the problems inherent in 
the current system. Insurance reform needs to happen, and we 
should start now.
    I look forward to your testimony and to your 
recommendations for how you feel we should proceed.
    Thank you.
    Chairman Kanjorski. The gentleman from California, Mr. 
Royce.
    Mr. Royce. Chairman Kanjorski, I thank you. I thank you 
also for holding this hearing and for your leadership on this 
issue.
    I think that, you know, as to this hearing, which really 
focuses on some of the flaws in the current regulatory 
structure, an element of this is going to be looking at what 
the viable alternative is to this. And as Congresswoman Melissa 
Bean has just explained, she has introduced legislation, of 
which I am a cosponsor, but this is legislation that the 
Bloomberg-Schumer Commission and the U.S. Chamber Report on 
Competitiveness in the United States has recommended to us.
    Why they have recommended this? Well, if we went back a few 
years, we would have seen that the financial center of the 
world, undisputedly, was New York. But now capital is a mouse 
click away, so if you have a situation in the United States 
where you have 51 separate markets and you are trying to do 
business in those markets and you watch as insurance out of 
London and out of Tokyo and out of Hong Kong--as you watch the 
competitive disadvantage that the United States is in and you 
watch the regulatory burden and the costs of bringing new 
products to market, which can take up to 2 years now, and the 
cost to the consumer, you begin to understand why this has 
become a concern for economists, for industry leaders, for 
Senator Schumer, for Mr. Bloomberg, and for those who want to 
see this remain the financial capital of the world.
    Debbie Pryce is a former judge. She has a judicial 
temperament; she is patient. But as she says, she has sat 
through 15 hearings now as we have discussed the fact that we 
have been unable to get concurrence and agreement. And so these 
inefficiencies still remain across our system, this patchwork 
structure that we have, with 51 different regulators that are 
not consistent with world-class regulation. We need a world-
class regulator.
    And I believe the National Association of Insurance 
Commissioners has operated with the best of intentions. But, 
ladies and gentlemen, it has been 136 years. And these concerns 
are now concerns that have led so many prominent citizens and 
economists to ask us to look at this concept because it works 
so well in the banking industry, an optional Federal charter. 
And I think the American consumer has the most to gain.
    Let me point out for you several subsets of our own 
constituents who have the most to gain--members of the Armed 
Forces, one-third of whom are relocated every year pursuant to 
Federal order. Every time they move--within days, they have to 
move, of notification--they keep their banks, they keep their 
investments, their securities, but regardless of where they are 
moved to, they have to start from scratch when it comes to 
insurance products. All of you who send children away to 
college start from scratch when it comes to insurance products.
    The time and money spent whenever anybody relocates--and in 
addition, considering the compliance costs to our system of 51 
State regulators, just for the ACLI, they did a little study on 
Federal regulation. What would the result be in compliance cost 
if there was one set of standards just for that segment of the 
industry? $5.7 billion annually. That is not including 
property-casualty insurers.
    So, in a competitive market like the one which would be 
created under an optional Federal charter, those savings will 
undoubtedly be passed on to the consumer. In this ever-changing 
global marketplace, we have to have a world-class regulator 
able to properly regulate this critical industry, and an 
optional Federal charter is necessary to achieve this result, 
especially given the fact that, under the WTO, the E.U. and 
others are going to take action given this cumbersome, 
impossible situation we have and given the fact that our own 
industry now cannot get access and cannot get entry into 
markets worldwide on insurance products because of this 
cumbersome system that dates back 136 years here in the United 
States.
    I yield back, Mr. Chairman. Thank you.
    Chairman Kanjorski. Thank you, Mr. Royce.
    Now Mr. Scott of Georgia, by way of Scranton, Pennsylvania.
    Mr. Scott. Absolutely, the great hometown of my 
distinguished chairman.
    Let me just say, Mr. Chairman--first of all, let me thank 
you for having this very, very important hearing on insurance 
regulation. And let me thank the ranking member, of course, as 
well for holding the hearing.
    I feel that this hearing is very timely, as the issue of 
insurance regulatory reform has certainly been a hot-button 
issue for some time now. Insurance regulatory reform is an 
issue many involved agree requires action; there is no question 
about that. However, it is evident that the approach to the 
concerns involved are certainly mixed at best, and that is why 
this hearing is so important, to hear the variety of concerns.
    As the insurance industry continues to be primarily 
regulated at the State level and many involved wanting 
increased Federal oversight, I am interested to hear the views 
and concerns of our distinguished witnesses as we work toward 
some sort of consensus of our distinguished witnesses. I 
believe we all agree that regulatory reform is, indeed, 
necessary, but in any type of reform, it will take more time, 
discussion and compromise on how we move forward, because we 
want to take into account the actual operations of these 
businesses and how to ensure that whatever action we do take 
also does not deter competition, that it does not loosen 
efficiency or increase costs of operating. From the development 
of global markets to the various and detailed policy rationales 
toward pursuing regulatory reform, we must take all into 
account and listen to both sides of the issue before taking any 
further action.
    There are some very, very critical questions that have to 
be answered. For example, how big will a national office of 
insurance need to be to handle the millions of consumer 
inquiries and complaints that State regulators receive each 
year? How big will that office be? Are there other Federal 
agencies that would be dealing with consumers that should be 
used as a model in this regard?
    Now, one of the complaints of some in the industry is that 
it costs too much in compliance to introduce new products. We 
have to examine that. We have to give specific examples of new 
products that have not been introduced because of the cost of 
regulation as opposed to a business decision that a product is 
not competitive or profitable.
    What assures that the marketplace will become no less 
competitive under a Federal regulator than it is currently 
under State regulation?
    Finally, this question: Doesn't Congress have a duty to 
first use its significant influence, our resources, to try and 
help fix the current system before creating a brand-new 
competing system?
    The insurance industry is vital. It is the cornerstone of 
our financial service industry, because in it is our safety net 
across the board. It is critical that these questions be 
examined and thoroughly answered so that we can effectively 
determine the best way to move forward on this very critical 
issue of insurance regulatory reform.
    With that, Mr. Chairman, I yield back the balance of my 
time, and I look forward to the witnesses.
    Chairman Kanjorski. Thank you very much, Mr. Scott.
    Well, now it is my pleasure to introduce our excellent 
panel:
    The Honorable Walter Bell, the commissioner of the Alabama 
Department of Insurance and president of the National 
Association of Insurance Commissioners;
    Mr. John Bykowski, president and chief executive officer of 
SECURA Insurance, testifying on behalf of the National 
Association of Mutual Insurance Companies;
    Mr. Christopher M. Condron, chairman of the board and chief 
executive officer of AXA Equitable Life Insurance Company--and 
a former constituent of mine who is still very active in the 
Scranton, Pennsylvania area and with the University of 
Scranton--testifying on behalf of the American Council of Life 
Insurers;
    Mr. Albert R. Counselman, president and chief executive 
officer of RCM&D, Incorporated, testifying on behalf of the 
Council of Insurance Agents and Brokers;
    Mr. William H. McCartney, senior vice president of 
Insurance Regulatory Policy, USAA, testifying on behalf of the 
American Insurance Association; and
    Mr. Alex Soto, president of InSource, Incorporated, 
testifying on behalf of the Independent Insurance Agents and 
Brokers of America.
    Gentlemen, I welcome all of you.
    I say ``gentlemen,'' because there are no ladies, Deborah, 
but in the future, I am sure there will be.
    Ms. Pryce. We are trying.
    Chairman Kanjorski. Under the rules, we all have received 
your printed testimony. What I would ask you to do is to 
summarize within 5 minutes, if possible, your testimony so that 
we can get to the question-and-answer period. I will not be 
terribly strict with you, but if you push me to the wall, then 
I will become very strict, and I do not want to do that. But we 
look forward to your testimony, and then particularly to the 
responses in the question and answer period.
    Mr. Bell?

 STATEMENT OF THE HONORABLE WALTER BELL, COMMISSIONER, ALABAMA 
    DEPARTMENT OF INSURANCE, AND PRESIDENT OF THE NATIONAL 
             ASSOCIATION OF INSURANCE COMMISSIONERS

    Mr. Bell. Chairman Kanjorski, Ranking Member Pryce, and 
members of the subcommittee, thank you for inviting me to 
testify before you on the need for insurance regulatory reform.
    As we examine our insurance system, we must take into 
consideration the needs of and the protection of all consumers.
    As stated, my name is Walter Bell. I am the commissioner of 
insurance in Alabama and the president of the NAIC. I also 
serve as vice chair of the Executive Committee for the 
International Association of Insurance Supervisors, which is a 
group of 130 countries worldwide.
    I am pleased to be here today on behalf of the NAIC to 
update you on our ongoing successful effort to improve the 
State system of insurance supervision. As has been stated, 
State insurance officials have served as a front line of U.S. 
insurance regulators for over 150 years. Our record of consumer 
protection and industry oversight is second to none in the 
world.
    Insurance is a unique and complex product that is 
fundamentally different from other financial services, such as 
banking and securities. Most consumers find themselves 
concerned with the insurance coverage or lack thereof only in a 
time of crisis. State regulators have strengthened the State 
insurance regulatory process in any number of areas, including 
speed to market for product, rates and form filing, solvency, 
producer licensing, and fraud detection and prevention.
    An ambitious speed-to-market initiative puts in place an 
interstate compact to develop uniform national product 
standards and to provide a central point of filing. The compact 
allows insurers to file new life insurance annuities and other 
wealth-protection insurance products and receive one, single, 
streamlined review.
    Since the last time we talked about the compact before 
Congress, it has moved from concept to reality. To date, 30 
States have implemented the compact, representing over 50 
percent of the insurance market premiums nationwide. There has 
been a drastic reduction in the major insolvencies in recent 
decades. Regulators can now identify more quickly when insurers 
are troubled and can react more quickly to protect consumers.
    In January 2005, the NAIC launched an online fraud-
reporting mechanism. Consumers, employees, and others can now 
report wrongdoings to State enforcement authorities on a 
confidential basis. The SERFF program for electronic rate and 
form filings has been a huge success. Insurers choosing SERFF 
to file their products experience a much shorter turnaround 
time than under the traditional paper filing processes. Some 
SERFF filings are turned around in a single day. Currently, 
SERFF is being used by all jurisdictions and by over 3,000 
insurance companies.
    The next time someone tells you about an undocumented sob 
story about pink paper or paper clips from the decades past, 
tell them they need to leave the Pony Express behind and enter 
the Internet age.
    State insurance officials remain deeply committed to 
achieving greater uniformity in the producer licensing process, 
demonstrated by the standard, uniform producer licensing 
application now used in every State. In addition, the NAIC has 
developed a uniform electronic system designed to help navigate 
State-specific requirements for State licenses to write 
insurance. Each State and in some cases even zip codes 
represent a distinct market, with varying risk, products, and 
price. Most of the Nation's 4 million insurance agents and 
brokers operate today in three or fewer States. Today, 
companies of various sizes sell on an unprecedented basis 
products across State lines on a national basis.
    Some will tell you the world is changing, and we need to 
catch up to foreign countries. Let us put that argument to bed 
right here. When State insurance markets are compared to other 
national insurance markets around the globe, the size and scope 
of those States' markets and, therefore, the responsibilities 
of the States' regulators typically dwarf the markets of whole 
nations. Four of the top 10 and 26 of the top 50 insurance 
markets in the world are U.S. States. For example, Mr. 
Chairman, the insurance market in your home State of 
Pennsylvania is the twelfth-largest market in the world, larger 
than the insurance market of China.
    Consumer protection demands that State insurance officials 
be ever-vigilant to respond to the changing needs of consumers, 
the industry, and the modern marketplace. We would urge careful 
analysis, as has been stated, of any proposal to achieve the 
modernization of insurance supervision through Federal 
legislation. Even well-intended and seemingly harmless Federal 
legislation can have a negative impact on existing State 
protections for insurance consumers. We respectfully request 
Congress, consumers and the insurance industry to work with us 
to continue to modernize what we have been doing to protect 
consumers.
    Thank you very much for this opportunity today, and I look 
forward to your questions.
    [The prepared statement of Mr. Bell can be found on page 58 
of the appendix.]
    Chairman Kanjorski. Thank you, Mr. Bell.
    Next, we will hear from Mr. Bykowski, the president and 
chief executive officer of SECURA Insurance, testifying on 
behalf of the National Association of Mutual Insurance 
Companies.
    Mr. Bykowski?

   STATEMENT OF JOHN BYKOWSKI, PRESIDENT AND CHIEF EXECUTIVE 
     OFFICER, SECURA INSURANCE, ON BEHALF OF THE NATIONAL 
           ASSOCIATION OF MUTUAL INSURANCE COMPANIES

    Mr. Bykowski. Good afternoon, Chairman Kanjorski, Ranking 
Member Pryce, and members of the subcommittee.
    My name is John Bykowski, and I am testifying today on 
behalf of the National Association of Mutual Insurance 
Companies. NAMIC is the Nation's largest P&C insurance company 
trade association, with more than 1,400 members.
    I am the president and CEO of SECURA Insurance Companies, 
which are headquartered in Appleton, Wisconsin. Our company 
began in 1900, and we now write about $330 million in personal, 
commercial and farm products through 400 independent agencies 
in 13 States. And I currently serve as the chairman of NAMIC.
    NAMIC appreciates the opportunity to testify today on this 
very important issue. NAMIC supports a reformed system of State 
regulation. While we agree with some of the criticisms you will 
hear today, ultimately, NAMIC believes reform at the State 
level is more likely to produce better results than further 
Federal involvement in the insurance industry. Let me explain 
why NAMIC and an overwhelming majority of property-casualty 
companies feel this way.
    Since its inception, the U.S. property-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 other large national 
industries experienced sweeping deregulation, property-casualty 
insurance companies remained subject to some form of price 
controls in most States. That, more than anything else, must 
change. 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, NAMIC believes State insurance regulation has 
many strengths that are worth building upon. Chief among these 
are the ability of State departments to adapt to local market 
conditions, to experiment, to learn from each other, and to 
respond to the unique needs and concerns of consumers and 
insurers in their States.
    Unlike banking and life insurance, property-casualty 
insurance is subject to local risk factors, such as weather 
conditions, tort law, medical costs, and building codes. State 
regulation is able to take account of these differences in ways 
that Federal regulation would not. Once more, because of their 
thorough knowledge of local conditions, State regulators are 
attuned to the needs and interests of each State's consumers, 
such as hurricane risks in Florida and Louisiana or earthquakes 
in California and Missouri. A distant Federal regulator would 
not have the ability to be as responsive to those same 
concerns.
    Many States have made progress in recent years toward 
adopting needed reforms. They have softened company licensing 
restrictions, and in most cases, they have moved away from 
strict rate regulation. In fact, only 16 States still require 
prior approval of rates. Influential national organizations 
representing thousands of State legislatures have called for 
the abolition of prior approval rate regulation.
    Federal intervention in insurance regulation could take 
several forms, ranging from a complete Federal takeover or to 
an OFC, such as embodied in H.R. 3200, or to the narrower 
Federal tools approach already pursued by the House Financial 
Services Committee in H.R. 1065, the Nonadmitted and 
Reinsurance Reform Act.
    With respect to H.R. 3200, NAMIC believes an optional 
Federal charter would lead to negative outcomes that would far 
outweigh any potential benefits, and anticipated benefits would 
not be realized. Let me briefly outline our greatest concerns.
    First, it is clear that Federal regulation has proven no 
better than State regulation at addressing market failures or 
in protecting consumer interests. Moreover, unlike State 
regulatory failures, Federal regulatory mistakes could have 
disastrous, economy-wide consequences. The Savings and Loan 
debacle is an example of what can happen.
    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. I quote ``social regulation.'' 
I mean measures that tend to socialize insurance costs by 
spreading risk indiscriminately among risk classes. Regulations 
that restrict insurers' underwriting freedom often have this 
effect. Having the ability to accurately assess and classify 
the risks of loss associated with particular individuals and 
property is essential to the property-casualty insurance 
industry.
    Proponents of H.R. 3200 like to point out that it is 
``optional,'' but NAMIC believes the choice offered by an 
optional Federal charter would prove illusory. The cost to a 
company from adopting a Federal charter is likely to be quite 
high, and switching back and forth would be impossible for 
smaller insurers. Most small insurers would be trapped in the 
regulatory system they initially chose. The result would be an 
unlevel playing field, since only the largest insurers would be 
able to afford the option of switching regulators, thus 
reducing competition in the market.
    In conclusion, NAMIC believes that, while the States have 
not acted as rapidly or as thoroughly to modernize insurance 
regulation, they have picked up the pace of reform and appear 
headed in the right direction. 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 most appropriate course of action 
for consumers and insurers alike.
    Thank you.
    [The prepared statement of Mr. Bykowski can be found on 
page 80 of the appendix.]
    Chairman Kanjorski. Thank you.
    Next we have Mr. Christopher Condron, the chairman and 
chief executive officer of AXA Equitable Life Insurance 
Company, testifying on behalf of the American Council of Life 
Insurers.

STATEMENT OF CHRISTOPHER M. CONDRON, CHAIRMAN OF THE BOARD AND 
 CHIEF EXECUTIVE OFFICER, AXA EQUITABLE LIFE INSURANCE COMPAN, 
       ON BEHALF OF THE AMERICAN COUNCIL OF LIFE INSURERS

    Mr. Condron. Thank you, Mr. Chairman. Thank you, 
Congresswoman Pryce and committee members. It is nice to be 
here this afternoon.
    I am the CEO of AXA Financial and the chairman and CEO of 
our principal insurance operating subsidiary, the AXA Equitable 
Life Insurance Company.
    AXA Equitable was founded in 1859 as the Equitable Life 
Insurance Society of the United States, and we became a member 
of the Global AXA Group 15 years ago. And today, the AXA Group 
is one of the world's three largest diversified insurance 
companies.
    I am also a member of the Board of Directors of the 
American Council of Life Insurers. As the principal trade 
association for life insurance companies, the ACLI's 373-member 
companies represent 93 percent of the industry's overall 
assets.
    The views I express today reflect not just my experience 
since 2001 while running AXA Equitable but also my prior 
experience as president and chief operating officer of Mellon 
Bank Corporation, now Bank of New York Mellon, and as the CEO 
of Dreyfus Corporation, the Bank of New York Mellon's mutual-
fund subsidiary.
    National banks like Mellon and mutual-fund companies like 
Dreyfus are principally regulated at the Federal level. The 
same holds true for most broker dealers. While that creates a 
significant competitive advantage, I am not here just to 
advocate fairer competition. I am here because the current 
archaic, State-based regulatory system is increasingly 
impairing our industry's ability to efficiently manufacture and 
deliver the kinds of products and services that your 
constituents and our customers so desperately need, products 
and services that insurers are uniquely qualified to 
manufacture and deliver.
    For most of our 148-year history, our principal business 
was protecting people against the risk of dying too soon, but 
about 10 years ago, our business mix began to change. 
Increasingly today, our focus is protecting people against the 
risk of outliving their assets. We do that with variable 
annuities, which offer the benefits of investing in the capital 
markets while providing the peace of mind of downside 
guarantees.
    Insurers hold the only franchise in the financial services 
industry that can guarantee Americans that they will not 
outlive their assets. As a result, we are uniquely positioned 
to help this Nation address the challenges posed by the aging 
of the 77 million baby boomers: longer lifespans; the 
increasing elimination of defined-benefit pension plans; and 
the low levels of retirement savings.
    For us to continue to be a viable part of the solution to 
this Nation's challenges, however, the need to substantially 
overhaul the current State-based regulatory system is both 
urgent and critical. And while I am encouraged that we are 
making progress, I am concerned that we have not effectively 
explained the consequences of failing to move quickly.
    And that may be due to just how well we have done as an 
industry in shielding our customers and you from what we face. 
Could you imagine the implications if the auto industry were 
regulated the way insurance is, by 50 separate States, with 
local regulators empowered to determine if cars sold in their 
States will be left-hand- or right-hand-drive, or when new 
models could come to market, or what safety features could be 
offered? Yet, that is exactly what we tolerate when it comes to 
insurance.
    Our current system creates numerous regulatory gauntlets 
through which everything we do must pass: our product designs; 
the capital and reserving standards we must meet; how we 
administer our products; our sales practices; and the licensing 
standards for our agents. The result fractionalizes our 
business. It is common for us to have a dozen or more different 
versions of the same product in the marketplace at the same 
time.
    There are States in which we can only sell a product that 
is three generations older than what we are allowed to sell in 
most of the rest of the country. And since an insurer's home 
State regulator gets to determine capital requirements for 
business done nationwide, it creates the potential for 
erratically disparate protections of consumers within the same 
State. This simply makes no sense and it is unfair.
    At a time when most industries are increasingly looking to 
establish global regulatory standardization to deliver better 
value to customers, continuing to embrace this system does a 
disservice to all Americans.
    Candidly, I was stunned at what I found when I joined this 
industry 6 years ago. At Dreyfus, I could get a new product to 
market in all States in less than 60 days with no variations. 
In insurance, it is closer to a year, and the product still 
will not be approved in all States, and even where it is, it 
has often been changed and, in some cases, fundamentally and 
substantially.
    The stifling effect that this has on our ability to help 
solve America's retirement security crisis cannot be 
overstated. It also creates enormous headaches and 
inefficiencies for our agents, which, at AXA alone, number over 
90,000. That is one reason why thousands of them have come out 
in favor of the Federal regulation through groups like Agents 
for Change, AALU and NAILBA.
    A University of Georgia study recently estimated that the 
costs of this system are close to $6 billion a year more than 
if we had a single national regulator. And we all know who is 
paying for that.
    While the costs should be of concern to all of us, there is 
something more important at stake, and that is our ability to 
use our unique franchise to help address the retirement 
security crisis our Nation is facing. That is in your hands.
    We are not seeking easier regulation. We will gladly live 
with tough standards. What we are urgently seeking is the 
opportunity to choose uniformity in a single regulator.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Condron can be found on page 
91 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Condron.
    Our nest witness is Mr. Albert Counselman, the president 
and chief executive officer of RCM&D, Incorporated, testifying 
on behalf of the Council of Insurance Agents and Brokers.
    Mr. Counselman?

 STATEMENT OF ALBERT R. COUNSELMAN, CPCU, PRESIDENT AND CHIEF 
  EXECUTIVE OFFICER, RCM&D, INC., ON BEHALF OF THE COUNCIL OF 
                   INSURANCE AGENTS & BROKERS

    Mr. Counselman. Good afternoon, Chairman Kanjorski, 
Congresswoman Pryce, and Congressman Bachus. It is a pleasure 
to be here, representing the Council of Insurance Agents and 
Brokers.
    My firm is the largest agency and brokerage firm in 
Maryland. We are agents, and we are also one of the 65 largest 
commercial insurance agencies and brokerage firms in the 
country.
    In recent years, there has been a huge convergence in this 
sector of agents and brokers. Many of the problems we see in 
the fragmented State system are being exacerbated. The current 
regulatory structure is not equipped to handle an insurance 
marketplace that is international in scope. My firm serves 
clients in 50 States and in multiple countries, not unlike most 
council member firms, yet strikingly different from the local 
mode of operation that existed 20 or even 10 years ago. Like 
the marketplace, our clients have risks and exposures that 
transcend State boundaries. The current State regulatory 
patchwork cannot keep up due to the globalization of the 
business.
    The Council is very grateful to Representatives Bean and 
Royce for introducing the National Insurance Act of 2007. The 
bottom line is that this bill provides real choice for all 
participants in the insurance marketplace. The critics of this 
bill often seem to forget that the Federal charter for agents, 
brokers, insurers and reinsurers is an option, period, and the 
success of the dual banking charter system is a simple 
testament to how and why it will work.
    The primary objective of insurance regulation is to monitor 
and regulate insurer solvency, the most essential consumer 
protection, as it will remain so. While some risks and 
insurance markets remain local or State-based, in general, 
insurance has become an international marketplace in which 
risks are widely spread and losses are widely felt. Rather than 
encouraging increased availability and improving 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.
    Let me give you a couple of examples.
    Transparency with respect to compensation is a hot issue, 
and we support uniform disclosure rules. While the States 
impose explicit requirements, it is impossible to satisfy the 
differing requirements of the States with a uniform compliance 
approach. For clients with exposures across the Nation and 
their brokers who are trying to serve them efficiently and 
economically, the differing requirements serve no apparent 
consumer-protection purpose.
    The second example is licensure. After the enactment of 
Gramm-Leach-Bliley and its NARAB provisions, the NAIC pledged 
not only to reach reciprocity but, ultimately, to establish 
uniformity in producer licensing. Most States retain a variety 
of individual requirements for licensing, and they all differ 
with respect to fees, fingerprinting, certifications, among 
other requirements.
    The 183 producers in my firm, for example, hold 183 
resident licenses in four States and 512 nonresident resident 
licenses. As you can imagine, this requires significant 
monetary and human resources.
    Seven years after NAIC's adoption of a Producer License 
Model Act, the regulators still cannot agree on the meaning of 
basic yet critical terms that are contained in every State law, 
such as what it means to sell, solicit, and negotiate 
insurance. Nor can they agree on the meaning of other critical 
provisions of the law, even when the language in their 
individual State provisions are identical word-for-word. While 
these may seem like small issues, and individually they may, 
taken as a whole they are significant. Commissioner Bell 
accurately recounts the efforts that regulators are making to 
achieve results at the State level, but that is no substitute 
for Federal action on the matter.
    My third example is speed to market. Let me give you a 
personal story. A few years ago, PAR, an errors and omissions 
insurer for whom I am a director, needed to revise its coverage 
form. PAR had to refile the coverage form in 35 States where 
PAR writes coverage for 65 insureds. After 2 years and huge 
cost, all 35 States approved the filing. Every policyholder in 
this insurance company is a sophisticated insurance executive. 
Two years and massive cost is absurd. We advocate for complete 
deregulation of rates and forms for commercial lines of 
insurance.
    Finally, although the NAIC has 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. Competition and 
efficiency in the insurance industry lag behind other financial 
service sectors largely due to the regulatory inefficiencies 
and the inconsistencies in the State regulatory system.
    I am grateful for this committee's interest and work, but 
the root of the complaints that I see against the OFC proposal 
are inherently protectionist. The business of insurance and the 
consumers that business needs to serve have moved beyond 
artificial State boundaries, and it is long past time that the 
regulation of that business move beyond those artificial 
boundaries as well. Companies and producers should have a 
choice between State and Federal oversight, and consumers 
should be able to choose between companies and producers who 
can provide the best service and the best performance.
    Again, thank you, Mr. Chairman.
    [The prepared statement of Mr. Counselman can be found on 
page 101 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Counselman.
    And now, Mr. William McCartney, the senior vice president 
for insurance regulatory policy, USAA.
    Mr. McCartney?

   STATEMENT OF WILLIAM H. McCARTNEY, SENIOR VICE PRESIDENT, 
    INSURANCE REGULATORY POLICY, UNITED SERVICES AUTOMOBILE 
  ASSOCIATION, ON BEHALF OF THE AMERICAN INSURANCE ASSOCIATION

    Mr. McCartney. Chairman Kanjorski, Ranking Member Pryce, 
and members of the subcommittee, good afternoon. My name is 
William McCartney, and I am senior vice president, insurance 
regulatory policy, United Services Automobile Association in 
San Antonio.
    USAA was founded in 1922 by a group of 25 Army officers who 
found that they couldn't get automobile insurance because 
typical insurers equated their frequent moves with being bad 
risks, so they started their own insurance company. Today, USAA 
is a fully integrated financial services company, providing 
insurance, banking, and investment products to six million 
current and former members of the U.S. military and their 
families. Our mission is to be the provider of choice to the 
military community.
    I am testifying today on behalf of USAA and our property 
casualty insurance trade association, the American Insurance 
Association, and the American Insurance Association's more than 
350 members.
    Today, I will talk about an insurance regulatory framework 
that hasn't been updated since 1945, when FDR was President and 
this Nation was at war with Germany and Japan. No other segment 
of our economy has gone that long without being modernized. We 
strongly support H.R. 3200 as a vital means of rationalizing 
this industry for consumers today.
    By way of background, earlier in my career I served for 7 
years as Nebraska's Director of Insurance. During that time, I 
was active in national insurance issues and served as an 
officer of the National Association of Insurance Commissioners 
for 3 of those years, including as NAIC president in 1992.
    I have always believed that the primary and overarching 
focus of insurance regulation must be on the financial 
condition of insurers, and I used to believe that the States 
could achieve uniformity and consistency of regulation without 
Federal intervention. In fact, in the early 1990's, in a 
hearing before a House Energy and Commerce Subcommittee, I 
asked the members to give the States time to plug the holes in 
State regulation; and I told the subcommittee that if the 
States failed to do so, I would be among the first to come back 
and tell that to Congress. Well, 15 years later, here I am.
    The fact is, today's State-based regulatory approach is 
misguided. The system of price and product controls empowers 
regulators, not consumers. It creates instability and disorder, 
not uniformity and consistency. And, finally, continuing in the 
current system will put consumers at greater risk by driving 
insurers out of markets, rather than promoting solvency.
    Today, let me mention just one example of how the current 
system does not empower consumers. As Mr. Royce said, each year 
a third of USAA's members move at the direction of the Federal 
Government. I would like to tell you about one, but because he 
is on active duty right now, I have to protect his name.
    He is a sergeant who serves in the United States Army. 
Pursuant to Federal order, he has moved nearly every year since 
he enlisted. He recently purchased a vehicle in Georgia, his 
home of record, but shortly thereafter was moved to Texas. All 
it took was a change of address form to update his checking and 
savings accounts, credit cards, mutual funds, and retirement 
accounts. But unfortunately for this sergeant and every member 
of the Armed Forces, his automobile, renters, and umbrella 
insurance products are not portable. So, for these, the change 
of address form was just the beginning.
    Even though he had the same risk profile in Texas as he had 
in Georgia, USAA had to reunderwrite, reprice, and reissue each 
of those products on a Texas policy form, and some of the 
coverages changed because of State requirements. We also had to 
send him new proof-of-insurance cards in a Texas-specific 
format. Next year, when he moves to some other State, we will 
get to do it all over again.
    Instability and disorder, not uniformity and consistency, 
characterize the current system. Imagine if cell phones were 
regulated the way we regulate the insurance industry. What if 
your cell phone coverage ended when you crossed a State line or 
that the provider required a different model phone for each 
State? Would consumers pay for a service that required them to 
have three, four, or five plans, or carry three, four, or five 
different telephones every time they crossed a State line when 
on vacation or, in the case of our military men and women, 
change duty stations? Imagine the effect that that would have 
on communication. Consumers wouldn't stand for it, and neither 
would Congress.
    And the current system puts consumers at greater risk by 
driving companies out of markets, rather than focusing on 
promoting solvency. In spite of the States' continued 
assertions that improvements have been made and are under way, 
the fundamental problems have not been significantly addressed, 
and they cannot be.
    We are dealing with a system that has 51 regulators and 100 
separate legislative bodies. Most insurance regulators want to 
do a good job and have the best of intentions, but they are 
limited in what they can do under a regulatory design that is 
over 60 years old.
    So what should Congress do? We urge you to enact H.R. 3200, 
the National Insurance Act of 2007, sponsored by 
Representatives Bean and Royce. This bill would create a 
national insurance framework, but it would allow insurers that 
want to remain State regulated to do so. Similarly, consumers 
who want to deal only with insurers subject to the oversight of 
their State regulator could choose to do business only with 
those companies. However, consumers who value consistency of 
products and service, regardless of where they reside, like our 
men and women in uniform, could choose to do business with 
nationally regulated insurers.
    Thank you for allowing me to appear here today and for 
holding this hearing on this important issue. I look forward to 
responding to your questions.
    Chairman Kanjorski. Thank you, Mr. McCartney.
    [The prepared statement of Mr. McCartney can be found on 
page 122 of the appendix.]
    Chairman Kanjorski. And finally, Mr. Alex Soto, president, 
InSource, Incorporated, testifying on behalf of the Independent 
Insurance Agents and Brokers of America.
    Mr. Soto.

 STATEMENT OF ALEX SOTO, CPCU, ARM, PRESIDENT, INSOURCE, INC., 
  ON BEHALF OF THE INDEPENDENT INSURANCE AGENTS & BROKERS OF 
                         AMERICA, INC.

    Mr. Soto. Good afternoon, Chairman Kanjorski, Ranking 
Member Pryce, and members of the committee. I am the immediate 
past president of the Independent Insurance Agents of America, 
and immediate past chairman of the same organization. You know 
it as the ``Big I.''
    We are 300,000 men and women across the country. We are the 
intermediaries between the insurance companies and the 
consumers. Because we are independent agents, we represent 
multiple insurance companies, and we thank you for holding this 
hearing on an area that is of critical importance to all 
consumers and our clients.
    The current system of State regulation does indeed work, 
and in particular State regulation does work effectively to 
protect consumers. State officials are positioned to respond to 
the needs of the local markets and the local consumers. Also, 
protecting consumers against insurance company insolvency, 
which is the primary goal of the regulator, is done effectively 
at the State level, I think most people would agree.
    However, the State system also has been rightly 
characterized as slow and inefficient, with different laws and 
regulations that add unnecessary expense; and we believe that 
congressional legislative action is necessary to help reform 
the State regulatory system. The IIABA believes that the best 
method of addressing the deficiencies is a pragmatic, middle-
ground approach that utilizes Federal legislative tools to 
establish the greater interstate consistency in key areas, and 
so we navigate the middle ground in the various positions.
    Evidence of the viability of this approach is the 
Nonadmitted and Reinsurance Reform Act, which passed the House 
overwhelmingly by voice vote this year and unanimously last 
year. Unlike other reform proposals, this legislation has near 
unanimous support.
    An additional area where targeted reform could be achieved 
is in the area of agent licensing. We already talked about it.
    The more serious challenges facing the people that I 
represent, my constituents, is a redundancy in the cost 
requirements arising when seeking nonresident residence 
licenses, and Mr. Counselman already alluded to that.
    In most States, a person such as myself who wants to 
transact business in a neighboring State has to get three 
separate licenses, one for myself, one for my agency, and on 
top of that we have to register the corporation in each 
jurisdiction just to simply serve our clients. We believe that 
targeted Federal legislation preserves the right to States to 
supervise and discipline individual producers but would not 
impact the day-to-day regulation of insurance.
    I would be remiss in not discussing briefly our strong 
opposition to another suggested method to achieve reform, which 
is the creation of an optional Federal charter. If insurance 
regulation is shifted to the Federal Government, our agents 
would not be as effective in protecting consumers. Let me take 
the time, because time is brief, to give you just one simple 
anecdote.
    When Hurricane Andrew hit my area--and I live in Miami, 
Florida, and unfortunately we have lived through a number of 
hurricanes--we had started the year before in an orderly moving 
of a book of business from one major national insurance company 
to various companies. We had agreed not to do business together 
anymore, and we agreed to do it on a month-by-month basis as 
policies expired and not to disturb mortgagees, additional 
insureds, and the insureds themselves. Unfortunately, toward 
the end of the process, in August of 1992, Hurricane Andrew 
struck, and we found ourselves at InSource with 17 insureds who 
were about to be nonrenewed but had substantial damage to their 
properties. Roofs were blown off. Walls had been torn down.
    I made an appeal to this national insurance company for 
help. Please maintain the insurance for these people until they 
can repair the property sufficiently to get another company 
attracted to write their insurance. I made a home office 
appeal. I went through their government affairs officer and was 
turned down every single time.
    I then made an appeal to the insurance commissioner of the 
State of Florida, and the next day we got an emergency order 
requiring that insurance company, for a limited period of time, 
to renew the policies for these people.
    I am going to tell you that I cannot imagine a Federal 
regulator or series of regulators or series of ombudsmen being 
able to protect the consumers at that level, and that is why we 
believe in not dismantling the existing process but rather 
improving it. Even though--even though optional Federal charter 
is mentioned to be optional, it is not optional for our members 
and it is not optional for the clients that we represent, 
because invariably we are going to have to place some of them 
with companies that are State regulated and others that are 
going to be regulated by the Federal Government. We would be 
forced to deal with a Federal regulator and a State regulator.
    Proponents of OFC also assert Federal regulation is 
important if the United States is to remain a global financial 
services leader. IIABA believes that purported decline in U.S. 
capital markets' competitiveness for insurance companies does 
not stem from State regulation but rather other U.S. 
competitive concerns, such as disparate tax treatment, diverse 
financial reporting standards, and excessive costs of 
litigation.
    So, in conclusion, we believe that targeted Federal 
legislation to improve State-based systems presents the Members 
of Congress with a compromise that is achievable and something 
that we can all work on together.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Soto can be found on page 
136 of the appendix.]
    Chairman Kanjorski. Thank you, Mr. Soto.
    In listening to it, it seems we have rather diverse 
testimony. Some people think we have a problem, and others do 
not see it that way. And sometimes, I wonder whether we are 
providing a solution in search of a problem. And of course, 
what I mean by that is obvious, that there is no reason for us 
to move ahead. But I seem to hear a recognition from all of the 
witnesses that things could certainly function a lot better 
than they do.
    Starting with that proposition, what I would like to know 
is what would be the number one, two, and three issues that 
should be addressed if you had the choice of telling us what to 
address? Anybody on the panel who wants to take that.
    Mr. Condron. I would say time to market is very critical, 
because we are disadvantaging consumers in terms of how long it 
takes us to put a new product on the market. I will give you 
just a quick example. Our Accumulator 07 product after 7 months 
still isn't approved in five States, and one of those States 
will never approve the product.
    Secondly, I would say consistency in reserve requirements. 
The way the system works now, individual States can require 
different reserves, which is basically your cost of capital, 
your one asset, can require different costs of reserves by 
State. So New York can require different reserves than Arizona; 
and, as a result, companies end up being inconsistently 
regulated across the system.
    And I would say, finally, that the inability of our current 
system to allow our agents to freely work across State lines--
you know, a simple example would be if a client moves from 
Pennsylvania to Arizona and they want to talk about their 
insurance policy and their Pennsylvania agent isn't licensed in 
Arizona, they can't talk to him, and he is probably not going 
to want to get licensed in Arizona.
    So the example that was given about moving, the USAA 
problems of people moving around, the State licensing system is 
arcane. No other part of financial services requires State 
licensing State by State. They have blue sky laws in the 
securities industry, where you take one exam, you are 
automatically licensed in every State. That doesn't exist in 
the insurance industry. So I would say those would be my three.
    Chairman Kanjorski. I think that is very good. That is a 
good start, as far as I am concerned.
    We have three elements here, none of which really requires 
a Federal charter. Time to market, we could easily do that. It 
is something we do in Pennsylvania in agriculture. If you meet 
the Pennsylvania Department of Agriculture requirements, you 
are capable of doing business in all 50 States in the country. 
That is by Federal act.
    We could easily say if you qualify under New York State 
insurance regulation or California State insurance, or whatever 
State we pick as an idealized standard, that would qualify that 
product that you are interested in getting to market 
immediately, so you would have only one market to put it 
through.
    The reserve requirements would be pretty much the same 
thing, that uniformizing a reserve requirement. Whatever is 
determined to be the reserve requirement in the select State or 
States, it would be uniform throughout the country. As for 
agents working across State lines, that would be in conjunction 
with licensing, which would be easy to uniformize, it would 
seem to me.
    Mr. Condron. Well, the States have been at it for a long 
time. Today, 30 States are in a compact. They have been at it 
forever. The big States aren't there. New York is not there, 
California is not there, Florida is not there, and they are 
likely never to be there.
    Chairman Kanjorski. Why is that, sir?
    Mr. Condron. Because each State has different rules and 
regulations. Some are required by the State legislature; some 
changes are required by the State senate. So the insurance 
commissioners themselves as a group, a very able and 
hardworking and diligent group of people, they have their hands 
tied. And you have different goals in different States. And you 
know, we have been at it for a long, long time now trying to 
get uniformity, and it hasn't happened, and, frankly, it never 
will.
    Chairman Kanjorski. Mr. Counselman?
    Mr. Counselman. Mr. Chairman, thank you.
    I come at it from a different direction, I think. I think 
there is a fundamental change in how business is done in the 
United States today versus how it was done when I came into the 
business, which was 35 years ago, when my association, the 
Council of Insurance Agents & Brokers, was started, which was 
94 years ago; and I think that the fundamental change is that 
our clients are doing business nationwide and internationally. 
So, therefore, that is how we are doing business. Even if I 
were just one office in one city, I would be doing business 
throughout the country all the time for my clients and also out 
of the country all of the time for my clients, and that was the 
exception in the past.
    So I think that what we have now is something that was 
designed to fit what was appropriate when it was designed, but 
we need a fundamental change in how regulation is done today to 
reflect how business is done today, which is all the time, even 
from small offices of our member firms as well as from larger 
offices of member firms, business is done nationally and 
internationally on a daily basis. And so we are trying to make 
something fit, and it takes us a long time to make change 
through 50 legislatures, and we just can't move fast enough 
that way anymore.
    It just doesn't fit. The model doesn't fit anymore, and 
that is why I think we have to take this opportunity to look at 
this and say, what is the right way to build it? How can we 
really protect the consumer? And then also at the same time 
allow the insurance companies and the agents and brokers to 
flourish in serving the consumer.
    So I think the fundamental change that we have to look at 
is completely change the structure, and that is why I think OFC 
is so important, because that will cause it to happen.
    Chairman Kanjorski. Mr. McCartney?
    Mr. McCartney. Very briefly, Mr. Chairman. Thank you.
    And with all due respect, I think I need to disagree with 
the fundamental premise of your question that there are two or 
three or four issues that we can tackle and then the problem 
will go away. I just don't believe that we can do this 
piecemeal. We have to have an approach that deals with the 
entire problem.
    And, you know, from my perspective, representing a company 
that represents men and women in uniform, anything that doesn't 
cover the whole range of products probably is not going to be a 
satisfactory solution.
    Chairman Kanjorski. So your theory is we need to go from 
this point to a Federal system overnight?
    Mr. McCartney. I think your analogy of how the Pennsylvania 
Department of Agriculture standard then becomes accepted in 
every other State is one that might have some merit to talk 
about.
    At the same time, though, it really has to have some teeth, 
because in the States where the Federal Government has come on 
with directions and mandates to the States in the area of 
insurance, by and large the States haven't been able to get 
there.
    Chairman Kanjorski. It is an interesting discussion. I do 
not mean to eat up all the time, but the discussion had a lot 
of the fear of fairness and who would have priority if we have 
a dual system. In a dual system, I see a need for insurance 
companies to have a right to do business in one single State or 
one or two States for those that do not wish to go national. 
But you could construct a system that way, and then you end up 
with forum shopping and you end up with some States setting up 
regimentations that are advantageous to attract business as 
opposed to accomplishing business. And you get that--we have it 
in some of the areas--shopping around, if you will, for forum 
or license. And rather than see that, we could go to a Federal 
system that maintains a State system within categories of 
control so that if a State system gets out of control, the 
Federal regulator would have authority to come into place.
    Mr. Soto?
    Mr. Soto. Mr. Chairman, I agree with the way you started 
your statement and your question, which is if you create a 
laundry list of problem areas--and, obviously, for selfish 
reasons, agency reform and licensing reform would be about at 
the very top of my list, but also speed-to-market issues and 
forum regulations issues. And you target them and you go at 
them and therefore preserve those qualities that are still good 
in the State system.
    I mean, the fact is the State system has a lot of problems, 
but we don't need to demonize them. So there is a lot of good 
experience there, wealth of background and information, and let 
us preserve it, but let us target the areas where we need 
change.
    Chairman Kanjorski. I have to state my preference. I have 
great fear in creating another Homeland--what is the name of 
that agency?
    Ms. Pryce. Homeland Security.
    Chairman Kanjorski. The Department of Homeland Security. I 
cannot even remember the name of the agency, but it is a 
disaster. And, you know, it has been in effect for 5 years and 
probably will not get straightened out for another 5 years, 
because that is the way the Federal Government functions.
    I can't imagine what we are going to do if we take a huge 
industry like the insurance industry and screw it up for 5 or 
10 years before it gets its feet in place. It could be a 
disaster. You know, I don't want to be a solution in search of 
a problem. I think that is what we could do if we want to do 
the magnificent total picture of reinvention.
    Anyway, I have spoken enough. Ms. Pryce?
    Ms. Pryce. Thank you, Mr. Chairman.
    Following up on some of the issues you touched on, two 
things concern me the most about this issue. And let me just 
tell you what they are, and then you can all jump on them if 
you care to.
    One is the global economy and how insurance is affecting 
that, how we are working through those issues on a State-by-
State basis. You know, we talk in this committee a lot about 
trade in services. Right now, who does represent your industry 
when it comes to negotiating trade deals? We have heard from 
Schumer and Bloomberg and the U.S. Chamber that we are 
suffering a competitive disadvantage because of State-by-State 
regulation. Mr. Soto disagrees with that. He thinks it is 
because of taxes and litigation, other things. So that is my 
first one.
    The other is, you know, the retirement security crisis and 
how these new products, especially on the life side of the 
industry, can contribute to helping us solve this big problem 
that our country faces, and are we as a government standing in 
the way of the assistance that this country really needs 
because we are allowing each State to independently and 
specifically regulate--perhaps regulate these solutions out of 
being?
    And so that is two big questions, and who wants to go 
first? All right. Let us hear from Mr. Bykowski.
    Mr. Bykowski. Thank you.
    First of all, I would like to thank the chairman for his 
comments about concerns of creating this huge Federal 
bureaucracy, because certainly NAMIC would share those 
concerns. And we would like to talk about one of the key issues 
facing the regulatory reform we believe is the issue of rate 
regulation, heavy rate regulation in some States. In those 
States that have a reasonable regulatory system for handling 
rates you will find the most competition.
    In my home State of Wisconsin--
    Ms. Pryce. Are you addressing either one of my problems 
here?
    Mr. Bykowski. I can't speak to the life insurance 
questions.
    Ms. Pryce. Then how about the global economy question?
    Mr. Bykowski. Well, there is no doubt that we live in a 
global economy. But the insurance world, particularly the 
property casualty insurance world, has to deal with the local 
issues that affect it. The problems that we have in Florida are 
not the same as we have in Wisconsin or in California.
    Ms. Pryce. So Mr. Condron?
    Mr. Condron. Yes, first of all, Congresswoman, I would say 
AXA is an interesting example, because we are in 50 countries. 
And when you come outside of the United States of America and 
you say who represents the insurance industry in the United 
States, the NAIC tries to be a body that speaks for the 
insurance industry, but they can't commit the industry. They 
don't have any power to commit the industry. They don't have 
the--they are not vested with the power from all the States. 
Each State views each issue differently.
    So, from a trade standpoint, we are at a competitive 
disadvantage globally, and I think that is something that 
really needs to be considered. Because the securities industry, 
the banking industry, and all of the other financial services 
industries are well represented by a Federal regulator who can 
represent them globally in the global marketplace.
    Turning to your retirement security question, let me give 
you an example. In 1975, the average price of a home in this 
country was $47,000; today, it is $181,000. In 1975, the 
average price of a gallon of gasoline was $0.57; today, it is 
over $3. Think about if you retired in 1975 and think about how 
you would be able to pay those incremental costs if you hadn't 
invested whatever nest egg you had accumulated in some kind of 
investment that would have grown over time.
    And the beauty of what our industry does is we allow people 
to make investments in the securities industry, in the capital 
markets, and we put downside protection in place for them. So 
today someone age 60 puts $100,000 into a variable annuity 
contract, they pick whatever investment they want, and we 
guarantee them that after age 70 they can trade that investment 
account, regardless of how little it might be worth, for 
guaranteed income for life. So beginning at age 70 that 60-
year-old could get $11,000 a year for life or all of the upside 
from their investment portfolio. Those are the kinds of 
products our industry is providing.
    Ms. Pryce. And the current system is in the way of those 
products coming to market quickly?
    Mr. Condron. Sure. We can't get those products out there. 
We can't get them approved. And when we get them approved, 
there are different variations in different States, different 
minimum guarantees they will allow us to offer, different 
reserving requirements, which means different costs to the 
consumer. So there is an inconsistency.
    I will give you another example. In Chicago, in Illinois a 
year ago, there was only one person who approved any insurance 
products for the whole State. So everything just sat there in 
line waiting to be approved, and we waited a year for one of 
our products to be approved in the State.
    Ms. Pryce. In fairness, Mr. Bell, do you want to have the 
few seconds I may get left from the chairman?
    Mr. Bell. Thank you, Congresswoman Pryce.
    You mentioned the global economy. In some of the ACLI's 
representative, in terms of their talking of the global economy 
from 1977 and 1987, well, if you look back 10 years ago, the 
global market was very different than what it is today. China 
had not entered the global market at that time. India had not 
entered the global market at that time. So two-thirds of the 
world population have come on line basically in the global 
economy within the past 10 to 15 years, and so that is making a 
very different kind of situation in terms of what is going on 
from the Schumer report out of New York talking about where it 
is.
    Shanghai was not a marketplace. Hong Kong was a very small 
marketplace in terms of the global market. Taking the capital 
from New York, London was not even doing nearly what it is 
doing today.
    Mr. Sherman. [presiding] Thank you, Mr. Bell.
    The time of the gentlelady from Ohio has expired.
    We are not going to recess. I will be in this chair until 
Mr. Kanjorski can come back. We have one vote.
    Mr. Condron, you suggested that this Federal charter is a 
good way to be able to protect people from outliving their 
savings. My concern is that no one in the insurance industry is 
willing to market--it is not the regulators' fault--an 
inflation-adjusted--a genuinely inflation-adjusted longevity 
policy. Are you aware of any insurance company that is trying 
to--and I don't mean something tied to the stock market, I mean 
something tied to the Consumer Price Index--that is trying to 
market a policy that will assure somebody that if they outlive 
their savings and they live to be 100 years old--and we all 
aspire to that--that they will be able to afford the then 
existing prices?
    Mr. Condron. Yes, I am not aware of any specific product on 
point, but I would make the point that it is a very doable 
product to design.
    Mr. Sherman. It is a doable product to design. The problem 
is not these regulators.
    Mr. Condron. Yes, it is.
    Mr. Sherman. The problem is that it is a lot easier to sell 
a noninflation-adjusted product, which sounds great to the 50- 
and 40- and 30-year-olds in my district, but it isn't going to 
buy them a hamburger in the year 2060 or 2050 or whatever year 
they--in any case, voting for this Federal charter isn't going 
to get me the kind of longevity protection that I would like to 
see from my constituents, because, as far as you know, nobody 
wants to sell it.
    Mr. Condron. We are already providing longevity 
protections.
    Mr. Sherman. But not inflation-adjusted.
    Mr. Condron. Not directly. But if you look at the 
historical performance of the stock market, it is triple the 
rate of inflation.
    Mr. Sherman. Given the phenomenally bad economic policies 
and trade policies we are following, I wouldn't tell any of my 
constituents that they were safe unless they had inflation 
adjustment. And nobody wants to sell it. And it is not the 
regulators' fault. You know your industry pretty well, and 
there is not anybody who is trying to register such a policy.
    Mr. McCartney, you put forward all the problems of somebody 
moving from Georgia to Texas. They had to be rerated. They had 
to get a new card of proof of insurance. But if we are going to 
solve those problems don't we need to federalize the tort 
system and federalize the vehicle code? It occurred to me I 
moved from one part of Los Angeles to another, I had to be 
rerated. So, you know, the guy moves from Georgia to Texas, he 
has to be rerated. Are we going to have that seamless moving 
from Georgia to Texas if we just have an optional Federal 
charter?
    Mr. McCartney. First of all, the optional Federal charter 
bill, H.R. 3200, does not replace State tort laws or premium 
taxes or anything.
    Mr. Sherman. So if I move from one State to another I 
expose my insurance company to additional courtroom risks. If I 
move from one neighborhood to another, which obviously occurs 
in a State move, I expose you to higher risks or lower risks 
that I will be in an automobile accident. So if I move from one 
place to another, you and I are going to have a lot of paper 
and a lot of telephone conversations before we are done 
updating my policy even if you don't get an optional Federal 
charter or you do. We still have all these other problems.
    Mr. McCartney. Mr. Chairman, there is absolutely no reason 
why USAA could not provide a USAA member with a 3-year policy. 
There is no reason for it to be reissued. If somebody moved 
from Nebraska to Michigan, Michigan has a no-fault law. The 
policy would provide that we will provide whatever benefits at 
whatever limits you have suggested are required by the State. 
There is no reason--it may need--
    Mr. Sherman. So my insurance company, though--I mean, we at 
least have one regulator for the whole State of California, and 
the insurance companies could give you a different rating when 
you go to renew your policy if you just move from one 
neighborhood in LA to another. So there are different risks, 
apparently--at least my insurance company thought so--if I just 
moved within a jurisdiction.
    But I want to move on to Mr. Bell. My concern is that at 
least one State could have a major depression in its own State, 
be desperate for the kinds of jobs that they could get if they 
could just get some insurance companies to move in. If let us 
say the State of Desperation were to establish really low 
capital requirements and some insurance companies moved into 
that State and had very low capital, could they still sell 
insurance in my home State of California?
    Mr. Bell. That is a very good question, Congressman. What 
would happen is that your insurance commissioner would then 
look at the application once that State came across. And if in 
fact if it was national, then they would be able to. If it was 
a Federal charter, they would be able to. But if on a State-by-
State system--
    Mr. Sherman. I mean under the present system.
    Mr. Bell. Under the present system today, that particular 
insurance commissioner could require additional deposits.
    Mr. Sherman. So if I am an insurance company in Nebraska, I 
don't have to just convince Nebraska officials that I am safe 
and sound, I have to convince each and every State that I have 
adequate capital.
    Mr. Bell. They may have registered and became licensed in 
Nebraska 10 years ago and they are just moving into your State. 
So their financials could very easily change over that time. As 
you know, the financial statements can change on a day-by-day 
basis, let alone over time.
    Mr. Sherman. So I have 50 different regulators all deciding 
whether on a particular day I have sufficient capital to be 
able to pay off if I have a disaster or whatever else would 
cause me to have to write a lot of checks to a lot of 
consumers.
    Mr. Bell. As we look at a lot of financial statements on 
insurance companies, we see that from quarter to quarter there 
are drastic changes in their financial situations, and that 
would say what the commissioner is looking at at that 
particular time, yes, sir.
    Mr. Sherman. I would point out that my time has expired, 
and yet there is no one else here to yield to. I will stay here 
for about 2 more minutes, and then I will rush on over and 
vote. Hopefully, by then another member will be here asking 
questions. We have 4 minutes to vote, so really just a minute-
and-a-half to ask questions.
    I will ask--let me see, part of your name is hidden, sir, 
so I will just say Mr. B. We have 14,000 regulatory employees 
in the various States. Now if half of the companies get Federal 
charters, do 7,000 of those folks have to move here to 
Washington, or do we fire those 7,000 and hire a different 
7,000? We lose their institutional memory, or is that 
institutional memory useless because it is about how to do 
State-by-State regulation? And if we are not going to fire half 
of those 14,000, but we are going to have to hire another 7,000 
here in Washington, what is good about moving from 14,000 to 
21,000 regulators?
    Mr. Bykowski. I don't believe that there is anything good 
about moving the regulatory environment from the States to 
Washington. We are certainly not in favor of that.
    I can point to the regulatory environment in the State of 
Wisconsin, where we have 900 companies licensed to do business 
and over 100 domiciled companies in the State, and we have a 
tremendous competitive marketplace. And the regulatory--
    Mr. Sherman. Let me redirect that question also to Mr. 
Counselman, whom I know does favor a national charter.
    Mr. Counselman. Mr. Chairman, I think that we would see 
different--there would be a movement, yes. But it would be 
gradual, and it would only require those to move who are 
actually having to approve the licensing approvals.
    Mr. Sherman. So how many Federal employees would we have to 
hire here in Washington?
    Mr. Counselman. I certainly don't think I could even guess 
at that number, but it would be certainly displacing some of 
those that are--
    Mr. Sherman. That is the 2-minute warning. We stand in 
recess.
    [Recess]
    Mr. Moore of Kansas. [presiding] If we could resume, 
please, and we will get this hearing going and finished. And 
Mr. Baker, you are next, sir, if you would.
    Mr. Baker. Thank you, very much, Mr. Chairman.
    Commissioner Bell, there is an old country and western song 
that starts out, ``You had me at hello.'' You created a 
slightly different version for me today. It is called, ``You 
lost me at hello.'' I have to revisit a little history with you 
on where my personal frustrations lie in all of this.
    Mr. Bell. Yes, sir.
    Mr. Baker. As chairman of the Capital Markets Subcommittee 
7 years ago, a witness appeared that in the statement said, 
with regard to modernization, we are just around the corner 
from it.
    Six years ago, I had a hearing, and they promised me 
uniformity for product review in a program called CARFRA.
    Five years ago, President Vaughn testified the interstate 
compact was the solution, and she expected very quickly to get 
a significant group of States in place to make the interstate 
compact operational.
    However, 4 years ago when Chairman Vaughn reappeared, at 
that time before Congresswoman Biggert, asking the question 
about the failure of CARFRA, Chairman Vaughn replied that the 
main thing came down to the deviations that were in place. No 
kidding. I bet it took a lot of study.
    In looking at a hearing that Chairman Oxley was involved 
with 7 years ago, Chairman Oxley asked both the commissioner of 
Michigan, Commissioner Fitzgerald, and Ohio Commissioner 
Covington this question: ``If Congress sets a goal of 3 to 4 
years for achieving comprehensive uniformity by NAIC for 
product approval, do you, Mr. Fitzgerald, feel confident that 
you can meet that goal? And you, Mr. Covington?''
    Mr. Covington responded first: ``Chairman Oxley, I think we 
have to meet that goal. As said before, the current system is 
not good for consumers. It is not good for insurance companies. 
We must meet that goal.''
    Mr. Fitzgerald responded, ``I agree with that. If over the 
next 2 to 3 years you have not seen significant progress, I 
think there needs to be questions raised about whether we can 
effectively at the State level solve the problems you have 
identified.''
    That was 7 years ago.
    Now, I have a piece of correspondence from the NAIC in 
reference to what was then known as the SMART Act, which turned 
out to be not so smart, asking for a comment on that 
legislation. It was 47 pages. The ``Dear'' and the 
``Sincerely'' were the only two friendly words in that 47 
pages.
    I have to say, as an organization, the one most likely to 
drag the effort to reform down will be NAIC. There is an 
inability to reach a political willingness to understand that 
the organization's reluctance is not just about whether 
somebody puts their stamp on a piece of paper, it is about 
whether the people who work and pay taxes and who have to have 
insurance as a matter of economic necessity, not because they 
choose to buy it, can get access to a product that meets their 
needs at a decent price.
    Now as to the compact that you just mentioned that was 
adopted, 30 States, I believe you said, were engaged in that 
process. The scope of that compact, is that life only or is 
that everything?
    Mr. Bell. Congressman, that is life, annuities, disability, 
and long-term care. It is a product that we are working that we 
think has some basis that we can do that on. We have 36 
national standards in that compact now.
    Mr. Baker. Let me ask this question. My staff told me--and 
I have no way to know this. My staff told me there have been 
perhaps over 300 product approvals since that compact has gone 
into place. Is that the correct number?
    Mr. Bell. Three hundred?
    Mr. Baker. Yes, sir.
    Mr. Bell. The compact was started, took its first filing in 
June of this year. I don't know the number, but I don't think 
it is as high as 300 yet.
    Mr. Baker. Is it over 100?
    Mr. Bell. You know, we have the director of that compact 
here with us today.
    Mr. Baker. Would they be available to kind of shout out a 
number?
    Mr. Bell. We received six filings today, and there are many 
others in the queue.
    Mr. Baker. Out of those six, how many of those--or are they 
just all in the queue?
    Mr. Bell. That was received today.
    Mr. Baker. Oh, today. Okay. You are not saying that is the 
total number of receipts; you are just saying that is what is 
in today's mail.
    Mr. Bell. That was what was received today.
    Mr. Baker. I understand. Could you at some time tell the 
committee in the form of correspondence what the status of the 
compact result has been, maybe with some sort of monthly 
progress report? We would just like to see what is really going 
on there. Because it appears--
    Mr. Bell. We would be happy to provide that.
    Mr. Baker. I appreciate that. Because there seems to be 
great reliance on that in your testimony that that is a notable 
achievement, and I have my doubts.
    With regard to the paper clip and colored paper 
requirements, I looked quickly--I didn't have time, because I 
wasn't expecting that--at the e-file SERFF system. I believe 
that is the system to which you make reference that gets people 
into the technological--
    Mr. Bell. That is correct.
    Mr. Baker. Now, if I were a company and I had a product 
that was going to be sold in all States, how many times would I 
have to enter that data? Could I sit down once and fill out a 
form and be done?
    Mr. Bell. Yes, sir.
    Mr. Baker. That is not what I have been told. I have been 
told that if you are going to file and sell in the various 
States, you have to file a different form for each State. You 
have to hit that computer 50 or 51 times. Now, is that wrong?
    Mr. Bell. I am not sure how many times you have to hit your 
computer enter button, but we know that 50 States are using 
SERFF and that 46 States accept all major lines and 50 accept 
all PC lines.
    Mr. Baker. Well, I am told that each State still maintains 
its own approval variances, that the form is not a single form 
which someone can fill out one time and thereby be filed in all 
appropriate States to market that product.
    I would like to have a follow-up, if I may, on what the 
approval process looks like and whether in fact when the 
recipient entity gets the document do they in fact copy that 
filing and put it by paper copy into a file and then reenter 
the data into their own electronic storage system? And do some 
States actually require a written correspondence from the 
applicant that shows an original handwriting on a paper 
document which is generated at the State end and mailed back to 
the applicant? Yes, that is correct.
    Mr. Bell. You answered the question for me, Congressman.
    Mr. Baker. Thank you. Let me point out that if there is an 
ability to get this done, your organization has to take on the 
substantive policy reality of this problem. You are costing 
this country and the consumers of insurance products millions 
of dollars in wasted time and premium.
    Now, I know the view is that you stand between those in the 
market who would dupe and take advantage of the innocent 
consumer of insurance product. This is a competitive world, and 
Eliot Spitzer is still alive and well, and there are a whole 
lot of them all across this country willing to take on anybody 
who violates their fiduciary duty. But there is no public 
service served by a recalcitrant approach to say no to reform 
at any level, at any level. And laying claim each time you 
appear before this committee, as you have in my entirety of 
hearings on the matter of insurance reform, we are 2 to 3 years 
away. We are 2 to 3 years away. You ought to put it to music. 
It is a great song.
    Thank you.
    Chairman Kanjorski. The gentleman from Kansas, Mr. Moore.
    Mr. Moore of Kansas. Thank you, Mr. Chairman.
    To the members of our panel, in the 109th Congress the 
surplus lines industry presented a compelling case that there 
existed serious regulatory problems with their market that 
needed reform. I worked on a bipartisan basis with Ginny Brown-
Waite of this committee and in the House to pass legislation 
that would ease some of these burdens and create a more uniform 
regulatory system. Can any of you, if any of you care to, 
please tell me specific examples of problems that you, your 
company, or trade association have with the current insurance 
regulatory system?
    Yes, sir, Mr. Counselman?
    Mr. Counselman. Congressman Moore, I would like to thank 
you for your leadership in that area, because it has been 
significant.
    We have--we do filings whenever we make an excess of 
surplus lines placement, and we have to do it in each State in 
which there is a risk on the policy. And the filings themselves 
are different, the requirements are different in each State, 
and you have to file different directions and compute the tax 
separately. We go through that process--I would say in my 
office we go through it on a weekly basis, not a daily basis, 
with different risks that we insure. And it is usually part of 
a program, it is not the entire program, but parts of the 
policies. And because of that legislation, we feel that we are 
going to have a uniform way of providing that filing in the 
future. So we are going to have real savings to the customer in 
the future.
    Of course, it has just happened, but under the current 
system we pretty much have to guess where the proper premium 
allocations go to which State, and we have to follow--I don't 
know if it is colored paper. I don't know about yellows and 
pinks and greens. I don't think it is colored paper, but it is 
different types of paper, and it has to be different types of 
filings. So it is very complex, and it is about to become very 
simplified, and think I think that is going to result in more 
coverage being available to more insureds, because of the 
simplification.
    Mr. Moore of Kansas. Thank you, Mr. Counselman.
    Anybody else care to comment?
    Mr. Condron. I think what you have done is terrific, but it 
is tackling a piece of a bigger problem and no different than 
Congressman Kanjorski's question about what are the three big 
issues. Well, they are the three big issues, but, as Mr. 
McCartney said, you know, it is much more complex than that.
    Mr. Moore of Kansas. Sure.
    Mr. Condron. So a holistic approach to solving this problem 
on behalf of the consumers in this country, I think, is what we 
would ask you to be serious about considering.
    Mr. Moore of Kansas. Thank you.
    Anybody else?
    Mr. Bell. Congressman, I think that when we start looking 
at how the filings are being done, 60 percent of the filings 
are being done electronically these days and there is no paper 
involved. In the State of Alabama, we have even gone as far as 
to say that you have to use the SERFF system, and other States 
have done the same thing. So we can get away from this 
anecdotal stuff of paper filings, what kind of papers you use, 
what kind of paper clips you use and whether you put them in 
the left-hand corner or the right-hand corner.
    Mr. Moore of Kansas. Thank you, sir.
    Mr. Soto. Congressman, if you notice that even though we 
differ at this table as to the methodology, we all happen to 
agree with you that that is a great step forward, and that is 
why we believe that pragmatic, middle ground to attack these 
problems and get them solved takes us away from arguing whether 
aspects of a massive plan are going to be detrimental, we are 
going to have a tremendous increase in the Federal bureaucratic 
process or not, whether you believe in it or not. But this is a 
pragmatic approach which is working. We salute you for it.
    Mr. Moore of Kansas. Thank you.
    Yes, sir, Mr. Bell again.
    Mr. Bell. We hear a lot about the regulatory systems. Well, 
all of the companies do not do the same kind of things. Some 
companies use credit scoring when it comes to a filing. Some 
companies do not. So the regulatory scheme will have to take 
into consideration the variance from over 7,000 insurance 
companies in this country. If we could get all insurance 
companies to have one application, then we would solve a lot of 
problems. But I don't think that is going to happen, and we are 
not looking for that to happen.
    But I do not think that is going to happen, and we are not 
looking for that to happen.
    Mr. Moore of Kansas. Thank you.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. The gentleman from California, Mr. 
Royce.
    Mr. Royce. Thank you.
    I was going to ask a question of Mr. McCartney.
    Given your previous position as a former president of the 
NAIC--I think you said it was in 1992--I thought I would go 
back to this quote that Congresswoman Pryce had collected, that 
she started with, and the quote comes from George Miller, the 
founder of the NAIC in 1871.
    Again, what he said was, ``Insurance law shall be the same 
in all States, not reciprocal but identical in all States, not 
retaliatory but uniform in all States.''
    You know, back then, in 1871, there was still some 
institutional memory of what had happened with the Articles of 
Confederation and why we had a commerce clause and why we were 
trying to have one market in the United States. Yet, here we 
are, as we have discussed, 136 years later, and we have seen 
some instances where there was some forward movement but then 
three steps back as different States and insurance 
commissioners can always back out of any common agreement. I 
thought you could share with us some of your observations on 
that.
    Then you had also spoken about the particular problem with 
51 different regulators that many of our military personnel 
face as they go from one State to another, maybe touching on 
the New York signature requirement and some of these other 
impediments to our military and to those who move, and I will 
turn it over to you, sir.
    Mr. McCartney. Thank you, Congressman Royce.
    Let me give you an example. When our military is deployed, 
oftentimes, they have 5 minutes or 10 minutes a week to deal 
with their personal financial products, if that. USAA has tried 
to move as much of the products and as much of the services we 
can to the Internet because those folks might be in a foxhole 
over in Iraq or Afghanistan and have one of those notebook 
computers and be able to try to do some things. To my 
knowledge, USAA is one of the few companies, if not the only, 
that will write soldiers while they are deployed without a 
medical examination, and it is frustrating to us, for example, 
that, as to two fellows in the same foxhole, one of them may be 
able to apply online and effectuate the coverage in 5 or 10 
minutes, while the fellow next to him in the same foxhole 
cannot do that because the State Insurance Department from 
where he came will not allow it.
    Now we are to the point where more and more States will 
allow it, but in the one or two or three States that do not, we 
do not even bother to try to get approval because we have 
gotten clear signals from the department that they will never 
approve it. So those are the kinds of things that are 
particularly frustrating for the military community that there 
are two people in the same foxhole with two different products.
    Mr. Royce. There was another issue that I recently became 
aware of, and I will ask you this question about the NAIC's 
ability to reach an agreement with respect to international 
regulatory standards.
    Do they have the enforcement authority over the 50 States? 
Because this is a common source of contention with Europe and 
elsewhere as we try to gain access to markets overseas and they 
try to gain access to markets here.
    The reason I ask this is it would appear to me that there 
is a pretty clear disconnect between the NAIC's willingness to 
participate in these international dialogues and their ability 
then to enact any kind of meaningful legislation as a 
consequence. This is important because there is a letter that 
has been sent to the head of the NAIC's Reinsurance Task Force 
from the European Commission on Internal Markets, and with the 
approval of the Chair, I would like to insert a copy of that 
letter into the record.
    Chairman Kanjorski. Without objection, it is so ordered.
    Mr. Royce. Thank you, Mr. Chairman.
    In that letter, the EU warns that, unless the Reinsurance 
Task Force comes up with a new proposal, there may be 
potentially punitive actions taken against U.S. institutions 
all through the EU to reciprocate for the kind of treatment for 
foreign institutions here in the United States. They cannot 
believe this fractured market, 51 separate markets here in the 
United States, and they are threatening action.
    So I would ask you, and maybe, perhaps, Mr. Condron would 
like to comment, too. Are you concerned that foreign regulators 
may begin to take punitive actions against the U.S. entities 
because of the treatment their insurers and reinsurers are 
receiving here in the United States?
    Mr. McCartney. Mr. Royce, I will defer to Mr. Condron on 
that because I am certainly not an expert in trade matters, but 
let me just point out that attachment three to the NAIC's 
written testimony lists the 50 largest insurance markets, and 
among those are--I do not know--20 States. It is a little bit 
misleading because the United Kingdom is listed separately. 
Spain is separate. France is separate. What you are talking 
about are those companies coming together for a single market 
where you are able to do business in all the European 
communities. So it is a little bit misleading to list them 
separately on this list.
    Mr. Royce. Good point.
    Mr. Condron.
    Mr. Condron. Congressman, thank you for your support of the 
optional Federal charter.
    I thank the Congresswoman as well.
    You know, I cannot speak to what punitive action the EU 
would take, but I think that the main point is that the U.S. 
insurance industry has no common regulatory voice that can 
speak for it or regulatory voice that has the power to 
implement any decisions that they might make. I think, you 
know, as to all of the fine efforts that have been made by the 
commissioners in the NAIC, they are not unified, and they never 
will be, and that is part of the problem here.
    Mr. Royce. So we have the SEC. We have the Fed. We have the 
OCC that all serve to get financial instruments to represent 
the interests of the banking industry in terms of gaining 
access to markets overseas, and you are speculating that the 
National Association of Insurance Commissioners is not going to 
have that same clout or seat at the table in terms of opening 
those markets for competition?
    Mr. Condron. They just cannot. You know, they cannot agree 
on what the reserving requirements will be on universal life 
insurance policies, or when they do agree, they cannot get all 
of the States to go along, and that is the frustration, I 
think, Commissioner Bell and all of the commissioners have 
always had with the NAIC.
    Mr. Royce. That is what is hurting our competitiveness.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much.
    Mr. Scott of Georgia.
    Mr. Scott. Thank you, Mr. Chairman.
    Let me ask each of you, or whomever would answer this 
particular question, as we look at this issue.
    How big would a national office of insurance need to be to 
handle the millions of consumer inquiries and complaints that 
State regulators receive each year?
    Mr. Soto. Congressman, I would not be able to venture a 
guess, but if you really think about the vagrancies that occur 
in every one of our individual communities, you would have to 
have individuals close enough to the locales and with the 
authority to be able to react quickly to the needs of 
consumers, and that appears, to me, to be a very massive 
undertaking. I do not know what their number is, but it will be 
big, and it will grow continuously.
    Mr. Condron. I think I see a different approach.
    We are doing things 50 different times right now. We are 
doing it over and over 50 times. So I would say the size of a 
national regulatory overbody, like the optional Federal 
charter, in the aggregate would take less people than the 
current State system does.
    Mr. Counselman. Congressman, the OFC bill does have a 
proposal that suggests that there would be regional consumer 
offices or consumer complaint offices so that there would be a 
mechanism to respond. Certainly, wherever the complaints might 
be coming from, they need to be responded to.
    Mr. Bell. Congressman, the reality of the situation today 
is, with market conducts and consumer complaints and inquiries 
that we receive, we would probably be looking at somewhere 
between 10 and 12 percent of the current staff members who are 
part of the State regulations today that are devoted to that, 
and I can look at that from my own department.
    Mr. Scott. Let me also ask you this question, and I have 
heard the complaint or the concern that you have 50 different 
States and 51 different State regulations, but if States are a 
legitimate regulatory entity, do you believe that States are 
able to make rules to comply with what that State deems 
important for that population and that, in effect, different 
regions are different with different backgrounds, with 
different local needs and that, perhaps, the consumer could be 
better served and competition enhanced with that kind of 
sensitivity played to those local needs and, having the 
independence to grow in their own way and on their own time, 
that that would further ensure competition within the industry?
    I mean, don't you see clearly the benefits of having 
States' and local communities' having the most direct input 
that one size does not fit all, perhaps, particularly with an 
industry like insurance where the vulgarities of the whole 
Nation are so different? This is a very, very diverse Nation. 
Insurance is a very, very personal, grassroots entity. Even 
down in the South where I am from, I mean, there are different 
formats, but--you know, you have weather patterns. You have 
demographic patterns. You have so many differences. You have 
industrial patterns. You have health patterns that are 
different. In some parts of the country, people live longer 
than others.
    So this State versus National issue, I think, needs to be 
looked at with a more jaundiced eye than with what we are 
looking at it. Wouldn't you agree?
    Mr. Bykowski. If I may respond to that, I felt for a minute 
there that you were reading from my prepared statement because, 
certainly, NAMIC feels that we would much rather deal with our 
State regulators when we have those types of issues. I can pick 
up the phone and call my commissioner of insurance and discuss 
a regulatory problem. In fact, the commissioner has called me 
on a number of occasions to seek input on those types of 
issues, and I just cannot imagine what it would be like to have 
to call someone in Washington, D.C., and ask him about some 
specific issues relating to some of the States we do business 
in and trying to get the types of results that we are capable 
of getting on a local basis.
    Mr. McCartney. Congressman, if I may, for all of your 
constituents, if they wanted to continue to be customers of 
companies that are regulated by the insurance regulator in your 
State, that is their choice. They can do that. For others, they 
say, you know, ``I am perfectly fine with USAA, and USAA now 
has a national regulator. I prefer consistency in my product 
and consistency and uniformity in my service. I will opt for a 
federally regulated company.'' So it does not really displace 
the current system.
    Mr. Scott. But would it enhance competition--
    Mr. McCartney. Absolutely. Absolutely.
    Mr. Scott. --more than the State?
    Mr. McCartney. It would facilitate companies going into new 
markets. It would be incredible what would be unleashed if 
companies had the degree of freedom to compete on forms and 
prices and everything else that we see in other aspects of the 
financial services' community.
    Mr. Soto. One of the concerns that we have is that--we are 
building a portfolio, we are independent agents, and I 
represent a number of insurance companies.
    One of the concerns I have is, as we build the protection 
for a particular client, we may actually have their automobile 
with a State domestic company, the homeowners with another 
State domestic company but have the personal umbrella, the 
personal nexus, with a national company. To date, some 
difficulties have arisen. We have to navigate and help that 
client navigate that appeal. Certain appeals occur at the local 
level. Certain appeals occur at the Federal level, and it 
creates confusion and distortion for the insured.
    Again, we do not want to defend--with all due respect to 
Mr. Bell, who happens to be a personal friend, I do not want to 
defend a lot of aspects of the State system. I happen to 
believe that we need to improve it but with specific targets.
    Mr. Condron. I will just say, Congressman, that the things 
that you were referring to really do not resonate in the life 
business. In the life insurance business, you do have a very 
strong argument for uniformity across all 50 States and 
territories. I would say, you know, think about if the mutual 
fund you owned was different in your State versus in 
Congressman Kanjorski's, Pennsylvania. It serves no purpose.
    In terms of local regulation, we already have it with the 
SEC's regional office and FINRA regional offices. They are very 
effective. They regulate us on certain things out of their New 
York offices. They are very effective. It is a system that 
actually works very well.
    Mr. Scott. Well, let me just finalize one question if I 
may, Mr. Chairman. I know my time is running out.
    One of the complaints of some in the industry is that it 
costs too much in compliance to introduce new products.
    Could you give me some specific examples of new products 
that have not been introduced because of the cost of regulation 
as opposed to a business decision that a product is not 
competitive or profitable?
    Mr. McCartney. Congressman, it is not the aspect of the 
cost as much as the knowledge that, in some States, you will 
never get approval, and so you do not even try.
    When I was speaking earlier about the State that will not 
allow for online applications of life insurance products, we do 
not even try because the signals from that department are clear 
that it is never going to get approved, and so cost is much 
less of an issue than the stifling effect on innovation that 
the different requirements of the States have.
    Mr. Scott. Thank you, sir. I appreciate your indulgence 
with your time.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. The gentleman from New Jersey, Mr. 
Garrett, for 5 minutes.
    Mr. Garrett. Thank you.
    Thank you for the testimony of the committee.
    Mr. Bell.
    Mr. Bell. Yes, sir.
    Mr. Garrett. Back when I was in the State government, I had 
an opportunity to go and speak before a group of the regulatory 
and compliance officers, and when I told them what State I was 
from, there was just basically a groan, knowing how hard it is 
to file in the great State of New Jersey, not that you need to 
be defended; it is just in regards to Mr. Baker's comments. I 
appreciate what Mr. Baker was saying, and there may be truth to 
what he was saying there, but I think, also, the point needs to 
be made that some of the pushback on some of these issues as to 
why things do not come more uniformly is not just from the 
commissioners. There is an element to that, but it is also from 
the legislative body as well as the legislators who are 
hearing, in large part, from the consumer groups and the like 
that we retard any movement toward moving forward. We also hear 
from the insurance industry, certainly. Clearly, though, when 
the legislators move from the State level to the Federal level, 
we gain all wisdom, and so that is how we are able to resolve 
these issues on the national level.
    One issue, though, that you might be able to address or the 
other people might be able to comment on--and I do not know the 
answer to this as I look to you. I am told that the States 
currently get almost $3 billion, $2.75 billion, in nonpremium 
tax revenues from insurers and producers. I know from being in 
State government that it all doesn't go to pay for the 
Insurance Department. There are often bribes to the insurance 
companies that we raise these fees, and then we use that for a 
whole bunch of other programs in the States.
    If we were to go this way--first of all, that number is 
about right. If we were to go this way and carriers became 
national carriers or carriers regulated on the Federal level, 
would we begin to see diminution in those dollars going to the 
State coffers? If the answer to that is yes, then, B, what 
impact does that have either on the departments or on all of 
the other things a State usually likes to spend money on?
    I will start with Mr. Bell and then Mr. McCartney.
    Mr. Bell. Thank you very much.
    Let me say that the State of New Jersey today is one of the 
legislatures that has printing legislation for the interstate 
compact, so there has been much changed in the State of New 
Jersey.
    Mr. Garrett. After I left, it got better.
    Mr. Bell. But there has been.
    The impact on the financial resources of the State--much of 
the State's resources that we use in other areas of the State 
come from the premium tax that we collect. The fees that we 
collect to run the department go in to run the department 
primarily, per se. If, in fact, we do not spend it, then we 
send some back to the general fund, but that would have a 
tremendous impact on the general fund budgets of all States.
    Mr. Garrett. Mr. Counselman.
    Mr. Counselman. Our current bill would not address taxes. 
We would not replace taxes or move taxes, and States would 
continue to have a right to tax premiums, the OFC people.
    Mr. McCartney. H.R. 3200 specifically provides that 
insurance companies will continue to be liable for premium 
taxes in every State in which they operate.
    Mr. Garrett. How about nonpremium tax revenue?
    Mr. McCartney. Well, for the most part, the nonpremium tax 
revenue is limited to those States that have fee-based 
insurance departments.
    Mr. Garrett. My understanding is they are fee-based.
    So the figure that I had was $2.75 billion in nonpremium 
tax revenue. So you are saying that there would not be a 
diminution for those States if those carriers became federally 
regulated?
    Mr. McCartney. No, that is not necessarily true because, if 
it is a fee related to regulation, then those fees are going to 
be paid to the national regulator instead of to the individual 
States. There would be an offset in formulating the degree of 
regulation that is being asked of the States because it is now 
being done by the Federal Government.
    Mr. Counselman. Congressman, they could still tax premiums, 
which is the other portion and the larger portion.
    Mr. Garrett. All right. The other question--and maybe we 
can have a comment from Mr. Condron and from Mr. Bykowski on 
this. It is the issue on competitiveness. I have a feeling that 
you two differ on what would actually happen here. One 
argument--well, I will make the arguments for you.
    One argument is that you have greater competitiveness by 
the national aspect of this and--without putting words in your 
mouth, but you can speak to this--that now just the opposite 
would happen, that little guys out there would no longer be 
able to be in the same competitive ball game and would be 
squeezed out.
    Can you tell me which one of you is correct?
    Mr. Bykowski. Well, there are 1,400 insurance companies 
that are members of our trade association, and almost every one 
of them are concerned with Federal regulation versus State. We 
want to maintain the State regulatory model. Many of our member 
companies are single State or are few State operations. There 
is no doubt about the competitive nature of the market in many 
of the these States. I will use the State of Wisconsin, as an 
example, with 900 companies doing business. I do not think that 
a Federal regulatory business model would help that.
    Mr. Garrett. Mr. Condron.
    Mr. Condron. You may be drawing a distinction between the 
life business and the property and casualty business.
    In the life business, I think the competitive argument is 
very clear. It tends not to be a local business; it is a 
national business, and from our perspective, it should have a 
national regulator. I think you have two different insurance 
businesses here, and I think that--you know, I would encourage 
you to think about it that way.
    Mr. Counselman. Congressman, the commercial business has 
that same approach. It is a national approach. For some 
companies, it is national, and for many companies, it is 
regional, but commercial business is certainly a national 
approach.
    Mr. Garrett. Thank you. My time is used.
    Thank you.
    Chairman Kanjorski. Thank you very much.
    The gentlelady from Illinois, Ms. Bean.
    Ms. Bean. Thank you, Mr. Chairman. I have two questions. 
The first is for Mr. McCartney of USAA.
    You mentioned that you serve the military and, in trying to 
serve those men and women, that uniformity would assist you in 
doing that. I want to point out that the NAIC points to its 
SERFF system as streamlining and modernizing insurance 
regulation. Have you worked with that system? What has your 
experience been relative to streamlining the process of 
bringing products to market to those whom you serve?
    Mr. McCartney. Congresswoman, thank you, and thank you and 
Mr. Royce again for introducing H.R. 3200. We are very, very 
pleased.
    Ms. Bean. Thank you.
    Mr. McCartney. With respect to SERFF specifically--and I 
have an example in my written testimony--from our perspective, 
SERFF is somewhat helpful, but not really. To a large extent, 
all it does is saves us on postage, mailing fees, forms 
individually to each State Insurance Department. There are 
still State-based forms. As I mentioned in my testimony, we 
recently made a filing that would allow for an online--an 
Internet--discount. By the time it was all said and done with 
all of the State forms, it came to over 1,000 pages. So I do 
not view that as being an example of significant modernization 
or streamlining.
    Ms. Bean. Thank you.
    My second question is in relation to some testimony from 
July of 2006 before the Senate Banking Committee. 
Undersecretary Randy Quarles of the Treasury cautioned that the 
likely inability for individual State insurance regulators to 
get a firm handle on the risks that large, complex insurance 
companies pose to our Nation's insurance system, coupled with a 
lack of a Federal role in the State-based insurance regulatory 
system could leave a large blind spot in evaluating risks that 
are posed to the general economy and financial markets.
    So I want to direct my question to Mr. Condron since you 
head up a national entity. What are your comments on that?
    Mr. Condron. Yes. I mean, I think that is a pretty astute 
comment because the products that we are delivering to the 
marketplace today are very complex financial products that 
require--they require hedging. They require the use of 
derivative instruments, and they are very complex products to 
understand to figure out what kind of reserves should be put in 
place and to be sure that the companies that are making these 
guarantees are going to be here 50 or 75 years into the future 
to honor the guarantees they are offering to their clients.
    So I think that there is a risk and that you just do not 
have the sophistication at the State level that you could 
accumulate on a national basis with the Federal charter.
    Ms. Bean. Thank you.
    I yield back.
    Chairman Kanjorski. Thank you.
    The gentleman from Illinois, Mr. Manzullo.
    Ms. Bean. Can I yield a moment to my good friend, Mr. 
Royce?
    Chairman Kanjorski. Oh, surely.
    Mr. Royce. Thank you, Mr. Chairman.
    I thank the gentlelady for yielding.
    I wanted to ask Mr. Bell a question because, in going over 
your testimony, you cite many undertakings by the NAIC which 
have been adopted by a number of States. Thirty States have 
adopted the Interstate Insurance Compact. Thirty-three have 
implemented a uniform product coding matrix within SERFF. 
Twenty-six States are mentioned as using the P&C products 
requirement locator tool. I am assuming these are all 
successful measures.
    Are you aware of any substantive measure pushed by the 
NAIC, in the realm of regulatory modernization, which has been 
adopted by all 50 States? I understand, in the past, progress 
has been made, and then States have dropped out because, as 
discussed, State legislatures will see a bill coming through. 
Members of the State Senate and State Assembly will say it 
sounds good, but in so doing, they have opted out. I was just 
wondering.
    Can you cite an example like that where we have seen that 
kind of success where everybody has stayed in all 51 markets 
here?
    Mr. Bell. Congressman, that is a great question.
    The solvency issue of the NAIC that is put forth has all of 
the States involved in the solvency and in the accreditation 
process of the NAIC with the exception of New York, and I will 
tell you that New York at the current time is looking at going 
into the accreditation system. It is one where we are very, 
very hopeful that they will use our system even though they are 
using one that is comparable to the system currently.
    Mr. Royce. Well, I will just close, Mr. Chairman, by saying 
that, for example, with SERFF, many States adopt the 
requirement, and then they add all of these additional 
requirements on top of the generic from which the insurer has 
to comply, and all of a sudden, it is different. It is 
different in all of these areas. So I will just close with that 
point. It has been a long way in coming, and I think we have a 
viable alternative to this, an alternative that works 
worldwide, which is to consider one market for the United 
States.
    Thank you.
    Chairman Kanjorski. The gentleman from Illinois, Mr. 
Manzullo.
    Mr. Manzullo. Thank you.
    I appreciate you all being here this afternoon. I guess I 
have more questions than perhaps can be answered.
    I started practicing law in 1970. I have been through, 
probably, 1,500 to 2,000 real estate courses. The respite was 
passed in 1975, and the whole purpose of that was to 
standardize the closing of real estate transactions in the 
United States and to protect the consumer. It has been nothing 
but a total failure with HUD. Every year, we have to come in 
and fight HUD that wants to use a simple disclosure requirement 
to regulate the entire industry. I mean, I used to be able to 
close a transaction in 20 minutes to a half an hour. Go in 
there now, and you have papers like this. Look what happened to 
the real estate market. There is not anything in all of that 
Federal intervention and in all of the Federal disclosures. 
Nothing helped out the real estate industry, and it has been a 
lot worse. It has made it much more expensive to close, and no 
one knows what they are signing anymore. I take a look at 
instance after instance.
    For example, we just passed the Terrorism and Risk 
Insurance bill, and if it were not for one man who is my 
constituent who heads up Rockford Mutual, all of the mutuals 
would have been dragged into it, and with the gracious work of 
Mr. Kanjorski, we exempted companies that have under $50 
million in book from having to offer that particular type of 
insurance.
    Why would we want to federalize the entire insurance 
industry and have hearing after hearing after hearing on some 
unknown, unnamed regulator? I am just really astonished that 
those of you--I am going to give you a hard time--who are 
proposing a Federal regulator did not come in here with a 
model. Maybe the chart would look like Hillary Care. I mean--
but you cannot propose a huge, monstrous change in the manner 
in which insurance is regulated without having a model. You 
know, maybe the model is FEMA. Maybe the model is the 
Department of Homeland Security.
    I would not trust insurance to any organization in this 
city. No one knows how many people would be on the board, who 
the regulators would be, where they would be from, what the 
conflict of interest would be. I mean, I can understand the 
argument in favor of when it comes to instruments, because they 
are complex, these investment instruments, and it does take 
time. It does take time for the States, but as I look at how 
regulations come about, I mean, I just wonder what was going on 
in the real estate industry that compelled this national 
takeover.
    I mean, there was a national takeover in the casket 
business. You know, there is no interstate jurisdiction in 
burying somebody unless their spirit goes across State lines, 
and yet, they came in. Now there is this Federal disclosure 
when you go to a funeral home. Who looks at that? You want to 
get somebody planted, but somebody came into this town and 
said, ``We need Federal regulation in order to standardize what 
is going on,'' and I find it amazing here that many of the 
Democrats, who are supposed to be the liberals, are arguing for 
federalism, and many of my esteemed conservative colleagues are 
arguing for the national takeover of this.
    Mr. Royce. Will the gentleman yield?
    Mr. Manzullo. No, I have been here for 2 hours. I am not 
going to yield, okay?
    I guess my question is: Why would you propose something 
unless you have a model? Give me the model Federal agency that 
is doing a great job in controlling. Anybody.
    Mr. Condron. I would be happy to.
    I think there are several. I think the OCC that is 
overseeing the banks. I think the SEC and I think FINRA, all 
three of which are United States Government regulatory bodies 
or at least are connected to the Federal Government, all of 
which are regulating parts of the financial services industry 
very effectively, very efficiently and very economically, I 
might also add, with local offices around the country.
    Mr. Manzullo. You know, I chaired the Small Business 
Committee, and there are nightmares that came up with the SEC, 
on different sections of Sarbanes-Oxley that we passed, that 
could have knocked these little guys right out of business. I 
mean, what I hear as a Member of Congress is that people who 
get rolled--especially when I chaired the Small Business 
Committee, it is the little guys inevitably who get rolled by 
the big guys, and it is over and over and over again. Now, I 
would entertain that, if that is possible, if you are thinking 
about trying to have jurisdiction attached to a product or to a 
group of products as opposed to an industry, itself.
    For example, in the example that you gave about some type 
of financial product that had derivatives attached to it--I am 
not sure of the word that you used--I can say, well, you know, 
that would make sense because you want to get that to market in 
a hurry, etc.
    You know, if you take a look at the real estate industry, 
sure, the brokers are licensed through the States. You go to a 
closing. There has been a complete federalization of the real 
estate closing. I mean, it has been federalized. If you want to 
get something changed, do you know what happens? You have to 
come to Washington, and you have to fight with HUD.
    Mr. Soto.
    Mr. Soto. Yes, Congressman.
    I will give you another model. It is FEMA and the National 
Flood Insurance Program, not as a good example, by the way, 
which you can imagine. I will tell you this.
    Twenty-five years ago, I was part of a group of 12 
individuals who were invited to come here to Washington to work 
on reforming the National Flood Insurance Program. 
Interestingly enough, one was the representative from USAA, and 
when we met here, we indicated to the FIA and to FEMA that the 
National Flood Insurance Program had inadequate coverage, 
inadequate limits, and they were not charging actuarially sound 
rates. They were allowing people to rebuild in coastal, fragile 
areas, and there was no uniformity between the private market 
forms and the National Flood Insurance Program.
    Twenty-five years later, Katrina occurred, and the 
deficiencies in the coverage, specifically business 
interruption and additional living expense, were not there. The 
commentary all along the way was, ``It takes an act of Congress 
in order to change it.'' We spent about 6 to 8 months coming up 
here. We ended up reforming how the dec page looked, and we 
ended up reforming the application and reorganizing the manual. 
The substantial important coverage did not occur because the 
Federal Government is not nimble, and it is not able to quickly 
respond. I have the same fears that you do.
    Mr. Manzullo. I have no time left, but I--does somebody 
else have a comment?
    Mr. Counselman. Congressman, I would also like to reinforce 
the example in banking.
    I am a director of a community bank, and we are a State-
chartered bank, and we like it that way, and it works very well 
for us. So I think that model works for insurance as well as 
long as a local or a regional company has that option, which, I 
think, is a good thing. They should have that option. A 
national company, the M&T Bank in Maryland--I am from Maryland. 
They are from New York, but they are in Maryland. They are a 
national bank, and their predecessor was All First Bank. All 
First Bank, before it was acquired by M&T Bank, actually made a 
decision to change from national regulation to State 
regulation, and they became a State-chartered bank. So they had 
that option. They wanted to do that, and that is what they did, 
and it was a regulatory matter.
    So I think the model is the banking industry, and if we 
operate on that model, we can do this. A regional company can 
do well as well as a national company which has a different 
interest can do well.
    Mr. Manzullo. I guess I sparked some interest. Would anyone 
else like to respond?
    Mr. Bykowski. I think it is a mistake to assume that 
because dual regulation works to some extent in banking that it 
will work in the property-casualty insurance industry. A 
checking account is one thing. A checking account is the same 
thing in Wisconsin as it is in California, but in the insurance 
coverages and the needs of the consumers that are served by the 
property-casualty insurance company vary dramatically by 
region, and I do not think that having to deal with the Federal 
bureaucracy as an option is the right answer.
    Mr. Bell. It is a very good point in terms of the real 
estate industry.
    When we look at the CMS and the products that are just 
going out, now the Federal side of that is looking to try to 
get the States back into the market conduct side of it because 
it has been such a disaster in terms of the way it has been 
rolled out to the public.
    When we look at the $20 billion due from the taxpayers to 
the PPGC shortfall or at the $20 billion of the NFIP overrun, I 
mean you cannot name an insurance company that is dependent 
upon the taxpayers of the country to be able to keep it solvent 
or to pay the insolvencies when it would go out. So we have an 
insolvency system that nobody spoke of that is not anywhere 
nearly dependent upon the Federal Government as all of the 
Federal Government programs are.
    Mr. Manzullo. I am still open to this thing. I am just 
speaking out loud and thinking out loud, and I have no time 
left, but Mr. Royce is a good friend of mine, and perhaps we 
can create some time.
    I yield back whatever time I have.
    Chairman Kanjorski. Thank you. We will assume you have 
some.
    Mr. Manzullo. Thank you.
    Chairman Kanjorski. I do want to take a moment--I know it 
is very common--and we practice it on both sides of the aisle 
here--to criticize the Federal Government and its failure to do 
anything correctly.
    Mr. Manzullo, you brought up an interesting question of 
burial and that you are just trying to plant somebody. You may 
think that way until you get the bird flu or anthrax, and you 
had better be sure that person is planted uniformly and 
correctly, or you are going to wipe out half the population of 
the country.
    So now, with the amount of transient capacity that we have 
in the United States, it is important to have uniform standards 
that are followed and questioned. I remember bringing the issue 
up. You know, in anthrax, you have to understand--I will not go 
into the bird flu on this, but on anthrax, the human body 
becomes a factory, a manufacturer, of anthrax. So, if you were 
successful in determining where the bodies were buried and you 
dug them up and you used the product within the dead bodies, 
you would just increase the amount of anthrax you could 
distribute in the country, and we do not have in the United 
States a uniform policy of protection of how we dispose of the 
bodies of people who would die from anthrax poisoning. So it is 
something to look at. I wanted to go on and give you an 
analogy.
    You and I are both old lawyers. I may be, actually, an 
older lawyer than you are, but the other day, I was talking to 
one of my aides who is in law school, and I asked him how 
students today appreciate the Uniform Commercial Code and the 
Sales Act. When I said the Sales Act, his eyes glassed over, 
and he sort of looked at me like, what is the Sales Act? Well, 
you and I know, when we were in law school, we spent a year 
finding out what the Sales Act was about. That does not exist 
anymore in law schools. That is something of old England. They 
do not talk about the Sales Act anymore.
    So, you know, we have had the uniformed commercializing of 
our system. It does take a long period of time. When you think 
about it, it probably took 30 to 40 years for the Uniform 
Commercial Code to permeate the business community. But I think 
we all have to say that the number of transactions that are 
held in the United States today could never have been as 
successfully handled under the Sales Act as they are under the 
UCC.
    Then finally, I always point out to my friends who argue 
about the uniformity of the railroad gauges, that in the United 
States, some brilliant son of a gun decided to have a uniform 
gauge in the 50 States so we would not have to change our 
railroad cars and engines at every State line that we passed 
through, but in Australia, just up until 30 years ago, when you 
would go from one province to another, you had to stop the 
train, reassemble, and put new wheels on because you were going 
onto a new track. The lack of industrial development in 
Australia was phenomenal until they went through this upheaval. 
Of course, the problem is, the longer you wait, the greater the 
cost and the greater the upheaval because we all get 
experienced in dealing with the tried and the true.
    Then, finally, I heard you damn again the failure of the 
Federal system. If we would just all reach in our pockets and 
pull out our bills, we would discover that it was not until 
1914 that we had common national currency in the United States. 
At one time, Philadelphia was the major printer and distributor 
of American currency. It caused a problem if you were in San 
Francisco and somebody gave you a demand note drawn on the Bank 
of Philadelphia. You were not quite sure whether it was good or 
not, and it was very hard to call Philadelphia at that time 
since the telephone would not have been invented for another 50 
years. Now we take for granted the Federal Reserve notes and 
how great it is to have that uniformity.
    As we went through the crisis this last month, the fact 
that interest rates can be changed overnight and that 
sophisticated reaction to catastrophe--if you go back to the 
1907 crisis, it almost brought the Nation down. Here--not that 
I am going to predict that we are over it--we are certainly 
much further along and in a much more involved and more 
sophisticated society.
    So, although I have a tendency to be relatively 
conservative and fight change simply because I do not want to 
learn a new system--that is the truth of the matter--I think 
there is merit on both sides of this argument. Quite frankly, I 
am torn. One day, I wake up, arguing for a national standard to 
see how it could be done. Then the next day, I wake up, and I 
hear the echo of Mr. Soto, and I say, we cannot afford to have 
that happen, and we will do it in other stages.
    I am convinced of one thing. There is no question in my 
mind that this Congress has some objectives that we should go 
after, and that is to simplify some of the complicated systems 
that are happening now. Whether we call it an ``optional 
charter'' or just how sophisticated it is or what areas we go 
into, I do not think we can question the argument that the 
country will be more competitive, will be more price conscious 
and probably less regulated--the industry--than it is now, and 
it will protect our international competition area. I think all 
of those things are probably important because it seems to me--
again, I am not an economist, but as we do those things, we 
will create wealth for the United States, and I think that is 
probably what we are all trying to be about.
    So my offer to you, as an extension to the other side of 
the aisle, is we will hold hands together and go down these 
rapids that we are riding, but I think we will make it.
    I do not know if anyone has any further questions that they 
want to ask.
    Mr. Royce. Well, Mr. Chairman, I will just close any 
commentary with one last question, and that is--I am sure that 
we all agree in this debate, wherever we are in the 
particulars, that regulation should be based on consumer 
protection and fair, consistent, impartial treatment of 
insurers' products instead of a relationship on political 
connections.
    The question I was going to ask is: Would we have world-
class regulation today over the banking system if, instead of 
our current system, we elected--if we elected--the Chairman of 
the Fed, of the OCC? Should we elect the Chairman of the SEC?
    I would just ask Mr. Soto and maybe Mr. Counselman for your 
observations on that premise. You know where I stand. I think, 
for those who are in the national market, we give them an 
option. We allow the States to regulate on a State basis. We 
allow for those who want to be part of a national and an 
international market to have this option like the banking 
industry has, but I would just be interested in your 
observations about the efficacy of such a proposal.
    Chairman Kanjorski. I have one question before they go to 
that. My question to you is: Who would be silly enough to run?
    Mr. Royce. Well, that is the problem, those silly enough to 
run.
    Mr. Soto. I am not sure I am qualified to delve into the 
part about whether the Chairman of the Fed or of the OCC or 
others like that should be elected or appointed, and I suspect, 
by the way, that you stated your question, that you are dubious 
on that.
    I will tell you that we still perceive that insurance is 
different from banking. We have at the State level a number of 
appointed insurance regulators and a few elected. Candidly, I 
have discussed that issue with many people over the years and 
with people who have been in the business a lot longer than I 
have, and we find that there are good ones and there are bad 
ones on both sides. There are good ones who are elected and 
also bad ones and good ones.
    So, beyond that, I am not qualified to give you a broader 
opinion. Perhaps someone else will.
    Mr. Counselman. I agree with Mr. Soto. I would be very 
concerned about that position being elected, just as most 
States have been concerned. In most States, it is an appointed 
commission--the commissioner is an appointed position--and I 
think that is the more appropriate manner in which to regulate 
insurance.
    Mr. Royce. Thank you, Mr. Counselman.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. Let me ask a question while I am here, 
too, because I brought up the issue of creating a new 
bureaucracy. Is there a way to avoid creating a new 
bureaucracy? Maybe, Mr. Bell, I could point this to you.
    Is there some way we could press into service the existing 
State agencies out there and just federalize them or quasi-
federalize them? That is, allow them to operate as they are now 
on matters of issuing State licenses but operate as Federal 
people if they are dealing with an optional Federal charter? 
Could that functionally work and then have a very small office 
of the insurance commissioner here in Washington for Federal 
optional charters that would deal and implement through those 
State agencies?
    Mr. Bell. Congressman, they told me a long time ago that I 
was not in the business of passing law; I was in the business 
of regulating. I think you would have to pass a law in that 
area.
    Chairman Kanjorski. But do you think it could effectively 
work? You know, I do not see a big advantage to spending 5 
years of assembling 10,000 people down here in some big 
building in Washington if we do not have to do that, and it 
seems to me that a lot of the requests that you all are asking 
for here do not take a lot of bodies. It just takes a little 
thinking and common sense and a good computer, and it could 
probably be put together. I mean, the three things Mr. Condron 
mentioned we could do. If somebody had the authority to say, 
``This is an order. Do this,'' boom, it would be done.
    Mr. Bell. We have asked and have requested, and if we go 
back to the Smart Act that Representative Baker was mentioning 
earlier, the States came for some Federal tools to do certain 
things, and in the end, we ended up with 37 preemptions coming 
out of the Smart Act.
    I think that you would have to be careful in the 
preemptions of the States because then you would have to deal 
with the Governors and the State legislators there, but I think 
that Federal tools that are used judiciously in terms of 
helping the States get to--we have 30 States. If we had a 
Federal tool that says that, you know, ``By this time, if this 
is not going to happen, you will become a part of the 
interstate compact for life, health and insurance annuities and 
products that are more of a national kind of product,'' that 
would go a long ways. If we had a--
    Chairman Kanjorski. We can do that along with creating an 
optional charter. We are capable of writing down conditions and 
saying to these other 20 States, ``You have had enough time, 
and we are going to tell you that, in so many years, you are 
either going to do this or you are going to get an optional 
Federal charter imposed on you or be put out of business.''
    Mr. Bell. There is always going to be a disincentive as to 
why you do not want to go on the other side of it, and I think 
that you certainly have something there. The Federal database--
    Chairman Kanjorski. Yes. I am going to tell you that I am 
as frustrated as Mr. Baker was when he indicated this. He and I 
have been working on this thing for many years. We are starting 
to grow gray beards, thinking that this was all going to come 
about and in listening to representatives of your body tell us 
we are just a few years away. I am now convinced that, without 
some coercion from the Federal Government, you are just not 
going to get those other 20 States, and I am not sure if I were 
in California or in New York or in Texas that I would join you 
either. California is the seventh largest Nation for doing 
insurance business. Why would they want to get involved with 
all of these other States?
    Mr. Bell. Well, we are happy to say that legislation is in 
New York currently on the interstate compact, and we think that 
there will be some movement in California on it also.
    Chairman Kanjorski. So you think that we should look at the 
possibility of putting a final time frame out there and say, 
``Do it or else you are dead?''
    Mr. Bell. That would certainly help the NAIC and State 
regulations go a long way in terms of modernizing the system 
and the reform of the system that, I think, the industry is 
looking for. Yet, it would still leave, certainly, the solvency 
and the consumer protection issues in the hands of the State.
    Chairman Kanjorski. What do we do when Lloyd's of London 
comes to visit me and tells me that they are solvent and that 
they want to get in, in a big way, in reinsurance and in the 
terrorism field but that they are sick and tired of having to 
deposit $18 billion into the Bank of Citicorp or of New York as 
their proof of capacity to perform?
    I mean, those guys are a little antsy about their 250-year 
history in the insurance business. They think they have a 
credibility factor built up there, and they do not particularly 
like the way they get treated by the kids over the pond. Isn't 
that something that we have to attend to if we are going to do 
business in the EU or if we are going to do business in Asia?
    Mr. Bell. The meeting that prompted the letter that 
Congressman Royce has entered into the record today was a 
meeting that I was having with Commissioner Greeley from the 
EU, and it was the issue that we were talking about, and that 
was the reinsurance collateralization issue.
    There has been much talk on the reinsurance 
collateralization issue, but understanding the transparency of 
many schemes in the world in terms of regulations is not nearly 
as transparent as it is here in this country. When we look at 
certain countries, Lloyd's is in a unique position. Lloyd's is 
not a company, Lloyd's is a group of names; so--they don't have 
an entity that is a company, so it has made it very difficult.
    When you look at other companies in the reinsurance 
business, they have been able to--Swiss Re, Munich Re--they 
have been able to transition the market into the United States 
on a much better basis than having to go through, because they 
have been able to put a domicile company here in the United 
States.
    The collateralization issue is not just unique to the 
United States. They require collateralization in France on some 
of these issues. There is a reinsurance directive going on now 
in the EU that has been worked on for some time and still is 
not in place.
    The Solvency Two issue that has been put forth, they have 
been working on that since about 1999, and expect it to be in 
place by 2012. I mean, so it is not an easy transition going 
from one solvency scheme to another solvency scheme.
    We have a task force that I have directed at the NAIC that 
we will look at a scheme in reinsurance collateralization that 
will provide that a company with a proper transparency 
regulatory system, the proper capitalization, the company will 
be able to get to zero reinsurance collateralization. And I 
think that is what the EU is looking for.
    We had a recent dialogue with the EU just this past Sunday 
here in Washington with the NAIC, in conjunction with the NAIC 
meeting. That meeting is setting some tones for where we are 
going forward.
    Chairman Kanjorski. Very good. I am going to let Mr. Scott 
ask a question, but first, would it be fair to say--listening 
to all your testimony and your responses to some of the 
questions--that everybody at this table agrees that Congress 
should be working on doing something legislatively, regardless 
of what we call it? That there is some role that we have to 
help solve the problem that we have in insurance regulation in 
this country?
    Is that reasonable to say? Does anybody object to that?
    Mr. Counselman. We agree.
    Chairman Kanjorski. That is good. Everybody agrees. We have 
a green light from the table. We can do anything we want, Ed.
    Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman, for letting me ask 
another question. But I would love to put it on the table to 
get a response, because I think it is at the crux of what we 
need to do, because protection of the insurance consumer is of 
the utmost consideration--and particularly you, Mr. Bell, and I 
think, Mr. McCartney, who represents the agents, to respond to 
this, and others, if you can.
    But given the fact that that is our primary concern, where 
are the components within the State system, if any, that we 
need to fix that do, in fact, jeopardize any protection for the 
insurance consumer? Are there any areas under the current 
system at the State level that we need to address that 
jeopardize any protections for our consumers?
    Mr. Bell. One of the major problems that we currently see, 
and that is, Alabama has some coasts, in terms of being a 
coastal State; and one of the areas that we are looking forward 
to is trying to make sure that we have a stable, available 
market in coastal properties. We have that from Maine to Texas 
currently.
    The market has moved very drastically in terms of the 
modeling that it is doing in terms of how it looks at future 
disasters, coming forward. And this has certainly been since 
2004-2005 that one of the major concerns that we have as 
regulators today in those coastal States is making sure we have 
available markets there, that it is not going to shut down the 
economic drive of the States in those markets. Because 50 
percent of the people in the United States want to live within 
50 miles of a coastline, so that is driving a huge economic 
piece there. So it is very incumbent upon us to come up with a 
scheme that will allow us to make sure that those markets are 
stable, available, and affordable.
    Mr. Scott. And you are moving on those schemes?
    Mr. Bell. Yes, we are, sir.
    Mr. Scott. Yes, sir.
    Mr. Bykowski. If I may, I think that if there was one 
single issue from a regulatory perspective that would be most 
helpful to all consumers would be the deregulation of pricing 
in the States. We see in those States that have heavy rate 
regulation, we have an availability problem. Consumers have a 
hard time finding reasonably priced insurance, property 
casualty insurance.
    Those States that have the free market and the file-and-use 
systems where the regulators are not nitpicking on the pricing, 
but insurance companies are allowed to price their products 
based on the risks that they are underwriting and that they 
see, the choice for the consumers is much better.
    Mr. Condron. A quick example: We introduced long-term care 
as a rider on our life insurance contracts, and we can't get 
long-term care approved in somewhere around 20 States at this 
point. And I mean, that is--talk about consumer protection, you 
know, that violates the ability of people to be able to access 
something that they desperately want to be able to buy.
    Mr. Scott. Okay.
    Mr. Counselman. Congressman, I would add, any availability 
and affordability issue, from a sales point of view, for the 
customer is important. And I would say that difficult lines of 
insurance for availability and affordability typically are, as 
Commissioner Bell has just addressed, the coastal areas in 
particular. And whenever we have a risk that is in a coastal 
area, it is difficult to place.
    And then, in a totally different area of insurability, it 
is health insurance, particularly for a small group. And that 
tends--that is a State issue, as forms are different and 
requirements and rates are different in different States. But 
it is an issue that needs to be solved.
    Mr. Bell. Point of clarification, and that is that to my 
colleague, that long-term care is a product that has had 
serious problems in terms of the ratings, in terms of the 
pricing. Fifteen years ago when it was a huge, hot product, it 
was underpriced. And there have been substantial increases that 
we have had to pass along to the consumers to get it to where 
it is going to be a viable product going forward.
    So there are some real serious, complex issues in terms of 
looking at long-term care.
    Mr. Condron. I recognize that, but our product that we are 
trying to get approved just accelerates the payment of the 
death benefit to use it for long-term care, and we can't get it 
approved. So it is a little different than what you are talking 
about, Commissioner.
    Mr. Bell. And we are looking at that product very seriously 
right now in the viatical settlement model that we have just 
approved.
    Mr. Soto. Yes, Mr. Chairman. I am originally from Cuba, and 
I came as a political refugee in 1960. In Spanish we have an 
expression, ``El mango bajito.'' El mango bajito translates, 
``Go for the low hanging fruit,'' and if you listen to our 
testimony here today, we all agree that reforming surplus lines 
and reinsurance has been a great success, that that worked very 
well as a targeted measure.
    If we just listen to Commissioner Bell say that he would 
welcome--his organization would welcome tools that would help 
them bring about the rest of the States, and it doesn't have to 
be the full--the full OFC solution, but he is looking for 
targeted tools to help bring along his brethren States. And it 
would seem to me that in looking for what areas or what roads 
to go down, go down el mango bajito.
    Chairman Kanjorski. The gentleman from California.
    Mr. Sherman. Thank you, Mr. Chairman.
    Well, we just had the Big I tell us we ought to go for the 
low-hanging fruit. Mr. Condron, should we go for the low-
hanging fruit as a first step and then see where we go? Would 
you actually oppose a bill that went after the low-hanging 
fruit?
    Mr. Condron. I would, because I think--I would oppose it, 
because I think it wouldn't solve the problem. We would be back 
here, you know, trying to chip away at this, one little piece 
at a time, when a comprehensive solution is the only logical 
way to go at this problem.
    Mr. Sherman. Mr. Counselman?
    Mr. Counselman. Congressman, I absolutely agree that low-
hanging fruit will never get us to where we need to be in this 
economy.
    Mr. Sherman. And you don't want to harvest that first and 
then--
    Mr. Counselman. We need to go after the big issue, and that 
is how we regulate in this economy. It has to be different. And 
I think the NAIC has a lot to offer, and we could use a lot of 
what they have already built. But we have to take the bigger 
view in order to get what we need.
    Mr. Sherman. Let me play devil's advocate for a second.
    Say, okay, you guys who advocate a Federal charter have 
done such a wonderful job, why don't we only allow a Federal 
charter? Why should we allow insurance companies to pick 
whether they want to live under a Federal standard or pick to 
move to any of the 50 States where they could have a low 
standard?
    Is there anyone here that supports an exclusive Federal 
charter, by a show of hands?
    Let the record show that no hands went up.
    Mr. McCartney, if you are for an optional Federal charter, 
why not an exclusive Federal charter? Why should insurance 
companies be able to pick? I don't get to pick which set of 
rules or laws I comply with; I am pretty much stuck with one 
set.
    Mr. McCartney. It is a model that has worked a long time 
for the banking industry, and it has worked very well for the 
banking industry.
    Mr. Sherman. Well, it has worked for the banking industry. 
Some would argue that the banking industry has not done a good 
job by consumers, that--I mean, letus put it like this: Talk to 
any of my constituents who have recently gotten an overdraft 
fee and tell them we want to regulate insurance companies just 
like we do banks.
    Other than that, I mean, we have a single Federal system 
for a whole lot of other areas. They work well. Why should we 
pick the banking industry? Why not pick the securities 
industry? Why not pick the arms export control regulation 
regime? Why do we pick banking as our model?
    Mr. McCartney. The State-based system of regulation has 
been around for 130, 140 years. This would be the least 
disruptive model of anything that is being considered.
    Mr. Sherman. Mr. Soto has the least disruptive model.
    Mr. McCartney. No, actually, in many respects, this is much 
less disruptive than that, because one of the things you are 
talking about is Federal standards; and so the Federal 
Government would then dictate to the States what they would 
have to do, and at least in this case, the States could 
continue to regulate the business in their States that is under 
State regulation.
    So it would be less disruptive than any of the other 
alternatives.
    Mr. Sherman. Let me tell you about a little problem I have. 
I am from California. My voters voted for Prop 103. They voted 
for it by a narrow margin--well, by a moderate margin; and then 
a year or two later decided they really loved it.
    Am I supposed to go back to my constituency and say, I have 
acted at the Federal level to, in effect, repeal the 
protections that Prop 103 gave to, particularly, automobile 
insurance customers, Mr. Counselman?
    Mr. McCartney. No, because those protections would still be 
in place for consumers in California who want to deal under 
that system.
    For USAA members--
    Mr. Sherman. Let us put it like this: Folks from the 
industry have already said you are not really in love with rate 
regulation, and so wouldn't every company selling automobile 
insurance in my State get a Federal charter as opposed to a 
rate regulation charter? Do you know any company in your 
industry that wants rate regulation and would therefore opt for 
the California charter?
    So basically my people all voted for rate regulation, and 
then I come here and I vote for a national Federal charter, and 
then they don't get rate regulation.
    Mr. McCartney. I am sure there will be some insurance 
companies continuing to do business. I know of a couple of 
national insurance companies that deal in automobile insurance 
that are opposed to the optional Federal charter proposal. I 
would assume they would stay regulated by the States and 
continue to do business in your State.
    Mr. Sherman. Not if some of the people I know got 
themselves elected insurance commissioner in my State. We 
change that every 4 years. Trust me, I know some up-and-coming 
politicians who would assure 100 percent Federal charter should 
they be elected.
    I believe my time has expired. As you can tell, I am kind 
of with the chairman here. I want to see some reform, and I 
don't know how much fruit we should try to harvest.
    Chairman Kanjorski. First of all, I thank the panel. I 
think it has been a great panel. I certainly enjoyed it. Every 
time I have a hearing on this, I learn a little bit more.
    As Mr. Baker said, we have had maybe two dozen of these 
things. So after four or five dozen, we should probably be very 
experienced, and be ready to go in about 2035.
    But with that, we will close the hearing. The Chair notes 
that some members may have additional questions for this panel 
which they may wish to submit in writing. Without objection, 
the hearing record will remain open for 30 days for members to 
submit written questions to these witnesses and to place their 
responses in the record.
    I now ask unanimous consent that the statement of the 
National Association of Professional Insurance Agents be 
submitted as part of the record. Without objection, it is so 
ordered.
    There being no further business, this hearing is adjourned.
    [Whereupon, at 5:40 p.m., the hearing was adjourned.]


                            A P P E N D I X



                            October 3, 2007


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