[Senate Hearing 110-1009]
[From the U.S. Government Publishing Office]
S. Hrg. 110-1009
THE STATE OF THE INSURANCE INDUSTRY:
EXAMINING THE CURRENT REGULATORY AND OVERSIGHT STRUCTURE
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
ON
THE CURRENT STATE OF INSURANCE REGULATION, OVERSIGHT AND WAYS TO
ENHANCE CONSUMER PROTECTION, PROMOTE COMPETITION AND EFFICIENCY, AND TO
ADDRESS WHAT ROLE, IF ANY, THE FEDERAL GOVERNMENT SHOULD PLAY
----------
TUESDAY, JULY 29, 2008
----------
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.access.gpo.gov /congress /senate /
senate05sh.html
S. Hrg. 110-1009
THE STATE OF THE INSURANCE INDUSTRY:
EXAMINING THE CURRENT REGULATORY AND OVERSIGHT STRUCTURE
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
ON
THE CURRENT STATE OF INSURANCE REGULATION, OVERSIGHT AND WAYS TO
ENHANCE CONSUMER PROTECTION, PROMOTE COMPETITION AND EFFICIENCY, AND TO
ADDRESS WHAT ROLE, IF ANY, THE FEDERAL GOVERNMENT SHOULD PLAY
__________
TUESDAY, JULY 29, 2008
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.access.gpo.gov /congress /senate /
senate05sh.html
U.S. GOVERNMENT PRINTING OFFICE
50-411 WASHINGTON : 2010
----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii MIKE CRAPO, Idaho
SHERROD BROWN, Ohio ELIZABETH DOLE, North Carolina
ROBERT P. CASEY, Pennsylvania MEL MARTINEZ, Florida
JON TESTER, Montana BOB CORKER, Tennessee
Shawn Maher, Staff Director
William D. Duhnke, Republican Staff Director and Counsel
Amy S. Friend, Chief Counsel
Mark Osterle, Republican Counsel
Dawn Ratliff, Chief Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
C O N T E N T S
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TUESDAY, JULY 29, 2008
Page
Opening statement of Chairman Dodd............................... 1
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 3
Senator Johnson.............................................. 4
Prepared statement....................................... 45
Senator Menendez............................................. 4
WITNESSES
Steven M. Goldman, Commissioner, New Jersey Department of Banking
and Insurance, on behalf of the National Association of
Insurance Commissioners........................................ 6
Prepared statement........................................... 47
Alessandro Iuppa, Senior Vice President, Government and Industry
Affairs, Zurich North America, on behalf of the American
Insurance Association.......................................... 8
Prepared statement........................................... 61
John L. Pearson, Chairman, President, and Chief Executive
Officer, the Baltimore Life Insurance Company, on behalf of the
American Council of Life Insurers.............................. 10
Prepared statement........................................... 74
Travis B. Plunkett, Legislative Director, Consumer Federation of
America........................................................ 13
Prepared statement........................................... 89
George A. Steadman, President and Chief Operating Officer,
Rutherfoord Inc., on behalf of the Council of Insurance Agents
and Brokers.................................................... 31
Prepared statement........................................... 156
Response to written questions of:
Senator Shelby........................................... 328
Thomas Minkler, President, Clark Mortenson Agency, Inc., on
behalf of the Independent Insurance Agents and Brokers of
America........................................................ 32
Prepared statement........................................... 278
Response to written questions of:
Senator Shelby........................................... 355
Franklin W. Nutter, President, Reinsurance Association of America 34
Prepared statement........................................... 295
Richard Bouhan, Executive Director, National Association of
Professional Surplus Lines Offices............................. 37
Prepared statement........................................... 309
Response to written questions of:
Senator Shelby........................................... 355
Additional Material Supplied for the Record
Letter submitted by the American Academy of Actuaries............ 358
Letter submitted by the American Association of Independent
Claims Professionals........................................... 360
Letter submitted by the American Bankers Insurance Association... 362
Prepared statement of the American Association of Managing
General Agencies............................................... 364
Prepared statement of Lloyd's of London.......................... 384
Prepared statement of the National Association of Insurance and
Financial Advisors............................................. 426
Prepared statement of the National Association of Mutual
Insurance Companies............................................ 450
Prepared statement of David A. Sampson, President and Chief
Executive Officer, Property Casualty Insurers Association of
America........................................................ 461
THE STATE OF THE INSURANCE INDUSTRY: EXAMINING THE CURRENT REGULATORY
AND OVERSIGHT STRUCTURE
----------
TUESDAY, JULY 29, 2008
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met, pursuant to notice, in room SD-538,
Dirksen Senate Office Building, Senator Christopher J. Dodd
(Chairman of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Chairman Dodd. Good morning. The Committee will come to
order. I thank all of you for being here this morning, and let
me share some opening comments if I may, and then turn to
Senator Shelby. Then I am going to turn to Senator Tim Johnson
for some opening comments as well, and we will get to our panel
of witnesses--we have two panels this morning--and a full
discussion of this very, very important issue, ``The State of
the Insurance Industry: Examining the Current Regulatory and
Oversight Structure.''
Let me start off this morning by mentioning, as my
colleagues know, that this Committee has spent a significant
amount of time in recent months examining and responding to the
crisis in our mortgage and financial markets. The culmination
of that effort was the overwhelming bipartisan vote which
occurred on Saturday morning to pass the Housing and Economic
Recovery Act of 2008. I want to also take this time to thank
all of my colleagues, in particular, of course, my friend and
colleague from Alabama, Senator Shelby, as well as Senator Jack
Reed of Rhode Island, for their significant contributions to
achieving what we accomplished on Saturday.
Today, the Committee turns its focus to another very
important component of our financial system: the insurance
market. While insurance issues have not been as central to the
public discourse--or as vexing, I might add--as the challenges
we faced in the mortgage and financial markets, the insurance
industry is, nonetheless, a very critical underpinning of our
economy and, as such, no less deserving of the time and
attention of this Committee and its Members.
Most of us only think about insurance when things go wrong.
In fact, insurance is something that every one of us depends
upon every day to provide us with the economic certainty that
we need to function in an uncertain world. By protecting
people, property, goods, and services from every imaginable
risk, insurance provides stability to every sector of America's
$14 trillion economy. In short, a robust, vibrant insurance
marketplace is crucial to the economic well-being of our Nation
and the financial stability of our people.
This morning's hearing will focus on the current structure
of insurance regulation and oversight in the United States and
consider the impact of this regulatory structure on the
insurance marketplace, industry participants, and
policyholders. Unlike other participants in the financial
services sector, such as banks and securities firms, the
primary regulator of insurance is, of course, as we all know,
located in our States. The State-based system has been in place
since the 19th century and has been a source of important
innovation and consumer protection with regard to insurance. At
the same time, the insurance industry, like other segments of
the financial services sector, is increasingly becoming
national and even international in its scope.
The ability of the insurers to spread U.S. risk broadly
around the world has enormous benefits for American consumers,
as it increases insurance capacity here at home. The European
Union, one of our major trading partners with regard to
insurance, is currently updating its approach to regulating
insurer solvency in recognition of the fact that the insurance
companies are now key players in the global capital
marketplace.
Given the importance of insurance to our financial markets
and to the economy of our Nation as a whole, this Committee has
a responsibility, in my view, to consider the current state of
the insurance industry and the regulatory framework within
which it operates. Insurance regulation has been the subject of
hearings in this Committee during the last two Congresses, and
I commend Senator Shelby for his attention to this issue when
he was Chairman of this Committee. The Committee also has a
responsibility to consider proposals intended to modernize and
improve the regulation of insurance, and there is no shortage
of legislative proposals in this regard. To date, nearly 20
bills have been introduced in this Congress, each of which to
varying degrees seeks to reform or modernize our Nation's
system of insurance regulation.
I would be remiss if I did not take this opportunity to
acknowledge the hard work of Senator Tim Johnson, who has been
a leading voice in favor of insurance regulatory modernization.
It is my hope that this hearing will help the Committee
consider the merits of the initiatives that have been proposed
to date. And while I have yet to draw any firm conclusions on
the merits or demerits of any particular piece of legislation,
in my view consideration of insurance regulatory reform or a
modernization initiative rests on three important principles.
The first is strong consumer protection. Purchasers of
insurance must understand what they are buying. Then they must
be treated fairly and without deception, and they must know
that the company insuring them will be there down the road when
they have a claim.
Second, our regulatory structure must promote competition
in the marketplace, which will drive innovation and growth.
And, third, regulation must be efficient and not place
unnecessary burdens on those being regulated.
With that in mind, I want to thank our witnesses this
morning who are here, the two panels. I look forward to hearing
from them and what they have to offer, some of their ideas. I
know from my colleagues that there are many stakeholders not
present at the witness table today, some of which have
submitted testimony for the record, and I thank them for doing
that. We could have had literally a roomful of witnesses who
want to be heard on the subject matter. This will not be the
only time we consider their voices, and obviously we are going
to leave this record open in the coming days for our colleagues
to raise additional questions and for others who want to be
heard on the matters that we raise here this morning so we will
have as much of a full body of testimony about these issues as
possible.
With that, let me turn to Senator Shelby, and then I will
turn to my colleague Senator Johnson, and I see Senator
Menendez has joined us as well this morning.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you. Thank you, Mr. Chairman.
It has been 2 years since this Committee last examined our
insurance regulatory structure. During this time, developments
in our insurance markets as well as regulatory reforms abroad
have strengthened the case that our insurance regulatory
structure is out of date. If our insurance markets are to
remain competitive and innovative, our insurance regulatory
structure must keep pace with changes in the marketplace and in
the international regulatory landscape.
The most recent development is the crumbling of our bond
insurance market. The bond insurance problems appear to stem
from their decision several years ago to begin insuring riskier
securities. This leads to the question of whether the
regulatory regime governing bond insurers was properly
calibrated to account for the changes in their activities.
Because the financial problems of the bond insurers have
impacted not only federally regulated institutions but also our
overall economy, I believe that closer scrutiny of bond
insurance regulation by this Committee is warranted. Over the
past year, we have seen several insurance companies post
sizable losses of investments in mortgage-backed securities.
And while no major insurance company has yet failed due to the
turmoil in our credit markets, recent economic history suggests
that such an insolvency should never be considered outside of
the realm of possibilities or probabilities.
To ensure that we are prepared for the worst-case scenario,
we need to make sure that our insolvency statutes are up to the
task. Unless we have the right regulatory structure in place
well in advance of insolvency, I fear that the Federal
Government will once again be called upon to hastily organize
yet another financial bailout.
Recent regulatory reforms undertaken by other countries
also demand that we examine how our regulatory structure
interacts with the regulatory structures of other countries. In
particular--and Senator Dodd referenced this--the European
Union is moving forward with new regulations that will require
that the U.S. and the EU determine how and to what degree they
will rely on each other's insurance regulators when overseeing
insurance companies operating in both the U.S. and in the
European Union. The failure of the U.S. to secure such an
agreement with the EU could place American insurers at a
competitive disadvantage to European insurers.
It is my hope that today's hearing will shed additional
light on these and other regulatory issues facing our insurance
markets. I look forward to hearing what the States, as the
primary regulators of insurance, already are doing and what
additional steps need to be done to ensure that the U.S. has
the most competitive and modern insurance regulatory regime.
Also, I would like to encourage Senator Dodd, the Chairman,
to hold additional hearings on insurance regulation. These are
important issues that deserve more attention from this
Committee. And I would also like to thank all of the witnesses
in both panels for appearing before the Committee today.
Thank you, Senator.
Chairman Dodd. Thank you very much.
Senator Johnson.
STATEMENT OF SENATOR TIM JOHNSON
Senator Johnson. Chairman Dodd, Ranking Member Shelby,
thank you very much for holding today's hearing.
For most of the 110th Congress, the Senate Banking
Committee has been busy addressing the housing crisis. Out of
this housing crisis has come the need to examine the overall
regulatory structure overseeing financial services. I do not
believe that insurance should be locked out of this
discussion--as a financial service, as an important player in
the capital markets, and as an important piece of the
international economy.
In 2006, Senator John Sununu and I began a bipartisan
discussion about the need to modernize the insurance regulatory
structure with the introduction of our National Insurance Act
to create an optional Federal charter structure.
The issue of insurance regulation and oversight is an issue
of a fundamentally out-of-date system of State regulation that
no longer serves the needs of all consumers, companies, and
agents. Any efforts to reform this system should be done in a
comprehensive manner. I believe that the best solution is the
creation of an optional Federal charter and, therefore, a
Federal insurance regulator.
I ask that my full statement be submitted for the record.
Chairman Dodd. Without objection, it is so ordered.
We have been joined by Senator Hagel as well. Any opening
comments, sir?
Senator Hagel. No, Mr. Chairman.
Chairman Dodd. Senator Menendez, any opening comments?
STATEMENT OF SENATOR ROBERT MENENDEZ
Senator Menendez. Very briefly, Mr. Chairman.
First of all, let me take a moment to congratulate you and
Senator Shelby on what is--you know, we have pieces of
legislation that are desirable, and then we have pieces of
legislation that are critical. And I appreciate both of your
leadership in moving the housing bill that we passed last
Saturday, which I believe is critical to the Nation, and you
both worked in an exceptional fashion, and I appreciate your
collective leadership.
Chairman Dodd. Thank you.
Senator Menendez. I did not get the early St. Patrick's Day
message about the ties, so I am sorry that I did not come in.
[Laughter.]
Chairman Dodd. We call each other in the morning.
Senator Menendez. Very briefly, Mr. Chairman, let me thank
you for holding today's state of the insurance industry
hearing. I particularly want to welcome and thank Commissioner
Goldman from my home State of New Jersey for testifying today
on behalf of the National Association of Insurance
Commissioners. Commissioner Goldman is an exceptional public
servant. Governor Corzine appointed him approximately a little
over 2 years ago, and he has done an exceptional job in our
State. He is a long-time veteran of one of the State's most
prestigious law firms, earned a master's of law in taxation
from NYU, a J.D. from GW, and a degree in political science
from Boston University. We recently had a foreclosure
prevention clinic where hundreds of people came, and it was
incredibly successful. And I appreciate his leadership in this
regard going above and beyond.
Finally, Mr. Chairman, gaining insight to where things
currently stand with the industry and where we need to make
improvements is critical. The industry is a vital aspect of our
economy, protecting homes and businesses from wind, fire, and a
myriad of other disasters and accidents. Insurance provides
financial security for individuals and families when a problem
occurs or a disaster strikes. And while each of us hopes we
never have to exercise our policy, it provides a sense of
security in knowing that it is there. It is a safety net for so
many of our families. And whether it is property insurance for
one's home, accidental insurance for one's car, or a life
insurance policy, Americans rely on the industry to protect
their families and assets, and in many cases from the
unexpected.
So I am pleased that we are going to have an opportunity I
hope not just to continue to listen to debate that--some of the
earliest court decisions have gone back a couple centuries now,
but at the same time, learn how we can best ensure that the
industry has the solvency, the competition, and also how we can
enhance consumer protections. I think that is critical as well.
And so we look forward to all of the witnesses, and, once
again, welcome to Commissioner Goldman.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much.
I would note that we have been joined as well by Senator
Martinez of Florida. Senator, thank you for joining us. Any
quick comments?
Senator Martinez. Thank you, Mr. Chairman. Thank you very
much. I will put a full statement in the record, and the only
thing I would highlight is the great importance to our State of
this industry, particularly as we now approach yet another
hurricane season, and how tremendously important this is and
how the people of Florida have been tremendously under siege in
the last several years with the incredible premium cost to
homeowners, which adds to the cost of--when you add it to the
cost of gasoline, the problem with mortgages, and everything
else, it is creating a real burden to Florida families. So I
look forward to hearing from this excellent panel, and thank
you.
Chairman Dodd. Thank you very much, Senator.
Let me introduce our panel of witnesses. I again thank them
for joining us. You have already been introduced to Steven
Goldman, who is the New Jersey Commissioner for Insurance, and
as pointed out, he has been involved over 2 years in that job
and prior to that was a senior member of the firm of Sills,
Cummis, Epstein and Gross, a large law firm in New Jersey.
Alessandro Iuppa, we want to thank you for your green tie
this morning as well.
[Laughter.]
You got the message this morning.
Mr. Iuppa has been at Zurich Financial Services since 2007,
previously served as Maine's Superintendent of Insurance, where
he was an active participant on insurance issues at both the
national and international level, served as President of NAIC
in 2006 as well.
John Pearson--and, John, we thank you for joining us--is
the President and Chief Executive Officer of the Baltimore Life
Company. Prior to joining Baltimore Life in 1995, Mr. Pearson
was President of Utica National Life Insurance Company. He also
currently serves on the boards of the American Council of Life
Insurers and LL Global, and we thank you for joining us this
morning.
Travis Plunkett is no stranger to the Committee. We see him
quite frequently here. We thank him for coming again. He
directs the Federal legislative and regulatory efforts of the
Consumer Federation of America. He previously served as the New
York State legislative representative for AARP and the
associate legislative director of the New York Public Interest
Research Group. We thank you for coming.
I want to ask all of you to keep, if you can, your
comments, with two panels and a lot of member interest, if you
can keep it to 5 to 7 minutes or so, and then I will take your
full statements and make them part of the record, as they will
be for all of my colleagues here as well. And then we will also
accept any documentation and support you think is essential for
us to have.
Mr. Goldman, we will begin with you.
STATEMENT OF STEVEN M. GOLDMAN, COMMISSIONER, NEW JERSEY
DEPARTMENT OF BANKING AND INSURANCE, ON BEHALF OF THE NATIONAL
ASSOCIATION OF INSURANCE COMMISSIONERS
Mr. Goldman. Good morning, Chairman Dodd. Thank you.
Ranking Member Shelby, Members of the Committee, thank you for
inviting me to testify today. Senator Menendez, thank you for
that very kind introduction. I appreciate it.
My name is Steven Goldman. I am the Banking and Insurance
Commissioner for the State of New Jersey, and I am here today
to testify on behalf of the National Association of Insurance
Commissioners. I am pleased to be here to update the Committee
on the current State-based structure of insurance supervision
and on our ongoing, successful efforts to improve and
strengthen that structure.
State insurance officials are stewards of a vibrant,
competitive insurance marketplace. The insurance industry in
the United States has grown exponentially in recent decades
under State supervision.
Today, over 7,000 companies of various sizes compete to
sell a vast array of products across State and national
boundaries. The U.S. insurance market generates $1.4 trillion
in annual premium volume, and insurance income represents
roughly 12 percent of the country's GDP. The industry has
handled record claims volumes while earning record profits, and
insurer surplus stands at over $500 billion.
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 responsibility of State
regulators--typically dwarfs the markets of entire nations.
Four of the top 10 and 26 of the top 50 insurance markets in
the world are individual United States States. Mr. Chairman,
the market in your home State of Connecticut is larger than the
insurance markets in Brazil or Russia. Such a significant
market demands a local, accountable, and responsive regulator.
State insurance supervision has a long history of
aggressive consumer protection and is well suited to the local
nature of risk and the unique services offered by the insurance
industry. Risks can change from zip code to zip code, and
consumers sometimes just a few miles apart have different
insurance needs. As State regulators, we live and work in the
communities we serve and can respond accordingly. This kind of
consumer-oriented local response is the hallmark of State
insurance supervision, an asset that would be lost in any
attempt to Federalize insurance oversight.
While State insurance commissioners are strong advocates
for consumers, we also strive to provide a stable, efficient
regulatory environment for insurers, reinsurers, producers, and
other industry participants. Insurance regulation must
constantly be reformed and improved, and while those efforts
should always start at the State level, we would ask that
Congress work collaboratively with us and our colleagues in the
State legislatures to appropriately target efforts to
strengthen the existing State system where areas necessitating
Federal assistance are identified.
Indeed, we have worked to provide input on Federal
legislation affecting producer licensing as well as on surplus
lines and reinsurance legislation pending before this
Committee.
While most in the regulatory community believe such
targeted proposals have merit, we all agree on one proposal
that remains misguided policy. For over a decade, insurance
industry lobbyists have called for the creation of a new
Federal bureaucracy via an optional Federal charter that would
create a dual system of oversight similar to the banking
system. We do not want to repeat for the insurance sector the
current climate of instability and insolvency that now plagues
the banking sector.
The OFC concept is a thinly veiled attempt to unravel the
consumer protections, solvency structure, and oversight that
have led to the largest and most successful insurance market in
the world. Reforms should start at the State level, and they
have.
The NAIC has undertaken a number of initiatives with State
insurance regulators in recent years. Insurance regulators have
worked successfully to bring more cost-effective and sound
insurance products to the market more quickly. Central to this
effort is the Interstate Insurance Compact for speed-to-market
filing and regulatory review of life, annuities, long-term
care, and disability insurance products. This State-based
effort creates a single point of filing under one uniform set
of standards and is up and running, unlike an OFC, in 32 States
and Puerto Rico. Several other States, including my own, are
actively engaged in joining the compact.
Due to improvements made by State regulators, there has
been a 65-percent reduction in insurer insolvencies since the
late 1980s. Ultimately, these improvements have allowed
regulators to more easily identify when insurers are
potentially troubled and react more quickly to protect
policyholders and consumers, thereby avoiding the instability
and uncertainty presently plaguing other areas of the financial
sector.
We have launched an online fraud reporting mechanism to
allow consumers, employees, and others who suspect wrongdoing
to report their suspicions anonymously to State enforcement
authorities. The NAIC has developed a single point of
electronic filing for insurance products, allowing insurers
considerably shorter turn-around time than was possible under
the traditional paper filing process. By developing and
utilizing electronic applications and data bases, State
insurance officials have created much greater efficiencies in
licensing and appointing insurance producers in those States
that require it. State insurance officials remain deeply
committed to achieving greater uniformity in the producer
licensing process.
The NAIC has also developed an electronic system for
company licensing designed to help insurers navigate State-
specific requirements and provide a single entry opportunity
when filing in all jurisdictions.
State regulators understand that protecting insurance
consumers is our first responsibility. We also understand that
commercial insurance markets are constantly changing and that
modernization of State insurance supervision is imperative.
The NAIC and its members will continue to share our
expertise with Congress on insurance issues having a national
and global impact, and we welcome congressional interest to
help us improve the existing system of effective oversight. We
look forward to working with you in this regard, and I look
forward to answering your questions.
Chairman Dodd. Thank you very much, Mr. Goldman.
Mr. Iuppa.
STATEMENT OF ALESSANDRO IUPPA, SENIOR VICE PRESIDENT,
GOVERNMENT AND INDUSTRY AFFAIRS, ZURICH NORTH AMERICA, ON
BEHALF OF THE AMERICAN INSURANCE ASSOCIATION
Mr. Iuppa. Chairman Dodd, Ranking Member Shelby, Members of
the Committee, good morning. As you have heard, my name is
Alessandro Iuppa, and I am Senior Vice President, Government
and Industry Affairs for Zurich North America. And I appreciate
the opportunity to speak with you today on behalf of Zurich and
the American Insurance Association on the subject of insurance
regulatory reform.
Prior to joining Zurich last year, I was an active member
of the regulatory community for over 20 years, serving as
Commissioner in both Nevada and Maine. In the court of my 9-
plus years as the Maine superintendent, I also served as an
officer and president of the National Association of Insurance
Commissioners and in a comparable position as Chair of the
International Association of Insurance Supervisors Executive
Committee.
Zurich and the AIA are not opposed to the regulation of
insurance. I assure you, if they were, I would not be here. We
do, however, support prudent, strong, state-of-the-art
insurance regulation that allows insurers to meet the needs of
their policyholders and encourages competitive and thriving
markets both nationally and globally. Although the existing
structure works for some, it impedes our ability to achieve
these goals.
Financial markets in general have undergone extraordinary
growth and structural change in recent decades. Much of this
change can be attributed to the integration of capital markets,
advances in information technology, as well as shifting
attitudes toward competition and protection in the financial
services arena.
Unfortunately, the current U.S. regulatory structure is not
fully equipped to supervise the sophisticated marketplace of
the 21st century. The requirement to operate within the State
patchwork of regulation often hinders insurers with clients who
operate nationally and internationally.
It is increasingly apparent across the political spectrum
that the current regulatory system must be modernized and
adapted. Insurance regulation, specifically Federal chartering,
is featured prominently in both the Bloomberg-Schumer report
and the Treasury Blueprint. Both report recommend the creation
of an OFC. Likewise, the National Insurance Act of 2007, S. 40,
introduced by Senators Johnson and Sununu, recognizes the OFC
as the best approach.
Zurich and the AIA strongly agree that an OFC would play an
important role in the new world of integrated financial
markets. State insurance regulators have attempted to institute
regulatory reforms, but the reality is that the regulatory
efficiency in the insurance industry lags behind the other
financial services sectors.
As an insurance regulator, I spent a great deal of time
working on behalf of the U.S. regulatory community with our
international colleagues, and despite our best efforts, our
effectiveness was limited. For example, the IAIS has become the
standard-setting body for the promulgation of international
insurance standards. U.S. regulators have and will continue to
be active in the IAIS. But no matter the extent of agreement
that may exist among the regulators, the State representatives
cannot bind individual States to adopt those standards.
Likewise, the introduction of risk-based solvency
requirements in the EU through ``Solvency II'' will pose
enormous challenges to State-regulated insurers. U.S. insurers
will not be easily integrated into Solvency II because the U.S.
does not provide supervision equivalent to that of the EU.
As was recently stated by Standard and Poor's, and I quote,
``in the absence of supervisory equivalence, non-EU insurers
may find themselves operating at a competitive disadvantage in
Europe.''
Two areas that can especially benefit from Federal
oversight are market deficiencies and product innovation. The
lack of a sustainable market for terrorism coverage and
property coverage shortfalls in some regions illustrates a
deficiency in the U.S. marketplace. Regulation, however, can
play an important role in maintaining the proper equilibrium
among suppliers and purchasers through the encouragement of
market efficiencies. But by sustaining each State as individual
market, we inhibit the ability of insurers to spread risk and
enhance capacity.
A number of States still require pre-market regulatory
approval or rates and policy forms. Through my experience, I
have learned that for those products that did require prior
approval, the regulatory search for noncompliance at the
beginning substantially slowed the pace of product
introduction.
Despite recent improvements, the States are not likely to
solve the problems of non-uniformity and inconsistency on their
own, so we believe congressional action is necessary. Building
consensus among regulators is a very difficult thing to do and,
at times, almost impossible. An optional Federal charter will
modernize the regulatory environment and enhance consumer
choices. The availability of a national charter will not
dismantle the longstanding State insurance regulatory framework
or the ability of State-chartered insurers or agents to serve
local market needs; rather, it will complement the State system
with the addition of a Federal partner, one that concentrates
on strong solvency oversight, protecting consumers, and
speaking with a single unified voice at home and abroad. This
will produce a dynamic and healthy national insurance
marketplace able to keep pace with the demands of the global
economy.
I thank you for the opportunity and look forward to your
questions.
Chairman Dodd. Thank you, Mr. Iuppa. I appreciate it very
much.
Mr. Pearson. And turn that microphone on.
STATEMENT OF JOHN L. PEARSON, CHAIRMAN, PRESIDENT, AND CHIEF
EXECUTIVE OFFICER, THE BALTIMORE LIFE INSURANCE COMPANY, ON
BEHALF OF THE AMERICAN COUNCIL OF LIFE INSURERS
Mr. Pearson. Thank you. Thank you, Chairman Dodd and
Ranking Member Shelby and Members of the Committee. On behalf
of the American Council of Life Insurers, I would like to thank
you and the Committee for the opportunity to appear before you
today.
In the 2 years since this Committee last held a hearing on
insurance regulation, the case for regulatory reform has become
even stronger. Despite continued efforts by the States and the
insurance industry, transforming State-based regulation into a
more uniform and coherent national system has seen only
marginal results, with the Interstate Compact for life
insurance product filing and approval that has yet to be
adopted by a number of States and little other significant
progress.
Importantly, domestic operational concerns have been joined
by pressing international regulatory and competitive issues
which the NAIC has acknowledged fall largely outside the
State's authority to address.
The ACLI strongly supports the creation of an optional
Federal charter, or OFC, for life insurers. That is why we
strongly support Senate bill 40, the National Insurance Act,
which was introduced by Senators Johnson and Sununu and which
would establish the Office of National Insurance within the
Treasury Department to issue charters and oversee and regulate
Federal insurers. I want to specifically thank Senator Johnson
and Senator Sununu for their strong leadership on this issue
and their continuing recognition of the need to modernize
insurance regulation.
As the CEO of a small life insurance company, I can testify
to the many and varied reasons that the time has come for
Congress to enact an OFC bill. Lack of uniformity of State
insurance laws, conflict State compliance requirements, the
plethora of duplicative and unnecessary regulatory costs, the
inability to get new and innovative products to market in a
timely fashion, the unlevel regulatory playing field insurers
face when competing with other financial services entities, the
need for greater Federal Government expertise on insurance
issues and the growing pressure of the globalization of the
life insurance market all point to an overwhelming need to
change the way insurance is regulated.
All these are addressed in greater detail in my written
testimony, but I would like to focus my comments today on the
most important reason why change is necessary, the effects
regulatory modernization will have on U.S. insurance consumers.
The life insurance industry is advocating for an OFC built
around strong solvency and strong market conduct oversight
patterned after the best State statutes or model laws in
existence today. This would necessarily include robust uniform
regulation in the areas of capital, reserves, accounting,
investments, and other financial areas. And consumers would
enjoy a high level of protection under the system regardless of
where they live or where their insurance is domiciled or a
product is purchased. Anything less is not in the best interest
of life insurance companies or their customers.
Providing customers access to the same products and
benefits wherever they live would afford them uniform rules
regarding sales and marketing practices of companies and agents
nationwide. It would ensure strict, frequent, and consistent
market conduct and financial examination of national insurers.
It would also give consumers the opportunity to work with a
trusted company or agent if the customer moves from one State
to another, where today the company or agent may not be
licensed in every State.
Moreover, an OFC holds the promise of a significant cost
savings. Two recent academic studies have quantified those
savings. As noted in the studies, the life insurance market in
the U.S. is mature, and price competition is intense. It is
entirely reasonable to expect that a meaningful portion of
those savings would be realized by customers in the form of
lower premiums.
Now, those opposed to OFC would assert that it would be
fundamentally inconsistent with the best interest of consumers.
But when the facts I have just presented are carefully
considered against the opponents' arguments, it becomes evident
that nothing could be further from the truth.
Opponents would suggest that an OFC would lead to
regulatory arbitrage. We are highly confident, however, that
Congress will ensure that any Federal regulatory system is at
least on a par with the strongest State systems. The industry
is seeking strong, uniform regulation, not weak regulation or
deregulation.
Moreover, the potential for regulatory arbitrage already
exists today in the current State-based system since insurers
can readily change the state of domicile and choose to move to
a different State as their primary financial regulator. This is
not a problem today. We find it highly doubtful that the
introduction of a strong Federal regulator into the mix will
change things for the worse.
Opponents also argue that consumers will be hurt by the
loss of a local regulator who understands their concerns better
than people in Washington. This argument, too, has no merit.
First, the bill introduced by Senators Johnson and Sununu
requires that at least six regional offices of the Federal
regulator be established in addition to its D.C. headquarters.
So consumers will not be required to turn solely to Washington
for help or information.
Second, consumer issues surrounding life insurance products
are simply not local in nature. If anything, the long-term
promises to consumers made by life insurers, combined with the
mobile character of our society today, requires persons
concerned about consumer issues to recognize the truly national
nature of insurance products.
In fact, national uniform regulation of life insurance
products is much more valuable to consumers than local
regulation. This is a point made in the findings of the GAO
report issued just last week on long-term care insurance, which
cited variations in State laws as the reason some consumers
enjoy greater policy protections than other consumers. And,
frankly, the lack of an appropriate nationwide uniform consumer
protection is an industry concern.
For example, since it was adopted in 1998, the industry has
supported the NAIC Annuity Disclosure Model regulation, which
requires that companies deliver a buyer's guide and other
important disclosure documents to annuity purchasers. Ten years
later, only 16 States have seen fit to adopt that model rule,
and 25 States still have no law or regulation addressing the
issue of annuity disclosure. Contrast this to the fact that
under an OFC any annuity disclosure law put into place would
immediately affect all national insurance annuity purchasers
nationwide. This, as well as other examples of variation in
State laws, makes a solid argument that national and uniform
regulation holds more value for consumers than local regulation
does.
In conclusion, we believe the facts support the belief that
insurance regulatory modernization that includes the creation
of an OFC will benefit U.S. consumers.
Thank you, Mr. Chairman, for holding this important hearing
and allowing me to testify before you and the Committee today.
We look forward to working with you and other Committee Members
as the issue moves forward, and I will be happy to answer
questions.
Chairman Dodd. Thank you very much, Mr. Pearson.
Mr. Plunkett, welcome.
STATEMENT OF TRAVIS B. PLUNKETT, LEGISLATIVE DIRECTOR, CONSUMER
FEDERATION OF AMERICA
Mr. Plunkett. Mr. Chairman, Senator Shelby, Members of the
Committee, my name is Travis Plunkett. I am the Legislative
Director of the Consumer Federation of America. I would like to
thank you for holding a very timely hearing. Consumers are
presently facing a number of serious problems in the insurance
market regarding availability, affordability, unfair claims
practices, and the hollowing out of insurance coverage.
I appreciate the fact that the focus of the hearing is an
overall examination of the successes and failures of regulation
rather than just reviewing proposed legislation. Most of the
regulatory proposals that have been introduced in Congress to
date have been driven by the priorities of the insurance
industry rather than a need to help insurance consumers.
The optional Federal charter legislation and others that
the insurance industry has conceived promote the myth that
regulation, strong regulation, and competition are
incompatible. The truth is that the unique and complex nature
of insurance policies and insurance companies requires more
extensive front-end regulation than other consumer commodities.
Without regulation, insurers can ``compete through adverse
selection,'' which hurts our Nation's most vulnerable
consumers--the oldest, the poorest, and the sickest. Regulation
is also necessary to promote price competition and loss
mitigation efforts and to deter unfair sales and claims
settlement practices.
Consumer groups do not care who regulates insurance. We
only care that the regulatory system be excellent. We are
critical of the current State-based system, but we are not
willing to accept a regulatory regime that undermines consumer
protections by pitting Federal and State regulators against
each other in a contest to lower standards or a Federal system
that establishes one uniform but very weak set of standards. We
do agree that coordination and more consistent standards for
licensing and examinations are desirable and necessary, as long
as the standards are high. However, the burden of proof is now
on those who want to shift away from more than 150 years of
State insurance regulation to show that they are not asking
Congress and the American people to accept a dangerous ``pig in
a poke.''
There are a number of problems, as I mentioned. Let me give
you a little more information about the problems that consumers
are dealing with in the insurance market. Six problems.
First, many concerns have been raised in recent years about
abusive claims practices by insurers in the wake of natural
disasters, especially Hurricane Katrina. Insurers have reduced
their payouts and maximized profits by turning their claims
operations into profit centers by using computer programs like
Colossus designed to systematically underpay policyholders
without adequately examining the validity of each individual
claim. And in my written testimony, I urge the Committee to
examine this problem at length.
The second concern: The study released by CFA earlier this
year found that property/casualty insurers in recent years have
overcharged consumers and reduced the value of home and
automobile insurance policies, leading to profits reserves and
surplus that are at or near record levels. The pure loss ratio,
the actual amount of each premium dollar insurers pay back to
policyholders in benefits, was only 55 cents at the beginning
of this year, down from 70 cents 20 years ago. Meanwhile,
insurers earned an unprecedented $253 billion in profits over
the last 4 years, despite increased hurricane activity.
The third concern: Insurers have hollowed out property
coverage by adding insurance deductibles and by making it much
more expensive for consumers to get reimbursed for true
replacement costs, and they are now cherrypicking the locations
in which they will underwrite. They have also become adept at
cost shifting some catastrophic claims to Federal programs,
like the National Flood Insurance Program.
Fourth, insurers have used new risk classification data
such as credit scoring and information about an insured party's
occupation and education as a form of redlining. These factors
are clearly proxies for economic status, and sometimes race.
Fifth, anticompetitive behavior in the industry allowed by
the Federal McCarran-Ferguson antitrust exemption.
Sixth, I have already touched on some of the behavior along
the Nation's coastlines regarding rate increases and pullouts.
I urge the Committee to examine proposals that will
confront these problems head on rather than starting with the
industry-conceived proposals. The experience in the States that
have regulated well is that it is possible to improve
competition and oversight of the insurance market while
increasing regulatory uniformity and protecting consumers.
Appropriate regulation enhances competition. It requires
insurers to compete fairly and in a manner that benefits
consumers, and it results in a generous return for these
companies.
CFA released an exhaustive study of automobile insurance
regulation over the last two decades this year. We found that
the 15 States that require insurers to receive advance approval
of rate increases had the lowest rate increases of all the
States as a group. They also--and this is a key point. These
States performed well in spurring competition and generating
significant profits for insurers. California was the top-
ranking State in the country in this study.
In closing, I propose a number of other detailed
recommendations for achieving the twin goals of improving
competition and also improving regulation, and I urge this
Committee to look at those recommendations.
Thank you once again.
Chairman Dodd. Thank you, Mr. Plunkett, very, very much. We
appreciate your testimony.
Let me, if I could, I am going to turn the clock on to
about 6 minutes--additional Members have shown up, and I
appreciate their presence--so we can give everyone a good
chance to raise questions, and we have a lot of panelists. And
I will leave the record open, by the way, for Members who want
to submit questions as well, if you do not get a chance to
raise every one you would like. And I will certainly ask our
panelists, in the next week or so if you could get back to us
so we can complete the record, so we don't necessarily cover
all the ground here.
Let me ask, if I can, all of you, let me--it is kind of a
two-part question, and so I will just get the whole question
out, then ask you to comment if you would. It has been
referenced already--I think maybe Mr. Goldman, or someone
talked about drawing the comparisons to the dual banking-like
system, in a sense, what this would mean. Several of you
alluded to this approach to insurance regulation that models
our systems in banking regulation. I would like to sort of bore
into that a little bit, if I can.
I wonder if each one of you would share your view on the
impact that a dual banking-like approach on insurance
regulation would have, positively or adversely, in each of the
three areas that I identified in my opening statement, with the
areas the three pillars that I see, anyway, we should be
examining as we approach this whole idea of modernization or
regulatory reform: consumer protection, competition, and
regulatory efficiency.
And, second, should different lines of insurance be treated
differently? And, again, this is something I think all of us
have some appreciation for as evidenced by the fact we have
eight witnesses on this panel today. That was not by accident.
It was not because we had eight people who wanted to be here.
It is because we tried to cover the waterfront on the issues of
insurance, which cover a broad array of stakeholders. Insurance
is not monolithic. Obviously, to state the obvious to the
people gathered in our room today, insurance products cover
life, property, liability, health; they cover businesses,
public entities, individuals.
It leads me to ask the following question: What would be
the most effective approach to this Committee's consideration
of insurance regulatory reform proposals? Should we consider
changes to the regulatory structure more broadly? And some of
you have certainly implied that in your testimony here, as
envisioned by the Treasury Blueprint? Or should we focus any
efforts on ways to improve the regulation of particular lines
of insurance, recognizing there are significant differences in
the insurance that is being offered in terms of how--what
expectations are of people, life insurance versus property and
casualty, for instance? There is an expectation, I think, of
how people expect it, and there is an expectation of how we
treat these from a national perspective as well.
So would you kind of--we will begin with you, Mr. Goldman,
just run down, and, again, I ask you to be relatively brief so
everybody can get a chance. It is a large question, but it is
one that is important to me.
Mr. Goldman. Thank you, Mr. Chairman. Let me respond first
to the question about the banking model and emulating the
banking model. I am the Banking and Insurance Commissioner in
New Jersey, so I have had experience directly dealing with the
existing bifurcated regulatory system in the banking sector.
And the experience has been that when the Federal Government
decides to exercise its preemptive power, as it has
aggressively in the last number of years, the ability of the
States to protect their consumers, their local consumers, is
dramatically reduced. And the consequence of that I think is
partly manifested in some of the problems we have seen in the
banking sector over this last year and a half.
I know, for example, in New Jersey, just to give a brief
example, we have a statute called HOSA. It is the Home Owners
Security Act, and it was designed to prevent some of the more
aggressive efforts on mortgage origination and sales. And we
attempted to enforce that Act not only with respect to New
Jersey-chartered banks but also with respect to the operating
subsidiaries of federally chartered banks. And as a result of
an OCC preemption effort, we were precluded. And, frankly, a
number of the problems that are present now in New Jersey as a
consequence and that I think have manifested themselves around
the country have resulted from our inability to act on behalf
of our consumers to prevent some of these problems. And,
frankly, I fear a similar sort of potential problem were we to
then bifurcate the regulations of insurance.
I think one of the things the Committee importantly should
recognize is that the fabric of insurance regulation, while
there are many lines, as you mentioned--and there are--is very
much a holistic process. For example, trying to pull out
reinsurance, which provides an enormous capacity in the
marketplace for direct insurers, and regulate that
independently of the rest of the market would have a dramatic
impact on the regulatory framework throughout the country.
And so even though the lines are separate, it is important
to recognize the holistic nature of the regulatory structure
and the way the industry itself and its various components
interrelate. Some lines are more distinct than others, yes--
life and health, for example, versus property and casualty.
But, nevertheless, they are all related in important ways.
There are important reinsurance considerations that apply to
the life industry. So I think that is an important
consideration as we begin to think about these issues to
recognize.
With respect to the question of looking at this in a broad
reform effort or a narrow reform effort, I think this is a real
opportunity for creative federalism. The States, I believe--and
as I mentioned to someone earlier today, this is not a world
that I come from. I was a mergers and acquisitions lawyer
before I took this job. So I did not come to this----
Chairman Dodd. It sounds like perfect training.
[Laughter.]
Mr. Goldman. Yes, it was. But I did not come to this job
with any preconceived notions about the industry or its
constituents. And I have come to believe, after being in this
job for about 2.5 years, that the State-based system works
quite well. It does not work perfectly. There are problems with
it. But those problems can be addressed and should be addressed
in the context of what I believe is a very effective operating
system today. Some of the statistics I mentioned in my
testimony I think evidence that. You have a very vibrant
industry here in the United States. It is growing. It is
profitable. It is growing as a percentage of the GDP in the
country. And each of the States and the U.S. market in the
aggregate is far and away the largest insurance market in the
world and I think the best regulated insurance market in the
world.
And so I think if you look at the problems that have
presented themselves in the other financial services areas--in
the commercial banks, in the investment banks, in the rating
agencies--and you see the failures that have taken place there,
you do not see that degree of failure in the insurance
industry, and that is not by accident. I think it is because
they are a well-regulated group, by and large--not without
exception, but by and large.
Chairman Dodd. Well, I have already exhausted the time I
said I have, and I have to ask three other people. Just quick
comments, Mr. Iuppa and Mr. Pearson.
Mr. Iuppa. Yes. With regard to the three pillars, I think
with regard to consumer protection--and I spent 20 years as a
regulator. The ultimate consumer protection is the solvency and
soundness of the companies doing business in my State, that
they will be there when a claim comes in and so forth. Below
that, you have sort of the market practices, which are also
addressed. And I think that certainly with the National
Insurance Act proposal, there is a sufficient framework that is
in the bill at this point for consumer protection through
regional offices, Office of Consumer Protection, and I have
every confidence that Congress is not going to put something
out there that is not going to provide that type of protection.
With regard to regulatory efficiency, I will use one
example. Zurich is the third largest commercial writer of
property/casualty insurance in the world and the U.S. We have
put together a commercial auto policy that was probably
somewhere in the neighborhood of about 30 pages long as a
policy that we could deliver to our policyholders.
After going through all the approval processes in the
various States, the aggregate number of pages was in excess of
300 in order for us to be able to sell that across the country.
Competition, I think, is very much a possibility under the
dual approach. We are not advocating that the State system be
eliminated. What we are talking about is providing another
choice for some of the 7,000 companies that do business in the
U.S. If there is an OFC enacted and when that happens, I do not
think you are going to see 90 percent or 95 percent of those
companies seek to become licensed at the Federal level. I think
you are likely to see probably 5 percent, and that may even be
an aggressive number. But either way, the sooner you can get
products into the marketplace, the more innovative you can be.
You provide choices for consumers, and consumers include not
just individuals but the small businesses that do business here
in our country, as well as national and multinational
companies. So I think we have to keep that balance in mind.
With regard to the different lines of insurance, I think
that we are, frankly, best to look at this from a comprehensive
perspective. Some of the inefficiencies that we see in the
current system are not necessarily limited to the life business
or the property/casualty business, so I would encourage you to
continue looking at this from a comprehensive perspective. And
I will stop there.
Chairman Dodd. Mr. Pearson, quickly.
Mr. Pearson. I will. First of all, I have spoken broadly in
my opening comments about consumer protection. Let me talk
briefly about efficiency, if I may.
I think we are actually a very good example of a company--
we are a small life insurance company, yet we have 50
jurisdictions. Our total assets are just a shade over $1
billion. We have 140 employees in our home office. And yet we
have--because of the distribution network that we have, we are
forced to deal with 50 different jurisdictions. And, frankly,
it is very different than the banking model, obviously, where
the banks tend to be a very local fashion.
I guess the other thing I would talk about is different
lines of insurance. We are supportive of the surplus lines bill
that I believe has come to the Committee. But, again, just as
Mr. Iuppa has said, we also believe that a full comprehensive
rather than an incremental approach is a better long-term
solution.
Chairman Dodd. Travis.
Mr. Plunkett. Mr. Chairman, real quickly, regarding whether
the dual banking system is a good model for insurance
regulation, we obviously think it is, especially given recent
experience, a very bad model. I have worked now at both the
State level in New York and at the Federal level, and I have
seen problems from both ends. In New York, I can tell you every
single time New York regulators considered placing a new burden
on State-chartered banks, they hesitated and were very
concerned about State-chartered institutions jumping to a
national charter. And, eventually, a very big one, Chase, did.
So that slowed consumer protection significantly at the State
level.
From the Federal perspective, we have seen a situation
where the Office of the Comptroller of the Currency, the
primary regulator of national banks, has extended preemption
very broadly and very aggressively in a move to keep large
financial institutions that fund that agency in their realm,
and that is a very bad approach as well because it has reduced
consumer protection overall and hurt consumers and weakened
State protection.
Chairman Dodd. Thank you all very much. I apologize for
taking that long, but thanks.
Richard.
Senator Shelby. Thank you, Mr. Chairman.
I do not see anything fundamentally wrong with establishing
an optional Federal charter because I can see the efficiencies
of a large company, be it American or European, doing business
in 50 States, including my own State, or the inefficiencies of
that and the cost. And why couldn't we create an optional
Federal charter and have a strong regulator, at the same time
legislate protections for the consumer? Because we are all
consumers here. Mr. Plunkett raises a good question. He is an
advocate for the consumer. That is part of his deal, and he
does a good job there. But now he is working with the Federal--
of course, there is no Federal charter for insurance now, so he
has to work 50 States.
Mr. Iuppa, you had the experience, as Senator Dodd pointed
out, as Superintendent of Insurance in the State of Maine. Now
you are involved as an executive, a senior vice president of a
large international company, Zurich. What would a Federal
charter offer, assuming it is done right, a company like yours
that is doing business all over the world?
Mr. Iuppa. Well, I think one of the principal things it
would offer to us--again, in sort of looking at it from our
client base, as a commercial insurer we are doing business, as
I said, with small businesses but also multinational
businesses. Our clients come to us and tell us, Look, we do
business in Asia, we do business in South Africa, we do
business in Europe, we are doing business in the U.S. We need
to be able to know that we have got the proper coverages and
the ability to have a product there. And we can tell them that,
yes, we can give you a policy that will cover you for your
business in South Africa; we can give you a policy that will
cover your business in China. But for your operations in the
U.S., we are going to have to deviate from that, and we are
going to have to add coverages, perhaps provide you coverages
that you would normally not buy, and so forth. So we have--an
ability to offer products that match our clients' needs is
often constrained.
Senator Shelby. What if we had--and let's hope it will not
happen, but it probably will--what if we had a large American
or European or Asian company fail? Let's just say an American
company that became totally insolvent, and they were chartered
by a State here. Do you believe X State could deal with
something of that magnitude? I am talking about a huge
insurance company. And what happens to the consumers in that
case now as opposed to possibly a----
Mr. Iuppa. You know, I think one of the things you are
perhaps referring to here is sort of perhaps a systemic risk
that may be generated from a major insurer failing. And the
reality--I mean, there is a system in place to provide a basis
for policyholder protection that exists today. But, again, it
is State-based.
So, for instance, if this large company happened to be
based in--let's pick Maryland, it would be the Maryland courts
that would have the ability to approve any kind of workouts,
any sale of the assets, without regard to perhaps some of the
interests in the other States.
Senator Shelby. This leads me to the bond insurers
regulated by States, which are of great concern to a lot of us
in the financial industry today. What lessons should the
ongoing problems with the bond insurers teach us about the
weaknesses in our insurance regulatory structure? Mr. Pearson,
do you want to take that?
Mr. Pearson. We have not been particularly involved. It is
not something that affects us directly, and so I really do not
have a great answer, quite frankly.
Senator Shelby. Mr. Iuppa, do you have anything on that?
Mr. Iuppa. Well, I think, you know, when we are looking at
systemic risk, the bond market--the bond insurance market is a
good example. They have for the most part tended to be based in
New York. I think we have at least one in the Midwest. The
expertise that perhaps is needed to supervise----
Senator Shelby. Haven't some of those companies either have
failed or are about to fail?
Mr. Iuppa. It is my understanding that some of those
companies have had their ratings turned down.
Senator Shelby. Is that because of a lack of capital and
too much risk, too little capital, a combination?
Mr. Iuppa. Well, perhaps that they engaged in putting
products in the marketplace that they may not have had the
expertise to do. And perhaps, again, they are operating under
that State framework. There could be issues with knowledge of
the business, both on the part of the regulator and the bond
insurer. And I think if you had a bond insurer operating under
a Federal charter, for instance, you would be able to bring
considerably more resources to the table from the standpoint of
drawing on Treasury, drawing on the Fed; the SEC would have an
opportunity to weigh in. And you also have the ability to have
those Federal agencies perhaps react faster than the States can
in terms of coming together to a solution.
Senator Shelby. Mr. Plunkett, do you have any comment on
that, the bond insurers and the problems there? Because that is
a real risk to our whole financial system.
Mr. Plunkett. Senator, the issue there appears to be
regulatory expertise, the ability to assess as a regulatory the
financial risks, in this case the risks to the capital markets,
of a very complex financial product. And on that issue, so far
the Federal Government does not have a very good track record
either. So I would not assume that regulatory expertise----
Senator Shelby. I was not choosing one over the other
there. I think they are all flawed.
Mr. Plunkett. Yes, well, it has been a problem. It has been
a problem.
Senator Shelby. Sure. Mr. Goldman?
Mr. Goldman. Which question, Senator, would you like--the
bond insurers?
Senator Shelby. The bond insurers, seeing as you are the
Insurance Commissioner and the Banking Commissioner. You have a
dual role here, so you have some experience here. Go ahead.
Mr. Goldman. None of the bond insurers has failed at this
point, as Mr. Iuppa has indicated.
Senator Shelby. If they have not failed, are they under
great stress?
Mr. Goldman. They are under--a number of them are under
stress. There have been a couple of new entrants into the
market, actually. One of Warren Buffett's companies has decided
to start a new one.
Senator Shelby. Well, that is municipal bonds, isn't it?
Mr. Goldman. That is municipal bonds, not the
collateralized----
Senator Shelby. A lot less risk there than there is in
other things.
Mr. Goldman. Well, that is true. And had they stuck with
that position----
Senator Shelby. Buffett is smart, isn't he? [Laughter.]
Mr. Goldman. Had they stuck with that, they wouldn't be,
some of them, where they are today. But none of them, in fact,
has failed. They have been downgraded, a number are under
pressure. As I say, there have been some new entrants into the
market, which have been quickly approved--around the country, I
might add--by the States. I think all 50 States approved Mr.
Buffett's new company within 60 or 90 days. I think 40 States
approved it within 30 days to get more capacity into the
market.
And if I might, the issue of speed to market, which I think
was mentioned with the life insurers, the Interstate Insurance
Compact, which the States have put into effect, and which is in
effect in 32 States and Puerto Rico, does address that problem
and is well on its way, I think, to solving the issues that are
raised in that regard.
Senator Shelby. Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much.
And as mentioned by many of us already here, there is no
one who has been more active and more involved in these
questions on this Committee than Tim Johnson. And so I thank
him immensely. As I mentioned, I am sort of agnostic on these
questions, anxious to sort of hear the arguments that are being
presented here this morning. But I am very grateful to Tim for
raising the issues. He has been very coherent and very smart in
talking about them, so, Tim, we thank you immensely. The floor
is yours.
Senator Johnson. Mr. Iuppa, Mr. Pearson, and Mr. Goldman,
the surplus lines and reinsurance bill has passed the U.S.
House unanimously twice. Where do the trades stand in their
support for passage of the surplus lines and reinsurance bill?
Are there any reasons why this Committee should not pass the
bill? And would it help pave the way for comprehensive reform
such as OFC? Mr. Iuppa.
Mr. Iuppa. Thank you, Senator. Yes, I think it is important
to recognize that the bill does seek to address some real
problems in the marketplace when you are talking about the
surplus lines proposal. I think that at this point the AIA is
supportive of that legislation, and as I said, we believe it
really does address some real concerns that we have. But I
guess I would urge you with regard to that to not look at that
as solving all the concerns or addressing all the concerns,
that we still believe that a comprehensive approach and one
that would incorporate some of those measures is probably the
prudent way to go. And if the Senate chooses to go unilaterally
on that particular bill, we would really ask that you provide
some assurance that the comprehensive approach would not be
abandoned and still be a topic for discussion.
Senator Johnson. Mr. Goldman.
Mr. Goldman. Thank you, Senator. I think the NAIC and the
States have been working constructively with the Congress on
that bill. We have made a number of suggestions we think would
improve the surplus lines portion of that bill. And we are
supportive, with those changes, of the surplus lines portion of
the bill.
With respect to the reinsurance portion of the bill, I am
presently chairing a reinsurance task force for the NAIC, and
we are in the process of and I believe making good progress on
developing a comprehensive modernization proposal for
reinsurance regulation in the United States and answering some
of the questions that have been raised about mutual recognition
and solvency and some of those questions. So our view has been
that we think we are fairly close, and we would rather deal
with a comprehensive proposal on the reinsurance regulatory
modernization framework that we are working on.
Senator Johnson. How close are you?
Mr. Goldman. We are hopeful to have a complete proposal, if
we are a little bit lucky, by the end of this year.
Senator Johnson. Mr. Pearson.
Mr. Pearson. ACLI is supportive of the surplus lines bill.
We think it is a positive step. But we do see it as addressing
very narrow boutique issues, and we concur with Mr. Iuppa that
ultimately, if insurance reform is to be done properly,
comprehensive reform is the right answer.
Senator Johnson. Mr. Iuppa or Mr. Pearson, what is the
average time that it takes to bring a new insurance product to
market? Isn't product innovation discouraged because of the
time that it takes to get a product approved?
Mr. Iuppa. Looking back in my career, one of the things
that I saw, there was great variety across the States. In some
States, you could get products approved in a fairly short
order, within 30 days. In others, there are some products that
I am aware of that would take a year or 2 years to perhaps get
it approved or even to get a disapproval.
Mr. Pearson. Our process, generally it is about a year for
a product to get full approval in all 50 jurisdictions where we
operate, and industry data is suggesting as much as 2 years for
some products. And, frankly, in today's fast-moving world,
products are outdated within 2 years.
Let me also, just if I may, mention on the compact, we have
been very supportive of the NAIC moving the compact along and
applaud them for what they have done. But our concern, first of
all, is that it is but one issue that needs modernization.
Second, there are 33, I think, States and Puerto Rico, but
the big States are not in, and, frankly, we do not think we
will ever be in. And it is yet to be proven whether it is going
to work. It is a bit too early.
Senator Johnson. Mr. Iuppa, some believe that there would
be more congressional and industry consensus on OFC legislation
if it was life only. Why should P&C be included?
Mr. Iuppa. Well, P&C faces many of the same issues that the
life industry faces with regard to the need for an OFC. The
other thing is, again, to look at this from the standpoint--and
I will go back to some of the earlier comments about the
competitiveness of the industry, not only from an insurance
perspective but also dealing in the capital markets and
competitiveness there. The P&C issues--you know, at one time
P&C coverages were very local, especially for things like
homeowner's, auto insurance. But I was talking with some folks
this morning, and one example that I mentioned is that it seems
a bit of an anomaly--I live here in the District. I drive over
to Virginia. My insurance coverage comes with me. However, if I
move from the District over to Virginia or to Maryland, I have
got to start the process again of being able to obtain
coverage. And we have heard previously by others who have
testified on this that just that single thing alone provides a
significant burden, especially for people who are engaged in
businesses or perhaps even the military service where there is
regular movement because of the deployments or transfers, that
sort of thing.
I think, too, from the standpoint of looking at, again,
global competitiveness that we are confronted with, again, in
the context of the OFC, it is not meant for every company. But
it is going to be positive. It is going to be a benefit for
those that do business across the country or across the globe.
Senator Johnson. I am out of time, but, Mr. Pearson, can
you answer the question about why should P&C be included or if
it should not?
Mr. Pearson. First of all, we clearly believe that there is
a very strong position for life insurers and the need for an
optional Federal charter, and I am here as representing small
companies to suggest that it is not just an issue that impacts
the very large but, in fact, companies of our size as well.
We are supportive of Senate bill 40, and I think I probably
should leave it at that.
Senator Johnson. Thank you.
Chairman Dodd. Thank you very much, Senator.
Just to clarify, Senator Johnson asked a very important
question about the surplus lines, and as I understand it, you
are for it, Mr. Goldman?
Mr. Goldman. We have made a number of suggested changes to
the bill that we think address the----
Chairman Dodd. So you would not support it in its present
form here?
Mr. Goldman. Well, we think that the bill addresses a
number of important concerns, and we would be supportive of it.
We do think some changes are appropriate in the bill. But with
those changes, we would be supportive of it, yes.
Chairman Dodd. All right. Because this is a matter--I think
there is a lot of consensus about it. It passed overwhelmingly
in the House, that and the Office of Insurance Information were
two pieces of legislation that went through rather handily over
there, and we are looking at a package over here of things we
might be able to do. And so I want to get some clarity from the
witnesses on it. And you are for it, as well, as I understand
it, surplus lines?
Mr. Iuppa. Yes. We do support it.
Chairman Dodd. And Mr. Pearson as well. Travis, do you have
a point on that? You were asked that question.
Mr. Plunkett. Senator, we are opposed to it, for a number
of reasons. For one, it still applies to personal lines, not
admitted personal lines as well. Given the lack of access to
guarantee funds, we would like to see that carved out. And
there are a number of problems with the State of domicile
regulation for both nonadmitted insurers and reinsurers in
particular.
Chairman Dodd. Did you oppose--the House bill passed
overwhelmingly.
Mr. Plunkett. We did oppose it.
Chairman Dodd. OK. Senator Menendez. Excuse me. I am sorry.
Senator Martinez. I apologize.
Senator Martinez. Thank you, Mr. Chairman.
Mr. Goldman, I wanted to ask you about another matter which
is very important to many people in my State. New Jersey last
March, I understand, became the 11th State to protect consumers
from the practice by some life insurance companies to deny
coverage or charge excessive premiums for coverage based on
past or future lawful foreign travel. In June, the National
Association of Insurance Commissioners approved an amendment to
the Unfair Trade Practices Act to address unfair life insurance
discrimination on the basis of this lawful foreign travel.
Unwarranted denial of coverage by insurance companies affects
family members, humanitarian aid workers, and also
businesspeople seeking opportunities abroad. So as the
Commissioner of the New Jersey Department of Banking and
Insurance and the representative of NAIC here, can you tell us
why New Jersey acted to address this form of insurance
discrimination?
Mr. Goldman. Because we agree with you, Senator, that it is
inappropriate for people to be charged an excess premium just
because they are going to travel to a particular jurisdiction.
And so we felt, the legislature of New Jersey felt it was
appropriate to ban the practice, and did so.
Senator Martinez. And I understand you have feelings about
State and Federal issues, but would it be helpful, do you
think, for us to enact a Federal piece of legislation that
would strengthen what has been done in New Jersey and perhaps
make it be applicable throughout the country?
Mr. Goldman. Well, I think that, you know, that is one of
many issues that I think State Insurance Commissioners around
the country do deal with, and I think the cooperation of State
legislatures is necessary, as it was in New Jersey, to enact
the ban you are mentioning. We obviously agreed in New Jersey
that it was appropriate.
I think, you know, given a little bit of time, I think a
number of States, if not all States, might come to that same
conclusion. So I don't know if it would be necessary on that
narrow issue, for example, for the Congress to act. But we
certainly agree with the principle.
Senator Martinez. On another note, you and the other
commissioners that make up the NAIC in your difficult roles are
responsible for facilitating a functioning and a robust
insurance marketplace while at the same time keeping consumer
safety first and foremost. Are you familiar with the
legislation that Senator Nelson and I introduced last year, the
Nonadmitted and Reinsurance Reform Act, is regulatory reform of
the surplus lines and reinsurance marketplace and seems to have
a lot of support in this Committee? And would you share your
thoughts on this type of regulatory reform, especially if you
believe it could boost the vitality of the insurance
marketplace while preserving critical consumer protections?
Mr. Goldman. Yes, Senator. As I indicated, the NAIC would
support it, with some changes--I think the Insurance
Commissioner in Illinois, Mr. McRaith, has been very active and
the lead person on behalf of the NAIC in discussing some
changes that the NAIC would like to see in that bill. We think
that the simplification of the tax allocation process is
helpful. We think that vesting the control of the carrier in
the home State is helpful. We think establishment of uniform
eligibility standards is equally helpful, and the centralizing
of data reporting. So we have a lot of areas of that bill, as I
said, that we think make sense, and we are supportive with some
of the changes that we have suggested.
Senator Martinez. You have some tweaks that you would like
to see made, but on the whole, you are in support of the
concept.
Mr. Goldman. That is correct.
Senator Martinez. Mr. Chairman, that is all I have. Thank
you very much.
Chairman Dodd. Thank you very much.
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman. Thank you all
for your testimony. Like the Chairman, I do not come to this
with a preconceived view, so I appreciate the information flow
that is going on here. But let me ask a couple questions.
Mr. Iuppa, when you were the regulator in your State and
NAIC's--I think you were the president or one of the officers--
were you advocating a Federal optional charter?
Mr. Iuppa. I think to put the proper context on your
question, you have to recall that I was a State official at
that time representing within the context of the State of Maine
the position in Maine. When I was speaking on behalf of the
organization, I was doing just that--speaking on behalf of the
organization.
I made some reference in my testimony, in my comments,
about the difficulty in deriving consensus amongst the
commissioners. Of the 56 commissioners that we have here in the
U.S., you have some significant egos, and I will leave it at
that. And to try to get consensus around an issue like, for
instance, an optional Federal charter, one, it would have been,
I think, inconsistent for a State-based organization, an
association of State-based officials to come forward and
advocate for an optional Federal charter.
Senator Menendez. So you are saying--first of all, I assume
the answer is no. And, second, before you eat up all my time,
and, second, I also assume that what you are saying is that all
of our national insurance commissioners would not do the right
thing if they honestly thought that a Federal optional charter
was the right thing, they would still promote their own narrow
State-based interests?
Mr. Iuppa. I think they have done the right thing; they
will continue to do the right thing. But I think that they may
not have fully the perspective that I have managed to gain over
the last couple years dealing with a global insurer that has--
--
Senator Menendez. I see. Let me ask you another question,
both for you and Mr. Pearson. Wouldn't this really be, at the
end of the day, about profitability? Clearly, if you go to a
Federal optional charter based upon all the things you feel
that would be taken care of, your companies would be more
profitable, would they not?
Mr. Iuppa. Well, I think the ultimate consumer protection
is to be able to purchase products from a company that is going
to be profitable.
Senator Menendez. I have no problem with profit. My
question is: Would it not increase your profitability?
Mr. Iuppa. That remains to be seen. We could be
confronting----
Senator Menendez. You mean you would actually enter into a
system where your profitability would be diminished as a
result----
Mr. Iuppa. No. We are in the business that insures risks
and indemnifies risk. We do not have the ability to know with
certainty what that risk is ultimately going to be in any given
year.
Senator Menendez. Mr. Pearson, do you believe your
profitability would be raised?
Mr. Pearson. I think that it has the potential for
increasing profitability. It also has the potential for
increasing a better deal for the consumer from a price
standpoint because of greater competition and greater
efficiency in our companies that we can then pass along to the
consumer, because we are--as I said earlier, it is a fairly
intense price-competitive business.
Senator Menendez. Mr. Plunkett, on page 34 of your
testimony--there is a lot of stuff in here, but it is--you say,
``Notice that the insurance industry is very pragmatic in their
selection of a preferred regulator. They always favor the least
regulation. . . . But, rather than going for full Federal
control, they have learned that there are ebbs and flows in
regulatory oversight at the Federal and State levels, so they
seek the ability to switch back and forth at will.''
Is that switching back and forth that you suggest is the
case or would be the case, is that because--is it about
profitability or is it about something else?
Mr. Plunkett. Well, first, it is about lower regulatory
standards, which I think ensures--believe will lead to greater
profitability. I am referencing there, you know, 150 years of
history of jumping from approval for first Federal-based
regulation to then, at the beginning of the last century,
State-based regulation and now back.
Senator Menendez. Well, why would we presume that the lower
regulatory standards--why would we not presume, as they
suggest, the high watermark of high consumer protections?
Mr. Plunkett. Well, I think what we have shown in our
testimony and elsewhere is that high regulatory standards are
not incompatible with competition and are certainly not
incompatible with very strong returns. And we detail in the
testimony the fact that the States now have what is considered
to be the strongest form of regulation, prior approval, have
very healthy rates of return, in some cases better than States
that have other forms of rate regulation.
So it is not incompatible. You asked me to speculate about
what insurers might think, and that was my speculation.
Senator Menendez. All right. Commissioner, let me ask you a
question. We have seen reports of a certain company--I will not
name them--not renewing home insurance policies in New Jersey.
It is not a new phenomenon, either in New Jersey or in
different parts of the country. And there are a lot of families
who are furious and frightened that after decades of paying
coverage and paying premiums without ever making a claim, they
have their coverage dropped. And this is happening as we see
insurance industry profits continue to rise even during bad
years.
Can you give us a sense of what is happening out there and
what are some of the challenges before us?
Mr. Goldman. A number of the companies, based on their
catastrophe modeling, have made judgments that they want to
lessen the potential risk to themselves in particular
geographic areas, particularly along the coasts. As a
consequence, they have undertaken a concerted effort in coastal
areas around the country to reduce their exposure in order to
reduce that risk. And that has been the challenge.
In New Jersey in particular, we have been working with the
companies by, frankly, persuading them that it might be the
better judgment not to engage in the degree of nonrenewal that
they might come in to discuss with us in the first instance. We
have given them a couple of opportunities when reinsurance
costs for them on coastal risks have increased to pass through
some portion of that cost to consumers to persuade them to
stay. We have actively engaged in bringing new coastal writers
into the marketplace. We are engaged in doing that right now in
order to bring more capacity to the market. And we have also
seen an increase in surplus lines carriers in that market.
So we have worked on a number of fronts to try to mitigate
the problem in New Jersey.
Senator Menendez. Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator.
Senator Corker.
Senator Corker. Thank you, Mr. Chairman, and thanks again
for having a great hearing and to all our witnesses, thank you
for your professionalism.
I do come at this with a philosophical bent, and that is
that I would like to see our insurance industry be able to
operate in a streamlined way. I was in a business in my
previous life, a construction business, where we were licensed
in States across the country. It was, in my opinion, nothing
but restraint of trade. It had nothing whatsoever to do with
good qualifications, and it was just a way to keep contractors,
if you will, out of States so that in-State contractors could
flourish. That was what it was all about. So I come with a
bent.
On the other hand, after being here in Washington and
seeing the way things work here, for instance, Chuck Schumer
and I have introduced a bill, a toll-free number for people who
have issues with the banking system to be able to call one
place. I mean, people have no idea which particular entity
oversees whatever banking issue they might have. And after the
offices around our States in Tennessee are pummeled with calls
regarding people just wanting Government to do what Government
has agreed to do, we have to assign caseworkers ad nauseam to
deal with those issues.
So it seems to me that there is the issue of streamlining
that philosophically I agree with. I will say it does look like
the insurance industry is flourishing right now. It looks like
they are doing particularly well. But, on the other hand, I
would like to have a place for constituents to be able to call
the Attorney General or someplace else if they have had
advantages taken of them. And I would like for each of you, if
you would, to address, if you are for the optional Federal
Charter, how we might ensure that constituents do not get taken
advantage of and do not get caught up in this Federal abyss, if
you will, that exists here; or if you are on the other side of
that, explain how that can never happen.
Mr. Goldman. Senator, I can tell you that our office
annually gets about 45,000 to 50,000 calls in a State with
roughly 8.8 million people. Now, there are under this system 50
States plus the territories that are available to respond to
those concerns. I can tell you under an optional Federal
charter with six regional offices for 300 million people, I do
not think you are going to have very good consumer protection
or a place for consumers to reach out and get help. This is an
area--insurance--where people pay for a promise. The promise is
that when they need it, it will be there for them. Oftentimes,
they have difficulty having that promise fulfilled, and they
need help. And I do not think six regional offices for 300
million people is going to help too many people get that
promise fulfilled.
So I have serious problems with the idea of changing an
effective and healthy system in which consumers are more
protected than they would be, I think--and are, frankly--
anywhere else in the world. I think the U.S. regulatory system,
with whatever warts it may have, is probably the gold standard
in the world. To put an overlay on that that will reduce
significantly the benefits to consumers would be a dramatic
mistake.
Mr. Iuppa. Well, with all due respect to my former
colleague Mr. Goldman here, if the few companies that will be
federally chartered have 300 million customers, we will be
pretty pleased.
The reality under the OFC, what we are talking about is an
opportunity for a company, depending on their business,
particular business model, to enter into whichever regulatory
system they believe best fits that model. And at the same time,
consumers, policyholders, existing policyholders or new
consumers--and, again, I am talking about individuals, small
businesses, large businesses--will have an opportunity--they
will have an additional choice. They can choose to stay in the
State system and only purchase insurance from State-chartered
companies. Or their particular needs may have them gravitate
toward a nationally chartered entity.
Senator Corker. Do you really think consumers ask those
questions when they are buying a product? I mean, they buy a
product, and at the end of the day, they have no--I guarantee
you, I do not ask those questions. Maybe I should. But I do not
think they are going to be asking whether they are chartered by
Federal or State regulators. And so at the end of the day, they
will have a product, they will not know who is overseeing
those. Is that correct?
Mr. Iuppa. Well, in my 20 years as a regulator, I think I
have heard just about every question. But I think, too, you
have to keep in mind that there are also producers and agents
who work with their clients as well to provide them guidance as
to whether or not a company perhaps is State-chartered or
nationally chartered or, you know, is based somewhere else. I
mean, the reality is most of us buy insurance from a company
that is based somewhere else. But the important thing is to--
those companies who are State-chartered can still go to their
respective States. For those that will be federally chartered,
S. 40 provides a framework for those regional offices, and the
Congress, as the policymakers, I believe will not shirk your
responsibility to provide for a level of strong consumer
protection for those federally chartered companies and their
customers.
Mr. Pearson. First of all, we believe it is less of an
issue for our industry than for others. Our records say less
than 10 percent of complaints are life insurance and life
insurance-related.
Having said that, however, we frankly think the current
network does a very good job of handling consumer complaints.
We would prefer for more uniformity across States with some of
these model laws that have passed. But, frankly, we look at it
as something that we could build upon as through the Federal
bill that we would expect nothing less than an exemplar
customer complaint and recourse.
Mr. Plunkett. Senator, that is a very good question, and I
would just say that if insurers would like uniformity and
efficiency--and consumers do pay for a lack of efficiency--then
they should propose, you know, uniformly high national
standards, not allowing them to go back and forth between the
States and the Federal regulators. Senator Hollings proposed a
bill of that kind just before he retired in 2003 and got very
little support.
Regarding consumer assistance, some States do a good job
and others do not, but the States do have a good argument when
it comes to property/casualty insurance in particular because
there are regional variations. There are variations in tort
laws, no-fault versus tort, and the States have a pretty good
argument that they have local expertise when it comes to
particular property/casualty problems and claims that result in
their areas--you know, hurricane, earthquake, hail damage,
things like that.
So I would be worried a little bit about eliminating that
regional knowledge. Also, the Federal banking regulators who
are often cited as the model for national insurance regulation
have a poor track record of consumer assistance. They just do
not have the cops on the beat that the States have the
potential to have.
Senator Corker. May I ask one more brief question, Mr.
Chairman?
Chairman Dodd. Certainly.
Senator Corker. Mr. Pearson, I understand that--something
that I agree with, and that is that what we really want to have
is a streamlined process for having products approved. And I
understand there is an Interstate Compact that many States are
a part of, but there are 20 States that are not a part of, and
I wonder why the life insurance industry is not pursuing
heavily getting those other 20 States to the table and moving
on with that.
Mr. Pearson. We are. Frankly, we have been working with the
NAIC and each State and other jurisdictions to get an OFC
passed. I know in Maryland we have worked closely with our
Insurance Department as well as the legislature to do so. So it
is something that we are actively pursuing. We call it a dual
track of regulatory modernization, so we are interested in a
Federal charter, but also in improving State-based regulation
because we believe even if there is a Federal charter that it
will continue to be an option for insurers.
Senator Corker. Thank you.
Chairman Dodd. Thank you very much, Senator, and we will
leave the record open here. I don't think if there are
additional questions. I was going to make the point, having
been on this Committee for quite a while, even the notion not
that many years ago of a Federal charter, it would have been
met with total opposition from the industry and this subject
matter. It was a third rail if you were talking about the
insurance industry to be talking about a Federal charter.
Again, I am very interested in the testimony and very
interested in the proposals and the ideas and what may work. I
think Senator Corker touched on sort of the heart of it, which
is for many of us here--I have always sort of felt on the life
area you could make a pretty case for it because of the very
differences that have been raised in dealing with property and
casualty, and Mr. Plunkett raised it, certainly Senator Corker
did, too. There are distinctions in terms of local tort law and
other matters that come up. And, of course, as you point out,
Senator Corker points out, for the consumer this only becomes
an issue when you have a claim. I mean, other than that you are
buying the stuff, you are looking for price. But at the end of
the day, when we get the calls--it is not because of the price
you are paying for the policy. When a Senator gets a call about
it, it is because I am not getting my claim answered. That is
when it hits us. And so guaranteeing somehow at the Federal
level on property and casualty particularly you are going to
get that response is something that I am troubled by. How do
you get that response?
But I am very interested in this subject, and clearly we
have got to do something. We have got to reform in these areas.
So I appreciate immensely the testimony. We literally could
just keep this one panel here for the day with the questions I
have alone. I am sure my colleagues do as well. So we will
leave the record open. But I want to get to the second panel,
if we can. So thank you all very, very much for being with us
this morning. Very, very helpful.
Let me introduce our second panel as the first panel is
stepping down. Our next panel consists of George Steadman, who
is President and Chief Operating Officer of Rutherfoord Inc.
Mr. Steadman was recently appointed the 2008 Chairman of the
Council of Insurance Agents and Brokers. He is also a member of
the Board of Managers of Assurex Global Reinsurance Company.
Thomas Minkler is currently the President of the Clark-
Mortenson Agency. He also serves as Chairman of the Government
Affairs Committee of the Independent Insurance Agents and
Brokers of America.
And, third, we have Frank Nutter, who is President of the
Reinsurance Association of America, currently serves on the
Board of the International Hurricane Research Center, the
Advisory Board of the Center for Health and Global Environment,
the Governing Council of the American Meteorological
Association, the Board of the University Center for Atmospheric
Research, and the Advisory Board of OECD's International
Network for Financial Management of Large-Scale Disasters.
What's the weather going to be like, Frank, tomorrow?
Mr. Nutter. I will let you know.
[Laughter.]
Chairman Dodd. With all those, you have got to know
whatever is going on with the weather.
Richard Bouhan has been Executive Director of the National
Association of Professional Surplus Lines Offices since 1987.
Previously, Mr. Bouhan was NAPSLO's Director of the Government
and Industry Affairs Council.
And we thank all four of you for being here. We heard the
issues raised about surplus lines in the last panel, and
obviously this panel I know has some particular expertise in
that area as well, so we will come back and talk about those
questions here. But let me thank all of you for being with us,
and, again, I am going to ask you, if you can, to be relatively
brief in your opening statements so we can get to some
questions.
We will begin with you, Mr. Steadman.
STATEMENT OF GEORGE A. STEADMAN, PRESIDENT AND CHIEF OPERATING
OFFICER, RUTHERFOORD INC., ON BEHALF OF THE COUNCIL OF
INSURANCE AGENTS AND BROKERS
Mr. Steadman. Thank you, Mr. Chairman, Senator Shelby,
Members of the Committee. My name is Shad Steadman. I am
President and Chief Operating Officer of Rutherfoord,
Incorporated, a regional brokerage based in Roanoke, Virginia.
Rutherfoord is the 38th largest U.S. insurance brokerage firm,
and we have offices from Philadelphia to Atlanta. My testimony
is on behalf of The Council of Insurance Agents and Brokers,
whose members sell more than 80 percent of all business
insurance in the U.S. and a growing share of the international
marketplace. I am currently chairman of the council.
Like other witnesses here, we greatly appreciate this
opportunity to speak to you today. This Committee has worked
constructively and productively on a number of issues that are
critical to our industry and to this country. We similarly hope
that bipartisan consensus can be found on the complicated but
critical issues of insurance regulatory reform.
Let me say at the outset that our organization supports the
National Insurance Act, which would create a truly optional
insurance regulatory system for all industry players. We are
grateful to Senators Johnson and Sununu for their efforts on
this front. We believe the Act provides for comprehensive,
rigorous oversight of the industry that protects insurers and
policyholders in the case of insolvency and bolsters, rather
than diminishes, current protections for insurance consumers.
We believe that the current regulatory structure is simply
not equipped to handle an insurance marketplace that today is
not just national but international in scope and also is
increasingly complex and sophisticated. My firm serves clients
in 50 States and multiple countries, and our clients have risks
and exposures that transcend State boundaries. Regulation of
this business must move beyond those artificial State
boundaries, and the optional Federal charter is the best
ultimate framework for regulatory restructuring.
Political reality dictates that the achievement of the OFC
will not be an easy process, nor will it be quick. In order to
better serve our policyholders and clients, we need practical
solutions to real marketplace problems. That is why I
respectfully implore the Committee to pass one measure this
year that would address a fundamental flaw in the State-based
system of insurance regulation and for which a solution is
readily at hand. I am speaking about the Nonadmitted and
Reinsurance Reform Act, so-called the surplus lines
legislation, that has been introduced by Senators Martinez and
Nelson of Florida.
This legislation has been unanimously approved by the
House, and its surplus lines provisions constitute the only
piece of Federal insurance regulatory reform where all major
stakeholders, commercial consumers who are represented solely
by REMs, regulators, small insurers, large insurers, large
brokers and independent agents agree.
Let me describe very briefly what surplus lines products
are and what this legislation would do.
Surplus lines insurance provides coverage for unique,
unusual, or very large risks for which insurance is unavailable
in the admitted market. It is universally recognized as an
important component of the commercial property and casualty
marketplace. There are multiple sets of requirements in each
State with regard to the steps that must be taken before the
nonadmitted marketplace can be accessed, and there are
different premium tax requirements in each jurisdiction. When
surplus lines activity is limited to a single State, compliance
issues are minimal because there is a single set of rules.
When activity encompasses multiple States, which is normal,
full regulatory compliance is difficult, if not impossible,
because the laws of every State in which an exposure is located
may technically apply to the transaction. This is a real
problem.
The surplus lines legislation would dictate that the rules
and regulations only of the insured's home State would apply to
any multi-State surplus lines transaction. This would have an
immediate positive impact on the marketplace and consumers and
would complement the adoption of the regulatory reform
envisioned by the National Insurance Act.
Again, this is an issue on which we agree even with the
NAIC, but the optional Federal charter supporters and opponents
agree on this legislation. Obviously, we urge the Committee to
seize the opportunity to enact it this year due to the
extraordinary consensus that has emerged around the basic
tenets. And looking toward next year, we believe that the
National Insurance Act is the best and ultimate solution to the
many competitiveness issues that impact our industry.
Thank you very much.
Chairman Dodd. Thank you very much.
Mr. Minkler.
STATEMENT OF THOMAS MINKLER, PRESIDENT, CLARK-MORTENSON AGENCY,
INC., ON BEHALF OF THE INDEPENDENT INSURANCE AGENTS AND BROKERS
OF AMERICA
Mr. Minkler. Thank you and good morning, Chairman Dodd and
Ranking Member Shelby, and Members of the Committee. My name is
Tom Minkler, and I am pleased to be here today on behalf of the
Independent Insurance Agents and Brokers of America and our
300,000 individuals to provide our perspective on insurance
regulatory reform. I am the President of Clark Mortenson, a New
Hampshire-based independent insurance agency with 51 employees
that offers a broad array of insurance products to consumers
and commercial clients.
As you know, States carry out the essential task of
regulating the insurance marketplace to protect consumers.
State insurance regulators have done an excellent job in the
area of financial solvency, thereby ensuring that insurance
consumers receive the insurance coverage they need. However,
there are some problems with the State-based system, and
focused reform is warranted.
When considering such limited reform, we must remember that
during the recent turmoil in various sectors of the financial
services industry, the insurance industry has remained healthy
and stable. Unlike other financial services markets, there is
no crisis in the insurance industry that requires a risky,
massive overhaul of the current regulatory system.
The State system has proven that it best protects consumers
and can be modernized to work effectively and efficiently for
the entire insurance marketplace with the right legislative
pressures from Congress. Therefore, when considering any
reform, we must recognize that the current system does have
great strengths, particularly in the area of consumer
protection and solvency regulation.
Additionally, when considering reforms to the State
regulatory system, we believe that two overarching principles
should guide our efforts. First, Congress should attempt to fix
only those components of the State system that are broken.
Second, no actions should be taken that in any way jeopardize
the protection of the insurance consumer. We believe that the
effective solvency regulation and disciplined guaranty system
that does not require the potential support of Federal tax
dollars are essential to such protection.
To speak from a personal perspective, the most serious
regulatory challenges facing insurance agents today are the
redundant and costly requirements that arise when seeking
licenses on a multi-State basis. These requirements hinder the
ability of insurance agents to effectively address the needs of
consumers. The average independent insurance agent today
operates in more than eight States, and many are licensed in 25
to 50 States. We strongly support targeted Federal legislation
to streamline nonresident insurance agent licensing. This
legislation would be deferential to States' rights. Day-to-day
State insurance laws, such as those regarding consumer
protection, would not be preempted. By modernizing the NARAB
framework passed as part of the Gramm-Leach-Bliley Act of 1999,
Congress can help policyholders bring increasing marketplace
competition and consumer choice. The NARAB Reform Act
incorporates these principles and has had strong bipartisan
congressional and industry support. This has led to quick
action being taken on this reform measure in the House.
Another area where targeted Federal legislation is
necessary is in the nonadmitted market, and we support
legislation that would apply single-State regulation and
uniform standards to the surplus lines industry.
I also want to mention briefly our strong opposition to
another suggested method to achieve insurance regulatory
reform--the proposed creation of an optional Federal charter.
We are very concerned about this risky proposal for full-blown
Federal regulation of the insurance industry and believe that
it would not reform the current system but would supplant it.
The best characteristics of the current State system from the
consumer perspective would be lost if some insurers were able
to escape State regulation completely in favor of wholesale
regulation from the Federal level. Current Federal legislative
proposals to allow for such a Federal insurance charter would
not be optional for our members. Independent agents represent
multiple insurance companies, and we would be forced to deal
with the Federal Government irrespective of any licensing
reform that may be accompanying it. Even more importantly,
optional Federal charter would not be optional for the
consumer. The insurance company, not the insurance consumer,
would make that decision.
Current OFC proposals would also create a confusing
patchwork of solvency and guaranty regulations. It would not
replicate the significant structural improvements that were
made in the banking model in the aftermath of the S&L failures
and the banking crises of the 1980s and 1990s. The dual
structure proposed under the current OFC measures could have
disastrous implications for solvency regulation by dividing
this key regulatory function from guaranty fund provisions.
Proponents of OFC assert that a Federal regulator is
important if the U.S. is to remain a global financial services
leader. We believe that the purported decline of U.S. capital
markets' competitiveness for insurance does not stem from
State-based regulation but from other concerns such as
different tax treatment and the costs of excessive litigation.
In the end, we feel that a massive overhaul of the insurance
regulatory system along the lines of an OFC carries great risk
and is unnecessary as there is no crisis in the insurance
market.
There is a more practical alternative. We believe that
targeted Federal legislation to improve the State-based system
is a pragmatic, middle-ground approach, and the solution is
achievable. We encourage the Senate Banking Committee to
consider this approach specifically in the area of agent
licensing reciprocity. It is the only approach that can bring
the marketplace together to achieve reform.
Thank you.
Chairman Dodd. Thank you very much.
Mr. Nutter, thank you.
STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT, REINSURANCE
ASSOCIATION OF AMERICA
Mr. Nutter. Thank you, Mr. Chairman. My name is Frank
Nutter, and I am President of the Reinsurance Association of
America. The association represents property and casualty
insurance companies that specialize in assuming reinsurance.
I am pleased to appear before the Committee today to
provide the reinsurance industry's perspective on regulatory
reform and welcome this opportunity.
Reinsurance is critical to the insurance marketplace, as
has been mentioned by several witnesses. It reduces the
volatility experienced by insurers and improves insurers'
financial performance and security. It is the insurance of
insurance companies.
Reinsurers have assisted in the recovery from every major
catastrophe over the past century in this country. By way of
example, 60 percent of the losses related to the events of
September 11th were absorbed by the global reinsurance
industry, and 61 percent of the 2005 hurricanes Katrina, Rita
and Wilma were ultimately borne by reinsurers.
Reinsurance is a global business. Encouraging the
participation of reinsurers worldwide is essential to providing
the much needed capacity in the U.S. for property and casualty
risks. While nearly 70 foreign jurisdictions are reflected
among the ceding companies' preferences for reinsurers, the
majority of U.S. premiums ceded offshore are assumed by
reinsurers domiciled in about a dozen countries. Foreign
reinsurers now account for 56 percent of the U.S. premium ceded
directly to unaffiliated reinsurers--a figure that has grown
steadily from 38 percent in just 1997.
While the current State-based insurance regulatory system
is primarily focused on regulating market conduct, contract
terms, rates and consumer protection, as has been discussed
before the Committee today, reinsurance regulation focuses on
ensuring the reinsurer's financial solvency and to see that
reinsurers meet their financial obligations.
The fundamental concept underlying the U.S. regulatory
system is that a reinsurer must either be licensed here in the
United States and subject to the full spectrum of regulation as
insurance companies are or provide collateral through trust
funds, letters of credit, and other forms of security to see
that their obligations are met.
In recent years, capital providers to the reinsurance
market have opted for establishing a platform outside the
United States and conducting business through a U.S. subsidiary
or by providing financial security through a trust or
collateral. My testimony notes that since 1992, after Hurricane
Andrew, there have been 38 new reinsurance companies formed,
providing nearly $35 billion of new capital serving this
market. Nearly all of this capital came from U.S. capital
markets, yet no new reinsurer was formed in the United States.
Other than the U.S. subsidiaries of some of these new
companies, the last reinsurance company formed in the United
States was in 1989. For these startups, the ease of
establishment, capital formation, and regulatory approvals in
non-U.S. jurisdictions contrasts with the cumbersome and
protracted nature of obtaining licenses in the United States.
The RAA advocates a modified optional Federal charter for
reinsurance to allow reinsurers to choose a Federal regulator
or remain in the current 50-State system. Alternatively, the
RAA seeks Federal legislation that streamlines the State-based
system. We reference in the statement the Treasury Blueprint as
providing examples of why the State-based system does not serve
well a global marketplace like reinsurance.
As the rest of the world seeks to work toward regulatory
harmonization and international standards, the U.S. is
disadvantaged by the lack of a Federal entity with authority to
make decisions for the country and to negotiate international
insurance agreements or federally enabling legislation which
empowers a single state regulator to do so.
It has been long recognized that the level of reinsurance
regulation varies throughout the world. A system of mutual
recognition whereby the U.S. or a State could recognize the
regulatory system in another non-U.S.-based jurisdiction is one
which we support, and we are pleased to see that it has been
incorporated in S. 40, the National Insurance Act of 2008.
It is also noted in our statement that while non-U.S.
reinsurers have the option of being licensed in the U.S., State
regulation has attempted to strike a balance between creating
and maintaining an open marketplace, while ensuring the
financial security of ceding insurers and their policyholders.
As the world's largest insurance marketplace, the U.S. is
dependent on non-U.S. and U.S. reinsurance capacity. On the
other hand, it is difficult to see how 50 State regulators can
be expected to know, or to learn, the intricacies of the
accounting systems and regulatory schemes used throughout the
world to determine the financial strength of non-U.S.
reinsurers.
The RAA commends the sponsors of S. 40, the National
Insurance Act, for proposing an optional Federal charter for
insurers, and in large part, we think that would address this
concern about uniformity. Frankly, we are also encouraged by
the ongoing efforts of the NAIC, under Steve Goldman's
leadership, to develop a framework for reinsurance regulation
which seeks to streamline regulation through a national system
for U.S. reinsurers, a port of entry for non-U.S. reinsurers,
and a system of trans-border regulatory recognition. We have
encouraged the NAIC to seek Federal legislation to achieve this
system rather than hope that all 50 States' laws will be
amended on a uniform basis. Our 50-State system of regulation
has significant differences among the States with regard to
their requirements. We believe that any structure that is
adopted by the Congress or Federal legislation which addresses
State streamlining should eliminate duplicative and
inconsistent regulation. Again, we applaud the sponsors of S.
929, the Nonadmitted and Reinsurance Reform Act, for proposing
legislation that will eliminate extraterritorial application of
laws.
Finally, Mr. Chairman, we believe that changes in the
current regulatory system are necessary. We believe the options
include an optional Federal charter, as proposed in S. 40, or a
modified optional Federal charter which allows a reinsurer to
choose among a single Federal regulator or a single State
regulator or Federal legislation that streamlines the current
system.
I would like to commend the NAIC for its progressive
efforts to adopt a framework that seeks to achieve many of the
goals that we have set forth, but we have recommended to the
NAIC that they work with us and with the Congress to pass
legislation that would enable them to achieve the uniformity
that they seek.
Thank you, Mr. Chairman and Senator Johnson, for your
attention and support in this area.
Chairman Dodd. Thank you very much, Mr. Nutter.
Mr. Bouhan.
STATEMENT OF RICHARD BOUHAN, EXECUTIVE DIRECTOR, NATIONAL
ASSOCIATION OF PROFESSIONAL SURPLUS LINES OFFICES
Mr. Bouhan. Chairman Dodd, Senator Johnson, I want to thank
you and Ranking Member Shelby for holding this hearing on some
very, very important insurance reform issues. My name is
Richard Bouhan, Executive Director of the NAPSLO, the National
Association of Professional Surplus Lines Offices. I am pleased
to be here today to testify on the state of the insurance
industry with a focus on its current regulatory structure and
oversight. As my association's name implies, the surplus lines
marketplace will be the focus of my comments.
The surplus lines market is an indispensable and fast-
growing sector of our Nation's insurance industry, a
marketplace established to serve consumers by providing
coverage when the traditional markets fail to do so. Unlike
other components of the insurance sector, surplus lines is not
simply a type of coverage; instead, it is an entire insurance
marketplace that provides virtually all types of coverage to
both commercial and personal customers. Our customers include
doctors, lawyers, architects, and other professionals;
manufacturing concerns; public infrastructure, like hospitals
and airports. Ultimately, perhaps the market is best known as
the ``safety net'' that provides coverage when crises like 9/11
or Hurricane Katrina restrict the capacity of the standard
market. Given this wide range of service, there is simply no
one in this room who is not in some way impacted by the surplus
lines market.
With $40 billion in annual premiums, the surplus lines
industry represents nearly 15 percent of the commercial
insurance marketplace. This is a fourfold increase from just a
decade ago. The primary reason for this rapid growth is the
transition of our economy from a manufacturing and industrial
base to a complex and diverse array of industries that require
a flexible and dynamic insurance marketplace.
Unfortunately, while our sector has evolved to meet ever
changing consumer demand, our regulatory system is outdated,
inefficient, and in dire need of reform to better serve market
participants and consumers. Our major problems are caused by a
patchwork of inconsistent and, at times, conflicting State-
based regulations. These problems have been further exacerbated
by the dramatic expansion of multi-State surplus lines coverage
in recent years. Currently, about a third of all surplus lines
policies have multi-State exposure, creating a regulatory
compliance challenge that is costly and burdensome to all.
While attempts have been made to harmonize these laws,
history has proven that the States are unable to create an
efficient, uniform, and rational regulatory system for this
unique market. Consequently, NAPSLO believes the only solution
is Federal legislation that clearly resolves the problems I
will now review.
As a result of this patchwork system, licensed surplus
lines brokers have no way to determine how much tax would be
paid to the States on a multi-State risk and face multiple
compliance requirements. This is because the States have
inconsistent and sometimes conflicting rules to allocate
exposure and calculate taxes. The result is a marketplace
replete with confusion and acrimony between States and brokers
as to whether the correct amount of tax has been paid, with
consumers at times facing double taxation and, thus, bearing
the brunt of these regulatory and financial burdens.
Another significant problem lies in the licensing of
nonresident brokers. Nearly a decade ago, Congress attempted to
resolve this problem when it created a reciprocal nonresident
licensing program as part of Gramm-Leach-Bliley. Despite these
efforts, we remain to this day without an efficient system for
multi-State licensing contrary to the intent of the law.
While the challenges before us are significant, thankfully
solutions are well within reach. The Nonadmitted and
Reinsurance Reform Act is now before the Senate. This
legislation has twice been unanimously agreed to by the House
and has earned the support of the industry stakeholders.
Furthermore, the bill recognizes the dramatic changes and the
growth in the surplus lines market and puts forth common-sense
solutions to streamline the regulatory system to benefit all
affected parties. We are most grateful to Senators Bill Nelson
and Mel Martinez for introducing S. 929, the Senate version of
the Nonadmitted and Reinsurance Act.
Given the broad range of support behind this bill, NAPSLO
urges the Senate to promptly pass S. 929 because it will
provide consumers with more efficient access to the
marketplace, harmonize today's costly patchwork of inconsistent
State laws and regulations, and repeal the inefficiencies of
duplicative broker licensing requirements.
Again, I want to thank Chairman Dodd and Ranking Member
Shelby and the rest of the Committee for holding these
important hearings and for giving NAPSLO, on behalf of our
Nation's insurance safety net, the opportunity to voice our
concerns.
Chairman Dodd. Well, thank you very, very much, and we
thank all of you for being with us and being patient this
morning, having to listen to the first panel. That is an
advantage if you look at it in those terms. Let me pick up on
the surplus lines issue, if I can, and to you, Mr. Steadman or
Mr. Bouhan, if you can. One of the arguments advanced for
streamlining surplus lines regulation is that it will enhance
access to the surplus lines market for consumers. And I am
interested in gaining a better understanding of what that would
mean for consumers. Surplus lines, as all of you know, is
generally a less regulated marketplace than the admitted
market. And as I understand it, surplus lines companies do not
participate in State insurance guaranty funds, meaning that
consumers would not be protected if a surplus line company were
to become insolvent.
What would be the benefits for consumers of expanding the
surplus lines market, Mr. Steadman?
Mr. Steadman. Mr. Chairman, I think that the problems with
the admitted marketplace oftentimes is that there is a lack of
product available to consumers, and I think that if we
encourage nonadmitted carriers to practice in States and ease
regulation on them, it actually provides more creative
solutions coming in, additional capacity flowing in. I think it
was mentioned earlier in the previous panel that some of the
solutions that are coming to the coastal areas now, where there
is a lack of product available to insurers, is being taken care
of by the nonadmitted market. And I think that we need to
provide access to all those areas with these types of products
to these consumers, these types of products that will solve a
market need.
Chairman Dodd. Mr. Bouhan, you kind of addressed this, but
let me give you another chance to.
Mr. Bouhan. I would agree with Mr. Steadman's comments.
Chairman Dodd. Put your microphone on there.
Mr. Bouhan. I would agree with Mr. Steadman's comments. The
surplus lines market offers the consumer the opportunity to get
the products that are not available in the licensed marketplace
by creating a more efficient system of taxation. By creating a
system of compliance with the regulatory rules, you gain the
opportunity for the system to be overall more efficient, which
gives better opportunity for consumers to access the
marketplace and brokers to access the marketplace on their
behalf. So I think that would be one thing that would happen.
I want to comment on the guaranty fund question. Surplus
lines companies are not guaranty funds. But the vast majority
of surplus lines business is commercial business, and the
guaranty funds have limits. I think $300,000 is the more common
limit. Some are as low as $150,000 in terms of caps on the
claims payments. And most insurance commercial policies far
exceed that. So I am not sure the guaranty fund issue is a
significant one, at least in the context of the commercial
business that the surplus lines mostly writes.
Chairman Dodd. I think you addressed this, or Mr. Minkler
did, but on the surplus lines issue, where the bill has gone to
the House, the one that is pending here, have you taken a
position on that? Are you in favor of it? You indicated in your
comments you were, but I want to give both of you a chance to
comment on this.
Mr. Nutter. Mr. Chairman, we would strongly prefer an
optional Federal charter legislation. But to your question, and
if the Committee and the Senate were to address the more narrow
approach to the excess surplus lines and reinsurance bill, we
are supportive of the bill, but it does fall somewhat short of
what we think would be appropriate.
Chairman Dodd. I understand you would like more. I am just
trying to get----
Mr. Nutter. Well, let me comment on something you raised
earlier. The legislation that is reflected in the Treasury
Blueprint as in Mr. Kanjorski's legislation in the House does
create a Federal advocate, an Office of Insurance Information,
and also addresses this question of the constitutional
authority of the Federal Government to enter into trade
agreements with foreign countries. That would address the
question of recognition of companies doing business in the
United States.
Those two provisions added to the excess surplus lines and
reinsurance bill would make it a much stronger piece of
legislation and, frankly, address most of our concerns.
Chairman Dodd. OK. Mr. Minkler.
Mr. Minkler. Mr. Chairman, we are in favor of the surplus
lines bill, and as you indicate, there is a lot of traction
right now for the bill, as there is for the NARAB bill that has
come out with broad bipartisan support. So we would support
this bill.
Chairman Dodd. Thank you very much.
As has been discussed, since Gramm-Leach-Bliley a large
majority of States have adopted reciprocity laws with regard to
agent and broker licensing. Mr. Minkler, let me start with you
and ask Mr. Steadman as well. Could you explain specifically
why you believe those reciprocity laws are insufficient? And
let me anticipate. If you say it is the fault of the NAIC,
which some are apt to, if the problem lies there, how they made
their certifications, what efforts have you made to address the
issue at the NAIC?
Mr. Minkler. Thank you, Mr. Chairman. The tenets of Gramm-
Leach-Bliley to introduce across-State-border licensing
reciprocity were noble goals. They have fallen short. The new
NARAB bill, reform act, takes it a next step and introduces
Federal tools to be able to coax those States that may not have
the reciprocity now.
We have worked closely with the NAIC over the months and
years preceding this to come up with an agreement as to a model
that would work, both at the regulatory level and at the
practitioner level, which is my level. We believe that NARAB II
is the answer to that, and we look forward to its passage.
Chairman Dodd. Mr. Steadman.
Mr. Steadman. Our organization was one of the earliest
supporters of licensing reform, and we were big supporters of
Gramm-Leach-Bliley when it came about, and we think it did do
quite a bit to improve the licensing environment.
However, I have to tell you, it needs a lot more work.
There are still 20-odd States that do not have reciprocity.
I can tell you just as an example, my firm--not that
large--we have 300 employees, but we maintain in our firm--we
actually have full-time people doing nothing more than tracking
licenses. And we maintain thousands of licenses and
appointments in our organization, and I personally have
hundreds.
So it is a very, very difficult, time-consuming, burdensome
task for agents and brokers.
Chairman Dodd. I did not get a chance to ask Mr. Goldman,
because there were obviously a lot of Members here and a lot of
questions, but is there any likelihood those remaining States
are going to join in this? Or are you optimistic or not
optimistic about it? I heard one of my colleagues, I think, or
at least someone suggest there are a couple of large States
that will never join. At least, that is the impression.
Enlighten Senator Johnson and me as to the possibility of a
significant majority of those extra 20 States joining in this
effort, or all of them. What is your assessment of that?
Mr. Steadman. Mr. Chairman, I think that, absent some type
of Federal pressure, I don't think that there will be complete
compliance. I think that when we were looking for reforms
around counter-signature, yes, we were able to get most States
to come into compliance. But ultimately we were forced to file
suit in many States in order to get all States to drop these
protectionist policies they had in place regarding counter-
signature.
So if that is any example of what we could expect as far as
licensing reciprocity, I think that there will be some States
that never will come into compliance without some sort of
Federal pressure.
Chairman Dodd. What is your view on that, Mr. Minkler?
Mr. Minkler. Mr. Chairman, I think it is probably accurate
that there are a couple States that will be tough to come into
the fold. But the fact that the NAIC has endorsed this proposal
I think speaks volumes to its chances of success.
Chairman Dodd. Tim. Senator Johnson.
Senator Johnson. Mr. Steadman and Mr. Bouhan, you have
already discussed the surplus lines marketplace to ensure
against risk like terrorism and extreme weather. But I would
call to the Chairman's attention, over 20 percent of all
property and casualty placements are accounted for by surplus
lines.
Mr. Nutter, you talk about many problems the U.S.
reinsurance industry and fund reinsurers face with 50 different
U.S. insurance regulators and sets of State laws. You mentioned
that this patchwork of regulation has caused tensions with
foreign officials, and these result in U.S. reinsurers being
disadvantaged overseas. Can you elaborate? Is there anything
that this Congress can do to make sure that the U.S. reinsurers
are not discriminated against because of our regulatory system?
Mr. Nutter. Certainly, Senator Johnson. The global
reinsurance market is, in fact, a very international one. I
cited statistics largely to demonstrate that this is in many
ways an offshore market serving U.S. capacity needs through
U.S. subsidiaries and collateral. The 50-State system is an
awkward and cumbersome system to deal with which is why I
endorsed the idea of a Federal insurance office as well as
constitutional legal authority for that office to enter into
international trade agreements. Such agreements would provide
reciprocal recognition for U.S. insurers and reinsurers doing
business in foreign countries and for their insurers doing
business in the United States.
That feature, together with the excess surplus lines and
reinsurance bill's features, would go a long way toward
moderating this conflict and tension between the capacity needs
being served by non-U.S. entities in the U.S. and U.S. insurers
and reinsurers being able to do business on a global basis
based upon a system here.
Senator Johnson. Currently, what is done? Is there a
negotiation required by all 50 States?
Mr. Nutter. Well, currently it is not done, I think is the
answer to that. The NAIC itself is struggling with that issue.
Just last week, Commissioner Goldman chaired a meeting where a
legal opinion was reviewed about the problems of States or the
NAIC, which is really a trade association, entering into global
negotiations that are, in fact, trade matters. Federal
legislation, as is incorporated in the optional Federal charter
bill, and is addressed in the Kanjorski bill in the House would
provide the legal authority to deal with that.
It is really a matter of dialog at this point without the
legal authority to enter into binding agreements to secure the
capacity, but also to make certain that the obligations are met
by U.S. and non-U.S. companies.
Senator Johnson. Mr. Minkler, recognizing that licensing
reform is a top priority for insurance agents, do you agree
with the licensing reform initiative contained in my
legislation, the National Insurance Act, which streamlines the
process so that an agent only needs one instead of multiple
licenses?
Mr. Minkler. We do endorse agent licensing reform through
NARAB II, Senator. I may have missed your question in there.
Senator Johnson. The question was, Do you endorse the
provision which is contained in my legislation, the National
Insurance Act, which streamlines the process so that an agent
only needs one instead of multiple licenses?
Mr. Minkler. If you are referring to the NARAB portion----
Senator Johnson. Yes.
Mr. Minkler [continuing]. We are in favor of that. We think
NARAB II will greatly streamline the process. Today, I have to
apply in multiple States, and it is very burdensome. And we
think the targeted reform that we are talking about is the best
way to accomplish that.
Senator Johnson. Thank you.
Chairman Dodd. Well, thank you very much.
Let me ask just one--I am going to ask you just quickly, if
you will, the second question I asked the first panel involving
whether or not different lines of insurance should be treated
differently, the issue. And, again, pointing out that the fact
we have had eight witnesses and a multiple of issues that are
on the table, I wonder if you just might, each one of you,
quickly share just some quick thoughts on this. You have
generally already in your comments, but I wonder if you would
just comment on that. Mr. Steadman.
Mr. Steadman. Mr. Chairman, it is a little difficult for me
to address the question as far as multiple lines of insurance.
I principally deal in the property/casualty arena, and I am
very, very supportive of that, of an optional Federal charter,
and also for the reinsurance and surplus lines reform. It is,
again, extremely burdensome for us, and we are very supportive.
Mr. Minkler. Mr. Chairman, while there are certainly
differences between the property and casualty side of the aisle
and the life side of the aisle, our position on regulatory
intervention at the Federal level is just that: just targeted.
There are certain lines that obviously need immediate
attention. Flood insurance comes to mind.
Chairman Dodd. Right.
Mr. Minkler. That needs attention post haste.
Chairman Dodd. We are going to deal with, by the way,
Senator Shelby--we have passed it out of here. We need to work
out the differences with the House. My hope is we are going to
get that done. But we are going to get it done, in fact, in my
view, before we adjourn.
Mr. Minkler. Excellent. Excellent. But as far as a
distinction between lines of business for the type of reform we
are talking about, yes, there is a difference between life and
P&C, but our overall proposal is that a Federal regulator is
not going to solve the issues that are involved in the
differences between the lines of business.
Chairman Dodd. Frank, your thoughts.
Mr. Nutter. Very briefly, Mr. Chairman. We certainly have
endorsed an integrated approach as is contained in the optional
Federal charter legislation. However, I think the fact that the
excess surplus lines and reinsurance bill passed unanimously in
the House twice and is being actively considered here does
suggest that at least those two lines of insurance, as
distinguishable from the consumer-based issues that you often
deal with, says a lot about the value of moving on that
legislation.
Mr. Bouhan. Surplus lines is exclusively really property/
casualty, and we have not given a lot of thought to the life
issues in comparison to the property/casualty business. But I
want to agree with my colleague Mr. Nutter that I think the
surplus lines reinsurance bill, the NRRA, is a bill that could
move forward and solve some problems in those marketplaces
directly today, and I would like to see that happen.
Chairman Dodd. Well, I thank you for that, and this has
been very, very helpful, both panels on the surplus lines
issue, because I had--we are running out of time around here.
We have only got a few days left. We end up either this week or
next week, and then back for a few days in September before we
adjourn for the election, and whether we come back for a lame-
duck session or not is completely up in the air. And my hope
would be, I want to talk to my colleagues here as well about
this, but I am concerned, obviously, that we try and bite off
more than we can chew. And I know that people see something
moving around here they want to get onto it if they can, put
everything onto it. And I would just say with a roomful of
people here who have a lot of interest in what may move
forward, I would be very interested in moving something along
the lines here that would be narrower, that may not--because
once I get into a larger picture here, I could end up with just
nothing moves. As you can see, it does not take much to stop
things in the Senate. And with a limited amount of time left,
that 101st Senator begins to emerge, and that is the clock. And
once that 101st Senator shows up, things get very, very
difficult to move forward on.
But I appreciate the importance of a couple of these issues
that I think there is some consensus on, and, again, I cannot
speak for the Committee, obviously, but I would like to do a
survey of my colleagues here to find out what they are
interested in moving. My sense is they may be willing to move
on some of this that we have talked about here this morning.
So I will have to get back to you all on that as I ask my
staff to review their colleagues, the possibility of trying to
get something done here before we adjourn in September. So I
thank all of you.
Let me also point out, we have got--it does not always
happen here, but we have--there is a wonderful member of the
staff who is going to be moving on. Sarah Kline today staffs
the Committee mostly on transit issues, and she is going to be
moving to another call of public service and working for the
Washington Mass Transit--is that the WMATA, is that how you
pronounce it? Metro. And the transit riders of the D.C.
metropolitan area are going to be advanced substantially when
Sarah moves over here. But for 9 years she has served on this
Committee and done just a remarkable job for all of us--the
SAFETEA Act, the Terrorism Risk Insurance, National Transit
System Security Act, the recent housing bill passed on Sunday.
It is not an overstatement at all. People do not often get the
credit here. There are people who sit behind the dais here and
who most of you probably never get to know and wonder who they
are. But one of them is named Sarah Kline, and America is a
safer and a better place because of her. We thank you.
[Applause.]
Chairman Dodd. The Committee will stand adjourned.
[Whereupon, at 12:25 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM GEORGE A.
STEADMAN
Q.1. Does the Council favor Congress moving forward with the
NARAB II legislation before it adopts more comprehensive
reforms, such as the establishment of an optional federal
charter?
A.1. Yes, the Council does support the immediate enactment of
the proposed NARAB II legislation. The Council also supports
the enactment of a comprehensive optional federal charter but
we do not believe that the two efforts are duplicative or
mutually exclusive in any way. The NARAB II legislation would
establish a national licensure clearinghouse for the licensing
of insurance agents and brokers by the states. Agents and
brokers licensed through the NARAB II facility would still be
required to obtain a license from each state in which they
would like to engage in the business of insurance and they
would still be required to comply with all of those states'
post-licensure requirements.
In contrast, under the optional federal chartering
proposals that have been introduced to date, a comprehensive
federal regulator would be established and would function as
the sole regulator for the carriers, agencies, agents and
brokers that opt to be chartered at the federal level.
Individuals and firms licensed by the federal regulator would
be subject only to the rules and requirements established by
the federal regulator and would be completely exempt from
oversight by the state insurance regulators. This model is
based closely on the national bank and federal thrift
regulatory regimes.
The Council's expectation is that some of its members
undoubtedly will opt for the federal regime and some will opt
to remain state regulated. NARAB II is a broadly supported,
simple piece of legislation that would resolve a current
problem that would remain a problem even after the enactment of
optional federal chartering legislation. All of the insurance
producer trade associations as well as the National Association
of Insurance Commissioners have voiced their support for NARAB
II. In contrast, the optional federal chartering legislative
debate is just getting started and there are numerous issues
that must be resolved and overcome before that legislation will
be enacted. The Council can identify no benefit of delaying
action on NARAB II until the optional federal chartering issues
can be resolved.
Q.2a. How would the Surplus Lines and Reinsurance legislation
affect the amount of premium taxes States presently collect on
surplus lines transactions?
Q.2b. Can you give assurances that no State would see a
reduction in the amount of premium taxes they collect if the
legislation is enacted?
A.2a. It is very difficult to determine with any specificity
how the legislation ultimately would affect the premium taxes
collected by any single State. The legislation would prohibit
any State except the ``home state'' of the insured from
requiring the payment of premium taxes on surplus lines
products. The legislation also, however, is designed to
encourage the States to enter into a premium tax sharing
compact under which they each would share the premium taxes on
a pro rata basis based on the premium exposure in each State.
If all of the States participated in the sharing compact, it
appears inevitable that surplus lines premium tax collection
would rise in the aggregate.
Two factors explain this. First, it does not appear that
States currently are collecting all of the surplus lines
premium taxes to which they may be entitled. Many states impose
the premium tax payment obligation directly on the insureds but
the morass of complicated and overlapping tax payment
obligations sometimes elude insureds and the insureds may then
opt to not comply. We have attached a study conducted by Mackin
& Company for the Excess Line Association of New York that
purports to demonstrate that surplus lines premium taxes would
likely rise overall under the proposed tax sharing system
because of the current level of non-compliance.
Second, if the transactional costs of accessing the surplus
lines markets are reduced, then insureds--and their insurance
brokers--should be more likely to want to access those markets.
Much of this expanded capacity most likely would be used to
replace self-insurance and off-shore coverage mechanisms,
neither of which generate any premium tax revenue at all for
the States.
A.2b. If a State would opt to not participate in the premium
tax sharing mechanism, it is difficult to estimate the effect
that it would have on its premium tax collections. That State
would be permitted to collect 100 percent of the surplus lines
premium taxes for insureds that are based in that State but
that State would not be able to collect any tax related to
insured exposures from insureds located elsewhere. No one
really knows how any individual state would be affected by the
imposition of this rule both because it is difficult to
determine--today--which insureds would be subject to the tax
payment obligation and how that would compare to current
collections and because of the non-compliance issue noted
above. We also must note, as an aside, that a rule dictating
that only the ``home state'' of the insured may impose a
surplus lines premium tax actually is the constitutionally
mandated rule announced by the Supreme Court over 40 years ago,
and the primary function of the legislation at some level is to
ensure that this constitutional mandate actually is followed.
Several States also use this rule now, which leads to the
conflicts and duplicative tax payment obligations for insureds
that also have covered exposures in States that use a pro rata
approach.
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY
FROM THOMAS MINKLER
Q.1. Mr. Minkler, in your testimony you discussed at length the
benefits of state regulation and your opposition to an optional
federal charter. Yet, you support the enactment of Federal
legislation to establish a national system for agent licensing.
Since you support state regulation, why not have the
States, rather than the Federal government, address the
problems you identified with agent licensing?
A.1. IIABA supports federal legislation, the NARAB Reform Act,
to provide for national licensing reciprocity and not a
national licensing system. As I mentioned in my testimony,
while IIABA continues to support the state system, we do not
believe that the states will be able to resolve all of their
problems on their own. Therefore, we believe that focused
congressional action is necessary to help reform the state
regulatory system, but only on an as-needed basis to overcome
the structural impediments to reform at the state level. The
NARAB Reform Act is such legislation, because it improves the
state-based system of insurance regulation by providing
licensing reciprocity through a board of state commissioners
and industry representatives instead of creating a massive new
federal bureaucracy.
Q.2. Do you believe that the NAIC provides an effective
mechanism for streamlining and harmonizing state regulation?
A.2. We believe that the NAIC is effective in moving the states
towards reform and helping to streamline the system. However,
while the NAIC can help encourage harmonization of state laws,
it cannot compel all states to adopt such laws. We therefore
believe that there are areas where the state-based system needs
to be streamlined and modernized through the use of targeted
federal legislation such as the NARAB Reform Act and the
Nonadmitted and Reinsurance Reform Act.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY
FROM RICHARD BOUHAN
Q.1. Will you please explain why you believe Federal
legislation is needed to streamline the regulation of surplus
lines insurance?
A.1. Federal legislation is the only way to ensure that uniform
rules and procedures are created and implemented among all the
states to overcome and rationalize the current inconsistencies
and conflicts in state regulatory requirements in the placement
and taxation of surplus lines business, particularly when the
surplus lines transaction involves multi-state exposures. The
inconsistencies and conflicts in state laws and regulations
governing surplus lines transactions are a result of these laws
being ``state-centric'' (unique to each state) and are state
specific to a much greater extent than the rules governing the
admitted or standard market transactions.
While an interstate compact (or some type of interstate
agreement) has been offered as a vehicle to solve these
inefficiencies and conflicts in order to streamline surplus
lines regulation, these proposed solutions require that each
state, individually, agree and join the accord. Such a
``patchwork'' solution would still require the surplus lines
industry to maintain an infrastructure to operate under the
current system of inconsistent, conflicting and inefficient
rules and regulations, as well as those under the new
agreement. Federal legislation is the only method by which
these problems can be solved immediately and universally among
the states.
NAPSLO is aware that the Committee is considering
legislation to broadly or ``globally'' reform the current
insurance regulatory system. But such legislation, if enacted,
would not eliminate the state based system of insurers and
insurance regulation. Surplus lines is part of the state based
system. The reform enacted through S. 929 would continue and
benefit the surplus lines market and those buyers that use the
surplus lines market even after a broad insurance regulatory
reform is enacted.
Q.2. Why should we not leave it to the NAIC to accomplish this
task?
A.2. The simple answer is that the NAIC cannot solve the
problem. It neither has the history nor is it, as a trade
association representing state insurance regulators, structured
to do so. Moreover, the NAIC has no regulatory or enforcement
authority that would allow it to accomplish this task.
The NAIC has been aware of the premium tax allocation and
remittance problems regarding surplus lines for decades and
various NAIC committees, sub-groups and task forces have
addressed these problems over time. Yet, none of this effort
has resulted in any solution to the problem.
Even if a solution had been forthcoming from the NAIC, it
is doubtful that one would have been enacted in the states. The
history of the enactment of NAIC model laws in the states, much
less enacted by all states, is dismal. Few of the over 260 NAIC
model bills have been adopted in all fifty states. In fact, the
track record of the enactment of NAIC model laws has been so
poor that the last year the NAIC announced a moratorium on
working on model bills and compacts since so few were actually
passed.
As was noted at the July 29, 2009 hearing, the NAIC is
generally supportive of S. 929/H.R. 1065 and has indicated that
the surplus lines tax question, in particular, is an area where
Federal legislation could be helpful. In their August 2007
issue paper on this legislation, the NAIC stated: Conflicting
state oversight and licensing rules governing surplus lines
insurance and surplus lines brokers, particularly for premium
tax collection and allocation, should be resolved through a
state compact or through federal legislation. Subsequently, the
NAIC abandoned work on developing model state compacts.
Q.3. Mr. Bouhan, how do you respond to the concerns Mr.
Plunkett raised in his testimony about the Surplus Lines and
Reinsurance bill? Please specifically address Mr. Plunket's
concern that the bill would exempt certain personal lines of
insurance from state consumer protection laws.
A.3. S. 929 does not impact any consumer protections laws or
regulations. The legislation only affects the surplus lines
placement and tax payment requirements on multi-state risks by
directing the placing broker to comply with the placement and
tax remittance laws of only the insured's ``Home State.'' This
eliminates duplicative, overlapping and costly multiple
compliance and remittance procedures on multi-state surplus
lines transactions. No other laws, in any state including the
``Home State'' of the insured, are affected by the legislation.
Each state's consumer protection laws remain in effect.
While the above addresses the impact S. 929 would have on
consumer protections related to surplus lines insurance
purchases, including personal lines transactions, the
relationship between personal lines--personal auto and
homeowners--and the surplus lines market that Mr. Plunkett's
question raises needs to be addressed.
To the extent that homeowners coverage and dwelling
policies are found in the surplus lines market, they are
written on structures located in earthquake and hurricane areas
that the standard companies don't want to write. In recent
years that segment of the surplus lines market, particularly in
states with coastal exposures, has increased as the incidence
of natural disasters has grown.
Based upon recent surplus lines stamping office statistics,
NASPLO estimates that somewhere between 2.5 and 3.0 percent of
the almost $40 billion dollars in annual surplus lines premium
comes from personal lines products. However, personal lines
transactions are overwhelmingly ``single state'' in nature and
since S. 929 is directed at multi-state surplus lines
transactions, the legislation would have minimal impact on the
limited number of personal lines transactions written in the
surplus lines market.
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