[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




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50-411                    WASHINGTON : 2010
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            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

                              ----------                              

                         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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